China's Economic Transition

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http://urn.fi/URN:NBN:fi:hulib-201702101299
Title: China's Economic Transition
Author: Nurmi, Aleksi
Other contributor: Helsingin yliopisto, Valtiotieteellinen tiedekunta, Politiikan ja talouden tutkimuksen laitos
University of Helsinki, Faculty of Social Sciences, Department of Political and Economic Studies
Helsingfors universitet, Statsvetenskapliga fakulteten, Institutionen för politik och ekonomi
Publisher: Helsingfors universitet
Date: 2016
Language: eng
URI: http://urn.fi/URN:NBN:fi:hulib-201702101299
http://hdl.handle.net/10138/175801
Thesis level: master's thesis
Discipline: Kansantaloustiede
Economics
Nationalekonomi
Abstract: The aim of this study is to understand the fundamental features of China’s economic transition since 1992. In order to do so, the central features of China’s transition are reviewed, most notably the main economic reforms, the firm-level resource reallocation, productivity differences between state-owned and private enterprises, moderate wage growth and rising income inequality, financial market imperfections and the central macroeconomic indicators: accumulation of foreign surplus and high aggregate investment and savings rates. A growth model consistent with China’s growth experience is built to give a clear qualitative explanation to China’s puzzling phenomena: Why does a country accumulate a foreign surplus despite of high domestic rate of return to capital? Why does a country’s rate of return to capital remain high in spite of a high investment rate? The cornerstones of the model are heterogeneity in productivity, reallocation of resources and asymmetric financial imperfections. The enterprise sector is divided into private and state-owned enterprises. Private enterprises are more productive, but due to the discrimination by the financial sector they must rely on internal savings, while state-owned enterprises are less productive, but survive in equilibrium due to better access to external financing. If the entrepreneurial savings are large enough, private enterprises gradually outgrow state-owned enterprises. Financial integration of state-owned firms and labor mobility sustains the rate of return for both types of firms during the transition. Moreover, the aggregate rate of return to capital increases due to the composition effect. The accumulation of foreign surplus originates from the financial imperfections. The wage earners deposit their savings to the banks, which in turn, can either invest to domestic enterprises or in foreign bonds. As the transition progresses the volume of high-productive financially constrained enterprises increase while the volume of low-productive externally financed enterprises decrease. Hence as the volume of state-owned enterprises decrease, a higher amount of domestic savings is invested into foreign assets by the financial intermediaries causing the foreign surplus to increase. After the transition is over, the economy is dominated by private enterprises and capital accumulation is subject to diminishing return to capital. The main contradictions with China’s experience are frictionless labor market, financial market laissez-faire environment and the prediction that state-owned enterprises fully fades from the economy. Despite of these simplifications, the model gives a clear qualitative explanation to China’s puzzling phenomena of sustained return to capital and growing foreign surplus. The simplifications allow the model to focus on the main differences between E and F firms, that is to say the heterogeneity in productivity and asymmetric financial imperfections.
Subject: China
Economic Growth
Productivity Heterogeneity
Financial Market Imperfections
Foreign Surplus
Investments
Savings
Rate of Return to Capital
Reallocation of Resources
State-Owned Enterprises
Private Enterprises


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