China's Industrial Revolution And Economic Presence (Advanced Research in Asian Economic Studies) (Advanced Research in Asian Economic Studies)

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Author: Manoranjan Dutta

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Advanced Research in Asian Economic Studies - Vol. 2

China’s Industrial Revolution and Economic Presence

Advanced Research in Asian Economic Studies

(ISSN: 1793-0944)

SeriesEditor: Manoranjan DUTTA (Rutgers,The State University of New Jersey, USA)

Published Vol. 1 Asian Economic Cooperation in the New Millennium: China’s Economic Presence Edited by Calla WIEMER (East Asian Institute, National University of Singapore), Heping Cao (Pebng University, China) Vol. 2 China’s Industrial Revolution and Economic Presence by Manoranjan Dutta (Rutgers, The State University of New Jersey, USA)

Advanced Research in Asian Economic Studies - Vol. 2

China’s Industrial Revolution and Economic Presence

M Dutta Rutgers Universig, USA

vp World Scientific NEW JERSEY * LONDON

SINGAPORE * BElJlNG

SHANGHAI

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H O N G KONG

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TAIPEI

CHENNAI

Published by World Scientific Publishing Co. Re. Ltd.

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British Library Cataloguing-in-PublicationData A catalogue record for this book is available from the British Library.

CHINA’S INDUSTRIAL REVOLUTION AND ECONOMIC PRESENCE Copyright 0 2006 by World Scientific Publishing Co. Re. Ltd.

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To Lawrence R. Klein Benjamin Franklin Professor of Economics (Emeritus) University of Pennsylvania The 1980 Nobel Laureate in Economics who taught economics and econometrics to me

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ACKNOWLEDGMENTS

My sincerest appreciation to

Richard L. McCormick, University Professor of History (emeritus), Rutgers University Robert J. Alexander, Professor of Economics (emeritus), Rutgers University who empowered and inspired me to keep the Rutgers’ Scarlet flag flying; Chang Peikang, Huazhong University of Science & Technology, Wuhan Zhang Zhongli, Shanghai Academy of Social Sciences, Shanghai Liu Guoguang, Chinese Academy of Social Sciences, Beijing Huang Fanzhang, China Reform Forum & China State Planning Commission, Beijing whose generous scholastic collaboration since the 1980s led me on the road map of China; Li Jingwen, Chinese Academy of Social Sciences, Beijing Lin Shao Kung, Huazhong University of Science & Technology, Wuhan Heping Cao, Peking University, Beijing Chyau Tuan, The Chinese University of Hong Kong Linda Y. F. Ng, The Chinese University of Hong Kong for their helpful professional cooperation for the past twenty-five years; Dwight H. Perkins, Harvard University D. Gale Johnson, University of Chicago vii

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M Dutta

Gregory C. Chow, Princeton University Anthony M. Tang, Vanderbilt University Nicholas Lardy, Institute of International Economics Gary H. Jefferson, Brandeis University Calla Wiemer, Singapore National University James T. H. Tsao, US International Trade Commission whose scholarly works on China taught me how to study China’s Industrial Revolution; Richard F. Kosobud, Kazuo Sato, H. Peter Gray, Richard Hooley, George Rosen, Steven L. Husted, David J. Green, Robert H. Aten, John Malcolm Dowling, Frank S. T. and Mei-Chu Hsiao, Peter D. Loeb, Kanta Manuah, Michael G. Plummer, Saleem M. Khan, Edna E. Ehrlich, Lee Fazio Fiorino for their friendship and support for many, many years, giving me far more than I could ask for; Wenhui Wei, Ming-Chung Wen, Amiya Sharma, Chien-Chung Nieh, Kiseok Lee, Daniel Tantum, Mary Mewa with whom I worked over the past twenty-five years on many varied research projects and who taught me a great deal; Donna Ghilino, Dorothy Rinaldi, Paula Seltzer, Janet Goodstein, Debra Holman, Janet Budge for their loving friendship; David T. Motovidlak and Wade Olsson for all their help every time my computer refused to respond to my commands; Laura F. Liang for her research assistance with a commitment to total excellence; Usha Kaul, Ashok Kaul, Kavery and Bhupender Kaul for their love and affection which has kept me driving; Kanak who has been with me all hours for the past 55 years.

Acknowledgments

ix

SPECIAL THANKS TO The Fulbright Senior Specialist Program, for designating me a Fulbright Senior Specialist for a five-year tenure, 2002-2007, Washington, DC; The Center for Government and Social Statistics, Alexander Library, Rutgers - The State University of New Jersey, for their generous help in collecting data on China’s National Income Statistics, New Brunswick, NJ; The University Research Council, Rutgers -The State University of New Jersey, for their financial support to my research over the past many years, New Brunswick, NJ; The Ford Foundation, The John D. and Catherine T. MacArthur Foundation, Asian Development Bank, The East Asian Development Network of The World Bank, and The United Nations Development Program, for their funding for the six international conferences held in China between 1986 and 2002 on Asian Economics, jointly sponsored by the American Committee on Asian Economic Studies (ACAES), Huazhong University of Science and Technology (HUST), Chinese Academy of Social Sciences (CASS), Shanghai Academy of Social Sciences (SASS), and Peking University, each of which I had the privilege and honor to co-chair; The World Scientific Publishing Co., Inc. for their publication of this volume.


PREFACE

My study of the Chinese economy was inspired by my friendship and communication with Professor Chang Peikang of Huazhong University of Science & Technology (HUST), Wuhan, China, who came to attend the International Economic Conference on US-Asia Economic Relations, held at the New Brunswick campus of Rutgers, The State University of New Jersey in April 1981. At his invitation, I visited his University in 1986. Six international conferences on the same theme in China soon followed. HUST and the American Committee on Asian Economic Studies (ACAES), an inter-university program with an exclusive focus on studies in economics in the context of the new emerging paradigm of US-Asia economic relations and founded in 1982, cosponsored the first one held at the Wuhan campus of HUST in 1987. The next four conferences were sponsored jointly by ACAES, Shanghai Academy of Social Sciences (SASS), and Chinese Academy of Social Sciences (CASS), three at the SASS campus in Shanghai in 1988, 1990, and 1994, and one at the CASS campus in Beijing in 1992. The sixth conference held at Peking University campus in 2002 was sponsored by ACAES in collaboration with Peking University School of Economics and China Reform Forum. In addition, I had occasions to undertake academic visits to China on five other occasions between 1986 and 2004. Over the years I had as many as 35 occasions to give invited lectures and seminars, make scholastic presentations to assemblies of professional economists, and address general meetings of students and professional groups at various institutions, universities, and academies of social sciences. Special conferences with the officials of the People’s Bank of China (PBOC) and of various government ministries inclusive of the macroeconomic group at China’s State Planning Commission helped my field research. In addition to HUST, SASS, and CASS, I had occasions to xi

