12 March 2024 15:21

Introduction to China's Growth: Carsten Holz

Key facts to remember:
• Average growth rate in the US = 2-3%
• PRC GDP (2023) = 18 tn USD
• US GDP (2023) = 27 tn USD
• Only 10% of China's land is arable
Key explanations for China’s economic growth:
• Institutional changes
○ Production function: more capital = more output, more labour = more output
○ Technology refers to any other things that are not labour and capital
○ *Capital changes over time, whilst labour remains relatively constant
• China’s comparative advantage in manufacturing
○ Due to cheap labour costs
○ Higher income due to greater exports = reinvesting and the exporting higher quality
goods and services
• Capital accumulation
○ More machines

How can we predict the future trajectory?

• Extrapolating past growth
• Supporting extrapolations: development patterns and precedents
○ Structural changes in the economy - Labour shifts from low productivity in primary sector
industries (agriculture) to higher productivity industries or services
○ The trends show that the higher the rate of labour shifting out from agriculture, the higher the
labour productivity and growth in that year
○ Factor price equalization: Free trade in commodities between countries will cause identical
factors of production to converge to the same price in different countries - Without the need
for factor mobility
• Growth accounting
○ Considers labour force and the population
○ Real GDP growth = real wage growth + labour growth

• China’s GDP calculation depends on exchange rate

China’s market in comparison to other markets:

• Size of China
○ Large and complete industrial sector
○ Large domestic market
▪ Economies of scale – lower cost = higher profitability = increase capital
▪ Competition = puts downward pressure on prices and increases pressure to innovate
○ Human capital: largest pool of talent
○ International bargaining power
China’s superpowers:
Resource endowment
China → Cheap labour currently, increasingly skilled labour
US → Relatively skilled labour currently, tech and land
Asia has rapidly taken stride in technology due to R&D
Political foci: economic versus military power
Military
Area denial strategy
Establishing overseas bases of China is ‘suicidal’ because it will give rise to opposition

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 Establishing overseas bases of China is ‘suicidal’ because it will give rise to opposition
against China’s rise
Economic power
Integration of Asia and China through energy/infrastructure, projects and trade
China lent more to developing countries that the world bank (2009, 10)
Domestic growth focus:
Low interest rates
State owned enterprises
Banking system
Private and foreign economy
Heavy dependence on foreign-directedness
Extensive foreign ownership of Chinese assets
>50% of exports are from foreign invested firms
Large degree of openness
Integrated with international markets and production chains

Causality: Gary King

2 components of causality:
• Don’t have the counterfactual
• Want systematic elements only
In Social science, you cannot control all variables like you can in science - we want to get rid of non-
systematic influences
2 research approaches:
Descriptive inference
Describes what is happening
Partitions the world into systematic and non-systematic components
Draw conclusion and infer meaning only from systematic aspects → avoids the problem
of causality (doesn’t draw causal relationship/correlation)
Causality
2 problems faced by causal arguments:
We can never know causality for certain
Causality needs to be clear of non-systematic components
Definition of causality:
Causal effect = Difference between systematic component (when explanatory variable takes one
value) and systematic component (when explanatory variable takes another value)
Key causal variable = cause / treatment variable / independent variable

Realized causal effect for the unit = DV observation (factual) - DV observation (counterfactual)
Realisted causal effect = Y(treatment) - Y(control)

• Want to estimate true mean (we don’t know it) - over time, random individual observations
average out
Assumptions:
• Unit homogeneity - Relationship between all variables is the same
○ The expected values of all the dependent variables from each unit are the same when
the explanatory variable takes on a particular value
• [Weaker effect] Content effect - even if absolute numbers are lower, the difference between 2

