Frontiers of Economics in China

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“One Belt and One Road” and Free Trade Zones—China’s New Opening-up Initiatives
Justin Yifu Lin
Front. Econ. China    2015, 10 (4): 585-590.   DOI: 10.3868/s060-004-015-0026-0
Abstract   PDF (187KB)

“One Belt and One Road” and Free Trade Zones are two of China’s new opening-up strategies developed in response to the changed domestic and international circumstances. Implementation of these strategies can provide China with a sounder market economic system and a better external environment. It can not only help China to further develop into a high income country, but also facilitate the industrialization and modernization of other developing countries.

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Learning and Efficiency with Search Frictions
Xi Weng
Front. Econ. China    2015, 10 (3): 449-466.   DOI: 10.3868/s060-004-015-0019-4
Abstract   PDF (219KB)

This paper studies the allocative efficiency in a Moscarini (2005)-type equilibrium search environment with learning. It is shown that the stationary equilibrium is efficient if and only if the Hosios condition holds no matter whether learning is about firm-specific human capital or about general human capital. However, the stationary equilibrium can never be efficient if externalities exist from unemployment. In contrast, even with externalities, the stationary equilibrium can be efficient under some modified Hosios condition if there is no uncertainty (standard Mortensen and Pissarides (1994)-type equilibrium search environment). The key intuition is that the equilibrium can only be efficient if firm-worker matching is formed and terminated efficiently.

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Hollowing out of the Real Economy: Evidence from China’s Listed Firms
Xu Li,Xiang Shao,Zhigang Tao
Front. Econ. China    2016, 11 (3): 390-409.   DOI: 10.3868/s060-005-016-0022-6
Abstract   PDF (282KB)

The paper studies an often-observed phenomenon of diversification of manufacturing firms into real estate development in East Asian economies. Utilizing a sudden change in China’s accounting standards that requires firms to disclose information about their real estate holdings for investment purpose (or investment property), we examine both the impact of such diversification on firms’ investment in their original business and the stock market response to such diversification. Our results confirm there exists underinvestment in original business (or hollowing out of the real economy) for firms diversifying into real estate, and that there is a lack of investor response to such diversification, in both short-run and long-run. Our study calls for further research on the role of real estate development in the long-run competitiveness of developing economies.

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A Policy Perspective on Outward Foreign Direct Investment by Chinese State-Owned Enterprises
Steven Globerman
Front. Econ. China    2016, 11 (4): 537-547.   DOI: 10.3868/s060-005-016-0028-8
Abstract   PDF (186KB)

A growing number of developed country governments in recent years have adopted a hostile attitude towards foreign direct investments undertaken in their markets by state-owned enterprises (SOEs), the latter often based in China. The broad reason for this hostility is the belief that state-owned enterprises pursue non-commercial objectives with resulting damage to host economies. This paper argues that the empirical evidence shows SOEs are increasingly exhibiting market-owned behavior. Furthermore, any adverse consequences of non-commercial behavior are likely to be realized primarily by the SOEs themselves.

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The Effect of Family Size on Children’s Education: Evidence from the Fertility Control Policy in China
Ying Shen
Front. Econ. China    2017, 12 (1): 37-65.   DOI: 10.3868/s060-006-017-0003-3
Abstract   PDF (2238KB)

Empirical research on the effect of family size on child education is complicated by the endogeneity of family size. This study exploits plausibly exogenous changes in family size caused by China’s population control policy to estimate the causal relationship between family size and child education outcomes. The results show that, compared to an only child, a person with an additional sibling will have an approximate seventeen percentage points lower likelihood of completing middle school in China. Separate regressions across individual characteristics reveal that much of this negative effect appears to be driven by the cohorts born in earlier years after the policy, and children with the highest birth order within a family.

