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Ho w Can De veloping Countries Benefit fr om Globaliza tion: How Dev from Globalization: T he Case of China
Fan Gang, Zhang Xiaojing *
ith the development of globalization and the emergence of the problems during the course of globalization, the disputes on the benefits of globalization are becoming more and more fierce. The dispute is focused on the question of whether developing countries can benefit from globalization. The Latin American countries that experienced debt crises in the 1980s and the Asian countries experienced financial crises in the late 1990s provided adverse evidence on this matter. The cry to fight globalization becomes stronger and stronger. Against this backdrop, the experiences of China have been used as a successful example to prove the benefits of globalization. It is obvious to all that China has benefited from the globalization. Well then how has China benefited from globalization, and what kinds of experience can China share with all the other developing countries? Generally speaking, the experiences of China can be summarized in the following areas: 1) to match degree of opening up with the development level; 2) to conduct reform in line with the level of opening up; 3) to attach great importance to introducing direct foreign investment.
* Fan Gang , director, National Economic Research Institute, E-mail: fangang@neri.org.cn; Zhang Xiaojing, associate professor, Institute of Economics,
Chinese Academy of Social Sciences. Email: xjzhang@neri.org.cn.
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tax rebate on exported goods, which is a kind of subsidy to export companies to enhance the competitive strength of domestic ventures. The main beneficiaries of export rebates were manufacturing companies. Generally speaking, in processing trade only those which use domestic raw materials can get export rebates. In the common trade exports, non-foreign trade companies accounted for nearly 80% of this. The status of common trade exports best reflects China's competitive power. While export rebates increased dramatically (the comprehensive export rebate was up to 15%), the competitive power of home-made production and common trade exports increased remarkably. (Fan Gang, 2002). Market access control is another example to reveal the practice of opening up under protection. The order of opening up from trade to finance reveals the aim of protection. As far as the developing stage of a country is concerned, normally the services industry comes after the establishment of manufacturing industry. And the industrial conversion practices of developed countries also observe the same law. Therefore, on the primary stage, by using the comparative advantage of labor, the developing countries can compete with the developed countries in terms of manufacturing, laborintensive manufacturing in particular. The practice of opening up these fields should not bring serious problems. Therefore, China opened up the trade industry first. But the services industry, especially the financial services industry is one of the weakest industries in China. Therefore, it has been opened to the outside world according to the related commitments set forth by the WTO, step by step. During the process of Chinas opening up, we have learned that protection on a certain level, when matched with a nation's development level, can lead to remarkable achievements. But there are questions which need to be further discussed. For example, the media emphasized that the scale of opening up should match the development level of China but what kind of opening up matches the development level? By whom is it decided? By the market or the gover nment? Furthermore, protection can definitely lead to economic
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distortion. How to reduce the distortion as much as possible and improve overall effectiveness are questions the country must take into account when deciding how to set the protection level.
tems would constrain the development of those departments (e.g. foreign trade department) which have experienced rapid development. If no co-ordination exists among various systems, then disorder would emerge to reduce the effectiveness and the growth rate of economy (Fan Gang and Wing T. Woo, 2002). Therefore, the practice of opening up must match the institutional reform of other areas to produce better results.
1. Theory explanation
Threshold effect and absorptive capacity: Generally speaking, in order to give full play of opening up, a nation must possess a certain set of conditions, which is the nation's threshold. If a country could not meet the requirements of such a threshold, the function of opening up could not be fully exerted and could even cause problems. Some literature proved the existence of the threshold. For example, the promotion of FDI to growth depends on the level of the human resources of the developing country. If the human capital of a country can rise to a certain threshold, then the function of FDI can be fully exerted; otherwise, the active role of FDI to economic growth will be greatly reduced (Borenzstein, De Gregorio, and Lee, 1998). The threshold effect reflects the importance of absorptive capacity from another angle. We can evaluate the absorptive capacity of a country from facets such as human capital, financial development and management level. Therefore, in order to strengthen the absorptive capacity, reforms are needed. The coordination between opening up and reform: In addition, opening up can lead to a lack of synchronicity among various departments, which in turn can lead to the emergence of bottlenecks. The departments or systems that experienced slow development of reform or non-reformed departments or sys-