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 • [Weaker effect] Content effect - even if absolute numbers are lower, the difference between 2
observations will be the same
Ideal solution:
• Large n-analysis with random selection and random assignment to address the problem of
causality --> Sample size would depend on how many explanatory variable. But if 1
explanatory variable and not a lot of other info, sample size of 300.
• No endogeneity --> the dependent variable should not decide whether the explanatory
variable is applied
• Guarantees conditional independence
• Non-systematic components average out due to large n → they cancel out
• Maximize concreteness
How to construct causal theories?
• Construct falsifiable theories
○ Can you test the theory to prove/disprove? → What evidence would prove?
• Build internally consistent theories
○ Could use math to test (but shouldn’t oversimplify)
○ Clarify language and concepts
• Carefully select dependent variables
○ Must be dependent and NOT cause the explanatory variable
○ Values must vary within the range that we want to explain
• Maximize concreteness
○ Use terminology that is as precise as possible and observable concepts
• Try and state your theories in as broad and encompassing ways as possible - explain as much
of the world as possible
Fallacy of affirming the consequent:
If an argument holds in one way, the fallacy occurs when you try and make it hold in the other way
→ if P is therefore Q is, then Q is therefore P is = Not necessarily true

China's Historical Boom: Brandt and Rawski

Key Takeaways from reading:
• Late 1970s: unprecedented growth in China - almost labelled ‘miraculous’
• Innovation and growth arise primarily from decentralized initiative rather than state direction
(Hayek claimed the same)
• Opening up internationally and relaxing domestic constraints encourage bottom-up
development
• Growth was accelerated when the state was relatively weaker in its governance and control
○ Enabled opening up to foreign forces through treaty ports, free trade and allowed
foreigners to establish factories on Chinese soil.
○ Facilitated financial innovation
○ Extended domestic market liberalization by constraining state economic actions under
the WTO
• Consistent elite preferences for systems that allow rulers to concentrate decision making and
resource allocation that enhance their control but inhibit economic advancement
• Little tolerance for dissent and the efficacy in identifying violators is amplified by technology
for official surveillance
• Leaders are portrayed as flag bearers of moral authority
• Censorship, information control and state monopoly over education content pushes public
opinion in directions that benefit the incumbent regime
• Nomenklatura system – A system wherein important positions are filled by individuals who
are appointed by the party [nepotism]
• Power and authority rest on personal patronage → exchanges of money, favours and loyalty
build support for leaders and allow subordinates to get access to opportunity and protection
• Culture of gift exchange within personal networks creates some sense of tolerance for bribery
(increases leeway for corruption)
• Costs of network interests in public administration
Informal side payments

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 ○ Informal side payments
○ Stifles competition
○ China’s politburo obtained land for half the price paid by non-affiliated counterparts for
land of the comparable quality
• Self-reliance was a critical message both from Mao and from Xi
○ Long standing distrust associated with foreign technology
○ “The post-1978 reform era revived support for reduced state control, greater market
orientation and increased international openness in opposition to the Mao-era tendency
to repress dissent, suffocate private business, suppress market allocation, and minimize
global involvement.”
• Post Tian an Men square massacre – Party struggled to build cohesion and authority
○ Ambitious plans juxtaposed against their meagre funds due to a fall in their tax base
○ Policy implementations:
▪ Labour mobility
▪ Sector restructuring
▪ Tariff reduction and exchange rate depreciation
• “Cronies” - a nepo individual
Key themes:

Innovation and growth arises from decentralized initiative rather than state direction
When the state is weak and has lesser control, growth is faster
Tends to be a pattern - they are not trying to be causal, they are presenting a
trend/pattern
External opening and relaxation of domestic constraints encourage bottom-up development
Opening the economy leads to economic growth
Elites prefer to influence decision making from the government to advance their own
economic status
Authoritarian governance dominated by elites
Family wealth that perpetuates itself over time

State structure:
• Self-perpetuating - wealth and power is retained within the same families
• Authoritarian - not democratic
• Everything is ranked - very hierarchical
• Elites are all connected through economic, social and political ties - all 关系
• Citizens are satisfied as long as there is economic advantage
• Custom and law strengthen the state --> contrast to the west (where laws strengthen the
rights of the citizens)
• Ancient structures of sociopolitical organization

