China's Economic Transformation (3^rd Ed.)

Now available in a fully-revised and updated third edition, this established textbook provides a penetrating and comprehensive analysis of the historical, institutional, and theoretical factors that have contributed to China?s economic success.

• Includes coverage of China?s foreign investments, trade with regional partners, Chinese human capital, and bureaucratic economic institutions
• Covers a diverse set of important issues, including environmental restraints, income distribution, rural poverty, the education system, healthcare, exchange rate policies, monetary policies, and financial regulation
• Accessibly written and intelligently organized to offer a straightforward guide to China?s economic evolution
• Written by a lauded economist, researcher, and advisor to government officials in mainland China and Taiwan

Preface to the Third Edition xii

Part I: Historical Background and General Survey 1

1 Economic Lessons from History 3

1.1 Introduction 3

1.2 Significant Events in Major Historical Dynasties 4

1.3 The Republic of China, 1911– 10

1.4 Summary of Historical Lessons 15

1.5 What History Can Reveal about the Chinese Economy 16

References and Further Reading 17

Questions 18

2 Experiments with Planning and Economic Disruptions 20

2.1 The Communist Party Rises to Power 20

2.2 Historical Review: 1949–78 22

2.3 A Model of the Chinese Planned Economy 25

2.4 The Behavior of Economic Units in a Planned Economy 29

2.5 Output Planning in Theory and Practice 32

2.6 Organization and Administration of Economic Planning 37

References and Further Reading 40

Questions 41

3 Economic Reform up to the Mid-1990s 43

3.1 Why Economic Reform Started in 1978 43

3.2 Agriculture 45

3.3 Reform of State-Owned Enterprises 46

3.4 Price Reform 48

3.5 The Banking System 49

3.6 Foreign Trade and Investment 50

3.7 The Nonstate Sectors 51

3.8 Institutional Infrastructure 52

3.9 Reform Policies Similar to Those of Taiwan 53

3.10 Reasons for the Success of China’s Economic Reform 56

3.11 Summary 60

Appendix: China’s Geography 61

References and Further Reading 63

Questions 63

4 Further Reform up to the 2010s 65

4.1 Introduction 65

4.2 Enterprise Reform 66

4.3 Banking Reform 68

4.4 Foreign Trade and Investment during the Asian Financial Crisis 72

4.5 The Impact of WTO Membership 74

4.6 Reform in Agriculture 81

4.7 Rural Poverty 82

4.8 Prospects for Reform 85

References and Further Reading 87

Questions 88

Part II: Analysis of the Macroeconomy 89

5 Economic Growth 91

5.1 The Neoclassical Model of Economic Growth 91

5.2 Data on Output, Capital, and Labor 93

5.3 A Review of Regression Analysis 98

5.4 Estimating Production Functions for China 99

5.5 Use of the Neoclassical Growth Model to Forecast GDP 104

5.6 How Large Will the Chinese Economy Be in 2020? 107

5.7 Lessons from Forecasting 108

References and Further Reading 108

Questions 109

6 Economic Fluctuations 110

6.1 The Multiplier–Accelerator Model of Economic Fluctuations 110

6.2 Dynamic Properties of the Multiplier–Accelerator Model 113

6.3 An Econometric Method for Estimating Parameters of Linear Stochastic Equations 115

6.4 Estimating a Multiplier–Accelerator Model of the Chinese Economy 116

6.5 A Vector Autoregression (VAR) System 120

6.6 Econometric Models of the Chinese Economy 122

References and Further Reading 122

Questions 123

7 Macroeconomic Policies 125

7.1 Introduction 125

7.2 Monetary Policy 127

7.3 An Econometric Analysis of Inflation and of Monetary Policy in China 134

7.4 Basic Facts about Government Revenue and Expenditure 136

7.5 Fiscal Policy 139

References and Further Reading 140

Questions 141

8 The Effects of Political Movements on the Macroeconomy 142

8.1 Specification of a Dynamic Optimization Model of the Chinese Economy 142

8.2 The Solution of the Dynamic Optimization Problem 145

8.3 Statistical Estimation 149

8.4 Measuring the Effects of Two Political Events 150

8.5 Conclusions 156

References and Further Reading 157

Questions 157

Part III: Topics in Economic Development 159

9 Consumption 161

9.1 Trends in Per Capita Consumption 161

9.2 Household Expenditure Patterns 165

9.3 Rural Per Capita Consumption Expenditures in 1998 by Province 171

9.4 Consumption of Housing in Rural and Urban Areas 173

9.5 Demand and Supply of Urban Housing 175

References and Further Reading 176

Questions 176

10 Energy and Environmental Problems and Policies 178

10.1 Introduction 178

10.2 Environmental Problems in China 179

10.3 Laws, Agencies, and Policies for Protecting the Environment 181

10.4 Problems of Policy Implementation and Law Enforcement 185

10.5 A Study of Industrial Pollution 187

10.6 Regulation of China’s Industrial Air Pollution 189

10.7 Conclusions 191

References and Further Reading 192

Questions 193

11 Population 194

11.1 The Role of Population and Human Capital in Economic Development 194

11.2 The Chinese Population and Its Rate of Growth 196

11.3 Population Policy 199

11.4 Evaluation of China’s Population Policy 203