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China’s Macroeconomic Outlook and Risk Assessment: Counterfactual Analysis, Policy Simulation, and Long-Term Governance — A Summary of Annual Report (2015–2016)
Kevin X. D. Huang,Guoqiang Tian
Front. Econ. China    2016, 11 (2): 173-191.   DOI: 10.3868/s060-005-016-0011-2
Abstract   PDF (5436KB)

This summary report highlights the confluence of continued downward pressures and deflation scares in the face of looming uncertainty in China’s key macroeconomic landscapes. Counterfactual analyses and policy simulations are conducted, in addition to benchmark forecasts, based on IAR-CMM model and taking into account both cyclical and secular factors. Economic deceleration is projected to continue in the short to medium term, with real GDP growth declining to 6.3% (5.5% using more reliable instead of official data) in 2016 and facing a significant risk of sliding further down in 2017. Five key factors contributing to the weak outlook, additional to frictions and impediments associated with economic transition/restructuring and lackluster domestic/external demands, are identified, including: lack of new growth/ development engine, exhaustion of government-led driving force, the crowding-out of private sectors by state-owned enterprises (SOEs) with excess capacity\capital overhang, nonperforming government sectors and officials, and twist or misinterpretation of the “New Normal.” A root cause of these problems, lying with sluggishness in China’s transformation into a market based economy, has to do with overpowered government but underpowered market in resource allocation and government underperformance in enforcing integrity and transparency in the marketplace and in providing public goods and services. At the nexus between inclusive growth and institutional transformation are market oriented and rule of law governed structural reforms and harmonious development. As such, fundamental institutional reforms that dialectically balance demand and supply side factors and properly weigh short run stabilization against long run development should be elevated to the top of the agenda.

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Exchange Rate Flexibility and Current Account Adjustment: A Threshold VAR Analysis
Yu You,Zongye Huang,Yoonbai Kim
Front. Econ. China    2016, 11 (4): 635-667.   DOI: 10.3868/s060-005-016-0032-3
Abstract   PDF (3721KB)

Global imbalances (current account imbalances) have become an important issue for economists and policy makers. Greater exchange rate flexibility is often suggested as a means to achieve faster and more efficient adjustment in the current account. However, previous empirical studies show little support for this hypothesis. This paper revisits this issue with a large panel dataset and a threshold VAR model and finds that (1) some existing popular exchange rate classifications may not capture actual exchange rate variability as well as expected; (2) Once exchange rate variability is correctly identified, the speed of mean reversion in the current account balance is indeed higher in a regime with greater exchange rate variability.

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Foreword to “A Comparative Study of Two Global Crises”
Graham Allison, Lawrence Summers
Front. Econ. China    2015, 10 (3): 393-395.   DOI: 10.3868/s060-004-015-0016-3
Abstract   PDF (157KB)
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An Empirical Test of the “Financial Accelerator” in China: Evidence from the Chinese Industrial Enterprises Database
Jie Chen,Zhe Li
Front. Econ. China    2015, 10 (3): 509-526.   DOI: 10.3868/s060-003-014-0022-2
Abstract   PDF (943KB)

The purpose of this paper is to test the applicability of the “financial accelerator” mechanism to China. Using the Chinese Industrial Enterprises Database, we find strong evidence suggesting that the employment and investment of leveraged firms are less responsive to aggregate fluctuations. This finding goes against the implications of the “financial accelerator”. To make sure our empirical result is reliable, we have done several robustness checks using different estimation methods and subsamples.

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A Comparative Study of Two Global Crises
Front. Econ. China    2015, 10 (3): 396-413.   DOI: 10.3868/s060-004-015-0017-0
Abstract   PDF (4049KB)

This article identifies the differences and common features of two global crises: the Great Depression of 1929 and the international financial crisis of 2008. The circumstances of the two crises differ in terms of the demographic structure, the technological conditions, the economic and social systems in developed countries, the extent of globalization and other global economic situations. Among the common features, both crises were preceded by unprecedented economic booms, laisse-faire regulatory policies, easy monetary and credit policies, asset bubbles and yawning income gaps. Moreover, the crises had a strong redistribution effect, which would cause shifts of power among large countries and major changes in international economic order.

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A Syntactic Approach to Knowledge in Finite Games of Perfect Information
Wenzhang Zhang
Front. Econ. China    2015, 10 (3): 467-482.   DOI: 10.3868/s060-004-015-0020-8
Abstract   PDF (239KB)

In this paper I present a syntactic approach to modeling the interactive knowledge of rationality in finite games of perfect information. This approach allows for a more transparent interpretation. In particular, we have the intuitive picture of viewing knowledge as the input and decisions as the output of a player’s deliberation. This distinction is blurred in the semantic state-space approach.