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visit China Reform Forum, Peking University, Fudan University, Wuhan University, Sinopec Research Institute, North China University of Technology, China-US Business University, The City University of Hong Kong, and The Chinese University of Hong Kong. These gave me an ample opportunity to interact with a large number of my fellow economists in China and also with many economic policymakers in both government and business sectors of China even though I had to do all my field work without the knowledge of the Chinese language. Friendly help from my hosts in China proved immensely useful and my pursuit of professional work on China progressed substantively. In 1981, The New York Times published in a multi-column headline: For The First Time In The History Of The United States, The TransPacific Share Of Its Trade Became Larger Than The Trans-Atlantic One. Indeed, my research has shown that it actually happened in 1980. For many years, Asian economic studies in the United States have remained fractured. Normalization of relations with the People’s Republic of China came only as late as 1978. India and other South Asian economies continue to be treated as disjointed units of Asia’s continental map. ACAES and the Journal of Asian Economics, sponsored by ACAES in 1990, have worked to bridge the gap. China’s Industrial Revolution and Economic Presence is an output of my studies of the Chinese economy. With a 1.3 billion strong population base, China is world’s most populous economy. Population relates to the twin blades of the economic scissor, labor supply and consumption demand. China’s economy has a relatively abundant endowment of natural resources. Indeed, over the past 25 years, China has accomplished an economic miracle, its annual rate of growth of Gross Domestic Product (GDP) averages over 9 percent and China as emerged as a competitive industrial economy, with trading partners in nearly all continents. The book has seven chapters, each with a specific focus. A large number of tables and figures lend support to the analytic expositions in each chapter. Chapter 1 reviews China’s accelerated rate of industrialization and growth of GDP since the 1980s, and examines the issue of the

Preface

...

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sustainability of this rate of growth for the years to come. Is a period of softening in order? Specific issues of bottlenecks China may face are discussed. Resource bases are limited for any economy; however, Chinese authorities have made intensive and extensive efforts to find relief. Exploration of oil bases in China’s offshore regions in the Pacific and alternative energy sources inclusive of electricity, hydroelectricity, coal, and acquisitions of interests in petroleum reserves in Kazahkistan have all been noted. Can China lead the world in exploring solar and wind power? For other industrial raw materials, China is ready to make good use of its ever increasing foreign exchange reserves and be a currency broker in the world market. For zinc, China has been active in neighboring Mongolia and has gone as far as Cuba in Latin America. For chemicals, iron ore, and steel, China has expanded her trade relations with her Southern neighbor, India. The inter-sectoral imbalance has been another issue. China’s industrialhecondary sector has grown immensely while the tertiary sector, consisting of service items inclusive of money and banking and financial institutions lag behind. China has been paying serious attention to this (Chapter 5). A more serious gap in China’s tertiary sector relates to education, research, and health care. To sustain the rate of growth at its very high rate, China must be able to build up the necessary stock of human capital. In the global context, China is far from a competitive position. It has been argued that in the absence of careful planning in this regard, China will face a real challenge. Chapter 2 deals with China’s economic presence. China’s global economic presence has become a reality and its economic competitiveness warrants careful and thorough recognition. Indeed, economic cooperation with China will maximize economic welfare for the peoples of China and the rest of the world. Chapter 3 is an exposition of the theme that China must develop a framework of economic cooperation with her neighbors in Asia. The continental map of Asia is as real as the continental map of Europe. China’s economic cooperation with the economies of Northeast, Southeast, and South Asia has made spectacular progress. China has also developed a proactive economic cooperation agenda with her neighbors to the North including Mongolia and Russia. Lessons of history based on

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regional conflicts must be carefully learned. The one economic market of Europe is a new paradigm of continental economic cooperation. China can lead the Asian economic cooperation agenda as a member of the 3 plus 5 model, recently expanded to the 4 plus 10 model. Chapter 4 is an extensive exposition of the role of foreign investment in China’s industrialization and economic growth. Indeed, as Phase 3 of China’s open invitation to foreign investors in 1992, China has been the recipient of huge volumes of foreign investment, earning her the recognition as being the most foreign investment friendly country in the world. We have analyzed the six specific points how foreign investment contributed to China’s transformation into a global economy. We have argued that the Chinese model is one of import-export led growth, not one of export-led growth. China’s exports became a necessity for the repatriation of profits home by the foreign investors in China. This only stimulated more investment; China’s foreign exchange reserves soared and her international credit rating went up. Chapter 5 discusses China’s financial market. If, in the earlier decade, the secondary sector received priority and manufactures became the dominant share of China’s GDP, now is the time to build up the financial services in the tertiary sector to support the manufacturing industries in the secondary sector. Delaying this attention will force China to face the consequences of the severe imbalance between the two sectors. It is evident that the Chinese planners have ascertained their priority for the financial market inclusive of banking, insurance institutions, and related services. Overseas banks and financial institutions from the USA, Canada, Germany, UK, Switzerland, France, the Netherlands, and others, are out to buy stakes in China’s government-owned banks and financial institutions. In Chapter 6, the foreign sector of the Chinese economy is analyzed. China’s trading partners cover a large number of economies in all populated continents. China has not limited her trade relations to a select group of large economies with relatively larger economic dimensions based on GDP or with the availability of much-needed resources. China’s agenda is simply to be engaged in economic partnership with as many economies as possible.

Preface

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Finally in Chapter 7 , we review selected issues of concern to the Chinese economy in the post-Industrial Revolution regime. Is China yet a mature industrialized economy? Can China bridge her interregional economic gaps by a planned and progressive industrialization of the remote provinces to the west? How does China rate for income distribution based on the Gini coefficient index? For health, transportation, technology, education, science, and telecommunication, a comparison based on four economies, the two most populous, China and India, and the two richest economies, USA and Japan, has been a part of this chapter. I have argued against the thesis “Walls, Walls, and more Walls”, advocating that China has no grand designs to dominate the world economy. The history of the collapse of the imperial economic hegemony has been all too pronounced. China will work with its socialist market economy and will continue to ensure her place in the world economy by the open route of free market competition. The failure of the communist economy was very much attributed to the absence of competition. “To Be Rich is Glorious” will remain China’s economic agenda. In my final remarks, I venture not to offer any conclusion in recognition of the fact that eventful changes in the dynamic process of progression of China’s Industrial Revolution must continue to occur. Indeed, Change has been observed to be the only constant in our world. It is thus so for China’s Industrial Revolution.