State ideology:
• Elites are the sources of moral authority (in contrast to the west, where the legal system can
only say broke the law/abided by the law - cannot make moral judgement)

Attempts to secure popular support:

• Meritocracy in educational advancement and official recruitment
• Censorship and information control
○ State monopoly over educational criteria
○ Cement a clear hierarchy - rising in the ranks is very important
○ Individual recognition - clear award systems
○ Nomenklatura - clearly defined positions and the power and privilege that comes with
that position
Personal networks determines one's power/authority:
• Long term exchange of money/favours/loyalty: culture of gift exchange
• Elite decision making authority
• Evade disciplinary mechanisms to let corruption proliferate - they don't publicise officials' and

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 • Evade disciplinary mechanisms to let corruption proliferate - they don't publicise officials' and
their families assets
• People in power do not want to be seen/supervised

Costs with such a system:

• Informal side payment
• Networks stifle competition as personal favours can override existing system
• Prevents innovation

Outcomes:
• Reforms threaten the privileges of the elite - so it's very difficult to come by; they will lose out
from the reform because they currently have all the benefits; jeopardizes the welfare of the
masses
• Copy the west but don't threaten the imperial Chinese system of the elites
• Remove foreign textbooks; limit access to information
• Document #9 2013 - Ideological trends that jeopardize the strength of the central govt/elites
(7 "dangerous" western values)
○ Eg. Excessive western influence and lean - HK was heading towards that

The pattern of Chinese past: Mark Elvin

Why did China not industrialize?
- P1: Lack of financial capital
- P2: Political obstacles
- P3: Enterprises small-scale and short-lived
- P4: Restricted markets

Point C: Amount of grain required to survive

B-C = Surplus
- When you make more profits due to surplus, people start to reproduce
- Best practice is potential output --> it plateaus eventually
○ Only reliant on labor agriculture - NO technology - pre-modern technology

How do we break out of high level equilibrium trap?

- External shocks --> foreigners with technology

• Shanghai cloth argument

Notes:

What were potential reasons for why Late traditional China missed the opportunity for an industrial
revolution?

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 1. Inadequate capital and restricted markets? --> [NO]
- Lack of capital = Low productivity = low income and lower saving = Lack of capital --> Self-
reinforcing cycle
- Low productivity = low incentive to invest = 2nd cause of low capital
- Low incentive to invest is dependent on the size of the market
- Shanghai Cloth argument
○ 3 types of cloth: best was known as 'Standard'
○ Standard cotton cloth flourished under the Ming dynasty
○ Profits and sales volume of Standard declined in the Ching dynasty while trade in
midloom prospered
- Shortage of capital and unwillingness to invest was NOT the critical weakness
○ Many traders and merchants had ample silver and cash at their disposal

2. Political Obstacles to economic growth? --> [NO]

- Government unable to provide security from riots and uprising made it unsafe for merchants
to concentrate their wealth in an apparent/explicit fashion
- Custom duties inhibited free circulation of goods
- Grain ships were used to transport goods wanted my merchants. After 1772, surplus goods on
the grain ships beyond the stipulated allowance were treated as smuggled goods --> didn't
drastically change anything
- Big rewards were granted to those who could successfully bend rules, therefore, there was a
misdirection of energy and talent
- Many officials also utilized their position to engage in business

1. Enterprises small-scale and short-lived?

- Inability to create large private economic organization
○ Potentially because the Chinese found it difficult to trust anyone that they weren't
related to or didn't have a pre-existing longstanding relationship
- Businesses tended to stay small and operate within a small geographic scale
- Network of branches that allowed remittances of funds from one end to another -->
Eventually allows them to become very strong and rich

• There had even been revolution in terms of social classes in the country side - but this had no
significant impact on the techniques of production

The High Level Equilibrium Trap:

- Quite a lot of invention (Western adopted, incremental and taken from other inspirations)
- Organizational changes: growth of money shops, remittance banks, inter-regional trade
- Short-run considerations were prioritized in a perfectly rational fashion to decide on
production techniques
- High cost of individual materials: high cost of metal was not adopted despite its potential
value to farming areas
- China's extensive system of waterways allowed water transport to be significantly cheaper
than land routes, causing land routes to be underdeveloped
- Technological discontinuity: yields per acre were as high as possible without the use of
advanced industrial-scientific inputs. Insufficient suitable land to raise the yield per worker
○ The diversity of the Chinese agricultural environment across both space and time makes
output a poor indicator of technology
○ Chinese communists used intensified traditional technology, but it didn't seem to raise
yield per acre or yield per farm worker
- High population placed a lot of pressure on agricultural productivity

Key points of the HLET:

- Discontinuity in late traditional Chinese farm technology
- Potential output curve represents the maximum output with the pre-modern method and
technology at a given labor force

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 technology at a given labor force
- With land constant, potential surplus shrinks - first, relatively then absolutely
- Actual surplus is a function of practice (investment and organization)

Breaking the equilibrium trap in China:

- Contributed by the West
- Foreign machinery laid the foundations of Chinese enterprises

Reform period overview: Qian YingYi

Notes:
• 2 great transformations of economic systems around the world:
○ Transition from a capitalist market to socialist centrally planned system
○ Reverse transition from centrally planned to market system
• Different paths of transition
• First stage of China’s transition
○ Shift in party’s focus from class struggle to economic development
○ Main ideology during this stage was the idea that planning is a principal part and market
is a supplementary part [a drastic shift from Mao’s push to abolish markets completely]
○ They learned from the economic downturn after the 10 year cultural revolution (in
contrast to 4 Asian Tigers and their outstanding growth)
○ 5 major reforms were pursued:
▪ Agricultural reforms
□ Commune system: basic unit for production, distribution and land allocation
for each crop
□ Introduction of the household responsibility system: Promise to fulfill the
procurement quota of grain to the state; Households obtain almost all
control rights over production
▪ Opening up the economy
□ Expand foreign trade and welcome foreign investment
□ Guangdong and Fujian were at the forefront due to their location - they
were one step ahead of other regions in the country → adopted special
policies and implement flexible measures
□ 4 SEZs - lower tax rates and special institutional and policy environment
□ SEZs were allowed to operate as a market economy dominated by private
ownership
□ Initially controversial and sparked ideological opposition, however, there
was not much vested interest due to the zones being outside the scope of
central planning and govt allocation
▪ Fiscal decentralization
□ Unified revenue and unified expenditure previously - everything had to go
through the central government
□ Fiscal contracting system - central fixed revenue and local revenue
□ Increase incentives to local governments in revenue collection and local
economic development
□ Fiscal decentralization created multiple power centres
▪ Reform of state-owned enterprises
□ Expanded autonomy: right to produce and sell products to the market after
quotas were met
□ Authority to promote middle level managers without approval from the
government
□ Retained profits to be put into 3 funds: welfare, bonuses and production
development
▪ Support for commune-brigade enterprises
□ They obtained the freedom to make profits after the reform
□ Allowed to enter new industries unrelated to agriculture

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 □ Allowed to enter new industries unrelated to agriculture
□ Could sell beyond local markets
○ Dual-track approach to market liberalization
▪ Price ranges of market track to be within 20% of planned track initially
▪ Prices were freely determined by demand and supply after the restriction was
removed in 1985
○ SOE reform through construct responsibility system
▪ Increasing profit incentives and enterprise autonomy
▪ Profit retention negotiated on annual basis
○ Financial reform
▪ PBOC - Central bank and commercial bank initially
▪ In 1983, PBOC was formally declared Central bank and 4 commercial banks were
established (specialized)
○ Second stage of China’s transition:
▪ Entry and expansion of non-state sector
○ Socialist market economy - 2nd wave of emancipation: “carry out a reform so long as it
is beneficial to the increase of social productivity”

