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ECOS2025
Tutorial 7 (Week 7)
Answer Guide
N.B. The answer guide is not meant to be complete or exhaustive. It should not be a substitute for
actual tutorial discussion.
Questions are based on Week 6 lecture contents and designed to deepen our conceptual
understandings. Students are strongly advised to discuss these questions with their group members
in their designated tutorial classes. Questions marked * are designed for student (in a group) led
discussion.
Readings: These will be useful for answering the questions.
1. What made the Song dynasty prosperous? Why had the prosperity been discontinued in the
subsequent dynasties in China?
Basically, innovations, commerce, and importantly institutions allowing meritocracy and
development.
According to Dr Stephen Davies, (The Wealth Explosion: The Nature and Origins of Modernity,
2019) “In the Song Dynasty period from the middle of the 10th to the late 13th century, China had
all of the other conditions that you need for a dynamic and innovative economy: It’s got private
property, it has the rule of law, it has complex financial institutions, it has double-entry
bookkeeping — it has a whole range of institutions, as the economists call them. Plus, it has an
enormously extensive trade network and a highly monetized economy. And all of this produces lots
and lots of innovation, so much so that by the middle of the 13th or late 12th century, China is at
the same level of technological and economic development as 18th century Europe, to put it in
perspective”.
There are several theories as to why China lost its supremacy in the 13th century or had been
discontinued. One theory is explained by Dr Stephen Davies in 2019 (but Professor Joel Mokyr ,
Northwestern University USA , originally put this thesis (interpretation of history):
• The critical difference is that China is dominated by a single state. And what happens is that the
whole of China is conquered by the Mongols at the end of the 13th century. The Mongols did
not actually change much themselves, but it’s an enormous psychological shock to all of the
Chinese elite and the general Chinese mentality.
• And in 1368, the Mongols are thrown out by a rebellion from the Han Chinese, led by a man
who becomes the Hongwu Emperor and founds the Ming Dynasty. He and the Ming elite blame
this catastrophe of conquest by the Mongols on the innovative, open, and mercantile society
that the Song had. What they did is quite deliberately and systematically undo that. They quite
consciously and knowingly looked for things that would make China more conservative, less
innovative, and less dynamic.
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• They actually went to the extent of scrapping and eliminating entire technologies. Most
famously, towards the end of the 15th century, they outlawed the building of ships that could
sail out of the sight of land. This means that the Chinese merchant fleet, which had been the
largest in the world until then, was effectively eliminated.
• So that’s an ‘extreme’ example of what tended to happen in previous episodes — where elites
would typically take action, often with the support, it has to be said, of large sections of society
to stop innovation from happening. They maintained things the way they were, and prevented
people from trying out new devices, new ways of doing things, new ways of conducting
business.
• You can see quite obviously why elites would typically do this, because why do they want
change? They’re at the top of the tree —what good is change for them? And to the extent that
change does take place, it actually undermines their position, so they’re likely to see it as
threatening.
*2. Discuss why Chinese economy failed to grow under Mao’s ruling. Why did Mao’s focus on heavy
industry fail? What did he do wrong? What were the economic and political consequences?
See lecture slides. Fundamentally, private incentives and markets were ignored. Also, building heavy
industry requires a huge capital investment and modern technological knowhows. Unlike South Korea
(that invested in massive capital projects directly (e.g. POSCO) or via chaebols (e.g. Hyundai
shipbuilding), with learning advanced technology from Japan and the West), China relied on village
level furnaces by shifting resources from agriculture in a very unproductive manner.
The failure led to the Great Famine and a politically charged movement known as the ‘Cultural
Revolution’, which had further adverse effects on human capital and the economy.
*3. Did China benchmark any country in its development processes since 1978? What is unique
about China’s development model under Deng Xiaoping? In what sense was his strategy non-
orthodox?
China didn’t benchmark any particular country nor did Deng have any blueprint, although it was
known that Deng was inspired by Singapore’s success in his ASEAN tour in 1978.
Unique in the sense that Deng experimented a market based economy in a communist system
(unlike other communist countries). The reform was incremental and sequential, so as to avoid any
major disruptions and chaos experienced in many other transition economies.
Also, unorthodox in the sense that two systems (e.g. dual-track) were in place. Orthodox or
consensus views in neoclassical economics was to advocate a full market liberalisation, rather than
having such a mixed, incremental, and unorthodox (never tried before) approach. This is discussed
in a separate lecture topic.
*4. Using a model of exchange rate determination, show how Chinese monetary authority can devalue
or revalue Yuan. What are the benefits and costs of devaluing a currency?
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Shown in lecture slides. Devaluation or revaluation all requires the monetary authority to be a major
participant in the forex market as a buyer or seller, not simply announcing the new rate.
Devaluation (i.e. lowering the value of domestic currency) is typically triggered by the government’s
motive to improve international competitiveness of domestic goods and the trade or current account
balance, so that the economy can utilize increased foreign demand for domestic goods.
Recall Y = C + I + G + NX. So, by increasing NX, Y can be increased.
The costs include higher price of imports due to depreciation can increase domestic prices and also
makes imported capital goods more expensive domestically. It can also lead to a retaliation by a trading
partner, leading to competitive devaluation or other measures of trade retaliation.
(a) Identify the periods of fixed exchange rate, appreciation, and depreciation of the RMB.
Just check the period(s) in which the rate was flat, falling (appreciation) and rising (depreciation).
(b) Appraise the statement “China is a currency manipulator”.
This is a contentious issue. Evidence is at best mixed. There are several views of what a “currency
manipulation” really constitutes. Is intervention a “manipulation”? Manipulation is when there is a
systematic attempt to change the exchange rate to gain “unfair” advantages in trade. The US Trade and
Commerce has its own way setting their own rules, not transparent, of determining whether a country
is a currency manipulator.
6. What is the BRI? What was the Chinese government aiming to achieve through the BRI?
We may get back to this issue again, but the key points are shown in lecture slides. China’s
government has two key objectives: create a foreign demand through the BRI and raise foreign
influence geopolitically.
7. What do you understand by the middle-income trap (MIT)? What would be the areas of
improvement for China to avert this?