MAP OF CHINA


CONTENTS

Acknowledgments Preface List of Tables List of Figures

vii xi xxiii xxxi

1 1 4

Chapter 1 China’s Industrial Revolution 1 Understanding China’s Economy 2 Sustainable Rate of Growth: Accelerated Rate of Growth 3 Challenges Ahead: A Macroeconomic Agenda 4 China’s Economic Reform: Industrialization and Internationalization 5 Progression of China’s Industrial Revolution 6 Inflow of Foreign Direct Investment: A Digression 7 Sources of FDI: A Digression Continued 8 China is Aware of Challenges Ahead 9 Macroeconomic Agenda 10 China’s Macroeconomic Structure: The People’s Bank of China (PBOC) & the Government Budget: The Case for Restructuring 10.1 The People’s Bank of China & China’s Monetary Policy 10.2 Exchange Rate 10.3 China’s National Budget and Fiscal Policy 11 Economic Regionalization 12 Conclusion

44 46 48 51

Chapter 2 China’s Economic Presence 1 The Chinese Economy 2 The Socialist Market Economy

53 53 55

xix

16 17 25 26 32 36 38 40

40

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3 4 5 6 7 8

Industrialization and Internationalization Privatization and Industrialization The Service Sector of China WTO’s 143rdMember: Dimension of the Chinese Economy Challenges Ahead: Ownership of the Means of Production in China’s Socialist Market Economy: China and Asian Economic Community Conclusion

Chapter 3 China and Asian Continental Economic Community: Intra Community Macro- and Microeconomic Parameters 1 Interdependence of Globalism and Regionalism 1.1 The Post-WWII Infrastructure of Globalization and New World 1.2 The European Union (EU) I .3 Will the EU Survive the Challenge of Political Integration? 2 Asia-Pacific Economic Cooperation (APEC) 3 Can the EU Be a Learning Model? 3.1 Unity in Diversity: Pan-European Culture and Civilization 3.2 Intra-EU Micro- and Macroeconomic Agenda 3.3 The Principle of Inclusion, Not Exclusion 3.4 EU’s Competitively Larger Economic Base: EU vis-a-vis USA 3.5 Shares of World Trade for Member Economies of EU and the Euro-Regime 3.6 Richer and Poorer Member Economies in EU Compact 3.7 Freedom of Labor Movement 3.8 Fluctuations of Exchange Rate: Euro vis-a-vis US Dollar 4 Asian Economic Community (AEC) 4.1 The Map of Asia is as Real as the Map of Europe 4.2 Membership of the AEC Must Be Anchored in the Principle of Inclusion

56 61 62 64

65 69 71 72 73 74 75 77 79 79 79 80 80 82 85

86 86

87 87 88

Contents

xxi

Uniformity of the Level of Industrialization of the AEC Members 4.4 Asian Continental Economic Base in Terms of Its Shares of World Output and Trade Conclusion

88

4.3

5

Chapter 4 Foreign Direct Investment (FDI) in ChinaAn Economic Appraisal: A Structural Change 1 China’s Economic Reform and Structural Change of the Chinese Economy 2 Special Economic Zones (SEZs) Sources of FDI into China 3 4 FDI Inflow into China by Sector: The Focus on the Industrial and Manufacturing Sector 5 The Real Estate Boom 6 Transport, Post and Telecommunication Services in the Tertiary Sector 7 FDI Inflow into China by Regions: Productivity Analyses 8 Productivity Analyses: FFE in China’s Manufacturing Sector 9 China’s Foreign Trade: A Great Leap Forward 10 Inflow of Foreign Investments into China and Economic Impact 11 Job and Employment Profile in China’s Investment and Industrialization Plan 12 Investment in Fixed Assets: Capital Construction and Innovation 13 China’s Socialist Market Chapter 5 1 2 3 4 5 6 7

China’s Money and Financial Market The PBOC and Major Banks of China China’s Financial Market Foreign Banks and Financial Institutions in China Joint Venture Securities Companies China’s Growing Consumer Credit Market The Challenge to Reconstruct the Financial Sector Exchange Rate: The Chinese Yuan as a Floating Currency

96 121 123

i24 125 131 133 140 143 145 146 147 149 155 171 180 181 182 191 20 1 204 205 206 210

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Chapter 6 The Foreign Sector of the Chinese Economy 1 Trade Relations and Economic Cooperation 2 China’s Top 10 Trading Partners, Trade Destinations, and Commodities in Trade: Export-Import-led Growth Model 3 China and United States Trade 4 China’s Trade Account and the Value of Foreign Trade by FFEs 1999-2001

213 213 220

Chapter 7 1 2 3

233 233 236 252

China’s Industrial Revolution and Beyond China’s Economic Structure as of 2004 China’s Interregional Economic Gaps China’s Income Distribution and the Gini Coefficient Index 4 Comparison of China, India, Japan, and US: Health, Transportation, and Technology 5 Village Level Industries in China’s Primary Sector 6 Education: Science and Technology 7 China and the USA 8 Selected Issues for China 8.1 Super-power Paradigm 8.2 Walls, Walls, and More Walls Against Foreign Businesses 8.3 China’s Statistics 8.4 Corruption 8.5 Bad Loans and Banking Crisis 9 China and the Rest of the World 10 Concluding Remarks

224 23 1

253 258 258 259 264 264 264 267 268 268 269 270

Bibliography

273

Index

281

LIST OF TABLES

Table 1.1A: Table 1.1B: Table 1.1C: Table 1.2A: Table 1.2B:

Table 1.2C: Table 1.3: Table 1.4A: Table 1.4B: Table 1.5: Table 1.6: Table 1.7: Table 1.8: Table 1.9: Table 1.10: Table 1.11: Table 1.12: Table 1.13: Table 1.14: Table 1.15:

Average Annual Rate of Growth of Output (%) Period Averages of Growth Rate (?A) GDP and Annual Growth Rate, 1960-2002 Employment Growth Profile, 1960-2002 Public Expenditure on Education & Health: China, USA, and Countries of Middle and High Incomes, 2001 (“Aof GDP) Science & Technology: China and USA Land Resource, 1961-2002 (hectares) Electricity Production, Major Sources, 1971-2001 (Gwh) Sources of Electricity, 1971 and 2001 (% of total) Sectoral Shares of GDP (%) Sectoral Shares of GDP, Value Added, 1960-2003 (% of GDP) GDP and Foreign Direct Investment (FDI) Inflows, 1981-2002 (constant 1995 US$ billions) Impact of FDI, 1981-2002 Capital Formation, FDI, 1982-2002 (constant 1995 US$ mil.) Gross Domestic Savings and Gross Capital Formation, 1960-2002 (constant 1995 US$ billions) Realized FDI Inflow into China by Selected Countries/Regions (1986-2003) Share of FDI Stock in China, 2002 (%) Per Capita Productivity of Labor (N) at an Annual Rate Money and Rates of Interest, 1978-2002 Foreign Exchange Reserves, 1977-2002 (current US$ billions)

xxiii

1 1 2 7 9 9 11 13 14 15 19 26 28 29 30 33 34 36 41 45

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Table 1.16:

Public Expenditure on Education & Scientific & Technical Research, 1980-1999

48

Table 2.1 : Table 2.2: Table 2.3: Table 2.4: Table 2.5: Table 2.6: Table 2.7:

Sectoral Shares of GDP (%) China’s Key Economic Indicators, 1980-1999 GNP Per Capita, 1999 (constant 1995 US$) Sectoral Shares of GDP (PPP), 1999 (%) Sectoral Shares of GDP, 2000 (%) Shares of World GDP (PPP) and Exports, 1999 (%) China’s Shares of World GDP (PPP) and Trade-Exports & Imports (%) Shares of GDP and Trade of East Asia: China, Hong Kong, Taiwan, Korea, Japan (%) Shares of GDP and Trade of Euro, EU, and US, 1997 (%)

58 60 61 63 63 64 64

Table 2.8: Table 2.9: Table 3.1: Table 3.2: Table 3.3: Table 3.4:

68 68

EU Membership 80 EU GDP and Population, 1998 81 EU plus 10: GDP (PPP) and Population, 1998 81 The 12-member Euro-regime-GDP and 82 Population, 1998 Table 3.5: Shares of World Exports, 1999 (%) 83 GDP Shares (PPP) (in millions) and Population (%) 84 Table 3.6: Shares of World GDP (PPP), World Exports, and Table 3.7: 85 Population (%, millions) GDP (PPP) Per Capita (%) Table 3.8 : 85 Sectoral Shares of GDP (PPP), 1999 (%) Table 3.9: 89 89 Table 3.10: Sectoral Shares of GDP, 2000 (%) Table 3.1 1A: Sectoral Share of GDP Based on Value Added: Asia, 90 1980-1998 (%) 93 Table 3.1 1B: Sectoral Share of GDP Based on Value Added: European Union, 1980-1998 (%) Table 3.12: GDP and Trade of Euro Countries in 1987 and 1997 99 100 Table 3.13: GDP and Trade of EU Countries in I987 and 1997 101 Table 3.14: GDP and Trade of East Asian Countries in 1987 and 1997 102 Table 3.15: GDP and Trade of ASEAN Countries in 1987 and 1997

List of Tables

Table 3.16: Table 3.17: Table 3.18: Table 4.1 : Table 4.2: Table 4.3: Table 4.4: Table 4.5: Table 4.6: Table 4.7A: Table 4.7B: Table 4.8: Table 4.9: Table 4.10A: Table 4. IOB: Table 4.1 OC: Table 4.1 1A: Table 4:llB: Table 4.11C: Table 4.1 1D: Table 4.12A: Table 4.12B:

XXV

GDP and Trade of South Asian Countries in 1987 and 1997 GDP and Trade of ANZ in 1987 and 1997 GDP, Share of World, 1975-1999 (%)

103

FDI Inflows into China (current prices) Realized Foreign Investment in China, 1992-2000 (US$ billions) FDI, External Loans and Other Foreign Investment, 1979-1998 (%) Utilization of Foreign Capital in China, 1979-2000 (US$ billions) FDI Inflow into China from Source Countries/Regions, 1986-1999, (US$ Millions) FDI Inflow into China by Sector, 1997-2000 Contracted FDI by Sector by the End of 1998 (US$ billions) Distribution of FDI by Sector, 1993-1998 (%) Approved FDI Flows into China by Industry, 1987-1996 (US$ millions) Approved Inward FDI Stock in Several Industries Of China, 1987-2000 (US$ millions) Investment in Real Estate: Percent of Tertiary Sector and Percent of Total Investment, 1987-1996 (US$ millions) Enterprise Units and Employment in Real Estate Development, 1997-2001 Selling Price of Houses, 1998-2001 Staff and Employed Workers in Transport, Post and Telecommunication Services, 200 1 Basic Conditions of Transport, 1998-2001 Number of Civil Motor Vehicles Owned (10,000 vehicles) Main Communication Capacity of Telecommunications Regional Distribution of Investment in Fixed Assets, 1993-1998 (%) China’s Regional Economic Indicators, 1998

126 128

104 105

130 13I 132 134 136 137 138 139 141

142 143 144 144 144 145 145 146

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Table 4.13:

Table 4.14: Table 4.15: Table 4.16A: Table 4.16B: Table 4.16C: Table 4.16D: Table 4.16E: Table 4.16F: Table 4.17: Table 4.18: Table 4.19: Table 4.20: Table 4.21

Table 4.22:

Table 4.23: Table 4.24: Table 4.25: Table 4.26: Table 4.27:

M. Dutta

Sectoral Composition of Factor Intensity in Foreign Funded Enterprises (FFE) in China’s Manufacturing Sector, 1995 (%) Foreign Trade, 1978-2002 (constant 1995 US$ billions) National and Regional Labor Productivity, 200 1 (10,000 yuan/person) Ratios of Ordinary Profits/Total Assets, Manufacturing, March 1996 Ratios of Ordinary ProfitdTotal Assets, Manufacturing, March 1999 Ratios of Ordinary Profits/Sales, Manufacturing, March 1996 Ratios of Ordinary Profits/Sales, Manufacturing, March 1999 Dividend Rates, Manufacturing, March 1995 Dividend Rates, Manufacturing, March 1999 Percentage of Sectoral Employment, 1952-2001 (%) Employment in State-owned Units by Sector, 1978-2001 (10,000 persons) Employment in Units of Other Types of Ownership By Sector, 1996-2001 (10,000 persons) Scientific and Technical Employment by Sector, 200 1 (10,000 persons) Employment in Private Enterprises and Self-Employed Individuals by Sector, 1989-2001 (10,000 persons) Employment in Urban Private Enterprises and Self-Employed Individuals by Sector, 1978-2001 (10,000 persons) Employers and Employment in Private Enterprises, 2001 (in 10,000s) Average Wage of Staff and Workers by Sector, 1978-2001 (yuan) Average Wage of Staff and Workers by Sector Under Three Ownership Types, 2001 (yuan) Percentage Wage Change of Staff and Workers by Sector, 1978-2001 (yuan) Total Investment in Fixed Assets (100 million yuan)

