The Political Economy Of Economic Reform In China

1. The Political Economy Of Economic Reform In China

2. The Political Economy of Economic Reform In China

3. Convergence(or Transition Dynamics) Solow Model Predicts: Lower Income Countries (States) will Grow Faster than Higher Income Countries (States)

4. Convergence: US State IncomesBarro and Sala-I-Martin (1992) First, if the poorer states are to improve their incomes relative to the richer states, it is a mathematical fact that the poorer states must have higher growth rates than the richer states. Indeed this is exactly what has happened. This chart covers an even longer period. The horizontal axis is per capita income level in 1880. The vertical axis shows the annual growth rate of income over the 108 years to 1988. The graph shows the strong negative relationship between the 1880 income level and the growth rate. The low income states had the fastest rates of growth, while the states with relatively high incomes in 1880 grew the slowest. As a result, the inequality of state incomes has been dramatically reduced. This process or tendency is called �convergence�. Convergence occurs in some situations but not in others, and it is important to understand why poor areas sometimes fail to catch up.First, if the poorer states are to improve their incomes relative to the richer states, it is a mathematical fact that the poorer states must have higher growth rates than the richer states. Indeed this is exactly what has happened. This chart covers an even longer period. The horizontal axis is per capita income level in 1880. The vertical axis shows the annual growth rate of income over the 108 years to 1988. The graph shows the strong negative relationship between the 1880 income level and the growth rate. The low income states had the fastest rates of growth, while the states with relatively high incomes in 1880 grew the slowest. As a result, the inequality of state incomes has been dramatically reduced. This process or tendency is called �convergence�. Convergence occurs in some situations but not in others, and it is important to understand why poor areas sometimes fail to catch up.

5. Here is another example of convergence from my own work with a graduate student in Montana, Feng Juan. This is a more recent period, 1959 to 1979, but it shows the same pattern of faster growth among the poorer states, so that their incomes increase relatively fast.Here is another example of convergence from my own work with a graduate student in Montana, Feng Juan. This is a more recent period, 1959 to 1979, but it shows the same pattern of faster growth among the poorer states, so that their incomes increase relatively fast.

6. But during the period 1979 to 1999, incomes stopped converging among the states. In fact,they diverged slightly.But during the period 1979 to 1999, incomes stopped converging among the states. In fact,they diverged slightly.

7. Divergence Across CountriesBarro and Sala-i-Martin (1992) Here is another example from Barro and Sala-I-Martin. This is data across a broad range of countries during the period 1960 to 1985. You can see that these countries diverged rather than converged: The richer countries actually grew faster than the poorer countries, so the gap between them increased in both absolute and percentage terms. Why did the Solow model predict so badly in these circumstances? Answer: Economic institutions and policies that shape incentives for work, saving, investment and innovation.Here is another example from Barro and Sala-I-Martin. This is data across a broad range of countries during the period 1960 to 1985. You can see that these countries diverged rather than converged: The richer countries actually grew faster than the poorer countries, so the gap between them increased in both absolute and percentage terms. Why did the Solow model predict so badly in these circumstances? Answer: Economic institutions and policies that shape incentives for work, saving, investment and innovation.

8. Ancient China Domesticated Rice and Millet (ca. 8,000 BC) Pioneered Irrigation, Animal Fertilizers, Crop Rotation Invented Cast Iron Moldboard Plow Invented Printing and Paper Invented Compass, Gunpowder Invented Stern Post Rudder To explain this idea, we�ll consider the case of china. First, I�ll briefly review the last 10,000 years of chinese history, with emphasis on the last 60. Ancient China was a very advanced civilization, the equal (or more) of any in the world.To explain this idea, we�ll consider the case of china. First, I�ll briefly review the last 10,000 years of chinese history, with emphasis on the last 60. Ancient China was a very advanced civilization, the equal (or more) of any in the world.

