Introduction

Open economies, including the People's Republic of China (PRC), are suffering from the ongoing subprime crisis, which began in August 2007. This paper will discuss the role of the PRC in the economic crisis by providing statistical evidences in this paper about the consumption and savings behavior in PRC, its trade imbalances, and how this may be related to the current crisis. Rises in domestic consumption in the PRC have been modest during the past thirty years, and there has been a secular decline in the consumption-gross domestic product (GDP) ratio, partly because of the rising income inequality. Low domestic consumption, along with production overcapacity has led to overdependence on increases in exports for growth, and the low labor costs and the resulting comparative advantage of PRC products reinforces the reliance on export growth. Since the mid-1990s, the PRC has maintained its low labor costs through large-scale rural-to-urban migration and urban labor market reform, both of which furthered trends that saw the global reallocation of labor-intensive manufacturing industries to PRC. The trade dependency ratio in the PRC is substantially higher compared than other economies of similar scale. Meanwhile, consumption in the United States (US) has been high. Through international trade, a balance is thus formed between the PRC's high savings ratio and excess consumption in the US. What is responsible for the comparatively low labor costs in PRC? Why is the current economic crisis an opportunity for the PRC to alter its unbalanced development path? Answers to these questions are critical for both a further understanding of the linkages between labor market reform, PRC growth patterns, and the ongoing economic crisis, as well as a means to figure out better ways to sustain the PRC's long-run growth.

This paper will relate the current economic crisis partly to the labor market reform in PRC, started in the mid-1990s. Why and how the PRC should adjust its development strategy is also discussed. In Section 2, we explain the internal and external imbalances in the PRC and the impacts of the subprime crisis on the PRC economy. In Section 3, we briefly review what happened in the mid-1990s concerning labor market reform, while in Section 4, we discuss how the labor market reform has weakened labor's market strength that allows labor market to function well, but also widened income disparity. Section IV will also summarize the potential threats posed by income inequality to economic growth. In the final section, the paper will explain why the PRC must adjust its labor market reform strategies in order to both narrow its income disparity and to sustain economic growth, especially in face of the current economic crisis.

Download this Paper [ PDF 250.6KB| 29 pages ].

Post a Comment

We welcome your feedback on this publication. Post a comment. ADBI is not obliged to acknowledge or publish comments and may abridge or edit them before web posting.

Comment(s)

There are [0] comment(s) for this entry. Post a comment.