View: If it is too good to be true, it probably isn't always - China's economic statistics

This article is contributed by a kind reader of JC Economics Essays

For many economists and pundits who long believed that China’s incredible provincial and national economic growth figures seemed too good and neat to be accurate, they now have reliable confirmation of their scepticism. While long dismissed as speculation or myth, there is now official news confirming their suspicions. 

What happened?

In 2017, the Chinese government finally admitted that some of its outstanding economic data was made up… which means that some of the economic figures were invented, created, man-made.

Before these shocking revelations, there had been many suspicions: an economic study by Harry X Wu in June 2015 estimated that from 1978 to 2012, China’s Gross Domestic Product (GDP) grew by 7.6%, which would be around 2.6% lower than the official 9.8% economic figure. Perhaps he got closer to the truth than we realise. In fact, it might have been interesting to note that Wu’s (2014) results indicated that Chinese Total Factor Productivity (TFP) growth was negative from 2007 to 2012. Over-building, over-capacity, under-utilisation, and the advance of the Chinese state into private sector markets were also substantially dragging China’s economic growth down.

Yet, despite this doom and gloom in the economic analysis, and the many suspicions, it was reported cheerily in official news that China’s economy expanded by 6.7% in the third quarter of 2016. Economists have sometimes wondered why China’s economic growth figures often look right on track to hit the central government’s target economic growth rates.

And in January 2017, China’s northeastern Liaoning province, which relies on the production of steel as its economic growth engine, reportedly inflated its economic growth figures from 2011 to 2014. 

The sheer scale of this economic deception is quite staggering. This province has a population of about 43 million, which makes it bigger than California in the USA. And this is the first time the Chinese government has publicly admitted to faking official economic statistics at any level. 

Also, what makes this economic case even more surprising is that fiscal revenues in Liaoning were inflated by at least 20% during the same period, and some other economic data there were also fabricated. These actions can be partly attributed to the incentives that rational and utility-maximising Chinese officials face when it comes to economic data. It is said (in Chinese) that Chinese officials produce the economic numbers, and the economic numbers produce officials in turn, which means that massaging economic data can help one get ahead in Chinese officialdom. People respond to economic incentives.

It can be quite breath-taking to think that the economic books are cooked. Some of the faked economic figures are in fact quite dramatic. According to the news agency Reuters, one county in Liaoning province reported an extra fiscal revenue of 847 million yuan (around US$131.3 million) in 2013, more than double the actual figure. And in one of the years, Liaoning’s GDP growth figures were reported at 9.5%, far above the current figure of a mere 2.7%. A pittance! 

And Liaoning had failed to hit government economic targets in key economic metrics in 2016, including economic growth, fixed asset investment, and exports. Since 2014, when Liaoning stopped inflating its economic growth figures, fixed asset investment, an important proxy measure of construction work, had been declining 60% to 70% per annum.

In China today, the falsification of local economic statistics apparently still happens in some areas from time to time, and the government will occasionally issue stern warnings of heavy punishment for those who fake official economic figures. Enforcement seems to remain an issue for China as it continues its economic rise. There are many economic implications: Investors may have to think twice about investing in China; their economic figures have to be taken with a pinch of salt; and most importantly, and surely not just tongue in cheek, there should be many, many jobs for real statisticians in China. 


JC Economics Essays. This is an economics blog with opinions. This economics article was contributed by SS. We thank our readers for their kind and generous personal contribution to this economics blog. The views and perspectives expressed in this article are the author’s own views and based on his own research and are all made in his own private capacity. The sources are available online and also publicly, although the framing and opinions are his. To recap, JC Economics Essays is an economics resource also has useful sample or model economics essays, economics questions, A level Economics examination techniques and economics case studies. Thank you for reading and cheers. 

View: What's Wrong With A Universal Basic Income (Unconditional Basic Income)

This article was contributed by a reader (MSc Economics)

In recent years, many countries across the globe have been flirting with the idea of UBI - Universal Basic Income, or the Unconditional Basic Income, depending on the term you use or who you talk to. And while many articles by various pundits, journalists, policy wonks, and even economists are in favour of such a simple and easy measure to solve poverty and counter a "post-work" world in the future with automation and technology when jobs have been massively impacted, supposedly freeing up people to do anything they like, or even better, pursue their dreams - this economics paper takes a stand to argue against this idea. 

I don't think that the UBI is a good idea. It strikes me as a bad idea. 

Why is it not a good idea to give people free money, and allow them to pursue their dreams in a post-work world? Why not do away with other forms of welfare and just go with a simple blanket redistribution? I am with the Swiss on this one - in June 2016, the Swiss people overwhelmingly voted to reject an unconditional cash payment given to all citizens to the tune of $2,500 a month. To my mind, they voted wisely. 

First, to pay for this plan, proponents suggest that all that is required is to reallocate spending on other transfer payments, such as payments to help people tide periods of unemployment, to UBI instead. Everyone gets a cheque. All the money that would have been allocated to unemployment benefits are now redistributed as a lump sum that goes to all the citizens of a country, rich or poor. So one way of looking at it, this camp argues, is that there are no new taxes raised as funding allocated to social spending will now no longer be targeted to the poor, but given to everyone. 

This strikes me as odd, that the social assistance is not targeted to the poor, or those who need financial support, but instead given to everyone regardless of their level of income. Currently, most countries don't have unconditional income - that is why we are having this debate - but they do not give the rich a lump sum that is unconditional, that is, tied to nothing. Why give the rich more money? 