9. 7th � 14th Century Dominant Civilization of East Asia Culture spread to Japan, Korea, Tibet, Vietnam Standard of Living >= to Europe

10. Zheng He�s Treasure Ship http://www.time.com/time/asia/features/journey2001/greatship.html �Even in our 21st century of supertankers and cruise ships lit like floating cities, Zheng He's treasure fleet still inspires awe. More than 300 vessels with some 30,000 men sailed in the first imperial expedition in 1405. It was one of the greatest fleets ever assembled, rivaling the Spanish Armada and Japan's Pacific fleet during World War II in its ability to instill fear.� Zheng He was not an emperor � in fact, he was a eunuch. But he was the admiral of the emperor�s fleet, and guided them around the se corner to asia to sri lanka, india, and africa, and brought back an enormous variety of goods, including giraffes. �There are many theories as to why China curtailed its maritime aspirations in the mid-15th century. The simplest is that the Confucians prevailed. The imperial bureaucracy sought to contain the expansionary ambitions of its sailors and the increasing power of its merchant class: Confucian ideology venerates authority and agrarian ways, not innovation and trade. "Barbarian" nations were thought to offer little of value to China. Other factors contributed: the renovation of the north-south Grand Canal, for one, facilitated grain transport and other internal commerce in gentle inland waters, obviating the need for an ocean route. And the tax burden of maintaining a big fleet was severe. �http://www.time.com/time/asia/features/journey2001/greatship.html �Even in our 21st century of supertankers and cruise ships lit like floating cities, Zheng He's treasure fleet still inspires awe. More than 300 vessels with some 30,000 men sailed in the first imperial expedition in 1405. It was one of the greatest fleets ever assembled, rivaling the Spanish Armada and Japan's Pacific fleet during World War II in its ability to instill fear.� Zheng He was not an emperor � in fact, he was a eunuch. But he was the admiral of the emperor�s fleet, and guided them around the se corner to asia to sri lanka, india, and africa, and brought back an enormous variety of goods, including giraffes. �There are many theories as to why China curtailed its maritime aspirations in the mid-15th century. The simplest is that the Confucians prevailed. The imperial bureaucracy sought to contain the expansionary ambitions of its sailors and the increasing power of its merchant class: Confucian ideology venerates authority and agrarian ways, not innovation and trade. "Barbarian" nations were thought to offer little of value to China. Other factors contributed: the renovation of the north-south Grand Canal, for one, facilitated grain transport and other internal commerce in gentle inland waters, obviating the need for an ocean route. And the tax burden of maintaining a big fleet was severe. �

11. 15th to 18th Centuries BUT: No Renaissance No Scientific Revolution => Industrialization No Democratic Principles of Government China Closed Itself Off from Western Ideas and Technology With no Renaissance: No further development of scientific method (newton, copernicus, etc) whose work eventually led to the industrial revolution. Also, with no renaissance, there were no political philosophers like Rouseau and Montesque whose ideas eventually led to democracy. Instead, china closed itself off... With no Renaissance: No further development of scientific method (newton, copernicus, etc) whose work eventually led to the industrial revolution. Also, with no renaissance, there were no political philosophers like Rouseau and Montesque whose ideas eventually led to democracy. Instead, china closed itself off...

12. 7th � 14th Century Dominant Civilization of East Asia Culture spread to Japan, Korea, Tibet, Vietnam Standard of Living = to Europe But: No Renaissance China Closed Itself Off from Western Ideas and Technology With no Renaissance: No further development of scientific method (newton, copernicus, etc) whose work eventually led to the industrial revolution. Also, with no renaissance, there were no political philosophers like Rouseau and Montesquie whose ideas eventually led to democracy. Instead, china closed itself off...With no Renaissance: No further development of scientific method (newton, copernicus, etc) whose work eventually led to the industrial revolution. Also, with no renaissance, there were no political philosophers like Rouseau and Montesquie whose ideas eventually led to democracy. Instead, china closed itself off...

