The Global Impact of Chinese Growth
by Ippei Fujiwara, Keisuke Otsu, and Masashi Saito
2008 International Conference: Frontiers in Monetary Theory and Policy

Discussion by Selo ·Imrohoro¼
glu
USC Marshall Business School

May 28, 2008

Discussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

1 / 23

Two Observations on the Chinese Economy
Chinese economy opened up in 1978:
Trade Volume"
GDPfrom 10% to 40 + % very rapidly

Chinese output growth accelerated about the same time:
GDP per EAP 1978 2005 is 8.5%, up from 2.5%

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g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

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Questions
How did these two observations come about?
What were the e¤ects on China and the ROW?
Short run and long run macroeconomic indicators
WelfareDiscussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

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Theory and Methodology
Standard Growth Model
Two-country, two-good, Backus, Kehoe, and Kydland (1994)
Calibrated to observations between 1950-2004
A …nal balanced growth path is assumed far into the future
Key targets drive the calibration exercise
An equilibrium transition path, triggerred by surprises from nature and policy
Characterization of this path and welfare

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g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

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Main Findings
By construction: sudden drop in home bias and gradual increase inproductivity growth generate:
sudden increase in openness
rapid output growth

In other words, a relatively simple neoclassical growth model can account forthese two key observations.
Counterfactual experiments:
Only a drop in home bias:
Welfare in China rises; little e¤ect on the ROW

Only an increase in productivity:
Welfare in China and the ROW increase

Conclusion: To the extent that China’s opening up led to the increase in
Chinese productivity growth, everybody bene…tted.

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g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

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Related Research
Restricting factor: Data on the Chinese economyColeman (2007)
Static model in which an emerging giant produces and exports certain goods,
and they become relatively cheaper.
This leads some industries in other countries around the world to expand andothers to contract.
During China’s recent emergence:
Japan, Hong Kong, Singapore, South Korea, Malaysia, Thailand, Philippines,
Indonesia, Australia, India, and Taiwan reallocated employment away fromproducing manufacture goods towards service goods.

Dekle and Vandenbroucke (2006)
Two-good, three sector model
Exogenous driving forces: productivities in the three sectors, gov share ofemployment
Equilibrium paths for: output growth and the reallocation of labor into thethree sectors

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g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

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ModelHouseholds

Two-country, two-good, Backus, Kehoe, and Kydland (1994)
Households in each country likes its own consumption good and leisure∞Ui=∑ βt (Ψi log ci ,t + (1Ψi ) log(1li ,t ))t =0ci ,t + xi ,t + reri ,t Qt Γdi ,t +1= wi ,t li ,t + ri ,t ki ,t + Ti ,t + reri ,t di ,treri ,t for i = C is rerC ,t and reri ,t = 1 for i = R.

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May 28, 2008

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ModelTechnology: Intermediate Goods

China produces a
ROW produces b
Each country uses
yi ,t = exp(zi ,t )kiθ,t li1,t θΓki ,t +1 = (1δ)ki ,t + xi ,taC ,t : amount of good a used in producing the Chinese …nal consumption
goodbC ,t : amount of good b used in producing the Chinese …nal consumption
goodaR ,t : amount of good a used in producing the ROW …nal consumption goodbR ,t : amount of good b used in producing the ROW …nal consumption goodDiscussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese GrowthMay 28, 2008

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ModelTechnology: Final Goods

GC ,tGR ,t==ε 1εε 1εη C ,t aC ,t + (1η C ,t )bC ,tε 1εε 1ε(1η R ,t )aR ,t + η R ,t bR ,tεε 1εε 1Discussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

9 / 23Government

Ti ,t =

τ C ,t pCb ,t bC ,t0for i = C
for i = R

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May 28, 2008

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Resource Constraints
Intermediate Goods

π1

1πaR ,t= yC ,tb + bR ,tπ C ,t= yR ,taC ,t +πDiscussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 2008

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Resource Constraints
Final Goods

πdC ,t + (1ci ,t + xi ,tπ )dR ,t= Gi ,t= 0

Discussion by Selo ·Imrohoro¼g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 200812 / 23

Calibration
General Idea

1950-1977 is a period of symmetric steady-state characterized by low GDP
growth and low openness in China.
Equal EAP, preference and technology parameters, targeting a capital-output
ratio of 2.5 and fraction of time worked of 0.3.
β = 0.95 and Ψ = 0.34 accomplish these tasks.

Also:η C = η R = 0.71 (0.76?)
captures home bias
a reduction raises domestic demand for imported intermediate good
China took drastic measures in 1978 by reducing import licenses and quotas

θ = 0.33 capital’s share of income
δ = 0.035
ε = 1.5 : elasticity of substitution between C and R intermediate goods in theproduction of the domestic …nal good

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May 28, 200813 / 23

Calibration and Computation
1978 and Beyond

Assume that a …nal steady-state is reached by 2100
Balanced trade is achieved throughtout by selecting the tari¤ rate τ C ,t inChina accordingly
The remaining two targets: (Figure 7)(detrended) GDP growth rate as 0% versus 5% at 1978 and beyond;productivity as instrument
Openness as 10% versus 30% at 1978 and beyond; η C ,t as instrument

Eventually, the level of Chinese TFP (5% to start with) catches up with theROW.
In 1978:
Nature reveals a faster rate of growth of productivity in China
Chinese government announces and immediately implements a perfectly
credible openness strategy

Numerical computation of deterministic equilibrium paths

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Results
Only a Decline in Home Bias

Openness rises, then gradually returns back to its steady-state level.
Demand for Chinese intermediate good falls, so Chinese investment and labor(and GDP) fall.
Balanced trade forces consumption to rise.
Overall, welfare (CEV relative to the initial steady-state) rises in China.
Little e¤ect on the ROW; China’s GDP is 5% of that of the ROW.

