In this paper, we examine the economic implications of demographic age structure in the context of regional development in China. We extend the development accounting framework by incorporating age structure and apply it to a panel data set of 28 Chinese provinces. We find that changes in age structure, as reflected by shifts in both the size and internal demographic composition of the working-age population, are significantly correlated with provincial economic growth rates. During our study period 1990–2005, the evolution of age structure accounts for nearly one-fifth of the growth in GDP per capita, of which more than half is attributable to shifts in the internal demographic composition of the working-age population. Differences in age structure across provinces also explain more than one-eighth of the persistent inter-provincial income inequality.
Chinese real business cycle (RBC) exhibits a unique pattern, which is characterized by moderate consumption volatility, substantially low investment volatility, and acyclical trade balance. These features are quite different from business cycles in other emerging markets and cannot be explained by existing emerging market RBC theories. Motivated by the facts that China undertook dramatic and persistent reform on state-owned enterprises (SOE) in the last 30 years, we construct a full-fledged general equilibrium model with SOE sector and show that the model does a fairly good job in accounting for the above features. The two main driving forces are: (1) shock to the share of downstream SOE in manufacturing sectors and (2) shock to upstream SOE's monopolistic position. These two shocks can explain 85 percent of output volatility, 79 percent of consumption volatility, 72 percent of investment volatility, and 57 percent of the volatility of trade balance-to-output ratio. Relatively speaking, standard shocks such as permanent productivity shock, credit shocks, country risk premium shocks, and preference shocks are less important in explaining Chinese economic fluctuations. Our results show that Chinese RBC may be affected substantially by domestic policies.
Acknowledgments: We thank five anonymous reviewers and an associate editor of this journal, Robert Barro, Sascha Becker, Davide Cantoni, Eric Chaney, Claudia Goldin, Li Han, Avner Greif, Wenkai He, Philip Hoffman, Saumitra Jha, Yi-min Lin, Rachel McCleary, Nathan Nunn, Albert Park, Nancy Qian, Satoru Shimokawa, Carol Shiue, Robert Woodberry, Noam Yuchtman, and participants at Harvard's Economic History Workshop (2011), the Econometric Society's and Economic History Association's 2010 Annual Meetings, George Mason University, University of Hong Kong and Hong Kong University of Science and Technology, for helpful comments and suggestions on earlier drafts of this paper. James Kung acknowledges the financial support of the Hong Kong Research Grants Council (Grant 642711). All remaining errors are ours.
While a reduction in import barriers in a partial equilibrium may be thought to lead to an increase in imports and a reduction in trade surplus, the general equilibrium effect can go in the opposite direction. We study how trade reforms affect current accounts by embedding a modified Heckscher-Ohlin structure and an endogenous discount factor into an intertemporal model of current account. We show that trade liberalizations in a developing country would generally lead to capital outflow. In contrast, trade liberalizations in a developed country would result in capital inflow. Thus, efficient trade reforms can contribute to global current account imbalances, but these imbalances do not need policy "corrections".
In this paper, we examine the economic implications of demographic age structure in the context of regional development in China. We extend the development accounting framework by incorporating age structure and apply it to a panel data set of 28 Chinese provinces. We find that changes in age structure, as reflected by shifts in both the size and internal demographic composition of the working-age population, are significantly correlated with provincial economic growth rates. During our study period 1990–2005, the evolution of age structure accounts for nearly one-fifth of the growth in GDP per capita, of which more than half is attributable to shifts in the internal demographic composition of the working-age population. Differences in age structure across provinces also explain more than one-eighth of the persistent inter-provincial income inequality.
Chinese real business cycle (RBC) exhibits a unique pattern, which is characterized by moderate consumption volatility, substantially low investment volatility, and acyclical trade balance. These features are quite different from business cycles in other emerging markets and cannot be explained by existing emerging market RBC theories. Motivated by the facts that China undertook dramatic and persistent reform on state-owned enterprises (SOE) in the last 30 years, we construct a full-fledged general equilibrium model with SOE sector and show that the model does a fairly good job in accounting for the above features. The two main driving forces are: (1) shock to the share of downstream SOE in manufacturing sectors and (2) shock to upstream SOE's monopolistic position. These two shocks can explain 85 percent of output volatility, 79 percent of consumption volatility, 72 percent of investment volatility, and 57 percent of the volatility of trade balance-to-output ratio. Relatively speaking, standard shocks such as permanent productivity shock, credit shocks, country risk premium shocks, and preference shocks are less important in explaining Chinese economic fluctuations. Our results show that Chinese RBC may be affected substantially by domestic policies.
Acknowledgments: We thank five anonymous reviewers and an associate editor of this journal, Robert Barro, Sascha Becker, Davide Cantoni, Eric Chaney, Claudia Goldin, Li Han, Avner Greif, Wenkai He, Philip Hoffman, Saumitra Jha, Yi-min Lin, Rachel McCleary, Nathan Nunn, Albert Park, Nancy Qian, Satoru Shimokawa, Carol Shiue, Robert Woodberry, Noam Yuchtman, and participants at Harvard's Economic History Workshop (2011), the Econometric Society's and Economic History Association's 2010 Annual Meetings, George Mason University, University of Hong Kong and Hong Kong University of Science and Technology, for helpful comments and suggestions on earlier drafts of this paper. James Kung acknowledges the financial support of the Hong Kong Research Grants Council (Grant 642711). All remaining errors are ours.
While a reduction in import barriers in a partial equilibrium may be thought to lead to an increase in imports and a reduction in trade surplus, the general equilibrium effect can go in the opposite direction. We study how trade reforms affect current accounts by embedding a modified Heckscher-Ohlin structure and an endogenous discount factor into an intertemporal model of current account. We show that trade liberalizations in a developing country would generally lead to capital outflow. In contrast, trade liberalizations in a developed country would result in capital inflow. Thus, efficient trade reforms can contribute to global current account imbalances, but these imbalances do not need policy "corrections".