13. 19th Century Corrupt, Ineffective, Feudal Regime Domestic Insurrections Dominated by Technologically Superior Western Powers While western europe was undergoing the industrial revolution and democracy was taking hold, China suffered under a Domestic Insurrections: Essentially civil war among competing �lords� as we would call them under feudalism Domination: Opium Wars. Western countries wanted to sell opium to chinese. Emperor said no. Western countries sent in the military to establish right to sell opium.While western europe was undergoing the industrial revolution and democracy was taking hold, China suffered under a Domestic Insurrections: Essentially civil war among competing �lords� as we would call them under feudalism Domination: Opium Wars. Western countries wanted to sell opium to chinese. Emperor said no. Western countries sent in the military to establish right to sell opium.

14. 20th Century: First Half Last Emperor Falls 1911 Civil War: Nationalists v. Communists Occupation by Japan 1932-45 1949: Communists Win; Nationalists Flee to Taiwan Well, that does it for 9,900 years. Now for the last century. Japan reinstalled the last emperor as Japan�s puppet. Japan also ravaged much of China � the �rape of Nanjing.� Still an issue between the two countries.Well, that does it for 9,900 years. Now for the last century. Japan reinstalled the last emperor as Japan�s puppet. Japan also ravaged much of China � the �rape of Nanjing.� Still an issue between the two countries.

15. Initial Communist Policy Land Redistribution Literacy Campaign Barefoot Doctors The initial policies of the communists were: Landlords lost title to their land � sometimes they were killed. Land was turned over to peasants. Even today, China�s literacy rate is above 90%, well in excess of India for example, where literacy is only about 60%. (WDI 2006) The communists also extended medical care to the peasant population � this wasn�t the kind of high tech care that we know in the us: no angioplasty�s for example, but much of what needs to be done at the most basic level is pretty low tech: clean water, treatment of inflections etc.The initial policies of the communists were: Landlords lost title to their land � sometimes they were killed. Land was turned over to peasants. Even today, China�s literacy rate is above 90%, well in excess of India for example, where literacy is only about 60%. (WDI 2006) The communists also extended medical care to the peasant population � this wasn�t the kind of high tech care that we know in the us: no angioplasty�s for example, but much of what needs to be done at the most basic level is pretty low tech: clean water, treatment of inflections etc.

16. Survival to Age 5 The results of these efforts were apparent as recently as 1980. This chart shows that survival to age 5 is related to GDP per capita. What�s interesting here is that china�s survival rate was exceptionally high for such a poor country. This is an indicator of the success of the early efforts promoted by the communists. The chart also shows that china was one of the poorest countries of the world at that time.The results of these efforts were apparent as recently as 1980. This chart shows that survival to age 5 is related to GDP per capita. What�s interesting here is that china�s survival rate was exceptionally high for such a poor country. This is an indicator of the success of the early efforts promoted by the communists. The chart also shows that china was one of the poorest countries of the world at that time.

17. Central Planning Heavy Industry State Owned Enterprises Result: Rapid Expansion Large Collective Farms But as the 1950s progressed, the communists also adopted several other policies � some in imitation of what appeared to be the successes in the soviet union. The central planning system incorporated several elements, including the development of heavy industry in the form of state owned enterprises. The result was rapid development of industries like steel production. ON the agricultural front, peasants were increasingly organized in to large collective farms, so they lost any title to the land and rights to the production.But as the 1950s progressed, the communists also adopted several other policies � some in imitation of what appeared to be the successes in the soviet union. The central planning system incorporated several elements, including the development of heavy industry in the form of state owned enterprises. The result was rapid development of industries like steel production. ON the agricultural front, peasants were increasingly organized in to large collective farms, so they lost any title to the land and rights to the production.

18. Central Planning (2) State Assigned People to Jobs State Fixed Wages and Prices Consumption of Food, Clothing, etc. Rationed State Owned all Housing => Few Economic Choices The system of central planning gradually encompassed most of the economy. As a university student, you would be told what college you could attend and what you would major in. After graduation, you would be assigned to a (state-owned) company, which would assign you housing and provide medical care and schooling for you kids.The system of central planning gradually encompassed most of the economy. As a university student, you would be told what college you could attend and what you would major in. After graduation, you would be assigned to a (state-owned) company, which would assign you housing and provide medical care and schooling for you kids.