147

148 152 154 154 154 155 155 155 156 158 160 162 163

164

166 166 168 170 172

List of Tables

xxvii

Table 4.28:

Total Investment in Fixed Assets by Ownership, 173 1980-2001 (100 million yuan) Table 4.29A: Total Investment in Fixed Assets by Fund Source, 174 1981-2001 (%) Table 4.29B: Total Investment in Fixed Assets by Fund Use, 175 1981-2001 (%) Table 4.30: Total Investment in Fixed Assets by Ownership 177 Units, 200 1 (100 million yuan) Table 4.3 1: Investment in Capital Construction and Innovation, 177 1957-2001 (100 million yuan) Table 4.32: Investment in Capital Construction by Fund Source, 179 1978-2001 (100 million yuan) Table 5.1 : Table 5.2: Table 5.3: Table 5.4: Table 5.5: Table 5.6: Table 5.7: Table 5 8: Table 5.9: Table 5.10: Table 5.1 1: Table 5.12: Table 5.13: Table 5.14: Table 5.15: Table 6.1A: Table 6.1B: Table 6.1C: Table 6.2:

Number of Institutions and Employees in the Banking Industry, 2001 Money Supply, 1990-2001 (100 million yuan) Interest Rates, 1980-2002 (%) Foreign Exchange Reserves, 1978-2001 (US$ 100 million) Number of Listed Companies, 1990-2001 Key Indicators for Shanghai Stock Exchange, 1991-2002 Cross Country Stock Exchange Comparison Number of Institutions and Employees in the Insurance Industry, 2001 World Stock Market Indices (2000-2004) Banks Approved for Foreign-Currency Transactions, 2002 Chinese Banks with Foreign Investment in 2002 Sectoral Shares of GDP, 1980-2001 (“A) Cross Country Sectoral Shares of GDP (%) Rank Based on GDP (US$ billions) US$ to Foreign Currency Exchange Rates China’s Merchandise Trade, 2003 (US$ millions) China’s Trade by Commodity Group, 2003 (%) China’s Total Foreign Trade, Exports and Imports (US$ millions) China’s Economic Presence and Trading Partners

184 187 188 190 191 192 194 195 196 202 204 206 207 209 21 1 213 213 214 215

xxviii

Table 6.3: Table 6.4: Table 6.5: Table 6.6A: Table 6.6B: Table 6.7A: Table 6.7B: Table 6.8: Table 6.9A: Table 6.9B: Table 6.10: Table 6.1 1: Table 6.12:

Table 7.1A: Table 7.1B: Table 7.2A: Table 7.2B: Table 7.3: Table 7.4: Table 7.5A: Table 7.5B: Table 7.5C:

Table 7.5D:

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China’s Trade, 1978-2002 (constant 1995 US$ billions) China’s Foreign Trade & Economic Cooperation (US$ 100 millions) China’s Top 10 Trade Partners (US$ billions) Top 5 Trading Partners of Select Economies Ranking by Shares of China’s Exports and Imports, 2003 China’s Merchandise Exports by Commodity (current US$ millions) China’s Merchandise Imports by Commodity (current US$ millions) US Trade with China, 1994-2004 (US$ billions) Top US Exports to China (US$ millions) Top US Imports from China (US$ millions) Adjusted US Trade Flows and Deficit with China, 1999-2003 (US$ billions) US Textile and Apparel Trade with China, 1989-2004 (US$ billions) Value of Import and Export Goods of FFEs in China, 1999-2001 (US$ billions)

218

Sectoral Shares of GDP (%) Labor Employment by Sector (%) China and Nine Mature Industrialized Economies: Inter-Sectoral Shares of GDP (“A) China and Nine Mature Industrialized Economies: Inter-Sectoral Shares of Employment (%) National and Regional Labor Productivity, 200 1 Regional Trade as Share of National Total, 2001 Regional Employment as a Percentage of Sectoral and National Total, 200 1 Regional Employment in State Owned Units as a Percentage of National Total, 2001 Regional Employment in Private Enterprises and Self Employed Individuals as a Percentage of National Total, 2001 Regional Scientific and Technical Personnel as a Percentage of National Total, 2001

234 235 23 5

219 220 22 1 222 223 223 225 225 226 227 229 23 1

235 23 8 240 24 1 242 243

244

List of Tables

Table 7.6A: Table 7.6B: Table 7.6C: Table 7.7A: Table 7.7B: Table 7.8: Table 7.9A: Table 7.9B: Table 7.9C: Table 7.10: Table 7.1 1:

Regional Average Wage in State-owned Units as a Percentage of National Average, 200 1 Regional Average Wage in Urban Collective-owned Units as a Percentage of National Average, 2001 Regional Average Wage in Other Ownership Units as a Percentage of National Average, 200 1 Regional Transportation as Percentage of National Total, 2001 Regional Telecommunication Capacity as a Percentage of National Total, 200 1 The Gini Index of Income Distribution Health Measures Technology and Communication Measures Transportation Measures Comparative Figures in US$ millions for China and USA: Estimates for 2004 and 2008 China and USA, 2003 (constant 2000 US$)

xxix

245 246 247 248 249 253 254 255 256 259 26 1


LIST OF FIGURES

Figure 1.1A: Figure 1.1B: Figure 1.2A: Figure 1.2B: Figure 1.2C: Figure 1.2D: Figure 1.2E: Figure 1.2F: Figure 1.3: Figure 1.4: Figure 1.5: Figure 1.6: Figure 1.7: Graph 3.1: Graph 3.2: Graph 3.3: Graph 3.4: Graph 3.5: Graph 3.6: Graph 3.7: Graph 3.8: Graph 3.9:

GDP GDP Annual Growth Value-Added Sectoral Shares of GDP, 1960 Value-Added Sectoral Shares of GDP, 1970 Value-Added Sectoral Shares of GDP, 1980 Value-Added Sectoral Shares of GDP, 1990 Value-Added Sectoral Shares of GDP, 2000 Value-Added Sectoral Shares of GDP, 2003 Sectoral Share of Total Employment in China Impact of FDI Source-Country Composition of FDI Stocks by the End of 2002 Percentage Changes in Money Supply, GDP Growth, and Inflation (CPI) Money Supply and Interest Rates Share of World Total GDP: Northeast Asia Countries (Exclude Japan) Share of World Total Export: Northeast Asia Countries (Exclude Japan) Share of World Total GDP: Northeast Asia Countries (Include Japan) Share of World Total Export: Northeast Asia Countries (Include Japan) Share of World Total GDP: ASEAN 5 Countries Share of World Total Export: ASEAN 5 Countries Share of World Total GDP: Northeast Asia and ASEAN Share of World Total Export: Northeast and South Asia Share of World Total GDP: South Asia Countries xxxi

