Question

1. 5.13 [Related to Solved problem 13.2] Two reasons for the rapid economic growth of China over the past two to three decades have been the massive movement of workers from agriculture to manufacturing jobs and the transformation of parts of its economy into a market system (Federal Reserve Bank of Dallas, 2003).10 In China, labour productivity in manufacturing substantially exceeds labour productivity in agriculture, and as many as 150 million Chinese workers will move from agriculture to manufacturing over the next decade or so. In 1978, China began to transform its economy into a market system, and today over 40 per cent of Chinese workers are employed in private firms (up from 0 per cent in 1978).

   In the long run, which of these two factors—movement of workers from agriculture to manufacturing, or transformation of the economy into a market system—will be more important for China’s economic growth? Briefly explain.

Answer 1

In the Mid 1960's, China used to be a developing or an underdeveloped economy to a certain extent, with low level of income and significantly lower growth levels, high unemployment and poverty were wide spread as the economy was a primary one in which majorly the government controlled all production and was engaged only in agriculture.

Gradually, the country began to transform its economy and opened up to foreign trade. The government gave away its control and the country began to experience significant growth rates. It was realized, that the country had a lot of potential to grow and gain from the same.

However, in the long run, it is important to analyse which decision helped more. This we can conclude by saying that opening up the economy in comparison to a shift in production method and technique and industry has been of more advantage to the country.

Consider the fact, that the Chinese government only implemented reforms to enable itself to produce goods. In that case, the local demand would only be fulfilled and the government would not be able to sell its products to the outside world, which would have retrospective taxes in place against imports into their countries as well.

The end result would be, that a shift from agriculture to manufacturing would not be effective as exports would be negligible if the economy remained closed in its approach.

On the contrary even if the government opened up the economy and increased production of agriculture only, the country would still gain from it as exports would increase.

Thus, even though both factors have enabled China to become the great giant that it is today, opening up the economy and removing trade barriers and turning to a market-based system is more important. Unless a market-based system is applied, the local manufacturers do not have the added advantage of exports, and they do not innovate because they lack the required expertise.

A market-based economy increases productivity as competition in the market increases, and volume sales are only possible in an environment wherein market-based economics is present. Without this, no matter what goods and services are produced, the end outcome may not remain pleasant.

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