19. Central Planning (3) Rewards Based on Meeting (Exceeding) Production Quotas Little Reward for Innovation or Quality Improvement A frequent problem with central planning is that it is hard to get the incentives right for the people who actually make the decisions associated with production and consumption.A frequent problem with central planning is that it is hard to get the incentives right for the people who actually make the decisions associated with production and consumption.

20. The 100 Flowers Campaign Mao Feared that Communist Party Members were Losing Revolutionary Fervor Mao Encouraged Criticism of Party Mao Purged his Critics Few Criticized Mao Again On the political front, the 1950s saw some interesting political events that turned out to be precursors to the cultural revolution. Cultural and intellectual figures were encouraged to speak their minds. Mao personally took the lead in the movement, which was launched under the classical slogan "Let a hundred flowers bloom, let the hundred schools of thought contend". By mid-1957, however, the movement unexpectedly mounted, bringing denunciation and criticism against the party in general and the excesses of its cadres in particular. Startled and embarrassed, leaders turned on the critics as "bourgeois rightists" and launched the Anti-Rightist Campaign. On the political front, the 1950s saw some interesting political events that turned out to be precursors to the cultural revolution. Cultural and intellectual figures were encouraged to speak their minds. Mao personally took the lead in the movement, which was launched under the classical slogan "Let a hundred flowers bloom, let the hundred schools of thought contend". By mid-1957, however, the movement unexpectedly mounted, bringing denunciation and criticism against the party in general and the excesses of its cadres in particular. Startled and embarrassed, leaders turned on the critics as "bourgeois rightists" and launched the Anti-Rightist Campaign.

21. Great Leap Forward (1958) Millions of Peasants and City Workers Made Steel in Backyard Furnaces Results Steel Production > England Massive Economic Dislocation Denude Hillsides of Trees, Burn Furniture, Doors for Fuel Melt Down (Steel) Cooking Pots & Ag Implements to Make (Steel) Quota An additional economic thrust of the 1950s was the � It encouraged self-reliance, which meant that China further cut itself off from the rest of the world. One of the most costly aspects of the Great Leap Forward were the quotas imposed on individuals for the making of steel in backyard furnaces. Steel production did increase so that China passed england in output, but the costs were enormous. One cost was econ 101s opportunity cost � peasants who are making steel are not doing other productive things like growing grain, herding cattle, spinning cotton, or even taking care of their kids. Hillsides were stripped of trees to provide fuel, and the environmental consequences are still felt each spring when the NW winds blow sand into Beijing and other cities. Peasants even melted down their (steel) cooking pots and ag implements in order to make quotaAn additional economic thrust of the 1950s was the � It encouraged self-reliance, which meant that China further cut itself off from the rest of the world. One of the most costly aspects of the Great Leap Forward were the quotas imposed on individuals for the making of steel in backyard furnaces. Steel production did increase so that China passed england in output, but the costs were enormous. One cost was econ 101s opportunity cost � peasants who are making steel are not doing other productive things like growing grain, herding cattle, spinning cotton, or even taking care of their kids. Hillsides were stripped of trees to provide fuel, and the environmental consequences are still felt each spring when the NW winds blow sand into Beijing and other cities. Peasants even melted down their (steel) cooking pots and ag implements in order to make quota

