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ECON 186

Econ 186 test 4

Institutions Hypothesis: Institutions play the most important role in economic development. Geography and policy affect economic development only indirectly through institutions.
Institutions are historically formed and so economic development today is determined by the colonial past of countries.
East Asian Tigers Hong Kong, Singapore, Taiwan, South Korea.
Hong Kong, Singapore, Taiwan, South Korea These countries are considered to be developed economies now. They started out very poor in the 1960s, but grew at rates greater than 7 % per year from 1960-1990.
What enabled the East Asian Tigers to catch up? They adopted export-oriented industrial policies supporting exports to rich, industrialized economies of that time (=> greater participation in global markets).They could develop competitive advantage in the labor-intensive manufacturing sector.
What were other reasons that Enabled the East Asian Tigers to catch up? Lack of competitive exporting nations in the developing world (=> very few other developing countries adopted outward oriented policies at that time). Heavy government investment on field of education (=> investment in creation of social capabilities).
One of the key reasons for success of the East Asian Tigers was that they adopted good economic policies, particularly trade policies that promoted integration with the rest of the world. So in spite of being very poor even at the middle of the 20th Century, they were able to achieve greater growth
Integration/Policy Hypothesis: The choice of proper economic policy, particularly trade policy that leads to greater integration with the rest of the world, leads to economic development. Geography matters indirectly through economic policy only, particularly trade policy.
Case Studies: India -British imposed high taxation -They forced people to cultivate cash crops like opium (Narcotic plant) and indigo (dye), which resulted of shortage of food grains.terrible famines resulted from food shortage.
India Post independence: 1947-1990 -Protectionism (Import substitution, License Raj (Kingdom of License). License Raj- any new firm had to get licenses from multiple agencies. Industries in India were state-owned, many of these where mostly monopolies.
Liberalization measures were introduced in 1991 by finance minister Manmohan Singh that opened up India’s doors to international trade, foreign direct investment and reduced red tape and government intervention, promoting free markets and privatization.
Consequences of India's Liberalization: India has become one of the newly industrialized economies. Services are the major source of economic growth, accounting for more than half of India’s output. Poverty in India has fallen by 10% points since 1997.
Not everything is rosy in India though. 1. High inequality: Service-oriented middle and high income classes in the cities versus the rural poor 2. Very high food prices 3. Congested cities over burdened with people: high rural-urban migration 4. Environmental degradation.
The People’s Republic of China was created in 1949 after the Communist Party of China (CPC) led by Chairman Mao won the Chinese civil war.Emphasis on socialism and a centrally planned economy. Foreign investment and economic interaction with the rest of the world was greatly discouraged.
Great Leap forward CPC aimed to transform China from an agrarian society into a modern communist society through rapid industrialization and collectivization. This led to severe shortages of food, great famines and led to tens of millions of deaths.
Cultural Revolution policies adopted to impose Maoist socialism on China by removing capitalist, traditional and cultural elements from Chinese society
Deng Xiaoping became China’s leader in 1978 and led China towards a socialist market economy. He introduced policies to liberalize the Chinese economy in two steps 1)policies were introduced that would privatize much of the state-owned industries and reduce protectionism. 2)tariffs and trade barriers were reduced and the banking sector was reformed. China became a member of the World Trade Organization
Consequences: China grew at an average rate of 9.5% per year between, Poverty in China declined, Foreign investment has increased quality and knowledge in industries, China’s emphasis on export led growth has generated considerable trade surplus.
Problems: Inequality, Reversal of some reforms, Still existing state monopolies in sectors such as petroleum and banking. Adverse effects on public health and environment.