Agriculture Reference
In-Depth Information
depreciation in the crisis, combined with the fixed nominal exchange rate
of the period, necessitated a monetary policy sufficiently restrictive to
bring about a decline in the home price level relative to that in the US—a
deflation. This was the first in a series of deflations in the crisis and post
crss perods.
Shocks that cause real deprecatons also nclude the other elements
of China's domestic reform program. By raising productivity, these reduce
domestc costs relatve to foregn costs and hence they tend to reduce
relative domestic prices. Similarly, trade reforms divert domestic demand
away from home produced goods toward mports and so they also tend
to reduce the prces of domestc goods relatve to the mport prces of
foreign goods. In the period 1997—2001 China embarked on substantial
trade liberalisation, a major part of which included the introduction of
a duty drawback system on the imported inputs of export firms (Tyers
and Rees, Chapter 9). Real depreciations due to such shocks are robust to
Chna's macroeconomc polcy regme. But t s that regme whch dstrbutes
the nomnal effects of the real deprecatons between falls n the home
price level, or deflation, on the one hand and depreciation of the nominal
exchange rate on the other.
The declines in China's official measures of the domestic price are
ndcated n Table A10.1.
10
Other things held equal, such deflations are
contractionary. This is because, even in the most flexible of industries, wage
rates are renegotated more rarely than product prces are adjusted. Lags n
wage adjustment mean that deflation applies a profit squeeze that retards
both employment growth and nvestment n the prvate sector. Consstent
with this, real wage growth in China's modern sector has been extraordinarily
high since 1996, as Figure 10.5 shows, suggesting some deterrence of
labour demand growth and hence of growth n ths sector. Weaker overall
performance of the Chinese economy is indicated by its official GDP growth
rates (Figure 10.4). These bottomed out in the crisis period at between seven
and 8 per cent per year, and have not recovered since.
Snce 2001 Chna has embarked on a stll more dramatc set of trade
reforms as part of ts commtments assocated wth WTO accesson. By
themselves, these reforms will cause further real deprecatons. Should
there be no change in macroeconomic policy, growth and the relocation
of workers nto Chna's modern sector wll contnue to be retarded by