22. People�s Communes All Land & Equipment Owned by Collectives Massive Planting of Grains 1958: Huge Wheat Crop Waste: Unharvested (No Labor) No Storage/Transport Report to Mao: �Everything is Going Well� There was also a further consolidation of agriculture. Peasants were organized into people�s communes in which all land � At the Politburo meetings in August 1958, it was decided that these people's communes would become the new form of economic and political organization throughout rural China. Astonishingly for such a dramatic social change, by the end of the year approximately 25,000 communes had been set-up, each with an average of 5,000 households. (Wikipedia) When I was there people � chinese people � would point out steep hillsides that were unsuitable for grain production but that had been stripped of forest cover and planted to wheat during the Great Leap Forward. In many cases, the land had still not recovered. A Variety of other ag practices were introduced, including sowing large numbers of seeds (because seeds of the same type would not compete with each other), and plowing up to 6 feet deep in order to promote root growth. Mao distrusted all intellectuals, including scientists.There was also a further consolidation of agriculture. Peasants were organized into people�s communes in which all land � At the Politburo meetings in August 1958, it was decided that these people's communes would become the new form of economic and political organization throughout rural China. Astonishingly for such a dramatic social change, by the end of the year approximately 25,000 communes had been set-up, each with an average of 5,000 households. (Wikipedia) When I was there people � chinese people � would point out steep hillsides that were unsuitable for grain production but that had been stripped of forest cover and planted to wheat during the Great Leap Forward. In many cases, the land had still not recovered. A Variety of other ag practices were introduced, including sowing large numbers of seeds (because seeds of the same type would not compete with each other), and plowing up to 6 feet deep in order to promote root growth. Mao distrusted all intellectuals, including scientists.

23. Famine: 1958 - 61 Adverse Weather Government Required Communes to Provide Grain to the Cities 30 Million People Starved to Death in Rural Areas China Continued to Export Grain, as Mao Sought to Maintain Face During 1958-1960 China continued to be a substantial net exporter of grain, despite the widespread famine experienced in the countryside, as Mao sought to maintain face and convince the outside world of the success of his plans. (Wikipedia)During 1958-1960 China continued to be a substantial net exporter of grain, despite the widespread famine experienced in the countryside, as Mao sought to maintain face and convince the outside world of the success of his plans. (Wikipedia)

24. Life Expectancy: China The 1960 figures reflect the famine that followed the Great Leap Forward By 1965, life expectancy had reached 53, which was perhaps more typical. But the 1960s data accurately reflect China�s condition at that time: A poor country without reserves of food and which isolates itself from the world is vulnerable to weather and other disruptions. Now we complain about the weather, but the economic system is so much improved that mass starvation is not very likely.The 1960 figures reflect the famine that followed the Great Leap Forward By 1965, life expectancy had reached 53, which was perhaps more typical. But the 1960s data accurately reflect China�s condition at that time: A poor country without reserves of food and which isolates itself from the world is vulnerable to weather and other disruptions. Now we complain about the weather, but the economic system is so much improved that mass starvation is not very likely.

25. Life Expectancy: China The 1960 figures reflect the famine that followed the Great Leap Forward By 1965, life expectancy had reached 53, which was perhaps more typical. But the 1960s data accurately reflect China�s condition at that time: A poor country without reserves of food and which isolates itself from the world is vulnerable to weather and other disruptions. Now we complain about the weather, but the economic system is so much improved that mass starvation is not very likely.The 1960 figures reflect the famine that followed the Great Leap Forward By 1965, life expectancy had reached 53, which was perhaps more typical. But the 1960s data accurately reflect China�s condition at that time: A poor country without reserves of food and which isolates itself from the world is vulnerable to weather and other disruptions. Now we complain about the weather, but the economic system is so much improved that mass starvation is not very likely.

26. Under 5 Mortality: China Under 5 mortality tells a similar story.The impact of the famine is again evident: Almost 1 in four children would die before their fifth birthday, based on 1960 mortality rates. By 1965 this figure was still 173, so China has made very substantial improvements in the last 35 years. Much progress has been made, both in terms of economy and health in particular.Under 5 mortality tells a similar story.The impact of the famine is again evident: Almost 1 in four children would die before their fifth birthday, based on 1960 mortality rates. By 1965 this figure was still 173, so China has made very substantial improvements in the last 35 years. Much progress has been made, both in terms of economy and health in particular.