11.5 Economic Explanation of the Birth Rate 205

11.6 Why the Population Control Policy Should Be Terminated 207

References and Further Reading 207

Questions 208

12 Human Capital 209

12.1 The Importance of Human Capital and Its Measurement 209

12.2 Labor Supply and Demand 210

12.3 Investment in Human Capital 216

12.4 Measuring the Rates of Return to Schooling in China 222

12.5 Health Services 224

12.6 The Social Welfare System 228

References and Further Reading 229

Questions 230

Part IV: Analysis of Individual Sectors 231

13 The Banking and Financial System 233

13.1 Commercial Banks 233

13.2 The People’s Bank 235

13.3 Factors Affecting the Functioning of the Banking System 237

13.4 Possible Weaknesses of the System 240

13.5 Possible Directions of Reform 241

13.6 Weakness of Commercial Banks and Related Problems 243

13.7 Other Financial Institutions 244

13.8 The Role of the Chinese Government in Reforming the Financial System 249

References and Further Reading 251

Questions 251

14 Shanghai Stock Price Determination 253

14.1 Introduction 253

14.2 A Model of Stock Price Determination 254

14.3 Empirical Findings from the Shanghai Stock Exchange 257

14.4 Comparison with Findings for Hong Kong and New York Stocks 262

14.5 Concluding Comments 262

References and Further Reading 263

Questions 264

15 The Behavior of State Enterprises 265

15.1 Organization of a State Enterprise under Central Planning 265

15.2 Planning and Operations of a Large-Scale State Enterprise 269

15.3 A Simple Model of a State Enterprise under Central Planning 274

15.4 A Simple Model of a State Enterprise after Initial Reform 277

15.5 State Enterprise Restructuring in the Late 1990s and Its Effects on Enterprise Behavior 280

15.6 Current State of Chinese State Enterprises 283

References and Further Reading 284

Questions 285

16 The Nonstate Sectors 286

16.1 Relative Growth of Nonstate Sectors 286

16.2 Private Enterprises Prior to 1949 287

16.3 Economic Conditions for the Growth of Township and Village Enterprises 288

16.4 Econometric Measurement of the Relative Efficiency of State Enterprises and TVEs 291

16.5 Characteristics of a Free-Market Economy 292

16.6 Characteristics of the Chinese Market Ecomomy 295

16.7 Role of Entrepreneurs in China’s Economic Growth 297

References and Further Reading 299

Questions 299

17 Foreign Trade 301

17.1 Some Statistics of China’s Foreign Trade 301

17.2 Explanation of Trading Patterns under Free Trade 303

17.3 The Determination of Foreign Exchange Rates 309

17.4 China’s Foreign Trade Policy 314

17.5 Problems in Implementing Foreign Trade Policies in the Early 1980s 318

17.6 Protectionism in the United States 322

References and Further Reading 324

Questions 324

18 Foreign Investment 326

18.1 The Role of Foreign Investment 326

18.2 Historical Developments 328

18.3 The State of Foreign Direct Investment (FDI) as of 2002 329

18.4 Policies for the Regulation of Foreign Investment 333

18.5 Opportunities and Problems for Foreign Investors 334

18.6 How Attractive Is China for Foreign Investment? 338

18.7 The Impact of WTO Membership on Foreign Investment 339

18.8 China’s Investment and Economic Expansion Abroad 341

References and Further Reading 343

Questions 343

Part V: Studies of Economic Institutions and Infrastructure 345

19 Laws of Asset Management and Corruption 347

19.1 Introduction 347

19.2 Laws of Asset Management 349

19.3 Managing One’s Own Person 352

19.4 Managing Physical Assets 353

19.5 Managing Assets under the Responsibility System 355

19.6 The Misuse of Collectively Owned Land 358

19.7 Corruption and Economic Reform 359

19.8 Concluding Comments 363

References and Further Reading 364

Questions 365

20 The Legal System and the Role of Government 366

20.1 The Legal System prior to 1949 366

20.2 The Legal System since 1949 368

20.3 The Role of the Legal System in a Market Economy 371

20.4 The Economic Role of Government 372

20.5 The Role of Planning in China’s Market Economy 376

20.6 The Government’s Decision Process 382

References and Further Reading 384

Questions 384

21 The Education System and Policy 385

21.1 The Education System prior to 1949 385

21.2 The Education System after 1949 387

21.3 Education Policy 387

21.4 Economics Education 390

21.5 Demand for Education 398

21.6 Concluding Comments 403

References and Further Reading 403

Questions 404

22 Lessons from Studying the Chinese Economy 405

22.1 Lessons for Understanding the Subject of Economics 405

22.2 Lessons from Understanding the Chinese Economy 407

22.3 Lessons from Forecasting the Chinese Economy 418

References and Further Reading 423

Questions 424

Index 425

Gregory Chow is Professor of Economics and Class of 1913 Professor of Political Economy, Emeritus, at Princeton University. Author of 16 books and over 250 journal articles, he is a Fellow of The Econometric Society and the American Statistical Association. He has advised top government officials in mainland China and Taiwan, and in May 2001 the Econometric Research Program at Princeton was named in his honor.