Geography: Barry Naughton

Notes from Reading:
- China is most populous nation and has third biggest landmass after Russia and Canada
- Land area is 2% greater than that of the US
- Only 1/4 of China is low lying
- Small proportion of land is arable
- Modernization in China implies the need to overcome geographic isolation and high transport
costs
○ Integrated national market and economic space has been a key part of development
- China's traditional economy was predominantly inward oriented
○ Contrasts sharply with Japan, Taiwan, Korea
- Lack of coastal orientation contributed to China's relatively late economic modernization
- 3 key rivers in China:
○ Yangtze, Yellow river and Pearl river
- Great rivers of South and Southeast Asia originate within China on the Tibetan highland
- Aihui-Tengchong line divides China in half in terms of landmass but 94% of the population lives
to the right of the line
- The US and India has a lot more arable land per capita
- Uneven distribution of water resources:
○ Chinese government to create a massive south-to-north water transfer system of canals
- China currently has 31 diverse province level units: smallest is Tibet (3.2 million) and largest is
Guangdong (108.5 million)
- Sichuan - Chongqing municipality and Sichuan province --> fertile and densely populated
- Maritime China - homeland of the people who left China before 1949
- SEZs - Shenzhen, Zhuhai, Xiamen, Shantou
- LAND SCARCE, LABOUR ABUNDANT
- Since 2000, infrastructure development is predominantly in domestic land transport
○ World's largest national expressway network
- Economic growth was more rapid in coastal provinces than inland provinces
○ Government extended preferential policies to coastal regions to help link maritime
China to global markets
- Improvement in infrastructure will facilitate the redistribution of activity and new patterns of
urban development

- China has too much overcapacity

- Train routes to connect SEA and China --> Economically beneficial but pushes toward a debt

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 - Train routes to connect SEA and China --> Economically beneficial but pushes toward a debt
trap
○ Cost benefit analysis

Economic development characteristics:

1. Accumulation of capital
2. Incentives - Coercion/Normative/Remuneration
a. Coercion is pure force
b. China was mostly normative
c. Mao wanted people should be enthusiastic about socialism
3. Capital intensive
a. "Walking on 2 legs"
i. Modern industry (capital intensive/urban)
ii. Traditional industry (labor intensive/rural)
4. Role of professionalism - red (Mao) vs Experts
a. At some points, Mao is more important whilst during others (economic issues etc.)
experts are more important
5. Population policies
a. 1960s population control
b. Fewer --> more --> fewer
c. After great leap forward, 45m people starving

Definition of communism:
- Abolition property/inheritance
- Confiscation of emigrants and rebel property
- Progressive tax
- Centralization of communication and transportation - all state owned
- State ownership of most factories
- Equal liability of all to work
- Combination of agri + manufacturing
- Free education

-----------------------
China's Geography:

- Long coast line but doesn't have natural harbors

- Security and safety issues due to long land border (18000km)
- Neighbors: North Korea, Russia, Central Asian countries, South Asia
- China trades heavily with Russia, Pakistan and Vietnam
- Oil and gas trades with Kazakhstan
- Trade is reliant on ocean transport
○ Container shipping is cheap
- Land disputes
- Tengchong line
○ 94% of population is to the right of that line = Reveals reality of population density
○ Western China is higher altitude (not good for agriculture)
○ Coastal area is good for agriculture (11% of cultivated land)
- Water sources
○ Yellow river / Mekong /
○ All start from Tibet
▪ From a security point of view, China needs to occupy Tibet for water supply and
stability
○ North of China doesn't have much water compared to south
▪ Eastern/western/middle route transferring water from the south to the north
▪ 70% of Beijing tap water is from the middle route (East Canal project)
- Sichuan basin has very good agriculture

Agriculture:

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Agriculture:
- South: Rice
○ Very productive, 4 harvests a year (Average is about 2)
○ Environmental issues due to fertilizer
- Middle: Wheat
- North: Millet, soybean, corn
○ China imports corn and soybean a lot for animal feed from the US
○ Meat consumption has risen
- Very little forest areas --> Implications for air quality

Population:
- Very few workers supporting a large amount of retirees
- Ageing not necessarily all bad
- HK is an extreme example (even worse than Japan)
- China has a significant gender gap (30m more men than women) ==> prostitution as an
industry increases

Territorial organization (Important)

1. Central
2. Provincial (30)
a. 4 cities directly under the central government
b. Beijing, Shanghai, Tianjin, Chongqing
c. Autonomous regions: Guangxi, Inner Mongolia, Ning Xia, Tibet, Xinjiang - More
independence
3. Municipal (300)
a. Prefecture - less rights, less urban
b. 300 municipalities - more urban
4. County-level (3000)
a. In a city, there are no urban counties, they have districts instead
5. Township (40000)
a. Street committee (urban) and rural towns
6. Village level
a. Neighborhood committee

Overall --> LAND SCARCE, LABOUR ABUNDANT

US comparative advantage in agricultural land
China comparative disadvantage in agriculture
Good future in manufacturing/cater to its labor intensive structure

Resource scarce
Very good in infrastructure connectivity

Economic advantages: Each big city can specialize in something or the other
Mass production/competition

Central planning: Thomas Lyons

What do you want to plan?
- Employment
- Finances (Counterpart of everything else)
- Infrastructure
- Education
- Investment [has been planned for the longest time]
- Production

Midterm Notes Page 10

 Why would you want to plan?
- Overcome political enemies
- Very scarce resources - need to be diverted to the correct avenues
○ Better arrangement under central government
○ They can collect resources and concentrate them on a few sectors
- Catch up to the other economies

Central planning:
- Final Demand = Sum of C, I, G and NX from every factory ==> They want to aim for more
output/demand
- Write a matrix equations to get the final value of output that we want
- From an information perspective, it is practically unfeasible

Notes:

- Highly centralized system of economic management based on the Soviet model

○ Mandatory production targets set by the central government for local authorities and
the enterprises
○ Tight control on revenue and expenditure
○ All investments are centrally controlled
- Interregional coordination is a problem --> efficient patterns of economic activity require
interregional cooperation to exploit economies of scale and comparative advantages (due to
varying resource endowments)
- Planning cannot consistently identify and implement appropriate patterns of cooperation to
maximize efficiency (even if the aim was efficiency)
- China's planning system has been composed two parallel sub-systems
○ Ministerial organizations to reach into provinces and control centralized agents (agents
are few and scattered nationwide)
○ Provincial organizations which control the planned agents in one province
○ Equilibrium between centralization and interprovincial planning
- Provincial planning organizations are agencies of the provincial government not the central
government
- Central ministries engage in a wide range of plan-related activities
○ Develop guidelines and makes recommendations for the national plan; proposes central
projects; central balancing and allocation of resources
- State Planning Commission most important among the apex agencies
○ Guide ministries and provinces in their planning work; draft national plans on the basis
of national balances; Transferring commodities among provinces and ministries;
determine overall scale and pattern of investment
○ SPC has departments corresponding to the main components within the national plan
(finance, construction etc)
○ SPC lines of control are less effective in provinces than in ministries
- This whole structure is subordinate to National People's Congress via the State Council
- Overcentralisation is not the cause of unsatisfactory outcomes in a large portion of China's
economy that remained decentralized
- Chinese planning system would have a trade diversion effect

