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China and Japan

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Please do all five questions. All questions are equally weighted. 1. In “The Great Divergence”, Ken Pomeranz discusses the “shared” constraints約束; 限制of Europe and the highly developed core areas of China and Japan in the mid-18th century. * development trajectory in (recent) world history, the industrial revolution. * Before about 1800, growth did occur, but it was mainly “extensive”, leading to more people but almost no growth in income per capita. * After about 1800 this changed, and growth became (increasingly) “intensive”, focused on an almost continuous growth of GDP per head. *

What were these shared constraints?
* core regions in Asia and Europe had achieved a relatively high standard of living by the 18th century, shortages of land, soil degradation, deforestation, lack of a dependable energy sources (wood and charcoal were rapidly depleted), and other ecological constraints limited growth in per capita incomes * china, Western Europe, and Japan had developed to a relatively high level and began to face constraints on energy and land use * in Europe the land constraint was relieved by imports from its external periphery, which at the same time also became a captive market for its labor intensive manufactures and the re-export of textiles from Asia. Later of course, these peripheries would supply even more land- intensive – and in Europe land-saving! – cheap commodities, especially cotton and wheat and then alos meat, while also absorbing 60 millions of Europe’s surplus population.

By contrast, the much more internal Chinese periphery was able to pursue an import substation policy from early on, which simultaneously deprived the Chinese manufacturing centers of markets and by stimulating local demand there reduced the export supply and increased the import price of commodities to these centers from their interior peripheries. Thus Pomeranz shows how Europe’s overseas regions ameliorated its ecological and Malthusian constraints as China’s and other Asian peripheries never could. What else did they have in common?

* advanced Chinese regions matched or bested European ones in standard of living and especially the most important one * that China’s level of economic performance was more or less at par with that of Western Europe. Moreover, the lower Yangzi delta formed a core of economic prosperity comparable with the North Sea area, the most developed part of Western Europe. * consumption of calories from grain and even from sugar, as well as of household goods and textiles; * in storage, distribution and availability of grain to counter climatically induced famines * in quantities of long-distance grain shipments that were multiples of those through the Baltic; * in textile production and earnings of textile workers; * in commercialization of the economy and especially of agriculture, including markets in land, labor, inputs, products and credit What does Pomeranz argue was central to the divergence分歧between these core areas of Europe and China? * the fact that the industrial revolution occurred in England was due to fortunate geographic circumstances (the availability of cheap coal in the right places) and the fact that European countries had access to colonies, which China lacked. * industrial revolution occurred in Europe rather than China because European entrepreneurs were eager to adopt machines to cut down on high labour costs.

China didn’t “miss” the industrial revolution – it didn’t need it. * The ecological damage of previous growth ravaged both China and Europe and especially their forests and therefore their supplies of wood, thus driving up its [opportunity] price, particularly with respect to coal as an alternative. Fortunately however, in Britain coal deposits were located near potential industrial users, while the northeast Chinese coal deposits were so far from the coastal population and industrial centers as to make their use uneconomic. Therefore, coal driven industrialization as in Britain did not begin in China If these constraints were the source of China’s slower growth in the late 18th, early 19th century, how would have the opening up of China after the Opium Wars (1839-1842,1856-1860) possibly affected China’s growth trajectory?

* China, however, was not so fortunate and was forced to become a recipient of British opium and later other manufactured goods. China also became a labor supplier, as Chinese migrant workers went all over the world working in developing industries. What implications does China’s experience in the 19th century have for our assessment of the factors underlying China’s slower growth experience? * the reason Europe industrialized before China is because of European economic superiority. In fact, the two regions were about equal, with China even a bit more advanced; for example, the world’s wealthiest person during this time was a Chinese merchant. Instead of intrinsic European economic advantages, Pomeranz argues two accidents were responsible for the Industrial Revolution occurring in Europe: the easily accessible deposits of coal in Britain, Germany, and elsewhere, and the discovery of the New World. Both these “geographical contingencies” enabled Europeans to undergo rapid economic development during the nineteenth century and industrialize, whereas China’s economy, without access to new material resources like coal, grew much more slowly. Finally, can we reconcile和解Pomeranz’ perspective with that of Song and Ma? *

2. A case could be made that economic reform in China in the late 1970s had to start with agriculture and the rural sector. What is that case?
What was the nature of the reforms that were carried out?
* Chinese farmers and rural cadres were frustrated with the commune system, seeing it as an obstacle to improving agricultural production and their lives * economic reforms should begin with agriculture because at that time it was ‘the foundation of the national economy’. What was their impact and effect on China’s growth trajectory? Are they any potential lessons here for development policy for low income countries? If so, what are they?