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collection; and enhancing the employment of international conventional means to protect the national industry (e.g. anti-dumping, the implementation of guarantee measures and so on), establishing a system of tracking, monitoring and feedback (employ a tracking system to replace the examination and approval process). Corporate reforms to improve the micro management The reform of the foreign trade administration system attaches great importance to regulating importing and exporting activities, creating an equal competitive environment, enhancing the motive power of the company to export goods; while the core factors in opening up are foreign trade companies, other home companies with which the foreign trade companies have ties are also considered important. Therefore, a matching corporate reform with the reform of the foreign trade system should come into being. In line with requirements put forward in the 13th National Congress to "promote the practice of the foreign trade companies to take full responsibility for their own profits and losses, liberalizing operations, integrating industry and foreign trade and promoting the employment of the agency system", in 1988, the state popularized the system of contract responsibility in foreign trade companies and carried through pilot projects in three foreign trade fields, namely light industries, processing and the garment industry. Starting from January 1, 1999, the state decided to readjust and reform the exchange rate system to excise dual exchange rate systems, unified foreign exchange retention rate, canceled export subsidies to foreign trade companies and obliged the entire industry of foreign trade to take full responsibility for their own profits and losses. The aforementioned reforms played an important role in areas such as perfecting the foreign trade industry incentive system and the improvement of operational benefits. But it is not viable only with reform in the foreign trade industry. If it is expected to drive the development of other industries, such practices of cor-
porate reform must be aimed at perfecting the incentive system and improving micro management, which should be popularized to all companies. This is what China did. In addition, the corporate reform was not limited to employing the system of taking full responsibility for one's own profits and losses, but has continuously developed into establishing a modern corporate system from establishment of share-holding system by means of grasp the big and let go the small1, to the recent establishment of the State-Owned Assets Supervision and Administration Commission of the State Council to conduct the ownership reforms. This will further promote state-owned enterprise reform. All of these reforms, from foreign trade enterprises to other ventures, from the manufacturing industry to the financial services sector (e.g. the recently planned share-holding reform for the commercial banks and the planned listing on the Stock Exchange), and the development of private economy seem to have no direct ties with opening up, but in fact they are aimed at improving China's absorptive capacity. Governmental institution reform to improve the macro management capability It is a miniature version of the opening up course of China from foreign trade to domestic trade, from separation to integration, which also reflects how the governmental institution reforms serve the mission of promoting the opening up. The Ministry of Foreign Trade and Economic Cooperation was set up about half a century ago to promote exports. In 2003, this ministry was merged into newly established Ministry of Commerce to integrate foreign trade and domestic trade to meet the requirements of opening up at the new stage since China's WTO accession. In three years after China's accession to the WTO, all domestic and foreign enterprises will be able to enjoy the right to trade automatically and foreign trade is no longer a privilege. The establishment of the Ministry of Commerce brought forth this historic trend. The newly founded Ministry of Commerce integrated the
This policy meant focusing on the restructuring the major enterprises and leaving the minor ones to fend for themselves.
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related functions of the former State Economic and Trade Commission, the State Development Planning Commission and the Ministry of Foreign Trade and Economic Cooperation, and are mainly responsible for the policies and regulations of market operation and circulation fields, system reforms, monitoring and analysis, international co-operation, organizing and coordinating the anti-dumping and countervailing and so on. Here, the governmental institution reform is replying to the call of the new historical stage of the opening up. At this time, the mission to be compatible with international conventions, establish and perfect a unified, open, competitive and orderly modern market system and improve the macro management capability of the government have become the new priorities instead of pure foreign trade many works can be fulfilled independently by the enterprises which have the right to conduct foreign trade. In addition, the establishment of the China Banking Regulatory Commission declared the independence of the regulatory function, which is to improve the macro management capability in the course of further opening up of the banking industry. All the reforms, including the foreign trade reform, enterprise reform and governmental institution reform, have the core objectives to co-ordinate the reforms and opening up, improve the absorptive capability and give full play to the opening up in promoting the development of national economy.
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Table 2. Comparison of Portfolio Investment Flows in China and the US (1997 and 2001) in million US$
Stocks China US 1997 4618 427579 2001 13210 997821 Long-term debt 1997 14112 886325 2001 5504 1653419 Sort-term debt 1997 610 36192 2001 1457 417850 Total 1997 2001 19340 20103 1350096 3069090 % of global 1997 0.32 22.18 2001 0.16 24.46
tics in 2001, only 21.6% of foreign investment appeared in the services sectors, including transportation, storage, postal services, communications, wholesaling, retailing, catering, finance, real estate, social services, health care, sports, social welfare, education, culture, arts, broadcasting, scientific research and comprehensive technical services. With the exception of real estate, the proportion of foreign investment in the services sectors amounted to a little more than 10% (see Table 3).
This distribution reflects the process of gradual market-access policies adopted by the Chinese government that placed the manufacturing industry before the services sectors in its opening-up drive.
3. FDI Contributions
As mentioned above, FDIs can benefit an economy in many ways. The following is an analysis of the contributing role of FDIs in Chinas exports, fixed-assets investment and employment.
