Economic Growth Between Economy And Institutional Changes

The purpose of this research report is to provide an overview of China’s economic growth in relation to the long term economic growth drivers. Critical assessment will be made on the growth drivers to determine whether they lead to long term economic growth.

Institutions are the result of past historical and social developments. Since different countries have different pasts, institutions will vary.

China economy experienced an incredible growth in the last few decades that made the country the 2nd largest economy in the world. When China started the program of economic reforms in 1978, it ranked 9th in nominal GDP but 35 years later it’s now ranked 2nd in the nominal GDP and been the world’s manufacturing hub. In recent years, China’s modernization propelled the tertiary sector and in 2013, it became the largest category of GDP with a share of 46.1%, while the secondary sector still accounted for a sizeable, 45% of the country’s total output. Meanwhile, the primary sector's weight in GDP has shrunk dramatically since the country opened up to the world.

Throughout time, many countries have needed to implement some sort of economic reform in order to strengthen their economy so that they can be more of a power on the world stage and to stabilize their country. The Chinese reforms were long in the making, an unfolding process that had spanned most of the 20th century and, unlike other countries such as Russia who were trying to do the same thing but whom eventually failed, China prospered, and increased its economy greatly. China has had the fastest growing economy in the world for the past two decades, with an annual growth rate of approximately 10 percent since the economic reforms in 1979, and now has the second largest GDP in the world, second only to the USA. Starting in 1979 they

The study of economic growth focuses on the long-run trend in aggregate output as measured by potential Gross Domestic Product (GDP). Increasing the growth rate of potential GDP is key to raising the level of income, the level of profits, and the living standard of the population.

economic growth enables a society become more open, tolerant, and politically democratic, the societies are, in turn, more able to attract enterprise and creativity and therefore can

First it is of vital importance to define what we precisely mean by institutional change. In his acclaimed book, Douglass North mentions that institutional change will only be driven when relative prices and preferences of organizations change. Institutions are overwhelmingly incremental and will adapt and change its organization through continuous marginal adjustment. Institutions conforming nation-states are thus, non-static and will continuously adapt to different circumstances. North also mentions that change in preferences and prices can be exogenous, namely a plague, an economical crisis, or a colonizing power. However, North stresses the importance that the process of institutional change also includes “maximizing efforts of endogenous

This can be illustrated that in 1979 the Chinese government had brought about several new programs designed to stimulate the economy. During the same period of time that rapid Chinese economic growth took place there was a positive correlation with economic growth and wealth inequality rose as well. Currently, China has one of the highest wealth disparities on the

The significant economic growth of China happened after China adopted Economic Reform and Opening-up Policy in 1978 (see Appendix 1). Under this policy, China opened its door to the foreign investment and began to emerge in the global market. Its economic system has since then been transformed from socialist economy into a capitalist economy (Szamosszegi and Kyle, 2011, p.4; Paltiel. 2009). If the period between the founding of the People’s Republic of China in 1949 and the Reform in 1978 can be regarded as the first industrialisation process towards heavy industry monitored by central planning, then the

In the novel, Why Nations Fail, the authors Daron Acemoglu and James A. Robinson attempt to provide an alternative explanation to the economic disparities seen in the modern world. The authors argue throughout the book that political and economic institutions are the most important cause for differences in economic performances across nations. Developed countries like the United States and Great Britain took important steps in their history to move towards inclusive institutions, while nations like the Congo and North Korea continue to maintain extractive institutions. In order to support their argument, the authors cite numerous examples throughout history that demonstrate how the adoption of inclusive institutions created a virtuous cycle in developed nations, resulting in long-term prosperity. Nations with extractive institutions, however remain in a vicious cycle that inhibit their ability to prosper economically. Acemoglu and Robinson make many compelling points throughout the novel to support their claims regarding the importance of institutions by properly explaining the difference between inclusive and extractive, their importance for sustained economic growth, and using Great Britain as an example to cite institutions historical importance. The authors, however could have strengthened their arguments by addressing the difficulties in implementing institutions that are not suitable for the economic and political environments of certain nations. and the potential for

Next, Huntington argues that political institutionalization should play a greater role when writing about political development. Institutionalization can be a characteristic of any political system, it can be clearly defined and measured, and it is a reversible process. As defined by Huntington, political development is “the institutionalization of political organizations and procedures” (393). Different degrees of institutionalization can be applied to organizations based on their their adaptability or rigidity, complexity or simplicity, autonomy or subordination, and coherence or disunity. An organization that is more adaptable to changes has a greater level of institutionalization. An older organization--which has had more time to adjust to its successes and failures--is more likely to have a higher level of institutionalization than a younger organization, which is more likely to be rigid and less adaptable. In addition, an organization that has

produce large departures from the predictions of the ideal “frictionless” neoclassical equilibrium for a given institutional structure, new institutions tend to develop that partially offset the resulting inefficiencies.

This can be measured by the following formula; Per capita nominal GDP = Nominal GDP / Population, Per capita real GDP = Real GDP / Population. Seven factors determine economic growth. Natural resources such as land, mineral deposits, waterways; climatic conditions provide an essential foundation to economic growth. Combined with the other resources of capital, labor and enterprises, natural resources can be developed and organized to increase the productive capacity if the nation. Consequently the quality and size of the labor force is a major determinant of economic growth. Education and vocational training are essential the growth potential of a nation. The promotion of education and job training schemes increase the knowledge, skills and flexibility of the workforce that contributes to potentially higher levels of productivity and efficiency. Whether from natural increase or immigration population growth can cause a higher level of economic growth. An increasing population requires increased public spending on housing, education and other social needs while businesses expectations of

In the Acemeglu, Johnson and Robinson article, “Institutions as a Fundamental Cause of Long Term Growth”, the authors emphasize how institutions are the main determinant of economic development because stronger institutions allow for more growth in education, security, and health. To observe whether strong institutions determine economic growth it is important to mention the characteristics of a strong institution that allows for fast growth. Strong institutions are able to enforce property rights, a fair judiciary, efficient bureaucracies, intellectual property rights, corporation government bankruptcy laws, and democracy (e.g. “(Lecture 13)”). Going in depth

Before going any further, let us first examine the basis of most countries’ economy and the factors that partake in the overall long-term growth of an economy. In general, there are two types of factors that influence the economic development