And what makes this idea even worse is the fact that it completely ignores the fact that during good times and the economy is booming, less is handed out in transfer payments and more is collected in tax revenues, while the reverse is true - in bad times, there are many on the dole and taxes are often cut so as to boost AD. This means that under the situation of the UBI, during a recession relatively less government expenditure would be needed to fund the system, while during a boom time relatively more would be required to fund the system. Think about it for a second. In simple terms, more will be spent by the government handing out funding in the form of a universal basic income when times are good (as the government would not have handed out that much welfare benefit during a boom time); less will be spent by the government during a recession (as the government would have raised transfer payments counter-cyclically during a recession). 

Second, the UBI idea totally ignores the idea of economic incentives. I am not sure about other people, but surely I can speak for myself. If I received $2,500 for free - and I were to be taxed on income that I earn - because taxes do not simply pay themselves - I would definitely work less. I am a rational agent who actively responds to incentives. Why would this logic be any different when it is applied to a large population of people? While some unemployed would take this chance to get a better job and can have a proper subsistence - there's no denying that - some who are currently employed at around that wage would effectively have less incentive to work. I say again, I speak for myself but it is no stretch of the imagination that these incentives also work for other people - the incentive to be lazy and reduce work motivation, or for others to work in short term, simpler, less stressful jobs. At the slightest hint of problems at work, one would be tempted to leave as there is a UBI backing one up. Economists have often spoken of moral hazard and adverse selection - these important lessons should be revisited by anyone who is speaking about this topic. 

Third, I am not going to make an economic argument as I did above, but I am going to talk about unintended consequences of redistribution. And some history, especially involving redistribution (a few countries have had this experience). There was once a societal experiment, which everyone knows about, to build a classless society where everyone would work harmoniously - From each according to his ability, to each according to his needs. I am sure you know where this is going. If income is unconditional, we cannot expect the consequences to be the same as though the person got his income from hard work and labour; forgoing his present consumption; investing; saving; or even inheriting his wealth. There are unintended consequences and as history has taught us - sometimes these consequences can be quite dire. Many countries have tried to create utopia and solve poverty and inequality - many countries have failed. Free markets may not have solved all of the world's problems, but they do help massively, and the facts of history have borne their successes out. 

All in all, there are a lot of things wrong with a UBI. Please don't support it. Not only does work have meaning, but there's a lot to be said about financial incentives, a country's attempts to balance their budget, and the simple fact that there is no free lunch. 

JC Economics Essays - Special thanks to our readers for their kind contributions. This economics perspectives essay is contributed by SS.  

JC Economics Essays is an economics essay site that deals with A level economics essays, from H1 to H3, and also has articles on how to write an economics essay, how to craft paragraphs, and write strong justified evaluations. Thank you for reading and cheers! 

What is the economic impact of Brexit on Asian economies?

This economics post explains and analyses the possible economic consequences of Brexit on Asian economies and was created through synthesising a few economics essays. 

On 23 June 2016, in a historical moment that will be a discussion topic that would stand the test of time, citizens of the United Kingdom (the UK) voted in a national referendum on their continued membership in the European Union (the EU), ultimately choosing to leave. 

This huge event is called “Brexit”. 

What is the economic impact of Brexit on Asian economies? 

Brexit has negatively impacted global financial markets, causing economic volatility and huge losses of trillions of dollars in equity value. 

Meanwhile, the UK pound has seen the largest drop by any major world currency in recent history, and its largest drop since 1985.

On the surface, the UK leaving the EU would not matter that much economically to Asia’s economies. 

Although the UK is prima facie the world’s fifth-largest economy (now that is not the case any more, apparently as an immediate economic impact of  Brexit, because it has been overtaken by France), the UK is not actually one of Asia’s biggest economic customers. 

Except for Cambodia, Vietnam, and Hong Kong, most exports from most economies in Asia to the UK are relatively small as a percentage of total economic output. 

For Singapore, a small and open economy located in Southeast Asia, the UK is a relatively small customer. Singapore’s exports to the UK totalled S$7 billion in 2015, out of S$530 billion in total exports. 

Quite simply put, in the immediate or short term, the economic impact has been rapid and direct so far. In the immediate term - it's the economic impact on markets and currencies that matter currently. 

But the real and longer term impact of a “Brexit” – for Asia and the rest of the world – is much bigger than just merely market or economic volatility. 

The real economic impact of Brexit would be more subtle than any immediate effect on trade or markets. 

It would represent an economic slowdown – and maybe the first steps of a economic reversal – of the globalisation that has defined markets in recent decades. 

There are many definitions of globalisation, but in this case, globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased international trade and greater international mobility of factors of production like capital, labour, and enterprise across international borders. 

Asia has a lot to lose from this rollback of international trade or decline in economic globalisation. 

Many Asian countries rely heavily on international trade. 

For instance, Singapore’s international trade stands at 351 percent of its GDP, and it amounts to 439 percent of Hong Kong’s GDP. Growth in international trade has been slowing in recent years, and Brexit could slow trade and growth down further. 

For example, the UK takes fully three-quarters of Singapore's investments in the EU with big companies like Comfort DelGro and Frasers having an international presence in that country. The UK out of EU could lead to significant fall in Singapore's exports to the EU, and Singapore international businesses could suffer write-downs in economic value on their balance sheets.

If there is a rise in protectionist sentiment in the UK, this might spread to other countries as well. 

Protectionism refers to economic policies aimed at restricting international trade between countries, designed to protect domestic businesses and workers from international competition, while free international trade refers to the exchange of goods and services across international boundaries. 

Recently, other than just the UK government, many governments (and a famous US Presidential candidate from "across the pond") have been adopting or promoting protectionist measures in the belief that this would offset the impacts on their economies from international trade and globalisation.

China would likely have some major economic concerns. The EU is an even bigger destination for Chinese goods than the United States.

The EU is China’s largest trading partner, and as China enters an era of slower economic growth, the timing of the breakup of the European Union couldn’t be worse.

