Lecture 3 Could China Have Grown During the First Half of the 20 th Century c a b Production under Autarky (no trade) Production of computers and tomatoes occurs at the point of tangency between the PPF and the Indifference Curves: Which point is optimal and feasible? a Why not c? Why not b? Computers / textiles Tomatoes / food a Alternative Production Outcome (under Autarky--no trade) but in Kingdom of the Skinny Nerds Computers Tomatoes n With different preferences (IC n versus IC a ) … may choose to produce more computers and less food (at point n) … Who is happier? Those in Kingdom A or those in Kingdom N? a Production under Autarky (no trade) Characteristic of autarky: Consumption = production Produce F 1 food and consume F 1 food AND Produce T 1 textiles and consume T 1 textiles Textiles Food T 1 F 1 a b Growth: GDP b > GDP a How do you see growth? U a > U b (in this case, production / consumption of both food— F b >F a —and textiles— T b >Ta— is greater) How does growth happen from a to b? -- technical change? -- growth of inputs? -- trade? Original PPF New PPF Economic growth, Type I F a F b T b T a Textiles Food Gains from trade and specialization Example China’s point of view: Food Textiles autarky price $100/ton $600/container quantity produced 15 5 income (15*$100) + (5*$600) = $4,500 quantity consumed 15 5 trade price $200/ton $500/container quantity produced 40 1 income (40*$200) + (1*$500) = $8,500 quantity consumed 20 (20*$200=$4,000) 9 (9*$500=$4,500) a Moving from Autarky (a) to Trade – Producing at International Prices Textiles Food m p Iso-price line (traced out by the ratio of textile to tomato prices), International prices Iso-price line (traced out by the ratio of textile to tomato prices), domestic prices in autarky Q1: In what scenario is food relatively more valuable? Q2: In what scenario can you buy more textiles for the same amount of food? Q3: In what scenario would you want to produce more food? A: When facing international prices! a Moving from Autarky (a) to Trade – Producing at International Prices … Textiles Food When facing international prices, where would the country produce? z 3500 a 4000 m 8500 m p Iso-price line (traced out by the ratio of textile to tomato prices) z (7) y 7*500=3500 5 1 0 40*200 + 1*500=8500 15*200 + 5*200 = 4000 15 40 a Where does a Nation Consume Under Trade? Textiles Food m c When Nation produces at m p , then it earns an income of 8500 … and when there is international trade, it can afford any point on the iso-price line that passes through m p . Which one will it choose? Depends on preferences … in this case, it will choose m c ! m p a Growth from Trade and Market Liberalization/Commercialization? Textiles Food m c Difference between optimal solution under autarky and optimal solution under trade: Under trade: production is NOT equal to consumption Specialize in production (m p ) Trade and consume at m c Growth: Um c > Ua m p a How do we see trade? Textiles Food m c m p 1 10 production imports 4020 consumption Exports a What Happens after Economy Experiences Growth from Trade and Market Liberalization/Commercialization? Textiles Food m c Growth: Um c > Ua But, after hit m c … then there is no more growth, UNLESS there is additional technological change! m p Growth in Traditional Economy ? Through 1911: –? –? –? –? –? Growth in Traditional Economy ? Through 1911: ? Phase I – Early ripening rice from southeast Asia – New types of organic manures: manure / algae / alfalfas – New irrigation systems – Rice shoots sprouted in a rice bed / transplant – Additional laborers from population growth ? Diminishing marginal returns set in (why? Technical changes not fast enough) a b Original PPF New PPF Economic growth in China, Phase I F a F b T b T a Textiles Food How does expansion of the PPF occur? -- Rising inputs -- Technological change Production function and the rise of output from increasing inputs Food Labor Output increases as the quantity of input increases L1 L2 F2 F1 Diminishing Marginal Returns … and falling average product Food Labor Although output increases as the quantity of input increases, the AVERAGE output per input falls … What happens at really high levels of output? L1 L2 F2 F1 When move from L1 to L2, what happens to the average rise in output for a 1 unit rise in input? 