Trade reform in the short run - Agriculture and Food Security in China - page 236

capital controls, a region's domestic capital market might be represented
as in Figure A9.1. Net inflows on the capital account ( KA ), which comprise
the net inflow of foreign savings, S NF , less the net outflow associated with
the accumulation of official foreign reserves, ΔR , are perfectly elastic at
the global nterest rate (ths rate s adjusted by the exogenous regon-
specific risk premium, π ). 13 The actual scale of net inflows depends on
the net demand for foreign investment, NFI=I-S D , where the relationship
between NFI and r s shfted to the rght by an ncrease n the expected
future return on installed capital, r e , via Equation 1, or by an increase in
government spending, G, va ts effect on domestc savng. It s shfted to
the left by an ncrease n GDP ( Y ), via its effect on consumption and tax
revenue and hence on domestic savings, S D . In the figure, net inflows on the
captal account are determned by the ntersecton of the two curves shown.
For a balance of payments, these inflows must equate to net outflows on
the current account, CA , and prices, and therefore real exchange rates,
adjust to ensure that ths s the case.
In this analysis, capital controls take the form of a rigid ceiling on net
inflows on the capital account. This case is illustrated in Figure A9.2. In
ths crcumstance the lnk between the home and global nterest rates s
severed unless net foreign investment falls sufficiently so that the controls
cease to bind. To capture this in model simulations, the interest premium,
π , is made endogenous while net flows on the capital account, KA , or,
equivalently, on the current account, CA , are set as exogenous.
Data and parameters
The regions, primary factors and sectors identified in the analysis are listed
in Table A9.1. Considering regions first, we draw on the now well-known
GTAP Version 5 global database for 1997, which divides the world into 66
countres and regons. Although ths database separates manland Chna
from Taiwan, it amalgamates Hong Kong with the mainland. 14 Our further
aggregaton of manland Chna wth Tawan does overlook effects that
are internal to these regions but such effects are not our focus. Instead,
we seek to llustrate the strong nteracton between trade reforms and
macroeconomic policies, and, particularly, foreign exchange regimes. These
nteractons are mportant for all the economes of East Asa and partcularly