Lecture 3

Could China Have Grown During

the First Half of the 20th Century
 Production under Autarky (no trade)

Computers / textiles

Production of computers
and tomatoes occurs at the
point of tangency between
the PPF and the
Indifference Curves:
b
a Which point is optimal and
feasible? a
c

Why not c?
Why not b?

Tomatoes / food
 Alternative Production Outcome
(under Autarky--no trade) but in
Computers Kingdom of the Skinny Nerds

With different
preferences (ICn versus
ICa) … may choose to
n
produce more
computers and less
a food (at point n) …

Who is happier? Those

in Kingdom A or those
in Kingdom N?

Tomatoes
 Production under Autarky (no trade)

Textiles

Characteristic of autarky:

Consumption = production

Produce F1 food and

T1 a consume F1 food
AND
Produce T1 textiles and
consume T1 textiles

F1
Food
 Economic growth, Type I Growth: GDPb > GDPa

Textiles
How do you see growth?
Ua > U b
(in this case, production /
consumption of both food—
Fb>Fa—and textiles—Tb>Ta—
is greater)
Tb b
a How does growth happen from
Ta
a to b?
-- technical change?
-- growth of inputs?
-- trade?
Original PPF New PPF

Fa F b
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)
 Moving from Autarky (a) to Trade – Producing at International Prices
Iso-price line (traced
out by the ratio of Iso-price line (traced
textile to tomato out by the ratio of
prices), domestic textile to tomato
Textiles prices in autarky prices), International
prices

Q1: In what scenario is

food relatively more
valuable?
a
Q2: In what scenario can
you buy more textiles for
the same amount of
food?
mp
Q3: In what scenario
would you want to
produce more food?
A: When facing
Food
international prices!
 Moving from Autarky (a) to Trade – Producing at International
Prices …

Iso-price line (traced

out by the ratio of
Textiles
textile to tomato
prices)
When facing
7*500=3500 international prices,
where would the
z (7) country produce?

5 a
z 3500
a 4000

1 mp m 8500
y
40*200 + 1*500=8500

0 15 40

15*200 + 5*200 = 4000 Food

 Where does a Nation Consume Under Trade?
When Nation produces
at mp, then it earns an
income of 8500 … and
Textiles when there is
international trade, it
can afford any point on
mc the iso-price line that
passes through mp.

a Which one will it

choose?

mp Depends on
preferences … in this
case, it will choose mc!

Food
 Growth from Trade and Market Difference between
Liberalization/Commercialization? optimal solution under
autarky and optimal
solution under trade:

Textiles
Under trade: production is
NOT equal to consumption
mc

Specialize in production
(mp)
a

Trade and consume at mc

mp
Growth: Umc > Ua

Food
 How do we see trade?

Textiles

10 mc

imports a

1 mp

production
Exports

20 40
consumption Food
 What Happens after Economy Experiences Growth from
Trade and Market Liberalization/Commercialization?

Textiles

mc

Growth: Umc > Ua

a But, after hit mc … then

there is no more growth,
UNLESS there is
additional technological
mp change!

Food
 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)
 Economic growth in China, Phase I

Textiles

How does expansion of

the PPF occur?

Tb b
Ta a -- Rising inputs
-- Technological change

Original PPF New PPF

Fa F b
Food
 Production function and the rise of output from increasing
inputs

Food

F2

F1

Output increases
as the quantity of
input increases

L1 L2
Labor
 Diminishing Marginal Returns … and falling average product

Food

F2

F1
Although output
increases as the
quantity of input
increases, the
Average
product AVERAGE output
per input falls …
L1
L2
1 unit What happens at
L1 L2
When move from L1 to L2, what really high levels of
happens to the average rise in output Labor output?
for a 1 unit rise in input?
 Technological change from the perspective of the
production function

Food

Technological
change: for a
given amount of
input, get more
output (e.g., new
seeds / new
manures / etc.)
Labor
 Technological change and rising average product

Technology 2, T2

Food
Technology 1, T1

Technological
average
product change: for a
given amount of
T2 input, get more
output (e.g., new
T1
seeds / new
manures / etc.)
1 unit Labor
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)
 Economic growth in China, Phase I to III

Textiles

Tb b
Ta a

Original PPF New PPF

Fa F b
Food
 Story of Growth in Traditional China
Slow growing technological change, rise in
specialization from commercialization, expansion of
population and stagnant average product T2
3
2

Food
T1
1

Naughton: most
of people in
poverty … there
was upward
mobility … but for
most of China’s
history: rich were
L2 rich / poor were
L1
poor
Labor
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 19th century / warlords and
Japan in the first half ot he 20th 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]
 Reconciling Conflicting Stories
• Brandt, Rawski, and Meyers [economists]
– China was growing
• Huang / Elvin [historians]
– China was destined to fail

• Who is right?
 Economic growth in China, 1911-1937

Textiles

From beginning of
investment, technology
Tb b transfer and
Ta a commercialization

Original PPF New PPF

Fa F b
Food
 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 T2
3
2

Food
T1
1

The lack of rapid

technology
change … left
China in a
familiar position
…

L1 L2
BOTH COULD
Labor BE RIGHT!
 End of the end
• Japanese War – 8 years

• Civil War – 4 years

[End of investment / human capital investment]

• Rapid inflation

[End of markets]
 Economic “growth” in China, 1937 to 1949

Textiles

The effect of:

War
a
Corruption
Deterioration of
Infrastructure

b’ PPF, 1936 Inflation

PPF, Etcetera
1949

Food
 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 …