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Abstract
The 30 years of reform and opening have brought great material progress to China. By becoming a big country, China's actions created huge spillovers on other countries. The result has been a rise in trade tension between China and its trade partners. Recently, some have claimed that China's prolonged large trade surpluses have undermined global financial stability and tilted the world into a deep recession, if not a 1930s-style depression. Others have claimed that the greenhouse gases from China's industrialization would soon cause cataclysmic global climate change. One blunt but effective way to eliminate these negative spillovers is to restrict imports from China. Labor in the rich countries is under considerable stress because of the deep global structural adjustments brought by: (1) the integration of the labor force of China, India and the Soviet bloc into the world economy; and (2) the acceleration of technological innovations (as exemplified by the revolution in information technology). The new global equilibrium could be a win-win outcome for the world but the process of moving to it is a painful one. Protectionism to avoid the transitional pains is, however, likely to end up in a lose-lose outcome for the world. China must therefore, in its own interests, help to reduce international tension by updating its strategy of international economic engagement. China has to go beyond being a passive beneficiary of the WTO system to being an active promoter of WTO objectives. China should work with the US to bring Doha Rounds negotiations to a successful conclusion. China must also play a stronger and more constructive role in the forthcoming international talks on global climate change. China and India are simply too big to be exempted for a long time from national ceilings on the emission of greenhouse gases. China will have to face down its internal political opposition to replace the backward state-controlled financial system with a dynamic, but well-regulated, diversified private financial system in order to eliminate the odd phenomenon of a poor country lending to a rich country. For its neighborhood, China should push for an Asian Economic Union that takes the form of a WTO-plus free trade and open investment area that has regional pooling of foreign exchange reserves. Since there is no prospect of free labor mobility within East Asia, monetary integration would produce an economically inefficient outcome. East Asia should therefore be focusing its energy on creating as large a free trade area as possible, and forgo the unrealistic goal of a common Asian currency.
Acknowledgements
This is the revised version of a paper delivered at the annual conference of the Chinese Economic Association (UK), China's Three Decades of Economic Reform (1978–2008), held in New Hall, Cambridge University on 1–2 April 2007. I am very grateful to the participants for many deep insights, especially the guidance of Xiaohui Liu, Zhongmin Wu and Wei Zhang. The ideas on regional integration have benefited tremendously from the helpful comments of Barry Bosworth, Masahiro Kawai, Haihong Gao and Yunling Zhang.
Notes
Notes
1. The English version of the People's Daily, 19 January 2002, contains descriptions of this trip in ‘Records of Comrade Deng Xiaoping's Shenzhen Tour’ on website: http://english.peopledaily.com.cn/200201/18/eng20020118_88932.shtml
2. This meeting was the Third Plenum of the 11th Central Committee of the Communist Party of China (CPC), held on 10–22 December 1978.
3. Quote from ‘Southern Campaign Speech by Deng Xiaoping’ in website: http://www.shanghartgallery.com/galleryarchive/texts/id/448
4. Quote from ‘Southern Campaign Speech by Deng Xiaoping’ in website: http://www.shanghartgallery.com/galleryarchive/texts/id/448
5. The two turning points were 1994 and 1996, see Ho, Bowles, and Dong (Citation2003).
6. SOEs are unincorporated firms that are entirely state-owned. The level of employment at state-owned units (SOEs plus state organs, state institutions and social organizations at the central and local levels) went up from 74.5 million in 1978 to 112.6 million in 1995, and then dropped to 85.7 million in 1999 and to 64.3 million in 2006. The employment at collectively-owned units was 20.5 million in 1978, 36.3 million in 1991, 17.1 million in 1999 and 7.6 million in 2006. Source is Table 5–2 in National Bureau of Statistics (2007).
7. Although the state shares of output and ownership of productive assets are now lower than in 1978, the state still controls a substantial proportion of the economy. In the industrial sector in 2006, while SOEs (unincorporated firms that are entirely state-owned) accounted for only 9.7% of gross output value (GOV) and 16.8% of total assets, state-holding companies (corporations where the state is the biggest shareholder) accounted for 21.5% and 29.6% respectively. This means that state-controlled firms produced at least 31.2% of GOV and 46.4% of total assets in the industrial sector. Sources are Tables 14-1 and 14-8 in National Bureau of Statistics (2007).