1 unit L2 L1 Average product Technological change from the perspective of the production function Food Labor Technological change: for a given amount of input, get more output (e.g., new seeds / new manures / etc.) Technological change and rising average product Food Labor Technological change: for a given amount of input, get more output (e.g., new seeds / new manures / etc.) 1 unit Technology 1, T1 Technology 2, T2 T1 T2 average product Growth in Traditional Economy: A Race between slow technical change and rising population ? Through 1911: ? Phase II – Move up into the mountains – Maize and potatoes and sweet potatoes from new world – Systems of granaries – Additional laborers from population growth ? Diminishing marginal returns set in (why? Technical changes not fast enough) Growth in Traditional Economy ? Through 1911: ? Phase III – Commercialization of the country-side ? Water transport ? Money and banks ? Contracts / legal institutions (courts / merchants associations) ? Develop vast networks of small businesses – Additional laborers from population growth ? Diminishing marginal returns set in (why? Technical changes not fast enough) a b Original PPF New PPF Economic growth in China, Phase I to III F a F b T b T a Textiles Food Story of Growth in Traditional China Slow growing technological change, rise in specialization from commercialization, expansion of population and stagnant average product Food Labor T2 T1 L1 L2 1 2 3 Naughton: most of people in poverty … there was upward mobility … but for most of China’s history: rich were rich / poor were poor Elvin: “high level equilibrium trap” Needham Puzzle II (could China have developed during the 1911 to 1949 period?) ? Brandt, Rawski, Meyer: – There was growth: ?? ?? ?? Needham Puzzle II (could China have developed during the 1911 to 1949 period?) ? Brandt, Rawski, Meyer: – There was growth: ? Commercialization—new crops / handicrafts ? Extension system and new varieties ? Modern industry—Foreign enclaves / Chinese entrepreneurs There was a crisis in China that was not helping modernization ? Exploitation of forests and resources ? End of frontier (no more land) ? Yields may be as high as traditional technology allowed (Tawney: “The Chinese peasant is like a man standing on tiptoe up to his nose in water— the slightest ripple is enough to drown him.”) ? Low rates of taxation: 2% of GDP [what was Japan? – at least 10% and rising] ? War (Taipings in the 19 th century / warlords and Japan in the first half ot he 20 th century) Response of the Gov’t ? Japan: remarkable … land reform / universities / government led programs of technology transfer, state-owned/pushed industrialization and manpower training ? China: tried … Wuhan steel mills in 1890s / extension system in the 1920s / opening to foreign investment (rise in textiles / food and public utilitites—80% in 1930), much of it by Chinese industrialists! Beginning of human capital exchange … Chinese students to the US and foreigners to China But China’s effort too little, too late and only on the surface ? Industrial output: 2.0% ? Industrial workforce 0.4% ? Few linkages … – Due to poor infrastructure in China, proper – especially in Manchuria, due to Japanese policy ? Little control: lost enclaves and ability to defend itself … ? Lots of instability: floods / droughts / civil war / impending wars … who would invest? ? Corruption [cause and effect] End of the end ? Japanese War – 8 years ? Civil War – 4 years [End of investment / human capital investment] ? Rapid inflation [End of markets] Reconciling Conflicting Stories ? Brandt, Rawski, and Meyers [economists] – China was growing ? Huang / Elvin [historians] – China was destined to fail ? Who is right? a b Original PPF New PPF Economic growth in China, 1911-1937 F a F b T b T a Textiles Food From beginning of investment, technology transfer and commercialization Story of Growth in China, 1911 to 1937 Slow growing technological change, limited gain from specialization from commercialization, continued expansion of population ?stagnant average product Food Labor T2 T1 L1 L2 1 2 3 The lack of rapid technology change … left China in a familiar position … BOTH COULD BE RIGHT! a PPF, 1936 Economic “growth” in China, 1937 to 1949 Textiles Food The effect of: War Corruption Deterioration of Infrastructure Inflation Etcetera PPF, 1949 b’ What do you think? ? Two views: – China under Capitalism did not do anything right … there was no movement towards creating the institutions that would have led to rapid economic change. – China under the Nationalists did not have a chance … there was evidence of good things beginning … they were undercut by War and other external factors … If there had of been peace, China would have begun its rapid modernization in the 1950s / and would not have waited until much later …