For China’s long run economic growth dating back to the Qing dynasty? Please explain.

3. “In China, the banks are the financial system; nearly all financial risk is concentrated on their balance sheets. China’s heroic savers underwrite this risk; they are the only significant source of capital “inside the system” of the Party-controlled domestic economy. This is the weakest point in China’s political and economic arrangements.” (Walter and Howie, pg. 25) What is the basis for this claim?

* These in turn have created huge foreign exchange reserves, one third of the world’s total. At the same time, there is a parallel economy that is “geographical as well as politically strategic”. This is referred to as the economy “inside the system and, from the Communist Party’s viewpoint, it is the real political economy. All of the state’s financial, material and human resources, including the policies of opening up the country to foreign investment, have been and continue to be directed at the ‘system’. Improving and strengthening it has been the goal of every reform effort undertaken by the Party since 1978 * “It is a simple fact that China’s financial system and its stock, bond and loan markets cater only to the state sector, of which the ‘National Champions’ represent the reddest of the Red. These corporations, the heart of China’s state-owned economy, are ‘inside the system’. The private economy, no matter how vibrant, is ‘outside the system’ and, in fact, serves the will of the system” Do you agree?

What have been the difficulties in reforming China’s financial system to this point? The costs?  How is financial sector reform possibly constrained by other policies that the government is currently pursuing? * The global financial crisis eliminated the political consensus in support of the western financial model that had been in place since 1992. This has allowed the pre-reform economic vision of an egalitarian socialist planned economy to re-emerge. There are many in the Party and the government who had never supported Red Capitalism in the first place”. Are there any potential implications of this for the Chinese economy going forward?

4. In the mid-1990s, China carried out a package of reforms that recentralized the fiscal system, restructured the SOEs, cleaned up the balance sheets of the state-owned banks, and committed to joining WTO. Elaborate briefly on these reforms.

* 1994 reform and after: recentralization
B. 1994 reform and after: re-centralization
https://www.imf.org/external/pubs/ft/seminar/2000/fiscal/ahmad.pdf (p.5-16)

* The recentralization of revenues in 1994 strengthened the central government’s capacity to redistribute in favor of poorer provinces. The most serious disparities in resource availability, however, occur at the subprovincial level, which was not included in tax-sharing arrangements in 1994 and which is responsible for more than 50 percent of total public spending. Fiscal transfers to subprovincial levels remain largely at thediscretion of powerful provincial governments  and are subject to negotiation, leading to high disparities

* Banks play several functions in an economy. Besides being a payment and settlement system, the banking sector also performs a financial intermediation function. In the U.S., the latter function of financial intermediation of banks has become less important as non-bank financial institutions started to encroach the nearly monopolistic position under the protection of the 1933 Glass-Steagall Act. Not surprisingly, because of the advent of telecommunication technology and globalization of financial markets, the roles of the banking sector in a developing market economy like China have also changed. A recent Business Week (2/14/2000) article attests to the rapidly changing scene of the Chinese banking sector. Specifically, banks are again being ushered into changing economic scenes and are expected to perform well in the changing environment, despite how ill prepared they are.

This is the crux of the problems facing the Chinese banks. The firsttime that banks failed to answer the call for duty is when they were asked to clean up the bad loans problem most economists agree that  China’s entry into the WTO provides a strong catalyst for change and it is expected to bring long term benefits to the economy. In the meantime, Chinese banks will face tough competition against foreign banks since they remain undercapitalized, inefficient, and unprofitable. Their disadvantaged position is further hampered by their lack in credit skills and a commercial mindset or culture, although it is believed to be emerging at some banks. Tight government control still undermines governance and incentives at banks and hampers their commercial behavior and decision-making. Last, but not least, as SOEs, SOBs, and private enterprises start raising capital from the stock and bond markets, corporate governance issues begin to surface.

To date, corporate governance terminology has found its way into the companies’ boardrooms, private or public, its meaning and concept remains absent from practice. * The recentralization of revenues in 1994 strengthened the central government’s capacity to redistribute in favor of poorer provinces. Net transfers from the center make up an increasing share of subnational government resources (Table 3). Among transfers, both general equalization grants and earmarked transfers (targeted at specific development priorities) have been growing in recent years, allowing a welcome phased reduction of the “transitional systems transfer”. Viewed at the provincial level, such transfers have vastly reduced if not removed the correlation between government expenditure per capita and the level of local economic 15 This has risen to over 35% of GDP in 2010.