27. Amartya SenNobel Laureate in Economics �� no substantial famine has ever occurred in any independent and democratic country with a relatively free press� it is precisely this lack of challenge that allowed the deeply defective policies to continue even though they were killing millions each year.� Democracy as a Universal Value, J. of Democracy, 1999

28. The Great Proletarian Cultural Revolution: 1966-76 "Shatter the old world / Establish a new world." Red art from the early Cultural Revolution. A worker (or Red Guard) crushes the crucifix, Buddha and classical Chinese texts with his hammer; 1967 The idea of the cultural revolution was to create the �new socialist man� (or person) who would be free of all the cultural baggage created by history. I remember when I was an undergraduate an inspirational speaker came and talked about �moral rearmament.� The idea was similar but the cultural revolution was much more extreme.The idea of the cultural revolution was to create the �new socialist man� (or person) who would be free of all the cultural baggage created by history. I remember when I was an undergraduate an inspirational speaker came and talked about �moral rearmament.� The idea was similar but the cultural revolution was much more extreme.

29. Cultural Revolution1966-76 Mao�s Power Threatened by �Great Leap Backward� Closed Schools; Sent Teachers to Countryside to �Learn from Peasants� Unleashed Youth: Red Brigades Social Chaos: 500,000 Died Near Economic Collapse

30. End of An Era Mao Dies: 1976 �Gang of Four� Tried for Crimes Deng Xiaoping New Leader Visits �Poor� Taiwan, HK �Reform and Opening�

31. Real GDP/Capita I�ve already shown you these statistics. While the US developed over a very long period of time with a growth rate of about 1.7% per year, China has been growing at almost 8 percent per year. So while our per capita income doubled about every 40 years, china�s has been doubling about every 9 years!I�ve already shown you these statistics. While the US developed over a very long period of time with a growth rate of about 1.7% per year, China has been growing at almost 8 percent per year. So while our per capita income doubled about every 40 years, china�s has been doubling about every 9 years!

32. China�s Progress Here are some more stat�s. Housing has more than doubled, but remains considerably below the us. A square meter is about 10 square feet, so the recent figure is about 250 square feet per capita. The median size of all occupied housing units in the US is about 1800 square feet, or aboutHere are some more stat�s. Housing has more than doubled, but remains considerably below the us. A square meter is about 10 square feet, so the recent figure is about 250 square feet per capita. The median size of all occupied housing units in the US is about 1800 square feet, or about

33. China�s Growth Since 1978 Income/Capita Increased 6 Fold World�s 2nd Largest Economy (PPP) 4th Largest Trading Nation (Exports) Largest Recipient of FDI in the Developing World Never Before in History Have So Many Millions of People Been Lifted Out of Poverty in Such a Short Time Some of the statistics are: Per capita income has increased five-fold China is now the world�s second largest economy when measured using purchasing power parity China is the 9th largest trading nation (some say it is now 2d, and in fact china is growing so fast this may be true!) It is the largest recipient of foreign direct investment in the developing world Perhaps the best way to say it is, Never before in history have so many millions of people been lifted out of poverty in such a short time. Some of the statistics are: Per capita income has increased five-fold China is now the world�s second largest economy when measured using purchasing power parity China is the 9th largest trading nation (some say it is now 2d, and in fact china is growing so fast this may be true!) It is the largest recipient of foreign direct investment in the developing world Perhaps the best way to say it is, Never before in history have so many millions of people been lifted out of poverty in such a short time.

35. Explaining China�s Growth High Saving and Investment (Harrod-Domar Model) China�s saving rate � 40% of income US saving rate � 20% of (large) income But: China had �mobilized� saving during the 1950s, without achieving dramatic growth: Inefficient Invest Yes, China had very high saving and investment as is emphasized in the Harrod Domar modelYes, China had very high saving and investment as is emphasized in the Harrod Domar model

36. Explaining China�s Growth Structural Change (Lewis Model) Massive migration to cities, development of manufacturing, while traditional ag still exists in rural areas China�s development also has elements of the Lewis modelChina�s development also has elements of the Lewis model

37. China is undergoing an incredible transformation � from subsistence agriculture to a modern economy. My TA in China � a very, very bright young man who is certain to get his PhD eventually � came from this region of china, Sichuan province. His father farmed 3 mu, which is equal to about a half acre. Now it rains a lot and one may get three crops a year, but still � this kind of farming can never produce much, and so incomes can never be high. In fact that�s one of the ideas in Chapter 1 � that productivity equals income. And therefore if productivity is low, then incomes are bound to be low.China is undergoing an incredible transformation � from subsistence agriculture to a modern economy. My TA in China � a very, very bright young man who is certain to get his PhD eventually � came from this region of china, Sichuan province. His father farmed 3 mu, which is equal to about a half acre. Now it rains a lot and one may get three crops a year, but still � this kind of farming can never produce much, and so incomes can never be high. In fact that�s one of the ideas in Chapter 1 � that productivity equals income. And therefore if productivity is low, then incomes are bound to be low.

