China’s Economic Growth and How their economy got where they are

China’s Economic Growth and How their economy got where they are

Topic 1: Growth and How did we get here
A. History
a. Malthusian Trap
i. There is an equilibrium level of population sustainable by resources available
ii. 1800  Call the period of Modern Economic Growth
**It is a new kind of growth and not everyone has participated**

B. Modeling this Economic Growth
a. Harrod-Domar Model
i. Def; Rapid capital accumulation is the key “Investment”, there is a link between
investment and growth such that if you have a target or growth, there exists a
“required” investment rate to achieve that growth rate.
1. Ex. If I get 1% point growth in GDP when the investment/GDP ratio
increases 4% point, I can achieve 2% point more growth by increasing
my investment/GDP ratio 8% point.
ii. Application to developing countries
1. If a country doesn’t have enough savings to increase investment the
the amount deemed necessary for growth, the developing country borrows
money to fill the “financing gap” The gap between the savings rate and
savings necessary to get high growth rates.

Problem: There are decreasing returns to scale. So, no stable link truly existed.
b. Solow Model
i. Def; technological change is the key to long-run growth.
ii. Application
1. Capital accumulation can be helpful but only in the short-run

This increase in the capital can get a country onto their long-run growth
path but the burst in GDP growth is temporary.

Problem: Machinery is not in short enough supply to explain the gap in GDP/capita
across countries


c. New Solow Models (attempts to better fit data)
i. Account for differences in:
1. Human capital
2. Institutions
3. Health status
ii. Some model put technology in the growth model
T = f(K, L, T, E)
K  Capital
L  Labor
T Technology
E Environment

C. Measuring Economic Development (The “catch-up” of the rest of the world to the rich
or developed countries)
a. Traditional Approach
i. Development is an increase in GNI (Gross National Income) at rates of 5% to
7% or more annually

b. GNI per capita
i. Can look at growth per capita accounts for population growth
c. Computing a corrected GDP where income is added or subtracted depending on
people’s willingness to pay for an alternative.
d. Gross National Happiness (Subjective well being)
i. Use survey data where people are asked how they feel about their well being
1. EX. Bhutan
e. Capability Approach
i. How many different choices does someone have? Can they choose differently
careers, choose between doctors …

f. Synthetic Indicators
i. Human Development Index – use a basket of indicators of varying weights in
order to get an understanding of development progress (life expectancy, mean
years of schooling, GNI, inequality)

D. Our Path in ECN115B
a. How did we get here?
b. International Trade
c. Balance of Payments & Debt
d. Benefits and dangers foreign capital
e. Super Power of Developing World
f. Future of Development


E. The origins of the current income disparities across countries
a. Diamond & Approach
i. Where you are makes the difference
1. The big picture:
a. Early development of food production or Early arrival of food
 vast enough to production to produce surpluses
large, dense, sedentary, stratified societies
accumulate global power with guns, germs, steel to dominate
other societies and accumulate wealth
ii. Food Production vs. Hunting and Gathering
1. Rational economic agents are maximizing their return on calories with
the least cost (time & effort) given some level of certainty.
**Historically the various groups have judged each other negatively when in
fact, both groups are driven by economic rationality. **
2. Seen transition from hunting & gathering to food production over time
a. Decline in the availability of wild foods
– End of Pleistocene (2,588,000 to 12,000 yrs ago)
– Extinction of all large mammals in the Americas, some in Eurasia &
b. increased availability of domesticable wild plants
c. Development of technologies for collecting and processing wild
d. Auto catalytic process
i. Increased food production & increased population 
increase birth rates; therefore, the production of food 
sedentary  more population

e. The food producers were more numerous so could displace or kill
hunter & gatherers

3. Farmers domesticated first those wild plants that were easiest to
iii. The order of plant domestication
1. Earliest fertile crescent crops (~8,000 BCE)
a. Wheat, barley, peas
2. Fruit & nut trees (~4,000 BCE)
3. Fruit trees requiring grafting (~500 BCE)
a. Pears & apples
4. Weeds: beets, oats, lettuce, rye
iv. The requirements for a large (>100 lbs) mammal to feed a population
1. Diet: herbivores required less food
2. Growth rate: grow quickly
3. Must be able to breed in captivity
4. Can’t have a nasty disposition
5. Social structure: live in a herdable to follow a leader
**sheep, goat, cow, pig, horse**


v. the order of animal domestication
1. occurred between 8000 – 2500 BCE beginning of farming societies
2. sheep, goat, pig, cow
 horse
camel & donkey later
vi. The unique position of the fertile crescent
1. Largest zone of Mediterranean climate (mild, wet winter & long, hot, dry
2. Greatest climate variation from season to season, year to year
The abundance of plant varieties and animal varieties
3. Wide range of altitudes and topographic
4. Less competition from hunter/gatherer lifestyle
a. Short coastline
b. Few rivers
c. Gazelle over – hunted
d. Wild grains provided enough calories for early food producers to
get started
vii. The unique axis of Eurasia
1. There were three main early food producers
a. Sahel – Africa
i. <0.5 miles/year Mesoamerica – Americas
ii. 0.7 miles/year Fertile crescent – Eurosia
*Because Eurasia is oriented East-West, food production moved
more rapidly
*Not only food production, as a result of similar growing seasons,
moved rapidly.
-Technology travelled with the spread of food production
-Germs spread with the domestication of animals, the
population developed immunities

viii. Difficulties with this approach
1. Where is the culture in this argument? Where do institutions fit in?

