Cost Distortions and Structural Imbalances in China

17 Pages Posted: 14 Jul 2010

See all articles by Yiping Huang

Yiping Huang

Peking University, National School of Development

Bijun Wang

affiliation not provided to SSRN

Abstract

This paper attempts to explain the fundamental cause of China's growing imbalance problems. Economic data confirm that the key structural imbalance problems, such as overinvestment, large current account surpluses, low consumption share of GDP and income inequality, have all deteriorated over the past few years, despite continuous policy efforts to correct these problems. We argue that the key determining factor is repressed factor cost, which is associated with heavily distorted markets for labor, capital, land, resources and the environment. These are like implicit subsidies for producers, investors and exporters. They boost growth and, at the same time, lift investment and exports. Previous policy efforts have focused more on administrative measures, which have not been sustainable. Therefore, a more fundamental solution to the imbalance problem lies in completing market-oriented reforms for production factors and allowing free markets to determine prices of labor, capital, land and resources.

Suggested Citation

Huang, Yiping and Wang, Bijun, Cost Distortions and Structural Imbalances in China. China & World Economy, Vol. 18, No. 4, pp. 1-17, July-August 2010, Available at SSRN: https://ssrn.com/abstract=1639631 or http://dx.doi.org/10.1111/j.1749-124X.2010.01201.x

Yiping Huang (Contact Author)

Peking University, National School of Development ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Bijun Wang

affiliation not provided to SSRN ( email )

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