In States vs. Markets, Herman Schwartz presents two economic development strategies that have been employed by late industrial developers in order to either take advantage of existing comparative advantages or facilitate rapid industrial growth through state intervention and provision in order to gain a competitive foothold in world markets. Schwartz demonstrates how China was able to employ elements of these development strategies to generate capital from an abundant rural labour supply in order to pursue industrial development and attract foreign investment through economic reform starting in the late 1970's.
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This process must involve the intervention of the state to create such an infrastructure, provide capital to producers and nurture the creation of an adequate labour supply (Schwartz, 2010, 59-60).
This strategy is limited because economic development based on comparative advantage is subject to (at best) constant returns or decreasing returns. Ricardian success is based off of diversifying from initial exports and developing industry by using the capital gains from the initial growth based on comparative advantages (Schwartz, 2010, 59-60). Late industrial developers can shift from Ricardian to Kaldorian strategy to surpassing these limitations.
Kaldorian Development Strategies
Successful Kaldorian development strategies are driven by growth within the manufacturing sector and the creation of domestic demand to drive such growth (Schwartz, 2010, 61). Kaldorian strategy seeks to gain productivity growth in sectors where there is no inherent comparative advantage for domestic producers. This can be characterized as 'catching up' to core markets which have competitive advantages.
The process is subsidized by state investment and allows for producers to sell at a loss and overcome initial disadvantages. (Schwartz, 2010, 60). Manufacturing growth must become the engine for economic growth as a whole. This will, in turn, lead to increased productivity through Verdoorn effects and, as well, spur growth outside the manufacturing sector (Guo, 2007, 1). This strategy is undertaken in order gain competitiveness in the world market. Domestic markets are sheltered from international competition by use of tariffs and other protectionist measures.
Like Ricardian development strategies, Kaldorian strategies must also overcome GCAP to facilitate investment growth and global market competitiveness when markets finally open. Kaldorian development strategies are at risk of being unsuccessful as firms may lack competitiveness in world market when Verdoorn effects (or 'learning by doing' and returns to scale) do not occur. This can be characterized as Kaldorian Collective Action Problems (hereafter; KCAP) (Schwartz, 2010, 61). This occurs when protectionist measures from world markets do not offer incentives for producers to innovate and to the true development characteristic of core economies (and lacking in periphery markets) (Schwartz, 2010, 258).
Section 2: Historical Background
After the second world war, the ascension of the Communist Party to power brought a strong and stable state to a China that was destabilization by civil was from the 19th century to 1949 (Schwartz, 2010, 255-256). In the 1970's Chinese trade existed in the context of a planned economy and fixed to quantitative guidelines. Import and Export activity went through state planning committees and state-controlled corporations (Branstetter, 2006, 4). Agricultural activity, at this time, was limited to creating sustainable output to meet local demand. Subsistence farming took...