For China, the UK's decision to eventually extricate itself from the European Union’s common market will be a disappointing move. Chinese Premier Li Keqiang has taken a particular economic interest in the UK, reciprocated in recent years by Chancellor of the Exchequer George Osborne. Last fall, London became the first international financial hub to issue renminbi-denominated debt after Xi Jinping’s visit there. Brexit will be an economic setback for the ongoing internationalization of renminbi as London’s international relevance as a global financial hub is diminished as a result of Brexit. 

Brexit could also challenge some of the international trade deals focused on further opening the rest of the world to ASEAN economies. The Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), for example, are aimed at cutting international tariff barriers and promoting international trade with some of the world’s largest economies. 

Brexit could also mark an economic setback for China’s long-term economic goal of a free trade agreement with the EU. London had emerged as one of the most eager advocates for a China-EU FTA. 

With the UK now exiting the economic bloc, none of the other major EU states seem keen to ink an economic deal with Beijing. An FTA with the UK alone might be politically simpler to negotiate, but will not have nearly the same economic benefits for China. 

Remember that a Free Trade Area (FTA) refers to a trade bloc where more than two countries agree to engage in free trade with one another while maintaining members’ own individual levels of external barriers against non-member nations.

In the longer term, no one really knows what the economic impact will be - but it certainly will not be a walk in the park for UK or Asia, or Singapore, and only time will tell if Brexit really was a good economic decision ... 

or if the economic experts were right in saying that this was one of the worst economic decisions of all time. 

JC Economics Essays is an economics website which has a wide and useful range of economics resources and free lesson materials for students' own use, such as economics essays at the A level standard (H1, H2, H3, and A level standards), and undergraduate and masters economics essays. The main focus is on A level economics essays, but GCE, GCSE, AS, AO, and H1/2/3 economics essays are in this site too. In particular, JC Economics Essays has model A level economics essays and responses that students could use as an easy and relevant reference for learning, as well as relevant tips and techniques for writing strong and well-argued essays. A whole range of useful case study tips, essay writing techniques, and relevant opinion pieces on a relevant range of economic topics will help you learn economics effectively. Thank you for reading, and cheers.

"In your opinion, was China capable of nurturing its indigenous Industrial Revolution?"

Shared master's students economics essays for LSE (London School of Economics and Political Science) MSc. 

EH446 Economic Development in East and Southeast Asia series 

Introduction

This essay aims to evaluate whether or not China was capable of nurturing its indigenous Industrial Revolution. In order to answer this question, it is important to first clarify the question by defining ‘indigenous Industrial Revolution’ and explaining what is meant by ‘capable.’ This essay will treat China’s ‘indigenous Industrial Revolution’ as the great achievements in science and technology during the Northern Song period.  ‘Capable’ is considered to mean China’s inherent ability to maintain and invigorate its technological momentum in the absence of outside forces (most notably, the pressure from Tatars and the Mongol invasion in the thirteenth century).

This analysis begins with a summary of the product and process innovations leading up to the thirteenth century, followed by the shift towards extensive-type growth in agriculture, transportation, and economics. An explanation of the role of the state will follow, highlighting the differing roles of ideology, competition, and science in order to compare the Chinese and British cases. Using the structure defined above, this essay finds that China possessed both inherent strengths and weaknesses for cultivating its indigenous Industrial Revolution. The positive factors that led to significant technological advancements in the Northern Song period persisted, as did economic (extensive) growth in the years that followed. China lost its ‘edge’ when intensive growth slowed due to government (dis)incentives and a lack of competition. By considering the debilitating impacts of these internal factors , this essay concludes that it would have been difficult for China to foster its own Industrial Revolution, even in the absence of foreign struggles.

Intensive Growth during the Northern Song

China’s great achievements during the Northern Song period did not happen overnight. Song success was the result of a long period in which a “well-functioning” system developed; by 300 B.C., China “had many characteristics of a market economy.”  From that point through the early twelfth century, an industrial revolution was in the making. Scholars point to China’s early arrival on the scene, predating the British Industrial Revolution by centuries. 

The Northern Song period witnessed the invention of many products including massive ships, the compass, and military tools.  As John Hobson points out in his critique of Eurocentric writers, objects designed for large-scale conflict and exploration were not the only innovations during this time period. While useful for military technology, iron was also used to produce commonplace items such as shovels, stoves, and nails.  Iron was not alone in its versatility; paper was also used widely in China before reaching the West, for such disparate functions as wallpaper, money, shoes, and even military armour. 

In addition to the various new products that surfaced during the incubation of China’s Song Revolution, many process innovations also occurred. Metal treatment technologies such as smelting, confusion, oxidisation, and decarbonisation were mastered during this period, rendering Chinese cast iron production and metallurgy practices less expensive and more diverse.  In the textile industry, the introduction of spinning wheels using hemp and silk marked a great procedural improvement in this field.  It was these technological innovations in products and methods that stimulated China’s economic growth through the Northern Song period.

Extensive Growth during the Southern Song and Later

During the transition from the Northern Song to Southern Song period (in the early twelfth century), economic growth continued but its foundation shifted; society was no longer propelled by the innovative vigour of the preceding years. By the time the Ming Dynasty came to power in 1368, a new trend had emerged. In The Lever of Riches, Joel Mokyr identifies the sources of this new kind of growth as the “expansion of internal commerce, monetization, and the colonization of the southern provinces,” also noting the growing population and agricultural “intensification” that continued through the nineteenth century.  

Agricultural “intensification” efforts differed from the agricultural inventions of the Northern Song period in that they were not unique, novel creations. In most cases, such efforts were manifested in the form of small improvements to existing products or practices.  In his article, ‘The Needham Puzzle: Why the Industrial Revolution did not Originate in China’, Justin Yifu Lin cites some examples, including the share plow for creating furrows in soil and the introduction of Champa rice to be grown in the southern provinces.  Seed drills, weeding tools, fertilizers, and pest control also emerged during this time. 