38. Explaining China�s Growth International Dependence? Dominated by US/Europe in 19th Cent Occupied by Japan from 1932-45 But China�s experience in 1950s-1960s illustrates failure of SOEs, central planning, and autarky

39. Explaining China�s Growth Neoclassical Counterrevolution: Free Markets? Sort of, but definitely not exactly� China currently ranks 82 out of 141 countries in Economic Freedom In 1997 China received a grade of �F� for Economic (un)Freedom http://www.freetheworld.com/index.html

40. Household Responsibility System Farmers allocated individual plots of land to work (but not ownership) Farmers decide what, how to plant Sell quota to state; keep/sell the rest => Incentives to increase output and reduce costs Output and Rural incomes increased Generated surplus (> subsistence) to finance Investment The reform of the economy took several forms. The first reforms were in agriculture.The reform of the economy took several forms. The first reforms were in agriculture.

41. Township & Village Enterprises Local Governments/Cooperatives Produce for Market Local Decision-Making Local Finance Keep (Most of) the Profits Before: State Takes All Profits After: State Taxes Profits

42. Special Economic Zones Encourage Foreign Investment Capital Inflows Technology Knowledge of Rest of World (Chinese Diaspora) Encourage Production for Export Contrast with Autarky

43. �It�s Glorious to be Rich� Millionaires are invited to join the PartyMillionaires are invited to join the Party

44. Lessons Saving, Investment, and Technology are Important: Harrod-Domar Economic Institutions Create Incentives (or Disincentives) for: Savings, Investment, and Innovation Work, Output, Productivity Efficient Resource Utilization

45. Lessons - II China�s Development is Founded on: Gov�t Policy to Increase Health and Literacy Market Institutions (Incentives) Stable Political & Legal Framework Various Public-Private Combinations Deng: Black Cat � White Cat

46. K/L (or L over K?) What is the capital labor ratio in this picture? A lot of labor and not much capital. What is the capital labor ratio in this picture? A lot of labor and not much capital.

47. Drying Wheat Where are the cars (as opposed to trucks?) The Economist magazine is arguing that china�s entry into the world economy has resulted in an effective decline in the capital to labor ratio (because population is so great). The magazine further hypothesizes that wages throughout the world are depressed as a result, while the return to capital has increased. And indeed wages have made slow progress over the last few years, while corporate profits are the highest for 30 years. Where are the cars (as opposed to trucks?) The Economist magazine is arguing that china�s entry into the world economy has resulted in an effective decline in the capital to labor ratio (because population is so great). The magazine further hypothesizes that wages throughout the world are depressed as a result, while the return to capital has increased. And indeed wages have made slow progress over the last few years, while corporate profits are the highest for 30 years.

48. China is Still a Developing Country Lower K/L than West Lower Education than West => China has Comparative Advantage in Products that Intensively Utilize Low-Skill Labor (e.g. Textiles, Plastic Cups)

49. China�s Growth Will Slow as Western Income Levels are Approached Currently �Catching Up� in Capital, Technology, Education Grown so Fast because: So Poor to Begin With Policies were so Bad To China�s Credit: Many still Stagnate

50. Is China an Economic �Threat� to the US? Is Germany a Threat? Most of the Benefits and Costs of Development Are Domestic Increases in Chinese Productivity Mainly Benefit China Increases in Chinese Productivity do NOT Make US any Less Productive

51. Secondary Impacts Chinese Export Inexpensive Goods Benefit US Consumers Harm US Competitors Net Benefit to US Chinese Compete for Raw Materials Chinese Supply Capital Inflows Chinese Develop New Technology?