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.  

• Joel Mokyr (1992), ‘China and Europe’, Chapter 9, The Lever of Riches: Technological Creativity  
and Economic Progress, Oxford University Press,  
https://sydney.primo.exlibrisgroup.com/permalink/61USYD_INST/2rsddf/cdi_askewsholts_vleb 
ooks_9780199762712  
• ‘To get rich is glorious’: how Deng Xiaoping set China on a path to rule the world, The  
Conversation, https://theconversation.com/to-get-rich-is-glorious-how-deng-xiaoping-set- 
china-on-a-path-to-rule-the-world-156836  
• ‘Beware the middle-income trap’, Special Report, The Economist, June 25th, 2011 [See under  
‘Reading List’ or https://canvas.sydney.edu.au/courses/44390/external_tools/45015  

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.  
See this video: https://youtu.be/hlbB3cmgPmo  
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?  

ECOS2025  


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.  

*5. Refer to the data and graph at https://fred.stlouisfed.org/series/DEXCHUS for the period since  
1985.  
(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?  

Growing from poor to middle income economies may be possible simply by adding more labour and  
capital (i.e. primary factors of production) and copying others. However, growing from middle  
income to high income economies requires not simply using primary factors of production and  
copying what others developed but developing own technologies or knowhows to gain competitive  
advantages to stay at the technological frontiers. The international data shows that many developing  
countries failed to move into a high-income group after they moved into a middle-income group. The  
term was originally coined by Geoffrey Garrett, an Australian political scientist when he was at UCLA  
(also former USyd and UNSW Business Dean, now USC Business School Dean). The term has become  
a hypothesis in economics due to a World Bank report in 2007. There are absolute and relative  
definitions of the middle-income band. Absolute is in terms of the per capita income, a GNI per  
capita between $4,046 and $12,535, https://www.worldbank.org/en/country/mic/overview .  
ECOS2025  

Relative is in terms of a fraction of the US per capita real GDP, e.g., between 20 and 40% of per  
capita income of the US.  
China is currently sitting in the upper middle income group after several decades of high growth.  
Whether China will move into a high income country remains to be seen. But, even reaching 40% of  
per capita income of the US has enormous implications given its population size is about 6 times that  
of the US, making China’s economic size more than double that of the US.  
The key areas would be whether China will join the leading group of countries with technological  
frontiers, and what should precede to do so. How long would it take and what would it involve?  
More economic freedom? Better legal and economic institutions conducive to innovations and  
entrepreneurship? Can this all happen under the current political system, which is pivoting more to  
the left, as shown in Kevin Rudd’s video (to be posted on Ed).