2 3 20 20 21 21 22 22 23 27 34 42 42 109 109 110 110 111 111 112 112 113

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Graph 3.10: Share of World Total Export: South Asia Countries Graph 3.11: Share of World Total GDP: 3 Asian Regions Graph 3.12: Share of World Total Export: 3 Asian Regions Graph 3.13: Share of World Total GDP: 4 Groups Graph 3.14: Share of World Total Export: 4 Groups Graph 3.15: Share of World Total GDP: 5 Groups Graph 3.16: Share of World Total Export: 5 Groups Graph 3.17: EU: Value Added Share of Agricultural Sector of GDP Graph 3.18: EU: Value Added Share of Industrial Sector of GDP Graph 3.19: EU: Value Added Share of Service Sector of GDP Graph 3.20: Northeast Asia: Value Added Share of Agricultural Sector of GDP Graph 3.2 1: Northeast Asia: Value Added Share of Industrial Sector of GDP Graph 3.22: Northeast Asia: Value Added Share of Service Sector of GDP Graph 3.23 : ASEAN: Value Added Share of Agricultural Sector of GDP Graph 3.24: ASEAN: Value Added Share of Industrial Sector of GDP Graph 3.25: ASEAN: Value Added Share of Service Sector of GDP Figure 4.1 : Figure 4.2: Figure 4.3: Figure 4.4: Figure 4.5: Figure 4.6: Figure 4.7: Figure 4.8: Figure 4.9:

Figure 5.1: Figure 5.2:

113 114 114 115 115 116 116 117 117 118 118 119 119 120 120 121

Utilization of Foreign Investment 1984-1998 Source Country Composition of FDI in China (1986-1999) Investment in Real Estate Foreign Trade Sectoral Employment Percent Change in Wages by Sector, 1978-2001 Investment in Fixed Assets by Fund Source Investment in Fixed Assets by Fund Use Investment in Capital Construction and Innovation, 1953-2001

130 133

Percentage Change of Money Supply, 1991-2001 Foreign Exchange Reserves, 1978-2001

189

141 149 158 170 176 176 179

189

List of Figures

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Figure 5.3:

World Stock Market Indices (2004)

198

Figure 6.1 :

China’s Trade, 1978-2002

219

Figure 7.1 :

Regional Labor Productivity Compared to National Average

239


CHAPTER 1 CHINA’S INDUSTRIAL REVOLUTION

1. Understanding China’s Economy

China’s Industrial Revolution over the past twenty five years has been an epochal event and the rest of the world has accepted China’s emergence as a leading industrial economy. Understanding China’s economy is Table 1.1A: Average Annual Rate of Growth of Output (%) 1980-1990 1990-2002 10.3 9.7 Source: World Development Indicators, The World Bank 2002, p. 182.

Table 1.1B: Period Averages of Growth Rate (%) ~

Time Period Period Average 10 Year Averages 1960-1969 1970-1979 1980-1989 1990-1999 2000-2002 5 Year Averages 1960-1964 1965-1969 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2002 Source: World Development Indicators 2003 Note: Calculated from Table 1.1C

1

GDP growth 7.43 2.71 7.44 9.75 9.71 7.83 -1.41 6.83 8.08 6.80 9.64 9.86 10.66 8.76 7.83

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Figure 1.1A GDP

Year

-GDP -Linear

(constant 1995 US$)

(GDP (constant 1995 US$))

Source: Based on data from World Development Indicators 2003

Table 1.1C: GDP and Annual Growth Rate, 1960-2002 Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

GDP (constant 1995 US$ billions) 62.92 45.87 43.07 47.52 55.04 64.05 70.91 66.86 64.12 74.96 89.50 95.77 99.41 107.26 109.73 119.27 117.36 126.28 141.06 151.78 163.62 172.13

GDP growth (annual %) -27.1 -6.1 10.3 15.8 16.4 10.7 -5.7 -4.1 16.9 19.4 7.0 3.8 7.9 2.3 8.7 -1.6 7.6 11.7 7.6 7.8 5.2

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Figure 1.1B GDP Annual Growth

Year

-

GDP growth (annual%)

-Linear

..

(GDP growth (annual %) ..)


Table 1.1C: GDP and Annual Growth Rate, 1960-2002, (continued) Year GDP (constant 1995 US$ billions) 1982 187.79 1983 208.26 1984 239.91 1985 272.30 1986 296.26 1987 330.63 1988 367.99 1989 383.08 1990 397.64 1991 434.22 1992 495.88 1993 562.82 1994 633.74 1995 700.28 1996 767.50 1997 835.04 1998 900.18 1999 964.09 2000 1,041.22 2001 1,119.31 2002 1,208.85 Source: World Development Indicators 2003

GDP growth (annual %) 9.1 10.9 15.2 13.5 8.8 11.6 11.3 4.1 3.8 9.2 14.2 13.5 12.6 10.5 9.6 8.8 7.8 7.1 8.0 7.5 8.0

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indeed a challenge, which can be met at least to a limited extent by a review of Tables 1A through 1C. Indeed, it bas added to the enrichment of the global economy. Since 1980, average annual rate of growth of China’s Gross Domestic Product (GDP) has been at 10 percent, a performance unmatched by any other economy (Table IA). Table 1B presents annual averages of the rate of growth of China’s (GDP) since 1960, plus further details of annual averages for sub-periods of ten years and five years 1960 through 2002. In Table 1C we report the basic annual data for the above period. Graphic presentations of the GDP growth pattern of China follow (Figures 1A and 1B). Do we have a parallel of this phenomenal achievement on record? 2. Sustainable Rate of Growth: Accelerated Rate of Growth

For over twenty-plus years China had an accelerated rate of growth, and rightly so. The newly industrializing economies of Asia happily experienced periods of such accelerated rates of growth. I have argued that a period of accelerated rate of growth enables a newly industrializing economy to become a competitive actor in the world economy. Often it has been referred to as the theory of catching up (Dutta 1995a, 1995b, 1995c, 1995d, 1996a, 1996b, 1998, 1999, 2000, 2002a, 2002b, 2004a, 2004b). Can China sustain a rate of growth of her GDP at an annual rate of 10 percent for an indefinite period? Is a process of softening very much in order (Dutta 2004a)? The Shanghai Daily (July 17-18, 2004) featured the news story “GDP rises slower than expected at an annual rate of 9.7% in the first six months of the year. Albeit higher than the official target rate of 7.5% for the year, but lower than the economists’ forecasts of 10.6%.” Is there a threat of inflation? Is China exposed to a financial crisis? Is there a lesson to learn from the Asian Financial Crisis of 19971998? Keith Bradsher (The New York Times, June 11, 2004 and July 10, 2004) wrote “the odds of an imminent interest rate increase in China fell on Friday, July gth,as Beijing announced that industrial production grew at a slightly slower clip in June. At the same time, the expected rate of inflation was said to be below the central bank’s threshold for tightening

