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"China's Integration into the World Economy"

June 8, 2000

Angang Hu
Research Fellow, Center for China Study, Chinese Academy of Sciences, China

I. Economic Globalization is the Greatest Opportunity for China in the 21st Century

As China-Europe WTO talk was over and US House of Representatives approved PNTR, China's dream of entering WTO will soon become reality. China's entry into WTO is an important steppingstone towards economic globalization. I believe economic globalization is the greatest opportunity for China in the 21st century. Further opening to the outside world and active participation in globalization is consistent with China's national interests. As many scholars pointed out, globalization can not be beneficial to every developing country, but China is among very few countries who benefited most from globalization in these two decades (World Bank, 1997).

Economic globalization significantly promotes China's economic growth. In recent 20 years, China speeded up its integration into the world economy. Foreign trade and foreign direct investment (FDI) are key factors to China' s amazing economic development. According to a study by the World Bank (1996), FDI contributed 8.6% of economic growth rate during the period of 1990-1994. It was estimated that this contribution would be even greater in the next few years (World Bank, 1996).

Economic globalization helps solve difficult problems in reform and development. For example, China's monopolistic industries have become powerful interest groups and hindered market-oriented reform. The rules of international organizations like WTO are based on market mechanism, and thus could be very helpful to remove the resistance of those interest groups in the reform of the market economy. Moreover, globalization brought about foreign competition from the world market, which certainly will push China' s further reform and development.

Economic globalization also helps China fully utilize demestic and foreign capital, technology, resource and market. This is one of the main advantages of opening the economy for developing countries. Open policy can boost the economic growth directly through export and indirectly through import and FDI by absorbing new knowledge and technology (Rodrik, 1999).

China can't miss the chance of globalization. This is also determined by China's basic situation:

1. Abundant labor resource. It accounts for 26% of the world's total labor force;
2. Scarce agricultural resource. Farmland and water resource only account for 7% of world's total resource;
3. capital. Total investment accounts only 3.4% of the world total; investment;
4. Scarce energy,. Oil and natural gas reserve account for 2.34% and 1.20% of the world total reserve respectively;
5. Scarce technology resource. The number of patents granted only represents 1% of the world. Based on the above situation, China should effectively develop and import overseas agricultural resource, energy resource and other natural resource, attract FDI and advanced technology, and develop labor-intensive industries for world market.

China's integration into the world economy will surely have deep impact on Asia and the world as whole. It's not only beneficial to China, but also to other countries. As China becomes a more and more important player in the world economy, its participation in globalization will have big contribution to world economic growth, world trade and world development. Therefore, the result will be "both win".

The success of the participation in globalization is partly determined by whether a country can learn to play by the rules (Thurow, 1996). As for the rule of the world economy, China is in the transition of studying, acknowledging, obeying, participating, changing and making the rules. In the future, China needs to learn to actively participate in the process of changing and making the rules.

II. Human Insecurity is the Greatest Challenge for China in the 21st Century

Three factors that will affect China's long-term development are challenges to national security, economic security and human security. I believe human insecurity is the greatest challenge for China in the 21st century. Human insecurity is the conflicts arising from economic globalization, social transformation and economic transition. Human development refers to the expansion of the choices and the improvement of the quality of these choices, while human security means people can make these choices freely and safely (UNDP, 1994). The followings are seven aspects of human insecurity faced by Chinese people:

1. Employment insecurity. In 1998, there were about 16 million unemployed workers in urban China, including 5.7 million registered unemployed workers, 9 million laid-off workers and 800 thousand unemployed workers from rural labor force. The employment of the township and village enterprises declined by 17 million in 1998. Moreover, according to our estimates, China still has 150-160 redundant farmers in rural area.

2. Income insecurity. Despite the remarkable success of poverty reduction in China, there are still 42 million poor people in terms of official poverty line and 120 million poor people in terms of World Bank international poverty line in rural area. Contrast to many people's belief, in 1990s urban poverty increased slowly and amounts to about 10 million in 1998. In 1997 and 1998, the prices of the agricultural products declined by 12.1%, which cost the farmers' cash income by 122-135 billion yuan (Hu, 1999b).

3. Retirement insecurity. Two thirds of the retired workers in urban area are in "low income" group. Due to the incomplete social security systems, the retirement pension is often delayed and reduced. Up to 1998, the total delayed retirement pension is about 8.7 billion yuan or 2444 yuan per person.

4. Health insecurity. In 1997, China's infant mortality is 37.7% in rural area and 13.1% in urban area. Surveys in the early 1990s suggest that about 14% of children are underweight and 22% of women are anemic.

5. Cultural insecurity. In some poor counties, as many as half of the children do not go to school. In 1997, 16% of adults remained illiterate. About 10 million m2 school buildings are in danger. The culture of some minorities has serious problems to survive.

6. Social insecurity. The crime rate is climbing up slowly. In 1980, there were only 760 thousand law cases, but in 1997 it increased to 5.3 million. Each year about 700 thousand people were killed in China for all different reasons. Moreover, China's death rate of traffic accident is the highest in the world .