16 According to Ministry of Finance (2011), the gross revenue from the sale of state owned land use rights rose to 2.9 trillion RMB in 2010, equivalent to 7.3% of GDP. As a substantial share of such revenues is paid out in the form of compensation to displaced residents, the net proceeds from such sales are lower but still significant. The difference in expenditure per capita across provinces can be largely explained * by factors that affect the delivery cost, including average wage and population density. What do you see as their major motivation?

* For China, concerns about the ramifications of closing down the SOEs and SOBs, and opening up the capital accounts, which may cause instability in RMB on the overall economy, are the dominant factors * the recent banking reform efforts and the NPLs problem in particular, we find that China has demonstrated a strong commitment to banking reforms as well as in the broader financial sector such as the insurance industry, Are there economic or political reasons that these reforms were not carried out earlier? What do you see as the major effects of these reforms on China’s growth trajectory? Be sure to cite authors here.

Challenges to recent banking reform efforts
* The probability of success of the current bank recapitalization problem, especially the efficacy of the asset management companies in dealing with the NPLs; * Legal foundations for the success of the equity and debt markets * Fiscal sustainability of the bank reform program

* Competitiveness of the Chinese financial institutions with China’s entry into WTO * Weak or absence of corporate governance

5. Some believe that reform in China since 1978 is all about changing economic incentives. But a case could be made that changing political incentives have been equally important. Do you agree?

How have political incentives been changed?
What is the nature of these changes?

In what ways have economic reforms and changing political incentives complemented each other in the reform process? How does China’s high degree of decentralization fit into the picture? Are there any potential negative consequences of “incentivizing” government officials the way the system currently does? Are there limits to how far economic reforms can progress without further political reforms?




2011 may exam
A commonly expressed policy prescription of developing countries is the implementation of the rule of law and the establishment of well-defined property rights. Some have argued that over much of the last three decades of reform, china has had neither. Do you agree have less than well-defined property been an advantage? A drag on the development process? How have the property right evolved? Have there been substations that have helped to attenuate the problem? What implications does china’s experience have for policy? Draw on the reform experience in agriculture, industry, finance, etc for support.

In the early, 1950s, the Chinese radically reformed their economic system. What were the key institutional feature of this system? What were its objectives? How it was supposed to work in the interests of meeting these objectives? Was it scccessful? What do you see as its fundamental weaknesses? How would you assess it overall legacy for economic development in the post 1978 period?

Opening to the international economy has been an important dimension of china’s economic reform. What has been the nature of these reforms, and how have they unfolded over time? What do you see as their most important benefits? Cost? How well has china managed this process? How have these policy reform interacted with ongoing domestic reforms? Are the two substitutes? Complement? Going forward, how do you see this unfolding? Detail and concrete examples are important here. Estimates suggest that inequality in china today may be at the level of brazil’s, with the Gini coefficient, a commonly used measure of inequality, in the vicinity of 0.50. what do you see as the most important sources of this rising inequality? Is it a natural consequences of economic reform? A product of government policy? From a policy perspective, why is the rising inequality such a source of concern?

What can the government potentially do to lessen it? * Some economists believe the widening wealth gap is partly the result of large amounts of “illegal income” resulting from corruption. * about 4.8 trillion yuan ($703 billion) of urban income evaded tax and was referred to as “hidden income * hidden income” belonged to the high-income category, according to the survey, which covered more than 2,000 urban families across the country. * oted the unreasonable high incomes in “monopoly trades of electronic information, oil, finance and tobacco” and “profiteering trades of real estate, coalmine exploration and securities”. * “The income of senior executives in some State-owned enterprises is about 128 times of the average social income * the Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has an exactly equal income).

A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income).[3][4] * Gini coefficient is commonly used as a measure of inequality of income or wealth.[6] For OECD countries, in the late 2000s, considering the effect of taxes and transfer payments, the income Gini coefficient ranged between 0.24 to 0.49, with Slovenia the lowest and Chile the highest.[7] The countries in Africa had the highest pre-tax Gini coefficients in 2008-2009, with South Africa the world’s highest at 0.7.[8][9] The global income inequality Gini coefficient in 2005, for all human beings taken together, has been estimated to be between 0.61 and 0.68 by various sources.[10][11]