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Structural Changes in High Dimensional Factor Models
Jushan Bai,Xu Han
Front. Econ. China    2016, 11 (1): 9-39.   DOI: 10.3868/s060-005-016-0003-9
Abstract   PDF (311KB)

This paper provides a survey on recent developments in structural changes for high dimensional factor models. Compared with conventional low-dimensional time series, structural changes in factor models are more complicated due to the unobservability of factors and factor loadings. The following topics are covered in this survey: the identification conditions for the structural changes in the factor loadings, different impacts of big and small breaks in factor models, tests for structural changes in the factor loadings of a specific variable, tests for structural changes in the factor loading matrix, joint tests for structural changes in the factor loadings and coefficients in factor-augmented regressions, tests for smooth changes in the factor loadings, estimation of break dates, and model selection in factor models with structural changes via the shrinkage method.

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The Determinants of Location Choices of China's ODI: Institutions, Taxation and Resources
Yongqin Wang,Julan Du,Kai Wang
Front. Econ. China    2015, 10 (3): 540-565.   DOI: 10.3868/s060-004-015-0024-6
Abstract   PDF (647KB)

China has become the third largest source of outward direct investment (ODI). This paper studies how institutions in the host countries affect the location choices of China’s ODI. Based on a deal-level sample from 2002–2011, this paper empirically tests how political institutions, political stability, government effectiveness, regulatory quality, rule of law and contrd of corruption in the host countries affect the location choices of China’s ODI. On top of these institutional factors, we study the effects of tax evasion and natural resources in host countries, and their interactions with institutional factors. We find that political institutions in the host countries are not major concerns of the ODI, while government effectiveness, regulatory quality, and control of corruption have significant effects on the locations of ODI. In addition, China’s ODI tends to avoid countries with strict legal systems. Tax evasion and resources are also major motives of China’s ODI. General institutional quality and tax evasion are substitutes in China’s ODI location decisions.

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China’s Growth Prospects
Robert Barro
Front. Econ. China    2016, 11 (2): 192-195.   DOI: 10.3868/s060-005-016-0012-9
Abstract   PDF (143KB)

China’s diminished growth prospects are in the news and seem to spell bad news for just about everybody. This article assesses the evidence, arguing that China’s economic growth will be much slower from now on, reducing international trade. Perhaps the biggest challenge for China will be future political tensions in reconciling economic dreams with economic realities.

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China Is Not yet Number One
Jeffrey Frankel
Front. Econ. China    2015, 10 (1): 1-6.   DOI: 10.3868/s060-004-015-0001-1
Abstract   PDF (755KB)

Many claim that China will soon overtake the US. I argue that this claim is based on a misuse of statistics. The International Comparison Program (ICP) price data is necessary to compare living standards, since a dollar’s worth of yuan buys more in China than a dollar buys in the US. But the fact that rice and clothes are cheap in rural China does not make the Chinese economy larger. What matters for size in the world economy is how much a yuan can buy on world markets. Using the correct prices, the US remains the world’s largest economic power by a substantial margin.

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Public Housing, School Segregation, and Children’s Education: Evidence from Hong Kong
Junjian Yi,Kee Lee Chou,Linda Yung,Junsen Zhang
Front. Econ. China    2015, 10 (3): 414-448.   DOI: 10.3868/s060-004-015-0018-7
Abstract   PDF (2298KB)

Evidence in the literature shows that public-housing residents move less frequently than others. This tendency may restrict school choice for children from public-housing families and lead to school segregation and lower educational outcomes for those children. Our empirical findings from Hong Kong show three strands of evidence that support this hypothesis. (1) Children from public-housing families are more likely to drop out of school after compulsory education. The result is robust after controlling for family background and a series of parental characteristics. (2) Public-housing families with school-age children are less likely to move than their private-housing counterparts. (3) Children from public-housing families are more likely to study in local community schools, which are located on the outskirts of Hong Kong and are of lower education quality. These findings have important policy implications for the public-housing programs such as those which have been implemented in Mainland China since 2011.

