Agriculture Reference
In-Depth Information
reforms. Second, the long-run outlook is required in order that the
expectatons of nvestors can be formulated. Recall that they are assumed
to take changes n long-run returns on nstalled captal nto account n
determnng short-run changes n ther nvestment behavour.
The key elements of the long-run closure, already discussed, in summary,
nclude
there are no nomnal rgdtes (no rgdty of nomnal wages)
producton and consumpton elastctes of substtuton are chosen
at 'standard' levels to reflect the additional time for adjustment in
the long run over the short run (Tyers and Yang 2001)
physical capital is no longer sector-specific; it redistributes across
sectors to equalse rates of return
captal controls are gnored and
in China, irrespective of short-run fiscal policy assumptions, in the
long run any loss of government revenue assocated wth tarff
changes is assumed to not be made up via direct (income) tax, with
the result that the fiscal deficit expands.
The results from the long-run smulaton are provded n Table A9.4.
They show the expected allocative efficiency gains, reflected here in a
rise in GDP, aided by increased returns on installed physical capital that
induce greater investment and therefore larger net inflows on the capital
account n the long run. The ncreased average long-run return on nstalled
captal n Chna s therefore part of nvestor expectatons n the short
run and so tends to raise the level of investment in the short run, even if
capital controls are maintained, as discussed in the next section. Finally,
as discussed earlier, the trade reform causes home consumption to switch
away from home-produced goods, the relative prices of home-produced
goods to fall, and hence an overall real depreciation occurs. This real
depreciation accompanies a rise in Chinese export competitiveness, with
overall export volume expandng by 9 per cent.
Of partcular nterest are the changes n real gross output n each sector
of the economy. Although the trade polcy regme of 2001 advantaged food
processing, 'other crops', fisheries and light manufacturing, apart from
the smaller 'beverages' industry, it is the manufacturing sector that is the
robust beneficiary of the unilateral trade liberalisation. This somewhat
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