Conference on the Chinese Economy

September 30 and October 1 and 2, 2011
Shang-Jin Wei of Columbia University and Hanming Fang, University of Pennsylvania, Organizers

Xiaobo Zhang, International Food Policy Research Institute, and Xi Chen, Cornell University
Costly Posturing: Relative Status, Ceremonies and Early Child Development

Participating in and presenting gifts at funerals, weddings, and other ceremonies held by fellow villagers have been regarded as social norms in Chinese villages for thousands of years. However, it is more burdensome for the poor to take part in these social occasions than the rich. Because the poor often lack the necessary resources, they are forced to cut back on basic consumption, such as food, in order to afford a gift to present when they attend the social festivals. For pregnant women in poor families, such a reduction in nutrition intake as a result of gift-giving can have a lasting detrimental health impact on their children. Using a primary, census-type, panel household survey in 18 natural villages in rural China, co-authors Zhang and Chen show that children born to low income mothers who are exposed to a greater number of funerals and other types of ceremonies in their villages during their pregnancies are more likely to display higher rates of stunting and wasting (in other words, to be too short and skinny) for their age.

Yuyu Chen and Guang Shi, Peking University; Ginger Zhe Jin, University of Maryland and NBER; and Naresh Kumar, University of Iowa

The Promise of Beijing: Evaluating the Impact of the 2008 Olympic Games on Air Quality (NBER Working Paper No. 16907)

To prepare for the 2008 Olympic Games, China adopted a number of radical measures to improve air quality. Using the officially reported air pollution index (API) from 2000 to 2009, co-authors Chen, Shi, Jin, and Kumar show that these measures improved the API of Beijing during and after the Games, but that 60 percent of the effect faded away by the end of October 2009. Since the credibility of the API data has been questioned, the authors compare an objective and indirect measure of air quality at a high spatial resolution - aerosol optimal depth (AOD), derived using the data from the NASA satellites - to the API trend. The analysis confirms that the improvement was real but temporary. Most improvement was attributable to plant closure and traffic control. These results suggest that it is possible to achieve real environmental improvement in an authoritarian regime, but the magnitude of the effect and how long it lasts depend on the political motivation behind the policy interventions.

James Liang, Stanford University
Evolution of the Labor Market in a Rapidly Developing Country

Liang builds a model for the evolution of the labor market in a rapidly growing economy in response to the arrival of a large number of foreign (high-productivity) firms. Such high-productivity firms increase the demand for skills that require both education and experience. While the return to education will rise, the wages of young college graduates may decrease. The dynamic version of the model also predicts that there will be an over-supply of young college graduates in the short run, and higher wage inequality in the long run. Using a unique wage data set, Liang finds that these predictions are consistent with the recent development of the labor market in China and are supported by evidence from other rapidly developing countries in the last thirty years.

David Autor, MIT and NBER; David Dorn, CEMFI; and Gordon H. Hanson, University of California at San Diego and NBER
The China Syndrome: Local Labor Market Impacts of Import Competition in the United States

Autor, Dorn, and Hanson analyze the effect of rising Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting cross-market variation in import exposure stemming from initial differences in industry specialization while instrumenting for imports using changes in Chinese imports by industry to other high-income countries. Rising exposure increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets. The deadweight loss of financing these transfers is one- to two-thirds as large as U.S. gains from trade with China.

Julian di Giovanni, International Monetary Fund; Andrei Levchenko, University of Michigan and NBER; and Jing Zhang, University of Michigan
The Global Welfare Impact of China: Trade Integration and Technological Change

di Giovanni, Levchenko, and Zhang evaluates the global welfare impact of China's trade integration and technological change in a quantitative Ricardian-Heckscher-Ohlin model implemented on 75 countries. The model implies that the mean gain from trade with China is 0.1 percent, with a range from -0.25 to +0.73 percent. Countries in East Asia tend to gain the most, while many Textile-and-Apparel producing countries experience welfare losses. The researchers then simulate two alternative productivity growth scenarios: a "balanced" one, in which China's productivity grows at the same rate in each sector, and an "unbalanced" one, in which China's comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well known conjecture (Samuelson 2004), the average country in the world experiences an order-of-magnitude larger welfare gains when China's growth is unbalanced.