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A Biography of Gregory C. Chow
Ben Bernanke
Front. Econ. China    2016, 11 (3): 351-354.   DOI: 10.3868/s060-005-016-0019-8
Abstract   PDF (148KB)
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Governance Reforms and Growth: Some Ideas from Economic Theory
Avinash Dixit
Front. Econ. China    2015, 10 (4): 567-584.   DOI: 10.3868/s060-004-015-0025-3
Abstract   PDF (219KB)

Ideas from the theory of incentives and organization are deployed to examine how some aspects of economic governance—primarily protection of property rights, enforcement of contracts, and oversight regulation—can be improved for achieving better economic growth and development. Some suggestions for reform of governance institutions in developing countries are offered.

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Trade Liberalization and Wage Inequality: Evidence from the U.S. States
Xiaofeng Penny Li
Front. Econ. China    2015, 10 (3): 527-539.   DOI: 10.3868/s060-004-015-0023-9
Abstract   PDF (228KB)

This paper examines the relationship between trade liberalization and wage inequality for 50 U.S. states during the period from 1999 to 2008. The Difference-in-Differences and fixed effects methods are employed to evaluate the effect of trade liberalization on wage inequality in the U.S. states. Empirical results reveal that trade liberalization and de-unionization do increase the wage inequality between skilled and unskilled workers. Evidence shows skill-biased technological change has no significant impact on rising wage inequality. As Difference-in-Differences estimation on time-series cross sectional data involves many years, the conventional standard errors often understate the standard deviation of the estimators. This paper employs the standard bootstrapping procedure and the clustering error procedure to correct the problem, and all sign patterns still hold.

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Bank specific and macroeconomic determinants of bank profitability: Empirical evidence from the China banking sector
Fadzlan SUFIAN, Muzafar Shah HABIBULLAH
Front Econ Chin    2009, 4 (2): 274-291.   DOI: 10.1007/s11459-009-0016-1
Abstract   HTML   PDF (286KB)

This paper seeks to examine the determinants of the profitability of the Chinese banking sector during the post-reform period of 2000–2005. The empirical findings from this study suggest that all the determinants variables have statistically significant impact on China banks profitability. However, the impacts are not uniform across bank types. We find that liquidity, credit risk, and capitalization have positive impacts on the state owned commercial banks (SOCBs) profitability, while the impact of cost is negative. Similar to their SOCB counterparts, we find that joint stock commercial banks (JSCB) with higher credit risk tend to be more profitable, while higher cost results in a lower JSCB profitability levels. During the period under study, the empirical findings suggest that size and cost results in a lower city commercial banks (CITY) profitability, while the more diversified and relatively better capitalized CITY tend to exhibit higher profitability levels. The impact of economic growth is positive, while growth in money supply is negatively related to the SOCB and CITY profitability levels.

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Did Civilian Granaries Affect Social Stability? Empirical Evidence from the Qing Dynasty (1817–1856)
Fang Wang,Degang Miao,Xiaobo He
Front. Econ. China    2015, 10 (3): 483-508.   DOI: 10.3868/s060-004-015-0021-5
Abstract   PDF (513KB)

Based on historical panel data of social instability, civilian granary and climate shocks in the 17 Provinces of the Qing from 1817 to 1856, this paper examines the correlation between social instability and civilian granary holdings. It shows that the civilian granary system reduced social instability in the Qing Dynasty, while climate shocks raised social instability. Moreover, this paper shows that civilian granaries mitigated the effects of climate shocks on social instability.

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Hot Money Flows, Cycles in Primary Commodity Prices, and Financial Control in Developing Countries
Ronald McKinnon
Front. Econ. China    2015, 10 (2): 201-223.   DOI: 10.3868/s060-004-015-0009-7
Abstract   PDF (6571KB)

