Thursday, August 24, 2006

Economics and Mainland China

On my way to the train station this morning, I was listening to Morning Edition on NPR and heard an interesting tidbit from a series they've been doing on China. This specific story was about China's Hot Real Estate Market. It seems real estate prices in some trendy parts of Shanghai have gone up 300% in three years. To counter this, the Chinese government has forbidden the release of more land for the development of luxury villas.

Now it seems to me that this may have the opposite results. By my thinking, putting a cap on the land available for development of luxury housing is the same as placing an artificial cap on supply (vertical supply curve?). This means that demand for this housing will shift to the existing stock of luxury homes, causing a further acceleration in property values. This becomes even more interesting when combined with a comment I heard earlier in the series (sorry, I don't remember which one). That story mentioned that at the time of the Tiananmen Square uprising, the central government essentially made a Faustian bargain..."stop agitating for political reform, and we'll allow you to get rich." Essentially, the communist party allowed a number of people with skill and access to get rich, in return for being allowed to be kept in power. To the extent that it has worked, it has created a significant upwardly mobile group in China. However, many of those in the countryside still remain very poor. The observation was made that the "workers' and peasants' revolution" may soon be at risk from those same workers and peasants who have not shared in the growing economy.

Overall, I find this issue worthy of discussion, especially within a context of teaching about economic systems, economic institutions, incentives, and of course modern world history.

I welcome your thoughts and comments.

Posted by TSchilling at 5:18 PM Comments (0)

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