As the population shifted southwards and agriculture adapted to gain the most from this territory, transportation capabilities were also bolstered. The Chinese used internal waterways to send coal, iron, and steel south to meet the demand from these provinces.  In addition to the physical infrastructure, fiscal systems were also created to tax and regulate internal and international commercial activity.  The change from China’s intensive economic growth during the Song technology boom to the more extensive pattern in the years that followed was not simply a function of northern aggression and natural conditions. Institutions, ideologies, and methods of innovation also played a role in determining why China’s Song Revolution did not follow the same trajectory as the later British Industrial Revolution.

Institutions, Ideologies, and Incentives

The Chinese government played an integral part in the state’s economic development. Agriculture flourished in part because of government incentives and advantageous loan conditions.  The close alignment of the state apparatus with the economy created a kind of symbiotic relationship between the Chinese government and science and technology: when the state was strong, innovation thrived. In their essay, ‘The Evolution of Chinese Science and Technology’, Jin Guantao, Fan Dainian, Fan Hongye and Liu Qingfeng cite an example of this in the textile industry – noting that textile technology blossomed during the successful Song period, but then “degenerated as the dynasty collapsed and upheaval and destruction set in.” 

Scholars who attribute the stagnation of the Chinese Industrial Revolution to restrictive state action have been criticized for exhibiting a Eurocentric bias.  While this may be a valid contention, it is important to note the shift in ideology when the Ming Dynasty came to power. “Obedience” and “conformism” have been used to describe key values that prevailed during their rule.  John Hobson attributes the 1434 Ming ban on foreign trade to a return to Confucian principles; he asserts that it was more important for the Ming rulers to maintain the ban in theory in order to retain regime legitimacy, while the ban was loosely enforced in practice.  

One critical difference between the political climate of the technology revolutions in China and Britain was the lack of competition in the Chinese case.  The absence of public debate and a competitive market during the Ming slowed the type of accelerated growth that had been achieved during the Song and that was later seen in the British case. The strong state and its roots in Confucianism also stifled the kinds of scientific experiments that led to significant discoveries later in Europe. Confucianism valued knowledge learned from direct experiences over experiments, going so far as to deem the latter to be “witchcraft.”  The benefits of a system that intertwined science and technology were realized in Britain during the Scientific Revolution. In China, these remained discrete concepts and thus lacked the benefits of this kind of synergetic “feedback” mechanism. 

Conclusion

To answer the original question, was China capable of nurturing its indigenous Industrial Revolution, this essay has raised several points. First, although economic growth remained positive, there was a shift from intensive to extensive growth after the fall of the Song Dynasty, which was significant for the future of technological innovation. When this shift is considered in conjunction with state Confucian ideology, a lack of competition and the limited interaction between scientific methods and technology, China’s ability to maintain the technological strength of the Song Revolution even in the absence of external threats seems relatively weak. 

JC Economics Essays - This short series on JC Economics Essays is a set of shared economics essays on economic development, shared by my former economic history classmates KVL and TZ with me when we were reading our MSc. (Masters of Science) at the London School of Economics (LSE), London, United Kingdom. We shared our economic history essays so that we could gain additional perspectives on how to craft good essays to get a high grade for the Master's degree at LSE, and that was a good way of sharing information and material. All the economic history essays were graded highly by Dr Kent Deng, a very excellent and inspirational tutor and lecturer at the LSE when I was studying there. I hope you find the essays on economic development interesting or useful. Special thanks to KVL and TZ (both from the United States of America) for their kind sharing. Thank you for reading and cheers. 

EH446 Economic Development of East and Southeast Asia

"China’s high-yield agriculture was as much a result of suitable institutions as good natural conditions." Discuss.

Shared master's students economics essays for LSE (London School of Economics and Political Science) MSc. 

EH446 Economic Development in East and Southeast Asia series 

Introduction

This essay aims to analyse the relative importance and impact that good natural conditions and suitable institutions had on China’s high-yield agriculture. In order to discuss the relationship of these factors to agriculture as well as to one another, it is important to first identify the time frame in which to situate the analysis. Throughout the Qin and Han periods, institutions began to take root which would have lasting impact on the period of high-yield agriculture to follow.  A substantial shift in geographical focus to agriculture in the south of China during the Tang period  marks the start of the latter phase considered in this essay, extending into the Song Dynasty to cover the dissolving of large land estates and accompanying migration patterns.  

During this time period, China’s high-yield agriculture was both a result of good natural conditions and suitable institutions. This essay places an emphasis on the suitableness of those institutions to the natural conditions present and their responsiveness to changing circumstances and challenges presented by population growth and limited land capacity as instrumental in promoting China’s high-yield agriculture. The essay will begin with a brief description of the good natural conditions existing in China to promote an agricultural system, followed by an analysis of the institutions that mobilise this sector and the built-in response mechanisms that both contribute to high-yield agricultural sustainability as well as eventually lead to its stagnation. The conclusion offers a summary of the argument that high-yield agriculture in China resulted from a combination of a good natural environment and suitable institutions and their own mutually reinforcing relationship.

Good Natural Conditions

According to J.L. Buck’s Land Utilization in China, such natural factors as climate, topography, soil, and vegetation are important to consider in an analysis of the agricultural sector in China. These factors provided good conditions for high-yield agriculture in China, in part because of their wide variation across the vast territory. Lower elevations tended to be more suitable for large agricultural plots, the best soil could be found on valleys and plains, while rainfall levels varied by region and season. The sheer size of China and its varied geography allowed for a variety of crops and farming techniques to develop over time – from wheat, maize, and soybeans in the north to rice in the south – among many other variations from each and in between.  The challenging conditions in particular regions and seasons did pose some obstacles for farmers, but these could be overcome with developments in fertilizers and seed varieties.  These innovations were sponsored and encouraged by the institutions which developed during the Qin and Han periods.