8. Until about 2000, the academic literature in the West debated about whether China's sustained high growth had come from indigenous institutional innovations that were non-capitalist in essence or from convergence to a modern capitalist economy. For reviews of this debate, see Sachs and Woo (2000), Sachs, Woo, and Yang (2000) and Sachs and Woo (2003).
9. The negotiations had started in March 1987 under GATT, the predecessor of WTO; see Long (Citation2001), and WTO (Citation2001).
10. These claims are consistent with a developmental perspective based on the following three hypotheses:
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there are different stages of economic development that are analytically distinct;
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certain conditions must be met before an economy could enter into the next stage;
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because the growth barriers are different at each stage, the focus and method of economic management are different at each stage.
11. This line is from the song ‘Don’t Stop’ by the rock group Fleetwood Mac. A live performance is available on website: http://www.youtube.com/watch?v = WBKkwxCV5ls
12. Lardy (Citation1998) wrote that: ‘China's major banks are even weaker than most official data suggest … On a realistic accounting, these banks' capital adequacy is negative, and they are insolvent (p. 95) … The failure of China's largest financial institutions would disrupt the flow of credit and disrupt the payments system, leading to a collapse of economic activity. The failure of major banks also could have long-term implications for the household savings rate … A lower savings rate would mean a lower rate of investment and slower growth, in turn depressing the rate of new job creation, leading to sustained higher levels of unemployment’ (pp. 143–144).
13. Woo (Citation2009) offered the assessment that the most probable internal economic threat to growth was a fiscal crisis, but a fiscal crisis was less likely to occur than either the outbreak of social disorder caused by outmoded governance, or the appearance of water shortage as a result of inept environmental management.
14. For example, in 2004, there were 74,000 ‘mass incidents’ (cases of social disorders) involving 3.7 million people compared with 10,000 such incidents involving 730,000 people in 1994; data from Pei (Citation2005).
15. ‘Top official warns of looming water crisis’, South China Morning Post, 7 November 2006.
16. Right now, ‘[about] 400 of China's 660 cities face water shortages, with 110 of them severely short’. (‘China may be left high and dry’, The Straits Times, 3 January 2004). Furthermore, the increasing amount of water pumped from the aquifers in northern China is causing the water table to drop three to six meters a year (‘Northern cities sinking as water table falls’, South China Morning Post, 11 August 2001).
17. ‘Top official warns of looming water crisis’, South China Morning Post, 7 November 2006.
18. Woo's (2007) caution came from (1) the new major reforms being technically difficult to implement (e.g. setting up social safety nets), and having few, if any, successful precedents in the world to draw upon (e.g. designing market-compatible environmental regulation); and (2) the possibility that the many potential losers from these major reforms could successfully organize to resist meaningful implementation of the reforms.
19. Pei (Citation2006b).
20. As Huang (Citation2006) sees that India does not discriminate against its indigenous capitalists in favor of foreign capitalists, he predicts that ‘[u]nless China embarks on bold institutional reforms, India may very well outperform it in the next 20 years’.
21. Germany and Japan had current account surpluses of $252 billion and $211 billion, respectively, in 2007.
22. ‘Surplus fuels EU-China war of words’, Financial Times, 13 June 2007.
23. ‘4 in Senate seek penalty for China’, New York Times, 14 June 2007.
24. In the February–April 2007 period, the US filed WTO suit against Chinese subsidies to exports, Chinese import restrictions on copyright-intensive imports, and China's weak protection of copyrights. On 19 December 2008, the US filed a WTO suit against China's programs to establish global brands for its products because they were seen as export subsidies.
25. News Release (Monday, 2 March 2009) on conference “Winter Institute: China and US joined at the hip” that was held on 27 February 2009 at St. Cloud State University, Minnesota: http://www.stcloudstate.edu/news/pressreleases/default.asp?storyID=28126
26. International Monetary Fund (2008a, 2008b).
27. Compensation estimates are from Burtless (Citation2007). Woo (Citation2008) attributed this rise in compensation to the accelerated technological innovations in the US in the 1990s, and documented that the real compensation of US blue-collar workers increased fastest during the 2000–2005 period when the US current account deficit increased the fastest.
