1.

What are the major geographical similarities and differences when China is compared to
the U.S. and India? Explain geographical advantages and disadvantages for Chinas
economic development.
Chinas land area 2 % greater than that of the United States.
Cover similar latitudes and similar range of climatic conditions.
i. Numerous parallels between regions in the eastern half of both countries
1. Climate of Guangzhou is like that of Miami
2. Climate of Northeast is similar to that of Minnesota
Big difference between China and the United States is that China is far more rugged
and more of the land is inhospitable. Most of China consists of hills, mountains, and
high plateaus, broken by river valleys and a few plains and basins. China is big,
rugged and diverse.
i. Only 25 % of China is less than 500 meters above sea level, compared to 60
% of North America.
China and the United States are almost equally big but the United States has more
arable land with less than a fourth of the population. India is about a fourth as big as
the United States and China but has more arable land than China and almost as much
arable land as the United States. Arable land per capita is huge in the United States
compared to India and China.
China and India resource-poor and labor-abundant economies.
China is short of arable land, forests, and water, ensuring that Chinas environmental
problems will be extremely severe. Economic growth pushes up against the limits of
what the land can support.
2. In 1840, there was a major event in Chinas modern history involving international trade.
Explain how this event changed China.
Opium war. The British crushed the hopelessly outmoded Chinese defenses, and in
the treaty of Nanking (1842) forced China to cede Hong Kong to British rule and open
the first five Treaty Ports to foreign control.
Allowed extraterritorial rights in Chinese territories (foreign exemption from
domestic laws)
Many other unequal treaties ensued with Germany, France, Japan, etc.
3. Before 1949 there were two distinct patterns of economic development in China. Explain.
Treaty Port industrialization and Manchurian industrialization.
i. South of the Great Wall
1. Modern industry concentrated in a few treaty ports (Shanghai, Tianjin, and
Qingdao). Shanghai alone accounted for 40 % of industrial output in 1933.
2. Textiles made up 42 % of total output, and food products a further 26 %.
3. Firms started by foreigners but native Chinese capitalists soon became a
major force.
4. By the 1930s some 78 % of the value of factory output came from Chinese-
owned firms, and they were gaining market share.
5. Chinese industrialist often had some foreign experience or contact with
foreign businesses that provided their initial entry into modern industry.
These skills spread rapidly.
ii. Northeast
1. Japanese government-sponsored industrialization.
2. Heavy industry and railroads to exploit coal and iron ore for the Japanese
market.
iii. Summary
China proper Manchuria
Market Domestic China Japanese industry
Ownership Chinese, foreign Foreign
Structure Light, consumer goods Heavy, mining, producer
goods
Skill formation Steady accumulation Little transfer of skills
Linkages Backward Few or none

4. Was Chinas reform performance anticipated by the economists and political scientists in
the 1980s? Why or why not?
Economists have not anticipated this
i. Ask an economist in 1988 which country would come first economically,
China or the Soviet Union?
Political scientists have predicted otherwise
i. China was, and still is, a Communist country
ii. Political liberalization should come before economic liberalization
5. Chinas economic reform has evolved in two main stages between 1979 and 2001. Describe
the major themes of each and the differences between them.






