Trade reform, macroeconomic policy and sectoral labour movement in China

Abstract

In developing countries with fixed exchange rate regimes the real depreciations that follow trade reforms and productivity growth shocks require contractionary domestic deflations. In the short run, associated allocative efficiency and productivity gains can be offset by this contraction, slowing the rate at which workers relocate from agriculture to manufacturing and services. This paper documents Chinas overall performance and worker relocation experience since the Asian financial crisis, noting slowdowns that appear to be associated with deflation. General equilibrium analysis is used to test the hypothesis that restrictive macroeconomic policy has contributed to these slowdowns. While WTO accession merchandise trade reforms are found to be net contractionary, adding services liberalisation and associated productivity improvements makes the reforms net expansionary in the short run. When either capital controls or exchange rate rigidity are relaxed, improvements of at least a per cent per year are predicted in GDP growth and of several per cent per year in the uptake of workers by the manufacturing and services sectors.