7. Environmental insecurity. Natural disaster resulted in big economic loss. In 1998, the total economic loss brought by natural disaster was about 300 billion yuan, or 4.5% of GDP. Air pollution and water pollution are also big problems. It was estimated by the World Bank (1997) that pollution costs 3-8% of GDP each year in China.


The above seven aspects constitute the biggest challenge for China. However, globalization will not only affect the economic security, but also worsen the human insecurity. Its negative effects are:

1. Unemployment. After trade liberalization, the capital-intensive industries and some service industries, which do not have comparative advantages in China, will face foreign competition directly in both domestic and world markets. The unemployment rate will probably increase at least in the short term (Li, 1999).

2. Regional uneven development. In the period of globalization, the economic gap between the east and the west will be widened. Considering the infrastructure, technology, human resource and geographic advantages of the east region, we can draw the conclusion that most of FDI in the future will still go to the coastal area. Moreover, the industrial structure of the east is export oriented, which means east region benefits more from trade liberalization.

3. Inequality and poverty. The Gini ratio of income distribution increased from 0.34 to 0.42 in rural China and from 0.23 to 0.33 in urban China during the period of 1988-1995. From the world experience, globalization has disequalizing effects on income distribution. As unemployment rate increases and the prices of agricultural products continue to go down, both urban poverty and rural poverty will become more and more serious.

4. Eco-environmental problems. Globalization is not only an opportunity but also a big challenge for eco-environment in China, because it increases the burden on resource and environment. Pollution may also be transferred into China from some developed countries.

5. Macroeconomic instability. In the process of China's participation in globalization, external shock has big impact on China's macroeconomic performance. Though China was not directly hit by recent Asian financial crisis, China's economic stability was seriously affected by it.

III. China's Economic Globalization Strategy

In order to accelerate China's globalization and to solve the problem of development and resources facing China, the author propounds the economic globalization strategy for the 21st century. The implementation of China's economic globalization strategy will make China a production center, trade center, distribution center and transportation center in the world in the next 20 years.

The goal of the economic globalization strategy is to build the open economy, while China's goal of the economic reform is to build the market economy. The market economy and the open economy are the two wheels of China 's reform and open policy. Two indicators measure the economic openness: one is the indicator sof the policy of openness (including trade policy, FDI policy, foreign exchange system and economic system), the other is the indicators of the progress of openness (including the dependence of export, foreign capital and production) (Desai, 1997). There are big differences between open economy and export-orientated economy. The open economy is mainly measured by the indicators of the policy of openness, while the export-orientated economy is mainly measured by the indicators of the progress of openness. China's open economy should include the free trade regime, open FDI policy, flexible foreign exchange system and highly developed market economic system.

1. The analysis of China's indicators of the policy of openness shows that:

(1) China's tariff level is much higher than the average of the developing countries and there are many non-tariff barriers with very low transparency.
(2) China's policy is much positive for foreign capital but there are serious market entrance barriers in some sectors especially the service sector in China.
(3) Chinese currency (RMB) can't be exchanged freely and the capital account is still under tight control.
(4) China's economic system is now in the transition and there will be a long way for China to go to a matured market economy.

2. The analysis of China's indicators of the progress of openness shows that:

(1) China's dependence on export (the ratio of the total imports and the exports to the GDP) was 4.6% (calculated by PPP) in 1998, which was much lower than the world average of 14.6% (World Bank, 2000). In 1999, China's GDP ranked number 2 in the world (measured by the PPP) while China's total imports and exports only ranked number 9 in the world. Clearly, China's the foreign trade does not match its economic size;
(2) Although the China's FDI continues to rank number 2 in the world, China's dependence on FDI (the ratio of FDI to GDP) was only 1.1% in 1997, which is also lower than the average level of the world (1.3%).
(3) The dependence on the production (the ratio of the total overseas production of China's enterprises to GDP) of China is very low because China's investment abroad is only in initial stage.


The above study implies that there is still a long way for China to go into the open economy system.

The core of economic globalization strategy of China is to make full use of capital, technology, resources and markets, domestic and foreign. Currently China must change the situation that crops, oil and gas are highly self-supported. In 2010, China's net import rate of crops, oil and gas should reach 10%, 30% and 50% respectively.

The instrument of economic globalization strategy is the trade liberalization. The trade liberalization is to completely abandon the import-substitution strategy and the protectionism, strengthen the domestic and global competition, remove various trade barriers, attract foreign and domestic capital, facilitate the import, diffusion and transfer of technology and participate actively in regional integration and globalization. This includes:

--- Reduce the tariff rate and cancel various custom barriers such as import licenses, import quota, complicated inspection procedure and institutions;

--- Attract FDI more actively and abolish various market entrance barriers limiting foreign capital and provide the national treatment for foreign enterprises;

--- Stabilize the exchange rate of RMB and open the capital account gradually and step to flexible exchange rate regime;

--- Link the domestic and the world markets and pay more attention to the global price trends and fight severely with the black market and smuggling;

--- Accelerate the market transition and follow the world market rules.