Institutions

In order to maximize the productivity of the good natural conditions described by Buck, a number of institutions developed. Among these are private property and land ownership, small family farms, the land tax structure, and state investment in technology. There existed an overarching relationship between the state and the farmers in which both parties reaped rewards from the function of these institutions. For the state, agriculture was a “fundamental” cornerstone of the Chinese economy, a symbol of enduring prosperity in which it made ideological sense to invest resources.  There were not only philosophical benefits, but military and economic benefits as well, coming from “well-fed soldiers” and additional revenue.  Peasants depended on land from the state , so they derived benefit from this relationship and the institutions that supported it as well.

Private property and land ownership is important to high-yield agriculture in China because of its early development during the Qin and Han Dynasties. Its emergence gives rise to further patterns such as small farm sizes and tax structures. Under the Han Dynasty, economies of scale did exist for some non-rice crops in northern China, which gave rise to the formation of large scale farm estates. Later, this pattern was reversed, increasing the fluidity of peasant migration in the Tang and Song periods.  

Chao Kang uses the term “atomistic” to describe the many small farms (“production units”) that made their own individual decisions in the agricultural market.  The small family farm system had many benefits to high-yield agriculture in China. The land tax structure privileged small family farms. The state taxed farmers relative to the amount of land they owned, thus encouraging the smaller farms and protecting against rent-seeking behaviour of landlords who would otherwise try to monopolize surplus production.  In general, agricultural taxes were reasonable, Kent Deng notes, supporting the “moral economy of taxation in China.”  

Among one of the most important impacts of the small farm structure was the family’s ability to allow for a surplus population to exist in the agricultural production model. Chao makes a compelling argument that the family effectively shared their income within the same production unit and allowed the marginal product of labour to fall below subsistence cost.  This creates a situation where population growth is allowed to continue, and thus production also continues to grow but at a lesser marginal product of labour rate. 

Technological development responds in a similar manner, adapting to population growth and perpetuating the increase through investment in labour-intensive innovations. As the marginal productivity of labour declines, the system responds by increasing the marginal productivity of land.   Chao traces the technological innovation in China from labour-saving devices such as the shareplow until the 12th century, when this type of innovation comes to a halt in favour of labour-intense techniques such as raising more than one crop within a year and farming on previously uncultivated land.  As the population grew, migration to the southern region allowed a larger labour force to be successful in harvesting labour-intensive crops such as rice and to benefit from such techniques as double cropping and fast growing seeds.  Again, it was a case of the institutions, in this case, investment in agricultural technology, adapting to the constraints of a growing population and diminishing amount of available land.

Responsiveness

The key for good natural resources and suitable institutions to perpetuate high-yield agriculture in China was their compatibility with one another. Since natural conditions are natural, institutions need to be flexible to adjust to these as well as other variables (such as population). For Chao, the critical capability is redistribution. This property is evidenced in the family production unit structure, where the family production utility can be shared amongst the members internally, even though their individual members’ marginal product of labour is below subsistence level.  Thus, the family unit structure responds to the rise in population by allowing it to continue to grow. Similarly, technology and state policies and incentive structures allowed for agriculture itself to adapt and absorb a larger labour force.

The excellent responsiveness of institutions prolonged high yield agriculture in China. However, this institutional adaptability to a growing population on a fixed area of land led to a pattern of path dependency. The small farm structure and growth in labour-intensive agriculture impacted rational choices made by both peasants and the state. Within the family farm, despite the diminishing marginal product of labour, people continued to work and produce a greater total output rather than let the surplus labour sit idle.  Chao’s argument that the institutional ability to fix problems in the short-run contributed to long-run economic stagnation  provides a good explanation for high-yield agricultural success in China, while also acknowledging its shortcomings. Francesca Bray also touches on this stagnation point, dating it to around 1800 when China reached its geographical limits and the population finally surpassed the capacity of agricultural production. 

Conclusion

This essay has argued that China’s high-yield agriculture was a result of both good natural conditions and suitable institutions. The key to these factors’ ability to propel high-yield agriculture was their complementary nature. Having one without the other would not have provided the same rich platform for growth that was created by these conditions together. Institutions have been the focus of this essay because they are the factor over which the population has control. Institutions can be used to maximize the productivity of natural conditions, as they did through technological innovations to increase the marginal productivity of land, and state policies to encourage small family farms and labour-intensive crops. The assessments made by Chao and Bray attach importance to the roles of population and land capacity as constraints on agriculture for which institutions must correct. 

This essay has stressed the importance of institutional responses to these variables of population and land capacity. Institutions are critical to the development of China’s agricultural sector. During the Qin and Han periods, institutions such as private property and favourable tax structures maximize the use of existing good natural conditions (land, soil, and climate). Over time, particularly during the Tang and Song periods, family production units and labour-intensive technological development react to the limitations of natural resources as the population grows and agricultural space becomes constrained. How this responsiveness ultimately created an unsustainable path dependency that limited agricultural growth in the long-run is not the topic of this essay. However, it helps to illustrate the primary importance of institutions in managing good natural conditions in China for high-yield agriculture.