China ’s Industrial Revolution

5

monetary policy.” The news story in China, Bradsher continued, quoting The China Daily, that “administrative measures” had slowed growth in the economy, threatening signs of economy’s “overheating and rising inflation.” The issue of softening is in recognition. The choice of “administrative measures” vis-a-vis monetary-fiscal policies as macroeconomic control measures remains open for China. Monetary and fiscal policies are the core agenda of an economy’s macroeconomic policy, be it a capitalist market economy or a socialist market economy. In China’s socialist market economy, monetary and fiscal policies must be lawfully defined and operationally transparent. It does take a village to raise a child. Market economy of any description can function successfully only with well structured macroeconomic parameters. The restructuring of People’s Bank of China (PBOC) warrants a review. Management of fiscal policy and national budgetary policy merits a review as well. The macroeconomic framework will provide tools to soften the economy and contain exposure to possible financial crisis, as experienced by several Asian economies in 19971998. One must hasten to add that for China the focus on softening the economy towards moderating the rate of growth of GDP must be studied in the context of specific mitigating factors. The sustained rate of growth of an economy at an accelerated rate of industrialization can contribute to certain gaps and consequent exposure to explosive downturn. One can identify certain gaps: (a) availability of labor - skilled as well as unskilled at competitively low wage rates; (b) resource gap - endowment of raw materials may have been exploited; (c) energy gap - energy based on petroleum, coal, and the need to turn to and /or develop alternative renewable resources; (d) environmental gap - pollution emitted from the industrial process will warrant control and environmental protection measures or it will threaten the necessary growth of China’s human capital; (e) market gap - the market to consume Chinese manufactures can hardly be unlimited;

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( f ) service sector gap - an analysis of inter-sectoral rates of growth points to the fact that China’s growth in the manufacturing sector has failed to be matched by the growth in its service sector; (g) economic policy gap - macroeconomic policy defined by well specified monetary and fiscal policies - transparent and open to judicial reviews must be in operation.

In what follows we analyze each of the seven issues above: a) Labor supply: China’s population base of 1.3 billion people will continue to provide labor supply at a relatively low wage rate for a much longer period. It has been reported that wage rate in the eastern region of China where industrialization has so far been confined has gone up following the basic rule of economics of industrialization. The process adds more capital input per unit of labor and labor’s marginal physical productivity increases. Consequently, the wage rates go up. Historically, the process has been experienced in the mature industrialized economies and also in Asia’s other newly industrialized economies. In the interior regions of China, where industrialization is yet to spread, labor supply at a relatively low wage rate remains a fact. Industrialization in China can and must move to her interior regions inclusive of the far west. Analysis of the data in Table 2A below lends support to this proposition. Supply of skilled labor is a different story. China’s institutions for higher education must play its role. Return of the overseas Chinese scholars with higher education abroad will very much add to the pool. Hong Kong, until recently a colony under the British Empire, was returned to Chinese sovereignty after the end of the 99-year lease period as per the Extension of Hong Kong Territory convention. With its quality educational system, Hong Kong continues to be a source of human capital for China. It should be added that China began with a substantive indigenous supply of engineering skill. The growing need can be met by appropriate educational policy. Table 2A presents China’s employment growth profile for 1960-2002 and demonstrates the fact that in 1960 the labor force was 52.6 percent of the population while in 2002, the percentage moved up to 60.1 percent.

China 's Industrial Revolution

7

Given the labor force participation rate in a mature industrialized economy much above 60 percent, there is room for additional supply of indigenous labor. In 2003, the labor force participation rate in USA approached the high mark of 70 percent. A ten percent increase of China's labor force participation rate, given her population base of 1.3 billion, will be an enormous source of labor supply China can count upon. Table 2A also points out the contributions made by the country's female labor force. In 1960, they constituted 40.5% of the total labor force while in 2002, it was 45.2%. Table 1.2A: Employment Growth Profile, 1960-2002

Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

Female Labor force Labor Force (total, in (total, in millions) millions) 351 142 347 141 349 142 357 146 364 149 373 153 382 158 391 162 40 1 166 41 1 171 422 176 436 183 450 189 464 195 476 20 1 488 207 498 212 509 217 519 222 529 228 539 233 550 23 8

Labor Force

Labor force, female

Females willing & able to work

(% of pop.) ("?of tot. labor) (% of female pop.) 52.61 40.50 43.92 52.51 40.62 43.96 52.40 40.74 43.99 52.30 40.86 44.02 52.19 40.98 44.05 52.09 41.10 44.09 5 1.98 41.22 44.13 5 1.88 41.34 44.17 51.77 41.46 44.2 1 5 1.67 41.58 44.25 51.56 41.70 44.28 51.89 41.85 44.74 52.23 42.00 45.20 52.56 42.15 45.66 52.90 42.30 46.13 53.23 42.45 46.59 53.56 42.60 47.05 53.90 42.75 47.52 54.23 42.90 47.99 54.57 43.05 48.46 54.90 43.20 48.93 55.33 43.37 49.50

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Effective supply of labor must relate to education and health care delivery impacting on the productivity of available labor force. Health care delivery is also conditioned by environmental pollution control. If per thousand work hours, the Chinese workers would have competitively more hours of sick leave, more than what their fellow workers in newly industrialized economies would take, China’s productivity will be adversely impacted. In Tables 2B and 2C we present China’s challenges relative to the stock of human capital. Indeed, a long way to go for China. Table 1.2A: Employment Growth Profile, 1960-2002, (continued) Labor force (total, in millions)

Female Labor Force (total, in millions)

Labor Force

Labor force, female

Females willing & able to work

(% of pop.) (“Aof tot. labor) (% of female pop.) 1982 562 245 55.76 43.54 50.08 1983 575 25 1 56.20 43.71 50.67 1984 587 258 56.63 43.88 5 1.25 1985 600 264 57.06 44.05 51.84 1986 613 27 1 57.49 44.22 52.45 1987 628 279 57.92 44.39 53.06 1988 643 286 58.36 44.56 53.68 1989 658 294 58.79 44.73 54.30 1990 672 302 59.22 44.90 54.92 1991 683 307 59.33 44.94 55.05 1992 692 31 1 59.43 44.98 55.18 1993 702 316 59.54 45.02 55.31 1994 71 1 320 59.64 45.06 55.44 1995 720 325 59.75 45.10 55.58 1996 728 328 59.79 45.12 55.62 1997 736 332 59.83 45.14 55.66 1998 744 336 59.87 45.16 55.70 1999 75 1 339 59.91 45.18 55.74 2000 757 342 59.95 45.20 55.99 2001 763 345 60.01 45.19 55.34 2002 769 348 60.08 45.18 56.06 Source: World Development Indicators 2003 Note: Female labor force, labor force, females willing and able to work are calculated from World Development Indicators

Year


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Table 1.2B: Public Expenditure on Education & Health: China, USA, and Countries of Middle and High Incomes, 200 1 (% of GDP) Education Health China 2.2 2.0 USA 4.9 6.2 Middle Income Countries 4.5 3.1 High Income Countries 5.2 6.3 Source: World Development Indicators, The World Bank (2004) p. 68-70.