28. The single biggest boost to economic globalization in the 1990s was perhaps the post-1990 integration of the labor force in the former Soviet Union, India and China (SIC) into the international division of labor. The number of workers already engaged in the international division of labor in 1990 was 1083 million, and the combined labor force of SIC was 1232 million. The international division of labor in 1990 was certainly an unnatural one because half of the world's workforce had been kept out of it by the SIC's autarkic policies. By 2000, the number of workers involved in the international economic system in 2000 had increased to 2672 million (with 1363 million workers from SIC); data are from Freeman (Citation2004).
29. Feenstra and Hanson (Citation1996) estimated the impact of these two developments on US wages. Immigration has also increased the anxiety of the US worker; see Ottaviano and Peri (2005).
30. These inadequacies are outlined in Gary Burtless (Citation2005) who reported that within the G-7 in 2004, only the United Kingdom had a less generous unemployment benefits scheme than the United States. An unemployed person in the US received initial unemployment benefits that equaled 53% of previous income compared with 78% in Germany, 76% in Canada and France, 61% in Japan, 60% in Italy and 46% in UK. The duration of unemployment benefits was 6 months in the US compared with 12 months in Germany, 9 months in Canada, 30 months in France, 10 months in Japan and 6 months in Italy and the UK.
31. The savings rate rose because (1) the financial sector does not offer insurance against the increased risks that the public now faces (with the end of the iron rice bowl) in future employment, medical coverage, and pension benefits; (2) the financial sector does not offer adequate loans for housing and higher education, as these goods are no longer free (with the reduction in state subsidies); and (3) given the extreme difficulties in getting investment loans from the banks, entrepreneurial individuals saved more in order to realize their desires to set up small and medium enterprises. Liu and Woo (1994) has formalised motive (3) as investment-motivated savings.
32. ‘Schwab surprised by stance of India and Brazil’, Financial Times, 22 June 2007; and ‘China's shadow looms over Doha failure’, Financial Times, 22 June 2007.
33. ‘Brazil, others push outside Doha for Trade Pacts’, The Wall Street Journal, 5 July 2007.
34. The EU started off as group of six countries forming the European Coal and Steel Community in 1951 under the Paris Treaty.
35. Mercosur was founded in 1991 but its coverage has not expanded beyond the original members of Argentina, Brazil, Paraguay and Uruguay. ASEAN stands for the Association of Southeast Asian Nations, and it was established in 1967 by Indonesia, Malaysia, Singapore and Thailand. ASEAN now includes Brunei, Burma, Cambodia, Laos, Philippines and Vietnam. ASEAN was generally an inactive economic organization until the mid-1990s.
36. Haruhiko Kuroda, ‘Towards a borderless Asia: A perspective on Asian economic integration’, 10 December 2005; and Haruhiko Kuroda, ‘The challenges of economic integration’, 12 September 2008.
37. Reported in ‘The case for Asian monetary union’, Wall Street Journal, 1 June 2004.
38. Masahiro Kawai, ‘Creating an Asian currency unit’, The Japan Journal, September 2006.
39. Such a view is expressed in Masahiro Kawai, ‘The role of Asian currencies in the International Monetary System’, paper presented at the 2008 Macro Research Conference, The Global Monetary and Financial System and its Governance, sponsored by the Tokyo Club Foundation, 11–12 November 2008, Hotel Okura, Tokyo, Japan; which is why the terms ‘exchange rate coordination’, ‘exchange rate stability’ and ‘currency unification’ are used interchangeably in the paper.
40. See, for example, Woo, Schwab, and Sachs (Citation2000) and Blustein (Citation2001)
41. This is the common paraphrase of the opening sentences in Karl Marx (Citation1852).
42. O’Neill et al. (Citation2005).
43. Quote is from website: http://en.wikipedia.org/wiki/European_Coal_and_Steel_Community
44. This is the fundamental insight of Mundell (Citation1961).
45. The veracity of this statement is strikingly seen in that the G-20 summit in November 2008 turned out to be a G-22 summit because some of the European members pressed successfully for the inclusion of the Netherlands and Spain in the summit.
46. Wang and Woo (2004).
47. Samuelson (Citation2004) showed that free trade could cause a decline in the welfare of the developed country if outsourcing accelerates the transfer of knowledge to the developing country, which would then import less from the former causing the terms of trade to shift in favor of the developing country.
48. WTO + plus = the degree of openness exceeds existing WTO standards.