JC Economics Essays - This short series on JC Economics Essays is a set of shared economics essays on economic development, shared by my former classmates KVL and TZ with me when we were reading our MSc. at LSE, London, United Kingdom. We shared essays so that we could gain additional perspectives on how to craft good essays to get a high grade for the Master's degree at LSE, and that was a good way of sharing information and material. All the essays were graded highly by Dr Kent Deng, a very excellent and inspirational tutor and lecturer at the LSE when I was studying there. I hope you find the essays on economic development interesting or useful. Special thanks to KVL and TZ (both from the United States of America) for their kind sharing.

EH446 Economic Development of East and Southeast Asia

China's Economy: Discuss the implications of a revaluation of the Chinese yuan on Singapore’s economy. [25]

In recent years, economists worldwide argued that China should revalue her yuan, or shift away from her dollar peg, because her yuan (RMB) has been viewed as undervalued. (Year 2010-2012).

Discuss the implications of a revaluation of the Chinese yuan (RMB) on Singapore’s economy. [25]

Introduction

The Chinese yuan (reminbi, RMB) has long faced revaluation pressures with China’s mounting trade surpluses and developed countries’ claims of China dumping cheap goods on their markets, flooding their economies with low-priced goods “Made in China”. 

This paper argues that, as an increasingly dominant trading partner for Singapore, if China were to revalue the yuan, it would have a huge impact on Singapore’s economy. Revaluation, an increase in the value of the Chinese yuan, will impact the Singapore economy through imports from China, exports to China, and the concomitant effects on the balance of payments, and may thus impact Singapore’s economic growth and national income.

Imports: Imported Inflation

First and foremost, Singapore imports a large variety of goods from China, as Singapore relies on many Chinese intermediate goods as inputs for production of exports for her export sectors. As these are inputs or necessities needed in Singapore, the demand for these goods is relatively price inelastic, and thus the revaluation of the yuan, which makes Singapore’s imports from China more expensive, would likely raise Singapore’s import expenditure. 

Most importantly, because Singapore relies on Chinese inputs for production of both exports and also domestically consumed goods, a revaluation of the yuan would result in imported inflation in Singapore, as the prices of domestic goods will rise to account for the rising costs of production due to the increased costs of raw materials in terms of Singapore Dollars. 

Inflation is defined as a persistent and sustained increase in the general price level, and can be divided into demand-pull and cost-push inflation. In this case, cost-push inflation in terms of imported inflation would result from a revaluation of the yuan.

Exports: Earning?

However, on the other hand, Singapore’s exports to China would increase due to a revaluation of the yuan, ceteris paribus. A revaluation of the yuan, without any corresponding rise in the value of the Singapore dollar to offset the relative effect, would result in Singapore’s exports to China appearing cheaper in yuan. With the growing middle class in China and their rising disposable income, consumption of imports is rising in China, and Singapore can benefit from this boom. 

Yet, it has to be argued that the problem is that Singapore depends heavily on imported inputs, being a small and open economy, and as such it is likely that the increased exports to China would be less than the increased costs of imports, which are often needed to produce output in Singapore. This results in a catch-22, because the inflation from the imported inputs, which makes Singapore’s exports more expensive, would counter the relative price effects of the revalued yuan.    

Balance of Payments: Trade Deficit?

Therefore, the revaluation of the yuan would worsen Singapore’s balance of payments, possibly causing a growing trade deficit with China, thus hampering the Singapore government’s goal of a healthy balance of payments surplus. 

The balance of payments refers to the accounting record of all monetary transactions between a country and the rest of the world, and can be classified into the different components of the current account, capital account, financial account, and (statistical) balancing item. There could be a trade deficit for Singapore if (X-M) falls.

Damage to Singapore’s National Income and Growth

Furthermore, as China is one of Singapore’s emerging exporting market and increasingly important trade partner, given Singapore’s economy as one being driven by trade, the revaluation of the yuan can affect Singapore’s national income adversely. Economic growth can be thought of as increases in the Gross Domestic Product (GDP) of a country, and can be classified into potential and actual growth. 

First, potential growth could be hampered due to the rising input costs from goods we buy from China from Singapore’s perspective. Although potentially Singapore’s actual growth might improve if AD goes up due to rising X, this could be offset by long term damage to our potential growth. 

Furthermore, if Singapore’s exports are affected because unit costs have risen due to imported inflation because Singapore uses foreign inputs to produce exports, as argued earlier, then X might fall in the long run, and also cause actual growth to slow down. Hence, potentially a rise in the yuan could potentially and possibly lead to both lack of potential and actual growth for Singapore’s economy. Thus, while export revenue might increase in the short term, as Singapore is small and open, the higher costs of imported inputs from China would have detrimental effects and as such, the revaluation of the yuan has largely negative implications on Singapore’s BOP.

Policies and Conclusions

Since the export sector of (X-M) takes up a huge proportion of Singapore’s national income because Singapore is a open and small economy, falling net export revenue from China can potentially reduce Singapore’s rate of growth by shifting her AD to the left, unless this is cushioned by rising export revenues with other trading partners, like the USA and the European Union. 

However, that seems unlikely in the intermediate term given the global financial crisis and recent Eurozone crises and the concomitant recessions worldwide. Fortunately, as long as the Monetary Authority of Singapore allows an appreciation of SGD, ahead of the revalued yuan, the adverse impact of the revaluation on Singapore’s economy would likely be minimal. Singapore pursues an exchange rate policy using a managed float exchange rate system in place of a “standard monetary policy”. A strong Singapore Dollar keeps imported inflation low by maintaining the low cost of her imports. 

In conclusion, the implications of a revaluation of the yuan on the Singapore economy are most likely negative overall, but Singapore has the appropriate policy tools in exchange rates and monetary policy to manage and mitigate these impacts and will use them if need be. Hence, to a large extent, the discretionary powers of the MAS would be useful in mitigating the effects of a revaluation in the yuan. 