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Results
Only an Increase in Productivity

Standard e¤ects of an increase in productivity in China: GDP, investment,consumption and labor go up.
Welfare rises in China.
In the ROW, improved Chinese productivity makes for cheaper Chineseintermediate goods.
This in turn acts as a positive TOT shock to the ROW.
Investment, labor (slightly), output and consumption rise in the ROW.
Welfare goes up in the ROW also.

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Results
Both Shocks at the Same Time

Welfare goes up for both China and the ROW

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Sensitivity Analysis:
ε is likely to be a key parameter. At least two other values surrounding the1.5 used in the paper would be useful.
When there is an exogenous change in home bias, the degree to whichdomesic production responds depends critically on ε.

To ‘slow down’the response of households to sudden changes in the paths ofexogenous variables:
Capital adjustment costs; labor adjustment costs?

η is also quite di¤erent in China and the ROW.

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May 28, 200818 / 23

Ideally:
Use reliable data on Chinese productivity and other measures of trade andopenness.
Use bi-lateral trade data.
Examine the extent to which a standard growth model like the current one isable to explain the time path of actual Chinese and its partners’NIPA
accounts.
Use this model to evaluate welfare and to conduct counterfactuals so thatpolicy recommendations can be obtained.
So far, it proved di¢ cult to construct data from the Chinese economy toimplement this research strategy satisfactorily.
The current paper is taking a bold step toward utilizing whatever is available
and moving forward.

Discussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese GrowthMay 28, 200819 / 23

Other comments:
Short-run analysis:
Starting point: Given initial conditions in 1977
Ending point: same as in the current version; 2100 steady-state
Immediate aftermath of 2004: some assumptions on how openness andproductivity will pan out
Analyze the short-run e¤ects till 2004, evaluate welfare
Conduct sensitivity analyses for assumptions regardingDi¤erent starting pointsDi¤erent …nal steady-state calibrationDi¤erent paths of exogenous variables (backed out from alternative paths ofendogenous variables) in the immediate aftermath of 2004.

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Deterministic versus Stochastic Simulations:
0.30

Saving0.25

0.20

Saving Rate

0.15

0.10

0.05

0.00
1956

Benchmark Model

1961

1966

1971

1976

1981

1986

1991

1996

-0.05

-0.10

-0.15

Figure 2: Benchmark Economy
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GNP per person

hours per capita

1.30.5modeldata

1.1
10.4

0.35

0.90.8
1960

model
data

0.45

hours

GNP per person

1.2

1970

1980
year

1990

2000

1960

1970

capital
1.3

10.95

0.9

0.9

1970

1980
year

1990

0.85
1960

2000

1970

capital output ratio

1980
year

1990

2000

Consumption output ratio

4.5

0.7
model
data

3.5

3

model
data

0.65

C/Y ratio

4

K/Y ratio

2000

model
data

1

productivity

capital

1.1

2.5
1960

1990

1.05
model
data

1.2

0.8
1960

1980
year

labor productivity

0.6

0.55

1970

1980
year

1990

2000

0.5
1960

1970

1980
year

1990

2000

Figure: Model Properties with Varying Labor Wedge
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May 28, 200822 / 23

What’s Next?
Asymmetric given initial conditions and sensitivity analysis.
A permanent reduction in home bias in China.
Endogenizing TFP:
Technology Di¤usion?
A link from the imports of capital goods leading to an increase in theproductivity of Chinese …nal goods production.

Incorporating the e¤ects of demographic transition.

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g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 200823 / 23

What’s Next?
Asymmetric given initial conditions and sensitivity analysis.
A permanent reduction in home bias in China.
Endogenizing TFP:
Technology Di¤usion?
A link from the imports of capital goods leading to an increase in theproductivity of Chinese …nal goods production.

Incorporating the e¤ects of demographic transition.
Immigration to help out aging Japanese population with production andsocial security.

Discussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese Growth

May 28, 200823 / 23

What’s Next?
Asymmetric given initial conditions and sensitivity analysis.
A permanent reduction in home bias in China.
Endogenizing TFP:Technology Di¤usion?
A link from the imports of capital goods leading to an increase in theproductivity of Chinese …nal goods production.

Incorporating the e¤ects of demographic transition.
Immigration to help out aging Japanese population with production andsocial security.
Starting with LARGER …gures and graphs to help out older readers.

Discussion by Selo ·Imrohoro¼
g lu USC Marshall Business SchoolThe() Global Impact of Chinese GrowthMay 28, 200823 / 23