Because the U.S. Federal Reserve’s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuses on domestic American economic indicators and generally ignores collateral damage from its monetary policies on the rest of the world. Currently, ultra-low interest rates on short-term dollar assets ignite waves of hot money into Emerging Markets (EM) with convertible currencies. When each EM central bank intervenes to prevent its individual currency from appreciating, collectively they lose monetary control, inflate, and cause an upsurge in primary commodity prices internationally. These bubbles burst when some accident at the center, such as a banking crisis, causes a return of the hot money to the United States (and to other industrial countries) as commercial banks stop lending to foreign exchange speculators. World prices of primary products then collapse. African countries with exchange controls and less convertible currencies are not so attractive to currency speculators. Thus, they are less vulnerable than EM to the ebb and flow of hot money. However, African countries are more vulnerable to cycles in primary commodity prices because food is a greater proportion of their consumption, and—being less industrialized—they are more vulnerable to fluctuations in prices of their commodity exports. Supply-side shocks, such as a crop failure anywhere in the world, can affect the price of an individual commodity. But joint fluctuations in the prices of all primary products—minerals, energy, cereals, and so on—reflect monetary conditions in the world economy as determined by the ebb and flow of hot money from the United States, and increasingly from other industrial countries with near-zero interest rates.

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Understanding China’s Foreign Trade Policy: A Literature Review
Tan Li,Larry Qiu,Ying Xue
Front. Econ. China    2016, 11 (3): 410-438.   DOI: 10.3868/s060-005-016-0023-3
Abstract   PDF (321KB)

China has continued to experience rapid growth in its foreign trade since the implementation of its reform and opening-up policies. In recent years, the country has become the world’s largest exporter and second largest importer of goods and commodities. China’s trade policy has also gradually been transforming from protectionism to open trade. This paper aims to provide a comprehensive survey on the literature of China’s trade policy. The review covers (1) export and import policies, (2) tariff and non-tariff barriers, and (3) policy effects and motivations behind the policy design. This paper also reports on important topics and issues that deserve more research attention.

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IPR, Trade, FDI, and Technology Transfer
Tan Li,Larry D. Qiuaa
Front. Econ. China    2014, 9 (4): 529-555.   DOI: 10.3868/s060-003-014-0025-9
Abstract   PDF (276KB)

In this survey, we discuss how intellectual property rights (IPR) protection in the South affects trade flows, foreign direct investment (FDI) flows, and technology transfers from the North to the South. We also discuss optimal IPR policies and their effect on innovation. Our discussion covers both theoretical studies and empirical evidence. This survey is both comprehensive and critical. It aims to give readers the current state of IPR and globalization literature. Some issues have been studied more thoroughly, whereas for others the surface has only been scratched upon. This survey gives readers a clearer picture of the literature and may help them find future research topics.

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Does Openness Increase the Efficiency of China’s Manufacturing Firms? Evidence from the World Bank Investment Climate Survey
Wenjun Liu, Shuliang Zou
Front Econ Chin    2013, 8 (3): 430-451.   DOI: 10.3868/s060-002-013-0021-7
Abstract   HTML   PDF (289KB)

Based on the World Bank Investment Climate Survey, this paper investigates the openness effects on the efficiency of firms in China’s manufacturing industry using a two-step data envelopment analysis (DEA) approach. In the first step, the aggregate efficiency of open firms and non-open firms is compared in each sub-industry using a group-wise heterogeneous bootstrap procedure. The results show, at a 90% confidence level, that open firms are more efficient than non-open firms in four out of five sub-industries. Furthermore, in the second step, we employ the two-stage bootstrap DEA approach to more specifically evaluate the effects of openness on the efficiency of firms. The regression results show that three openness indicators (foreign capital, import and export) have strong positive effects on firms’ efficiency in China’s manufacturing industry. In addition, the results also suggest that a larger state share, larger firm size, and more capital stock are negatively related to the efficiencies of firms, while a firms’ learning and absorptive capacity is positively related to its efficiency.

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Possibility of a Middle Income Trap in China: Assessment in Terms of the Literature on Innovation, Big Business and Inequality
Keun Lee,Shi Li
Front. Econ. China    2014, 9 (3): 370-397.   DOI: 10.3868/s060-003-014-0019-0
Abstract   PDF (386KB)

This paper discusses the possibility of China falling into the so-called middle income trap in terms of three checkpoints: innovation capability, world-class big businesses, and inequality. Based on these criteria, our conclusions are as follows: First, China has increasingly become innovative and thus differs from other middle income countries. Second, China has many successful big businesses, a number disproportionate to its size. Thus, China differs from other middle income countries with few world-class big businesses, and the only qualification is that those big businesses are mostly nonmanufacturing firms focused on such areas as finance, energy, and trading. Third, China faces great uncertainty in terms of inequality. Although several signs show that the Kuznets curve will come to represent China, as noted by the gradual reduction of surplus labor and rising wage rates starting in the coastal provinces, the Chinese are now facing new sources of inequality in China, such as wealth (including financial and real estate assets) and non-economic factors (including corruption).