Junior College Economics Essay: Tutor's Comments - This Economics paper was written and contributed by a Chinese student from China. This Economics essay has to be praised: first of all, it was composed and written under H2 JC Economics examination conditions; second of all, the language is good, refined, and proper; third, the content knowledge is there, and there is wide understanding of both the Singapore and the Chinese economies. There is good application of economics knowledge and concepts, and there are also empirical evidence and current affairs discussions. As an Economics tutor, this is one of the best Economics exam pieces that I have seen by a Chinese student, and it goes to show that when students work hard, study hard, and try their best, they can achieve, grow, learn, and develop rapidly. If they want to, they can put their heart into learning and studying Economics. As usual, do think of how you can improve upon this work and how you would approach this essay. Maybe, try to write out the answer without referring to this sterling Economics essay? It has also to be admitted that this Economics paper is (of course) not perfect: What other economics concepts, theories, and knowledge could you bring in to make the discussion richer? Thanks for reading and cheers. 

Discuss whether the undervalued yuan (RMB) is the only cause of China’s rising inflation and trade surplus with the US. [25] (Rephrased Economics Question)

In recent years, it has been argued that the undervalued renminbi (RMB / yuan) is the major cause of China’s burgeoning inflation and massive trade surplus vis-à-vis developed countries, especially the USA. From 2007-21012, economists worldwide argued that China should revalue the yuan.

Discuss whether “the undervalued yuan” is the only cause of China’s rising inflation and huge trade surplus with the USA. [25]

Introduction

China has often been accused by the West of using her fixed exchange rate to maintain an “undervalued yuan”, meaning that her currency (yuan, renminbi, RMB) is cheaper than it otherwise should be in a floating exchange rate, relative to other currencies. 

This Economics paper argues that having an undervalued currency encourages demand for Chinese exports, which could arguably lead to demand-pull inflation, whilst concomitantly causing imported inflation for China, as its imports from its trading partners are relatively more expensive. Hence, it can be strongly argued that China’s inflationary woes indeed stem in part from an undervalued yuan, and, to a large extent, the high demand for low-priced Chinese exports is responsible for China’s huge trade surplus.

Inflation

First and foremost, it has to be argued that China’s inflationary woes stem partly from the undervalued RMB. With a relatively undervalued RMB, Chinese goods appear cheaper relative to other countries’ goods, and this causes an increase in the demand for Chinese exports, in contradistinction to other countries’ domestically produced goods or even goods from other exporting countries. This is because with increased demand for Chinese exports, (X-M) increases, and since AD = C + I + G + (X-M), there arises demand-pull inflation. Inflation is defined as a persistent and sustained increase in the general price level, and demand-pull inflation is caused by rapid and persistent increases in AD.

On the cost-push side, the undervalued yuan may have made imported inflation a real possibility and thus may have pushed up the AS curve. This is because if China imports inputs or factors of production, especially and furthermore so if those natural resources are then used as inputs to produce exports, then this might cause inflation in China if these inputs rise in price. Given that the cheaper yuan makes other countries’ currencies look more expensive, this is a real possibility.

Inflation in China, on the other hand, is also caused by the rapid growth they experienced in recent times. There has been rising domestic consumption due to the rapidly expanding middle classes in China, and that would have raised C. At the same time, rising optimism about business prospects have led firms to undertake investments, thus raising I as well. Since AD = C + I + G + (X-M), it is clear that these increase AD. Hence, AD also shifts to the right, thus causing demand-pull inflation due to rapid domestic Chinese economic growth, which is not solely related to growth in exports.

Trade Surpluses

Secondly, the “undervalued yuan” can be blamed for the mounting trade surplus China has with its trading partners, predominantly America, since American consumers’ high demand for cheap Chinese goods caused the Chinese to sell massive amounts of goods to Americans. As China uses a fixed exchange rate regime, this balance of trade disequilibrium is not automatically corrected, unlike under a freely floating exchange rate regime. Concomitantly, prices of imports remain relatively high, from the Chinese perspective, since the yuan was kept low. This leads in theory to import expenditure being low, whilst export expenditure is high. Hence, the low value of the Chinese yuan will continue to encourage other countries to import cheap Chinese goods, and thus incur a growing trade deficit; on the other hand, China will, theoretically, continue to accumulate surpluses given the low value of the yuan. Hence, it seems that the criticisms of the undervalued yuan seem justified here.

Other Countries’ Declining Comparative Advantage

Nonetheless, the “undervalued yuan” cannot be the only cause of this huge trade surplus; America’s slowly declining comparative advantage, where comparative advantage refers to the relatively lower opportunity cost of a country in producing a good relative to other trading countries, in manufacturing has led to weakening US exports, whilst, on the other hand, it might be possible to argue that China has developed a new, dynamic comparative advantage in manufacturing, especially cheap and lower-end products. For instance, the American steel industry has been too reliant on protectionism for many years, and this has contributed to her mounting trade deficit, because it has become less export competitive, while the Chinese improved consistently over recent years. Hence, perhaps the trade surpluses are due to American weaknesses and Chinese strengths.

Conclusion

Thus, while it can be strongly argued that the “undervalued yuan” does indeed have a part to play in China’s rising inflation and huge trade surpluses, it cannot be considered the only cause of these problems, and China’s increasing prosperity, especially for the middle classes, her rising economic growth, and the falling productivity and comparative advantage of the developed nations who are her trade partners are realistic and relevant alternative explanations for the same phenomena. 

JC Economics Essays: Tutor's Comments - This Economics essay was actually written under examination conditions by a Chinese student. First, it has to be praised: the English is very well written and fluent, and the student has clearly got a very good understanding of the Chinese economy and a good knowledge of international economic events. Secondly, it has to be said that the quantity and quality of this Economics essay far exceed what I would have expected as an Economics tutor, because this was written under examination conditions and by someone whose native language is not English. This just goes to show that if one puts one heart into doing something, and tries one's best - one can achieve many great things in life. As an Economics tutor, seeing such work and effort in my students' Economics essays is one of the joys of teaching. If you were to write this essay, how would you approach it? Would the approach be similar or different? Thanks for reading and cheers. 