* A Gini coefficient is a controversial measure of income inequality. Not only does its value depend on income inequality within a country, its value depends on other factors, such as the demographic structure. Countries with an aging population, or with a baby boom, experience increasing pre-tax Gini coefficient even if real income distribution for working adults remain constant. Scholars have devised over a dozen methods to calculate Gini, each of which gives a different value.[12][13][14] * Limitations of Gini coefficient: Extreme wealth inequality, yet low income Gini coefficient, Small sample bias – sparsely populated regions more likely to have low Gini coefficient, Same population with same income distribution, analyzed differently, yields different Gini coefficients, Gini coefficient is unable to discern the effects of structural changes in populations, Gini coefficient falls yet the poor gets poorer, Gini coefficient rises yet everyone getting richer, Inability to value benefits and income from informal economy affects Gini coefficient accuracy

In the early 1950s, the Chinese radically reformed their economic system. What were the key institutional features of this system? What were its objectives? How was it supposed to work in the interests of meeting these objectives? Was it successful? What do see as it fundamental weaknesses? How would you assess its overall legacy for economic development in the post 1978 period? Since 1978, the Chinese economy has been growing at a annual average rate of nearly 9% per annum/ what do you believe are the most important factors underlying this growth? What contribution has institutional reform made? Technological change? Captial accumulation? Reform of agriculture? Does solow surprise apply to china? Be sure to explain solow surprise * The key idea of the Solow model is DIMINISHING RETURNS The key finding is that diminishing returns place a sharp limit on how much growth you can get from just adding more capital (K) inputs. * Review Diminishing Returns to one factor of production when others are fixed * Economist Robert Solow (1957) assembled data for the US during the past 50 years on: amount of Labor

* He showed that the capital earns one third of all income — labor earns the other two thirds. We economists say that Capital’s share of national income is 1/3 * Y = A K^(?) L^(?) * Y = output per worker (we will use Y and GDP more or less interchangeably — the important thing is to know what you are talking about for any particular problem or example.) * Solow called the unexplained factor “technological progress.” This technological progress made labor more efficient when using ALL amounts of machines. Think of yourself using your laptop PC today which has more power and productivity than the world’s big mainframe computers of 20 years ago. We don’t just have *more* machines today, what we really have is *better* machines. * Solow suggested that the source of this technological progress was something outside the realm of economics. But ever since, economists have been trying to get a handle on what causes or at least promotes more technological progress.

They have also, at times, had debates about whether a particular growth spurt in a particular country is due to technological progress (“better machines”) or to a one-time increase in the amount of measured capital (“more machines”). The picture for China as shown in the yearly growth accounting data in Figure 20.1 is most like the story for South Korea and Taiwan. The pace of institutional reform in China in qualitative terms breaks down into four major periods. The first period, 1979–1984, was the period of the opening up of foreign trade, the return to household agriculture, and the freeing up of rural and many consumer markets.

The second period of reformfollowed closely on the first in 1985 through 1988 and involved the freeing up of industrial inputs for sale on the open market that led in turn to the boom in township and village enterprises that sustained high growth until the hiatus in June 1989 and conservative backlash to reform in the latter part of that year and in 1990. The third phase of reform came after Deng Xiaoping’s trip to China’s south in 1992 and his call for more not less reform. The fourth phase of fundamental institutional and policy changes came in the mid- to late 1990s with the rapid rise in foreign direct investment, China’s decision to do whatever was necessary to join theWorld Trade Organization (WTO), and the government’s disguised but clear decision to reduce sharply its role in the ownership * and control of the industrial sector.

It should be clear that his coherence is not the result of a carefully plotted reform strategy. Indeed, during some crucial periods, the coherence of the reform process emerged in spite of, not because of the policies of Chinese leaders. Coherence was a characteristic of the economic environmental in which the transition path unfold, rather than the explicit choices of policy makers” (naughton, growing out of plan, 1995) do you agree? Do you believe that this holds true for the post-1995 period i.e since 1995 is there reasons to believe that policy making has become ex-ante more coherent一致? Please provide examples, e.g banking reform, entry into wto. The E-school proposes two basic economic propositions concerning China’s reforms: * Gradualism in market reforms has been key to China’s rapid growth; and China’s gradualist strategy is transferable to other economies in transition from central planning; * China’s experiments in non-capitalist institutions are proving to be successful in (a) agriculture, (b) township and village enterprises (TVEs) in the rural areas, (c) state owned enterprises (SOEs); and China is evolving towards a unique set of economic institutions, as a result of experimentalism in policy design.

Three decades of reform have remade chinese industry along many dimensions. What is the nature of the change? What do you see as the key forces underlying this it? What role should we attribute to domestic as compared to international factors? What will future growth in chinese industry likely to be tied to? In your discussion, be sure to say a few things about the organization chinese industry pre-reform, and what this is may have meant for the reform trajectory.

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