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6. What were the main elements of Chinas development strategy in the 1950s? What were
the major achievements and problems?
The Big Push
Consumption was squeezed, as rapid industrialization was given highest priority.
Government controlled the bulk of the economy directly and used its control to
pump resources into the construction of new factories.
Investment, virtually all of which was government investment, increased rapidly to
over a quarter of national income.
Investment rates worldwide have risen since the 1950s, but even today poor
countries on average invest 20 % of GDP. China, by 1954, at a time when it was still
very poor country, had pushed its investment rate up to 26 % of GDP.
Most investment went to industry, and of industrial investment, more than 80 % was
in heavy industry.
Rapid industrial growth. Average annual rate of 11.5 %.
1980s reform 1990s reform
Cautious, consensual decision-making Personalized decision-making
Introduce markets where feasible; focus
on agriculture and industry
Strengthen institutions of market
economy; focus on finance and
regulation
Dual-track strategy. Coexistence of two
coordination mechanisms (plan/market).
Market unification, unite dual tracks
Particularistic contracts with powerful
incentives
Uniform rules: level playing field
Competition created by entry; no
privatization
State-sector downsizing: beginnings of
privatization
Decentralize authority and resources Recentralize resources, macroeconomic
control
Inflationary economy with shortages Price stability, goods in surplus
Reform without losers Reform with losers
Entire new industries were created. Example: Those producing electric generating
equipment, chemical fertilizer, and motor vehicles.
Most important, economic growth was jump-started, after the stagnation and
disruption if the depression and war years.
Consumption was neglected
Growth in services was neglected.
Employment creation was relatively slow. Because most industry was capital-
intensive and services were neglected, new labor requirements were modest.
Pouring scarce resources into difficult undertakings while ignoring opportunities to
exploit relatively easy projects. The strategy created an important heavy industrial
base, but those assets were being used at very low effiecieny.
7. Give the three common systemic features of the socialist system shared by China and the
Soviet Union. What in China has changed and what has not since the reform?
Communist Party in power, guaranteed by the Constitution
i. Monopoly on political power
1. Controls every aspect of the society
2. Controls everyone in the society
ii. The Partys jurisdictions
1. Personnel (appointment, promotion, dismissal)
2. Ideology and propaganda
3. Mass organization (union, students, women, etc.)
4. Major decisions of the government (five year plan, etc.)
iii. The Governments jurisdictions
1. Formulating plans
2. Implementing plans
3. Control over property, finance, prices, taxes, trade, etc.
Dominant public ownership
i. Property Rights
1. Rights to the income generated by the use of property
2. Rights of use of the property
3. Rights of transfer of the property
ii. Distinction between two types of property
1. Means of production: for producing products or services
2. Personal property: for personal use
iii. Distinction between two types of ownership
1. Public vs. private
2. State vs. non-state
iv. State ownership
1. Highest form of public ownership
2. Nominally, ownership belongs to the whole people
v. The government exercises all the rights
1. Incomes go to the state budget
2. Government bureaucrats decide how to use property
3. Government bureaucrats decide how to transfer property
vi. Collective and cooperative ownership
1. Lower form of public ownership
2. Nominally ownership belongs to a group of people
3. In reality, government control and intervention
Central planning as the main mechanism of resource allocation
i. Government control over investment
1. Five year plan and annual plan determine investment priorities
2. Also decide on specific investment projects (large investment
projects approved by Politburo)
3. All the necessary resources are allocated to the key projects such
as funds, labor, foreign exchange, etc.
4. A politicized process, not just for economic objectives
5. Resource mobilization economy, like a war economy
ii. Price determination
1. Prices set by government, not to equate supply and demand
2. Basic principle: prices reflect the social necessary costs (excluding
land and capital) and prices should be stable
3. Price policy serves the purposes of
a. channeling funds to/from the government
b. income redistribution
iii. Price distortion patterns (implicit taxation)
1. Low prices for consumer basic needs (food, rent, health care etc.)
and raw materials
2. High prices for manufactured goods and luxury goods
3. Low factor prices (wages, interest rates, exchange rates)
iv. Production plan: material balance
1. An output target for each producer
2. A supply plan that transfers resources between producers
3. A schedule of usage coefficients linking inputs and outputs
v. The input-output problem
1. How to disaggregate the plan
2. The problem of information
3. A huge number of bureaucrats involved
4. Feasible plan may be possible, but not efficient
vi. Management incentives under central planning
1. If plan target is the total number of nails, tiny nails will be
produced to maximize the number
2. If plan target is the total weight of nails, one huge nail will be
produced to maximize the weight
3. Managers also bargain with the planner to lower output quotas and
to raise input supplies
vii. Similarity and differences between managers under central planning and in
public corporations
1. They all have incentive problems: conflict interests
2. Solutions are different. How?
8. Explain the differences and similarities between state ownership and collective ownership
of firms in China.