Discuss the effectiveness of government policies that could be used to tackle China’s inflation. [25] (rephrased Economics question)

“In 2003, China achieved an impressive growth rate of about 9%. Domestic consumption and investment formed the dominant source of her growth, and her inflation rate was above 5%. The economy was overheated.”

Adapted from The Straits Times, 2004

Discuss the effectiveness of government policies that could be used to deal with China’s ‘overheated economy’. [25]

Introduction

China is facing massive demand-pull inflation because of her rapid actual economic growth in recent years. Inflation can be defined as a persistent and sustained increase in the general price level, and can be classified as demand-pull or cost-push. In the context of China, because domestic consumption and investment forms the dominant source of China’s actual economic growth, the likely cause of China’s “overheated economy” is demand-pull inflation, which has to be countered using either demand-management or supply-side policies, or a combination of such measures by the Chinese government. This paper discusses contractionary demand-management policies, such as fiscal and monetary policies, and supply-side policies, in China’s context, and discusses the effectiveness of the suggested policies.

Demand-Pull Inflation

Insert Economics diagram here. What Economics diagram should go here?

In the diagram above, it is clear that increases in consumption (C) and investment (I) have led aggregate demand (AD) to shift to the right, which constitutes in this case actual economic growth, and thus inflation has resulted because the economy is near the full employment level. With a burgeoning middle class in China wanting to spend on consumer goods and other luxuries, and with domestic and foreign firms wanting to capitalise on the rising middle class in China, there has been a huge increase in AD. These collectively lead to demand-pull inflation because AD = C + I + G + (X-M), and therefore there is a need for the Chinese government to utilise either contractionary demand-management policies or increase the AS through supply-side policies.

Effectiveness of Government Policies

In the short run, contractionary demand management policies such as fiscal policy, monetary policy, or exchange rate policy can be used, to shift AD to the left and thus reduce inflationary pressures. In the longer term, supply-side policies can be used to increase the AS and thus reduce inflationary pressures.

What is the effectiveness of demand-side policies in China’s context? First and foremost, it is clear that any contractionary demand-side policy will reduce AD and tackle the problem directly. For instance, fiscal policy dictates that government spending should be reduced or taxes raised, and this would shift AD to the left, ameliorating inflationary pressures. Monetary policy used in this context would raise interest rates, reducing C and I because borrowing costs have increased, and therefore AD would also shift to the left. Appreciating the currency or revaluing the country’s currency would make exports look relatively expensive whilst imports look relatively cheaper, thus shifting AD to the left as well, directly addressing demand-pull inflation. In China’s case, a combination of fiscal policy and revaluation would make sense by reducing AD, directly addressing the issue.

What is the effectiveness of supply-side policies in China’s context? There are many supply-side measures that can be taken, for instance improving the efficiency of the labour market, via reducing frictional unemployment; increasing human capital training and development via training, retraining, and upgrading; and increasing labour productivity through capital and technological increases. These measures would be effective in the long run when AS shifts to the right and thus reduces the general price level in the intermediate and long term.

Ineffectiveness of Government Policies

On the other hand, the Chinese government has to be aware of possible limitations of such policies. First, contractionary fiscal policy might lead to unemployment and political problems if Chinese State Owned Enterprises laid off staff or if military spending were to be cut. Rising income taxes could hinder productivity and labour incentives because people might not work as hard. Corporate taxes, when raised, might affect the profitability of firms. These might lead to unemployment or lower actual economic growth.

Secondly, monetary policy could be highly ineffective in China’s case. This could be due to a variety of reasons. First, if business confidence is high, increasing interest rates would not dampen consumption and investment much. Secondly, China operates a fixed exchange rate and therefore the economic “trilemma” should apply to China. According to theory, a country cannot have free flowing capital, a fixed exchange rate, and yet pursue monetary policy using interest rates, because of the impossible economic “trilemma”. Thus, it is more likely that China uses exchange rate policy rather than depending mainly on interest rates.

Thirdly, supply-side policies operate in the long run but inflation affects China now. Furthermore, supply-side policies operate indirectly rather than tackling the root of the problem which is demand-pull inflation, which affects AD. Also, the Chinese government would have to invest in costly, expensive, and difficult long-term training, retraining, and upgrading for the workforce, and all this spending would have opportunity costs in terms of healthcare, defence, and education.

Conclusions

In conclusion, the Chinese government can use fiscal, monetary, or exchange rate policies in conjunction with longer term supply-side policies to tackle demand-pull inflation. However, multiple management policies would probably have to be implemented in order to successfully counteract the “overheated economy”. Also, there are trade-offs in that an excessive handling of inflation could lead to unemployment and slower actual economic growth, and governments should be aware of the trade-offs and their implications.

JC Economics Essays – Tutor's Commentary: The above Economics essay is on the interesting and current topic of inflation in China and government macroeconomic policies that could tackle this inflation. Instead of me telling you the grade that this paper would get – instead, let’s do another thinking exercise. Put yourself into the role of an Economics examiner looking at this piece of work. Once again, think about how your Economics tutors in Junior College, or university, for that matter, would rate this essay. Try to put yourself into your Economics tutor’s shoes. What would he or she say, and why? Also, try another exercise: try to draw out the diagram that would have been in this post if I had been less of a luddite and more of a techie. What would the diagram be, and why? Hint: you might want to use an AD-AS diagram - how would it look like? Thanks for reading and cheers.