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Exports ($USD 100 million) % of Chinese total Increase in exports ($USD 100 million) % of Chinese total
Exports: Chinese exports where foreign-invested companies have played a major role, especially in recent years have been expanding at a very high pace. As shown in Table 4, foreign-invested companies contributed up to 50.1% of the total exports in 2001, and in the first half of 2003 the proportion reached 53.9%. Foreign-invested companies made an even bigger contribution to Chinese exports from the point of view of shares in exports increment. For example, in 1996 and 1998, FDIs were responsible for a huge proportion of the increase in exports since State-owned companies experienced a drastic drop in exports. In 1996 and 1998, FDIs not only compensated this drop, but also drove up the previous years exports. Apart from the extreme cases in 1996 and 1998 when State-owned companies performed very poorly, the FDI contributions of total Chinese exports ranged between 60% 80%. A plausible conclusion would point to the critical role played by FDIs in forming Chinas exportoriented economy. Fixed-assets investment: The FDIs contribution to fixed-assets investment is demonstrated in the proportion of realized FDIs in the national fixedassets investment. As Table 5 suggests, between 1993 and 2001, FDIs amounted to more than 10 % of the total fixed-assets investment. It was only when the Chinese government adopted proactive fiscal policies, strengthened infrastructure construction and implemented urbanization which resulted in more domestic investments that FDIs began to constitute a smaller share of contributions to fixedassets investment. Nonetheless, FDIs still play an increasingly important role in forming Chinese
investments. Employment: FDIs create jobs for Chinese workers. In recent years, the share of workers employed by foreign-invested companies in the total workforce have leveled off between 2.7% and 2.8 %. (See Table 6). Although a share of less than 3 % is seemingly negligible, it mitigates the issue of unemployment in China. Just imagine one percentage increase in unemployment that will translate into many Table 5. Shares of FDIs in Fixed-Assets Investment
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Realized FDIs in total social fixed-assets investment (%) 4.36 7.51 12.13 17.08 15.65 15.10 14.79 13.23 11.17 10.32 10.42
Sources: National Bureau of Statistics: China Statistics Yearbook, 2002 and China Statistics Abstract, 2003
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economic and social problems, it is not difficult to understand the importance of the job creation by FDIs.
IV. Conclusion
From a political economic point of view, while governments of advanced countries, multinational corporations and international organizations such as the WTO and IMF are pursuing their own interests in a bid to promote worldwide globalization, as a world trend, globalization is largely a natural result of the development of the market economy. This means that developing countries have only one thing to consider: how they can participate in this trend, not how to escape it. An analysis of Chinas experience in opening up reveals in what way a developing country can benefit from globalization. It should: 1) realize that for developing countries the ultimate end is development, not just opening up or protection; 2) implement an opening-up policy that fits the countrys own level of development where domestic industries are protected from undue foreign competition and where trade is open to foreign participation before finance; 3) increase the countrys abilities to absorb foreign capital and other advanced elements and maximize the benefits of opening up by carrying out reforms in line with the stages of opening up; 4) avoid risks posed by portfolio investments and take advantage of the benefits that FDIs can offer in capital formation, technological upgrading, management standards improvements by choosing FDIs over portfolio investments.
While China has its own, unique characteristics, its experience is by no means perfect. However, China did not liberalize its entire economy, as some foreign experts and economists suggest, to receive its share of the benefits offered by globalization. This is an important element that is essential to the Chinese experience and worthy of being used as a reference by other developing countries.
References
Borensztein, Eduardo, Jos De Gregorio, and Jong-Wha Lee , 1998. How Does Foreign Direct Investment Affect Growth? Journal of International Economics. Vol. 45 (June). pp. 11535. Fan Gang, eds. 2002. Follow-up Analysis on Chinas Macroeconomic Variables (in Chinese), National Economic Research Institute, Beijing. Fan Gang and Wing T. Woo, 2002. Phase in or Parallel? A Discussion on the Theories and Policies of Optimized Transformation. Working paper of National Economic Research Institute, China Reform Foundation (forthcoming). IMF, 2003. Global Portfolio Investment Survey , 2003. Washington: IMF. Jin Xiangyong and Lin Chengliang, 1999. Case Studies of Chinese Tariffs Adjustment and its Effective Protection Structure, (in Chinese). World Economy. Aug. 1999. List, F. 1841, Das Nationale System der Politischen Oekonomie (Stuttgart: J. G. Cottascher Verlag). Prasad, Eswar, Kenneth Rogoff, Shang-Jin Wei and M. Ayhan Kose, 2003. Effects of Financial Globalization on Developing Countries: Some Empirical Evidence . March 17, 2003. Washington: IMF. UNCTAD, 2002. World Investment Report, 2002. Geneva: UNCTA. Zhang Shuguang, Zhang Yansheng and Wan Zhongxin, 1997. Case Studies of Costs in Chinese Trade Protection, (In Chinese). Economic Research Journal. Feb. 1997.
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