Development of China

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Development of China

• - An Economy in Transition

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IntroductionWhy do we look at China?

• Development underdevelopment, less development,
  problems of underdevelopment
• China represents a large proportion of the world
  economy
• Population (Mid-2001) 1.27 billion (20.7 of the
  world total)
• Land 3.70 million square miles (7.1 of the
  world total)
• GDP (1999) US 989 Billion (3.2 of the world
  total)
• GDP annual growth (1999) 7.05 (2.72 times of
  the world average)
• GNI PPP1 per capital (1999) US 3550 (53 of
  the world average)
• China is under transition and developing through
  a unique path. It may provide lessons or
  experiences for other developing countries or
  countries under transition.
• 1 Gross National Income in Purchasing Power
  Parity (GNI PPP) per capital

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Purposes of This Lecture

• Measure the development
• Determines of the development
• Outcomes the development process
• Policy for the development

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Major Topics

• (1) General theory
• (2) Brief history of Chinas development
• (3) Models of development in China
• (4) New Challenges
• (5) Policy and new reforms

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(1) General Theory
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Development Indicators

• Economic
• Demographic
• Social
• Infrastructure
• Geographic
• Human Development Index

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Production Function

• 4 determinants of a countrys productivity
• Y A F(L, K, H, N), or
• xY A F(xL, xK, xH, xN), (if x gt0) or
• Y/L A F(1, K/L, H/L, N/L), (if x1/L)

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Long-run of Economic Growth- Selected Countries
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(2) History of Chinas Development

• First Five-Year Plan (1953-1957)
• A new economic order modeled on the Soviet Union
  example, emphasizing the development of
  capital-intensive heavy industry
• Great Leap Forward (1958-1960)
• The break away from the Soviet model and
  introduction of a new program aimed at rapidly
  raising industrial and agricultural production
• Cultural Revolution (1966-1976)
• The pursuit of Maos own development strategy of
  a self-reliant economy and political struggle
• Economic Reforms (1978- )
• To move the economy from a planned economy to one
  that is more market-oriented

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(3) Model of China Development

• 1 Socialist planned economy
• Government planning is basic means of allocating
  resources
• Production quotas quantity rather than quality
• Suppress consumption to increase saving invest
  in heavy industry
• Self-reliant and uninvolved in foreign economic
  relation
• Results
• Overuse of industrial equipment
• Shortage in supply production and consumption
  goods
• Unstable economy growth

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Model of China development (contd)

• 2 Socialist market economy
• Market is basic means of allocating resources
• State controls at the macroeconomic level
• Economic structural Reform
• Results
• Competition establishment of the diversified
  ownership
• Efficient profit maximization
• Open involved in foreign economic relation
• Fast and stable economy growth

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Economic Reforms

• Rural reform
• Increase of agricultural production and rural
  income
• Open-door policy
• Turnaround from an inward-looking, self-reliant
  economy to one that participates in the world
  economy (foreign trade, FDI, and SEZs)
• Industrial reform
• Enterprise reform and price reform
• Financial reform
• Companys responsible for financial performance
  and borrow money from banks raise capital at the
  stock market
• SOEs reforms
• Ownership restructuring

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Comparison of Two Development Models
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(4) New Challenges to China

• Three transitions
• Population and environmental pressures
• Employment insecurity
• Growing inequality and poverty
• Macroeconomic instability stemming from
  incomplete reforms

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Three Transitions

• From a planned economy to a market-based one
• From a rural, agricultural society to an urban,
  industrial one
• From a non-WTO nation to a WTO one

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Population and Environmental Pressures

• Large in number (1.27 billion)
• Low growth rate (1)
• Low urbanization (30)
• Large number of floating population (100
  million)

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Employment Insecurity
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Growing Inequality Per Capita Annual Income of
Urban and Rural Household and The Related Index
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(5) Policy and further reforms

• The spread of market forces must be encouraged
• The government must begin serving markets (by
  building the legal, social physical, and
  institutional infrastructure)
• Integration with the world economy must be
  deepened facing WTO

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(6) Summary

• Economic prosperity varies substantially around
  the world - some countries are times richer than
  others
• Economic growth rates also very substantially -
  the relative position of countries can change
  over time

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Summary (contd)

• The standard of living depends on the economys
  productivity
• Productivity depends on 4 determinants - physical
  capital, human capital, natural resource, and
  technological knowledge

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Summary(contd)

• Government policies can influence the economys
  growth rate in many ways
• encouraging saving and investment
• encouraging investment from abroad
• fostering education
• maintaining property rights and political
  stability
• allowing free trade
• controlling population growth
• promoting the research and development of new
  technologies

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Summary (contd)

• The accumulation of capital is subject to
  diminishing returns
• The more capital an economy has, the less
  additional output the economy gets from an extra
  unit of capital,
• higher saving leads to higher growth for a period
  of time, but growth eventually slows down as the
  economy approaches a higher level of capital,
  productivity, and income,
• the return to capital is especially high in poor
  countries (catch-up effect).