The guideline of China's economic globalization strategy should be people-centered. To meet the challenges of globalization, China should adopt the policies with people-orientation and specify the new development framework to solve the human insecurity problems. The economic growth is not the end, rather it is only a means to achieve development. In order to achieve the high quality development, China should implement the growth policies that are centered on the improvements of the human living standards. The old development framework is centered on the material and made the growth of GDP as priority with the policy to accelerate the capital input and accumulation. The new development framework is centered on people with a policy to strengthen the human capability, enlarge the development opportunities for the people, and meet human needs.

Directed by the people-centered guideline, China can take the advantage of globalization, i.e., acquire the most benefits brought by the globalization and reduce the negative effects brought by globalization. Here are some policy recommendations:

1. Employment priority strategy. China should make the employment creation and the reduction of unemployment as the priority of government goals:

(1) The government should actively develop the labor-intensive industry and encourage the development of medium and small-sized enterprises to create more employment;
(2) In order to increase the employment, the service sector should be further encouraged;
(3) The various barriers limiting labor migration should be removed and the mobility of rural labor force to urban areas and non-agricultural sectors should be encouraged;
(4) The informal employment should be encouraged by the government.

2. Pro-poor poverty reduction and development strategy.

(1) Raise the income level of the poor. The average income of the poor population should be raised by 30 percent by 2005 and by 60-65% by 2010;
(2) Guarantee the food security of the rural poor population. Government should to strengthen the capacity of food production of the poor and raise their ability to purchase the imported grains and food. The basic demand of 2150 calories per day should be guaranteed;
(3) Government should create more employment opportunities for; poor population and the "work for aid" projects and the mobility of the rural labor force should also be encouraged;
(4) Government should also pay more attention to human poverty and the knowledge poverty as well as income poverty.

3. Policy to narrow the regional development gap. In order to maintain the regional balance, China has decided to implement the western development strategy. The main policies are as follows:

(1) Reduce the knowledge gap and promote development through knowledge;
(2) Readjust the industrial structure;
(3) Protect the eco-environment and promote the sustainable development;
(4) Open service market in western areas and accelerate the overall openness of the western region;
(5) Develop the human resources with great efforts.

4. Policy for macroeconomic stabilization.

(1) Adopt the steady fiscal policy and avoid the great fiscal deficits;
(2) Control the monetary supply in order to prevent the inflation and the deflation shocks;
(3) Step gradually to the flexible exchange rate regime and maintain the stability of the exchange rate;
(4) Maintain the balance of the import and the export in order to avoid the serious balance payment crisis;
(5) Control the scale and structure of the foreign debt.

5. Sustainable development policy.

(1) Adopt the new food security strategy and food trade policy. The core of the new food security strategy of China is to make full use of the comparative advantage and raise the net food import level step by step;
(2) Adjust the energy structure and specify the new energy security strategy. Now, China's coal consumption ratio is too high while the consumption of the natural oil and gas is too low. Thus China should utilize the globalization opportunity to adjust the energy structure using market mechanism and import natural oil and gas and reduce the coal production substantially;
(3) Make use of China's comparative advantage to import scarce natural resources and protect the natural resources;
(4) Make full use of the "trade surplus" to compensate for the "eco-environment deficit";
(5) Adopt the stern measures to clean the main cities, rivers and lakes. Some enterprises with serious pollution must be closed as soon as possible;
(6) Open the environmental protection market and attract FDI to participate actively in the international cooperation in global environmental protection.


China must grasp the golden opportunities provided by globalization in order to successfully catch up with developed countries. Accession to WTO is only the first step for China's new round of open policy. In the future, China should maintain the free trade trends and integrate more actively into the world economy.

References:

1. Padma Desai, Going Global'Transit from Plan to Market in the World Economy,UNU/WIDER,1997.
2. Peter Drysdale, 1988, International Economics Pluralism: Economic Policy in East Asia and the Pacific, Allen&Uniwin, Sydney.
3. Angang Hu, China Enters High Unemployment Rate Period, China study Report ,No. 48, 1999a.
4. Angang Hu, The Characteristic, Causes and Policy Suggestions of Deflation in China, China study Report,No. 76, 1999b.
5. Angang Hu, Natural Disaster and Development, China study Report,No. 10, 1998.
6. Shantong Li, The study of the influence of China's entry into WTO, China Development Report, Chinese Financial and Economic Press, 1999.
7. Hertal, Martin et al, The Uruguay Round and Developing Countries,Oxford University Press, 1996.
8. Dani Rodrik, New Global Economy and Developing Countries: Making the Openness work,ODC essay series,1999.
9. Joseph Stiglitz, Economics, Prentice- Hall, 1996.
10. Lester Thurow,The Future of Capitalism,1996.
11. UNDP, Human Development Report, 1994,1999.
12. World Bank, China 2020, Oxford University Press, 1997.
13. World Bank,World Development Report,1999,2000.

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.