Lisa Cameron and Lata Gangadharan, Monash University; Nisvan Erkal, University of Melbourne; and Xin Meng, Australian National University
Little Emperors-Behavioral Impacts of China's One-Child Policy

Cameron, Erkal, Gangadharan, and Meng examine the behavioral patterns exhibited by individuals exposed to the One-Child Policy. They conduct an experiment with individuals born just before and just after the One-Child Policy who are otherwise similar. Those who grew up as only children as a consequence of the policy are found to be less trusting, less trustworthy, less likely to take risks, and less competitive than if they had had siblings. They are also less optimistic, less conscientious, and more prone to neuroticism. Thus, the One Child Policy has significant ramifications for Chinese society and for the world with which China increasingly deals.

Julan Du, Chinese University of Hong Kong, and Shang-Jin Wei

The Gate of Heavenly Peace: A Prism into the Capitalist Success in Communist China

While non-democracies may lower welfare for citizens through many channels, they do not necessarily lower the rate of economic growth. In particular, an autocracy can arrange political, legal, and other institutions to be more pro-capitalist than a typical democracy. Applying an event study framework to the crackdown of pro-democracy protests in China on June 4, 1989, Du and Wei study how the Chinese institutions and political setup were viewed by investors. While the crushing of the protests was overwhelmingly condemned as a setback for the country's move to a more accountable political system, these researchers uncover a relative rise immediately following the crackdown in the stock prices of those Hong Kong-listed firms with relatively more dependence on Chinese institutions than other firms Further investigation reveals that this pattern goes beyond politically connected firms. This suggests that investors regarded the prevailing political and institutional arrangements in China as favorable to capitalists in general, not just to cronies with strong political ties.

Chadwick C. Curtis and Steven Lugauer, University of Notre Dame; and Nelson Mark, University of Notre Dame and NBER

Demographic Patterns and Household Saving in China (NBER Working Paper No. 16828)

Curtis, Lugauer, and Mark study the effect that changing demographic patterns have had on the household saving rate in China. They use an overlapping generations (OLG) model where agents live for 85 years. Consumers begin to exercise decisionmaking when they are 18. From age 18 to 60, they work and raise children. Dependent children's utility will enter into parents' utility when parents choose the consumption level of the young until they leave the household. Working agents give a portion of their labor income to their retired parents and save for their own retirement, while the aged live on their accumulated assets and support from their children. Remaining assets are bequeathed to the living upon death. The authors parameterize the model and take future demographic changes, labor income, and interest rates as exogenously given from the data. They then run the model from 1963 to 2009 and find that it explains nearly all the observed increase in the household saving rate.

Christopher D. Carroll, Johns Hopkins University, and Olivier Jeanne, Johns Hopkins University and NBER

A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds (NBER Working Paper No. 15228)

Carroll and Jeanne model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Their model captures the principal insights from the existing specialized literature on the precautionary motive with a novel and convenient formula for the economy's target asset ratio. The target is the value of assets that balances growth, impatience, prudence, risk, intertemporal substitution, and the rate of return. The authors use the model to shed light on two topical questions: "upstream" flows of capital from developing to advanced countries; and the long-run impact of "resorbing" global financial imbalances.

Tuan-Hwee Sng, Northwestern University
Size and Dynastic Decline: The Principal-Agent Problem in Late Imperial China 1700-1850

Sng argues that one reason for China's relative economic decline in the 19th century was its size. A ruler governing a big country faces a severe principal-agent problem. Given his monitoring difficulties, his agents have strong incentives to extort from the taxpayers, especially the politically weak ones. To prevent over-exploitation that could foment rebellion, the ruler has to keep taxes low. The result is the paradox of low state revenue despite a heavy tax burden on the poor. Economic growth could further exacerbate the situation as it increases the incentives for corruption. Sng applies this model to late imperial China and finds that its predictions are well supported by empirical evidence. The Qing state taxed lightly and official land tax burdens were especially low in regions far from the capital. Furthermore, the fiscal and managerial capacity of the Qing dynasty began to contract steadily during the prosperous 18th-century, sowing the seeds for China's socio-economic problems of the 19th-century.

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