b. Institutions & Culture matter (accmoglu and others)
i. The way that humans themselves decide to organize their societies determines
whether or not they prosper
1. Overview
a. Institutions/Culture  innovation
b. Institutions/Culture  take risks
c. Institutions/Culture  save for the future
d. Institutions/Culture  human capital growth
2. Difficulties with this look at what countries are rich and what countries
are poor
a. Do successful societies create good institutions or do good
institutions create successful societies
“An endogeneity problem”

c. Industrial Revolution – Achievement (by some) of modern Economic Growth Rate in
GDP of 1.5% to 2% / year consistently.
i. Why England? (the US.)
1. It’s open
2. Socially mobile
3. Political liberty
4. One of the centers of the scientific revolution
5. Geographically blessed
a. Island economy (sea-based trade)
b. Close to the European continent
c. Navigable rivers
d. Proximity to N. America
e. Coal for powering the industrial revolution

ii. The change of industrialization
1. Urbanization
a. Fewer farmers
b. Specialization requires closeness
2. Changing gender roles
a. Falling birth rates
i. Empowering women
3. The spread of Industrialization
a. From England to her colonies:
i. North America
ii. Australia
iii. New Zealand

*Similar climate, transfer of technologies, institutions, etc.

b. Within Europe
i. Northwestern Europe
1. Southeastern Europe
ii. Began where climate, natural resources, disease
environment, political and social conditions more

c. Spread to Latin America, Africa & Asia
i. Confrontational, tumultuous
ii. Rich, powerful European powers exploited poorer
and less powerful regions
iii. Increased living standards came at a cost.
d. WWI and its consequences
i. Destabilized Russian Czarist Regime
1. Eventually to communist control of 1/3 of the world’s
ii. Financial Instability in Europe
1. Debt
2. Destruction of ottoman & Hapsburg Empires
a. Small successor states fighting with each

3. Allied claims for reparation payments from
a. Hitler & WWII
i. Great Depression, WWII

e. The second half of the 20th century
i. First world (Capitalist countries, already industrialized)
1. Western Europe, US., Japan, Australia
ii. Second World (Socialist world)
1. 1/3 of the population in the world
2. USSR, China, Cuba, North Korea, Eastern European
countries under soviet control.
3. Central Planning: when the government chooses
production levels, prices, who get what jobs
4. Economic separation from 1 st world
—Central planning didn’t work—
iii. Third World
1. Postcolonial countries
2. Not capitalist 1 st world nor socialist 2 nd world
3. Industrialize on their own
–Autarky did not work—
–Autarky: isolationist, no trade or interaction w/ others—

f. Where are we now?
i. Managing a new global interaction
1. Developing countries of second and third world
want to keep their sovereignty (their own control
of their country) while participating in global
economic prosperity.
2. Take part in trade
3. Take advantage of global capital

–While remaining a respected member of the global community–
ii. Key aspects important to growth at the household
1. Saving & investment
2. Trade: specialization and trade with others
3. Technology growth: fight for more productivity
4. Resource boom: get more to work with a person
when resources are abundant.
iii. Where growth fails
1. Negative shock to savings. “Poverty Trap” Where
you are too poor to save
2. Fiscal Trap: where government borrows so much
that they are spending their money paying back
debt instead of investing.
3. Governance failures
a. Problem with rule of law


4. Cultural Barriers
a. Isolate economically certain groups/women,
ethnic group
5. Geopolitics
a. Interference from the outside world. Trade
barriers from rich countries
b. Violence in neighboring countries
6. Physical Geography
a. High transportation costs as a result of
7. The Demographic Trap
a. Too many kids

iv. Institutions designed to help the process of
escaping these barriers to growth
1. The World bank
a. Founded in 1944
b. International Development Association
(IDA) – arm of the world bank uses donor
money to give loans to developing countries.
The loans are on concessional terms (low
interest rates and long terms)—15years, 20
2. The IMF
a. Founded 1944 at Bretton Woods Conference
b. After the 1970’s when the peg to the US$ fell
apart, the IMF provided temporary financing
to countries facing balance of payments
—Loans to stabilize currency—
3. The WTO: World Trade Organization
a. Founded in 1949 under GATT, hope was to
dismantle tariffs and open trade.
b. During the “Uruguay Round” in 1986, they
changed the name to WTO in 1995.


Academic LevelCollege (3-4 years: Junior, Senior)
Subject AreaEconomics
Paper Type Essay
Number of Pages1 Page(s)/275 words
Paper FormatMLA
SpacingDouble spaced
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