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China’s Outward FDI: An Industry-Level Analysis of Host-Country Determinants
Alessia Amighini, Roberta Rabellotti, Marco Sanfilippo
Front Econ Chin    2013, 8 (3): 309-336.   DOI: 10.3868/s060-002-013-0017-2
Abstract   HTML   PDF (780KB)

We use disaggregated data by country and industry to empirically analyze the host country determinants of Chinese outward foreign direct investment (FDI) for the years 2003 to 2011. Our results suggest that the host-country determinants of Chinese FDI differ between high- and low-income countries. While all Chinese FDI is invariably market seeking, other motivations stand out for differing sectors in specific country groups. The resource seeking motivation is relevant for manufacturing FDI to high-income countries with relatively high fuel abundance, and to low-income countries with primary resource abundance (other than fuels). Differently, the strategic-asset seeking motivation, measured by the level of R&D spending on GDP, only positively and significantly affects Chinese manufacturing and service FDI to OECD countries, while higher education levels are an attraction factor for all investing firms. Natural resource is an important attraction factor for Chinese FDI, not only in resource-related sectors, but also in manufacturing and service sectors. Finally, Chinese FDI tends to follow exports (rather than foster them), especially in service sectors.

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Inspections and Information Disclosure: Quality Regulations with Incomplete Enforcement
Liguo Lin,Lan Yao
Front. Econ. China    2014, 9 (2): 240-260.   DOI: 10.3868/s060-003-014-0013-8
Abstract   PDF (354KB)

The weak enforcement and monitoring systems employed in China (e.g., insufficient inspection resources and negligible fines for noncompliance) are widely blamed for the growing unrest over food safety in the country. Given this development, we consider a model where quality inspection performed by agencies is a means of disclosing information on product quality. We analyze the price-quality equilibrium scheme and show that a higher probability of inspection leads to lower price premiums attached to qualified products. We further investigate the welfare effect of minimum quality standards and inspection efforts and show that they should be complementary. We finally suggest that a state dependent inspection strategy, such as not inspecting those firms that have previously been found to be noncompliant, will enhance social welfare.

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Premature Deindustrialisation in the Developing World
Dani Rodrik
Front. Econ. China    2017, 12 (1): 1-6.   DOI: 10.3868/s060-006-017-0001-9
Abstract   PDF (1015KB)

As developed economies have substituted away from manufacturing towards services, so too have developing countries—to an even greater extent. Such sectoral change may be premature for economies that never fully industrialised in the first place. This article presents evidence that countries with smaller manufacturing sectors substitute away from manufacturing to a larger extent, suggesting a trade channel through which falling international relative prices of manufacturing lead price-taking developing economies to substitute accordingly.

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China’s Reform: History, Logic and Future
Guoqiang Tian
Front. Econ. China    2016, 11 (2): 210-231.   DOI: 10.3868/s060-005-016-0014-3
Abstract   PDF (239KB)

This paper is a brief introduction of the core content and basic concepts of the book China’s Reform: History, Logic and Future, and gives answers to questions such as why China’s reform and opening-up policy has achieved great success, why the catch-up mode, extensive and extractive development mode China adopted in the past three decades are no longer sustainable and what China’s market-oriented reforms should aim to achieve in the next stage so that readers can have a profound understanding of China’s reform. Planning ahead, from the perspective of sustainable economic development, China badly needs to transform from factor-driven growth to efficiency-driven and innovation-driven growth, the key to which is to further encourage the liberalization of thought, promote reform and opening-up, unswervingly follow the path of economic liberalization, marketization and privatization, to establish an inclusive modern market system, to allow the market to play a decisive role in resource allocation and the private economy to play a dominant role in the national economy. The market-oriented reform is a complicated project and China is faced with at least three different aspects of reform in some key areas—the main body of private economy, the liberalization of financial market and the marketization of land. Meanwhile, China needs to efficiently balance three elements of good governance, that is, the rule of law, execution and democratic supervision, so as to facilitate the modernization of state governance system and governance capability.

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