Use of knowledge in Society: Frederick Hayek

• Manufacturing is the most fast growing sector

Goals:
• Modernize the industrial system
• Develop new quality productive forces

Midterm Notes Page 11

• Develop new quality productive forces
• Expand domestic demand

Notes:
• Economic problem is not one that can be stated in pure mathematical form
○ Economic calculus which has been developed to solve the economic problem is critical but
doesn't provide the answers yet.
○ The reason for this is the data is never 'given' for the whole society
• The economic problem is not just how to allocate given resources, but rather how to secure the best
use of resources known to any of the members
○ How to utilize the knowledge known to humanity but not given to anyone in its totality
• Any economic activity is planning in some sense - collaboration and interrelated decisions about
allocation of available resources
○ The key challenge is how the collaboration from different individuals/parties allows a
knowledge transfer to the 'planner'
○ In that sense, the problem is fundamentally, what is the best utilization of knowledge which
is initially dispersed among people which is the key to an efficient economic system
• Competition is decentralized planning by many separate people
• The mid-way point between central planning and competition is delegating planning to organized
industries (monopoly)
• The 'correct' answer to this question depends upon the different type of knowledge and who has
maximum access to it
• Preoccupation with statistical aggregates: Law of large numbers or random changes cannot
compensate overall for the fact that the number of elements we have to deal with is not large
enough to produce stability
• Ultimate economic problem of society is one of rapid adaptation to changes in particular
circumstances of time and place
○ Ultimate decisions should be in the hands of people who are familiar with these circumstances
• Decisions must be made on account of a whole pattern of changes of the larger economic system
• Many of the issues that Hayek presents are addressed by the Price system
○ Prices can act to coordinate the separate actions of people - case example: tin (and how a shift
in prices gives rise to a change in incentives and affects incentives for stakeholders not only of
tin but also substitutes)
○ Limited individual fields of vision sufficiently overlap so that, with so many intermediaries,
the relevant information eventually is communicated to all
• Price mechanism is a marvel --> individual economic actors move in the right direction regardless of
whether they have a full picture
○ An individual, acting in their own interest, inevitably acts in the best interest of general society

Economic Development: Jian Wang

Economic development: A process of expanding the real freedoms that individuals enjoy
Freedom: Enhancing human capabilities and opportunities

Development in China
- Increase GDP/capita
- Expand freedoms
○ Political - No
▪ Distinction between narrow political freedom and civil freedom
○ Economic - Partially but has obstacles
○ Social opportunities
○ Transparency guarantees - No (corruption)
○ Protective security - Yes
▪ Education till middle school, healthcare (problematic), unemployment insurance,
pension system

Midterm Notes Page 12

These processes are central to development because
(i) evaluative reasons - these are objective, we value them as a society
(ii) effectiveness reason - they are interconnected, each of them supports the other

• This has not become the dominant view in Economics = GDP/capita is still the focus

Notes:
- Per capita income is still very low but industrial structure has developed past the stage where
light industry dominates
- Key characteristic of low development is due to proportion of labour still engaged in
agriculture
- Reasons for the unique industrial structure:
○ Foreign hostility forced China to speed up heavy industrial construction to support
military preparedness instead of agriculture and light industry
○ Influenced by Soviet theory and chose to pursue a development strategy
○ Highly centralized economic structure through non-market forces
- Next stage: strengthening the foundation and infrastructure of capital intensive industries and
heavy processing industries
- Abundance of labour in rural areas is a great asset
- Choosing a correct development strategy:
○ Go back to the stage that had been skipped: priority to light industry and development
of agriculture
○ Borrow foreign capital --> Not ideal due to high level of government indebtedness and
insufficient export ability
○ Export machinery and electrical products from heavy industry
○ Deploy rural manpower to use in the great international cycle - export labour intensive
products to utilize labour resources and earn forex
- Development strategy stages:
○ Stage 1: Concentrate efforts on light industry, textiles, F&B
▪ Focal point: coastal areas
▪ Sacrifice heavy industry development temporarily
▪ Forex earned would be used to import technology directly and develop heavy
industry
○ Stage 2: Products from the interior regions can be exported
○ Stage 3: Forex to be used for capital intensive industry development
- Normal law of industrial structural evolution: Rural population must be industrialized

Midterm Notes Page 13