Table 1.2C: Science & Technology: China and USA China

USA

Researchers in R&D (1990-2001) 584 4099 (Per Million People) Technicians in R&D (1990-2001) 202 Not Available (Per Million People) Scientific & Technical Journal Articles (1999) 11,674 163,526 0.54 2.80 Expenditures in R&D (% of GDP) (1996-2002) Source: World Development Indicators, The World Bank (2004) p. 298-300.

b) Resource gap: China is rich in mineral resources, and all the world’s known minerals can be found here. To date, geologists have confirmed reserves of 153 different minerals, putting China third in the world in total reserves. The reserves of the major mineral resources, such as coal, iron, copper, aluminum, stibium, molybdenum, manganese, tin, lead, zinc, and mercury, place China in the world’s front rank. China’s coal reserves total 1,007.1 billion tons, mainly distributed in North China, Shanxi Province, and the Inner Mongolia Autonomous Region. China’s 46.35 billion tons of iron ore are mainly distributed in Northeast, North, and Southwest China. The country also abounds in petroleum, natural gas, oil shale, phosphorus, and sulphur. Petroleum reserves are mainly found in the Northwest, Northeast, and North China, as well as in the continental shelves of East China. The national reserves of rare earth metals far exceed the combined total for the rest of the world. China has substantive reserves are tin, copper, mercury, antimony, manganese, molybdenum, vanadium, magnetite, aluminum, uranium, tungsten, and zinc. The Chinese Ministry of Land & Resources plans to promote Sinoforeign cooperation for development of mineral resources and set up a

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reserve and supply system for mineral resources including petroleum in the coming five years. China will make efforts to increase the utilization rate of mineral resources by five percentage points to protect national economic safety, the official policy statement asserts. About 90 percent of China’s primary energy, 80 percent of industrial raw materials, 30 percent of production and living water usage come from mineral resources. It is recognized that the demand for mineral resources will continue to increase for a long time in the future; however, the increase of mineral reserves cannot keep up with the speed and growth of demand. It is estimated that among the 45 varieties of major minerals in China, only 24 will be able to meet demand in 2010, and only six will be able to meet demand in 2020. The shortage of petroleum, iron, copper, manganese and other minerals will press on. The Ministry notes that China’s mineral exploitation technology is still not up to world standards and that waste of available resources is common in some regions. China will depend on not only domestic but also overseas mineral resources. A sustainable supply system of mineral resources remains the target. Much needs to be done for the exploitation of key minerals, hitherto unexploited. Conservation of resources by way of limiting all abuses and wastes will be the policy and very rightly so. China should further open its mining industry to foreign businesses and introduce foreign risk investment into the industry. Research about global information on key minerals should be strengthened and the exploitation of overseas mineral resources should be promoted. A resomce reserve system suitable to China is in order, which will enable China to insulate her economic growth against possible dislocations of the world mineral supply due to international events. No individual sovereign nation state economy can control the forces that impact on the interactive system of the economies of the contemporary world. In the context of the recent trend of the long run rate of interest, eloquent references were made to this phenomenon. To quote Chairman Greenspan of the US Federal Reserve System, “what we are dealing with are New Forces.. .in the international market. Their nature and their behavior is not something we are going to hlly understand, if ever, certainly except in retrospect” (The International


11

Monetary Conference, Beijing, People’s Republic of China, June 6, 2005). Let us review the land resource of China. Her vast land area is of course a parameter and much of it remains to be explored. Table 3 below presents data for 1961-2002 as follows: Column 1: land use under cereal production, Column 2: arable land, Column 3: arable land as a percentage of total land area, and Column 4: unused arable land: Little over 15 percent of available land area is arable as of 2002. To produce food for China’s 1.3 billion people has been a focus and column 1 relates to the land area under cereal production. c) Energy gap: Much has been written about the potential energy gap and China’s ability to sustain her annual rate of growth at about 10 Table 1.3: Land Resource, 1961-2002 (hectares) Year 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

Land use, area under cereal production 90,552,840 89,761,510 9 1,216,580 92,897,260 91,910,490 93,712,990 92,806,910 90,488,280 92,117,130 93,712,430 96,997,310 97,317,340 96,958,050 97,681,830 98,093,950 98,627,370 97,255,750 97,446,370 96,233,160 95,054,030 92,653,180

Land use, Land use, arable land arable land (% of land area) 103,397,022 11.09 103,100,036 11.05 102,903,040 11.03 102,705,018 11.01 102,443,010 10.98 101,981,022 10.93 101,494,035 10.88 101,011,993 10.83 100,547,O19 10.78 100,056,955 10.73 99,6 19,031 10.68 99,154,991 10.63 98,681,996 10.58 99,243,042 10.64 97,766,029 10.48 97,638,989 10.47 97,501,025 10.45 97,200,961 10.42 97,215,046 10.42 96,924,030 10.39 97,526,955 10.46

Unused arable land 12,844,182 13,338,526 11,686,460 9,807,758 10,532,520 8,268,032 8,687,125 10,523,713 8,429,889 6,344,525 2,621,721 1,837,651 1,723,946 1,561,212 -327,921 -988,381 245,275 -245,409 981,886 1,870,000 4,873,775

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percent. Based on data in Table 4A, from 1974-2001, China has scored a 963.34 percent increase for total electricity production, 1050.59 percent from coal source and 824.77 percent from hydro source. China is also exploring renewable sources of energy supply. Ethanol extracted from grain and corn is being used as an additive to petroleum. The Chinese government is promoting the use of ethanol gasoline in a bid to conserve petroleum-based energy consumption and also to reduce pollution. Table 4B tells us China’s successful efforts over 1971 and 2001 to produce electricity from alternative sources - coal, hydro, natural gas, nuclear and oil. Indeed, China has taken necessary steps to sustain its economic growth against possible energy gaps. Table 1.3: Land Resource, 1961-2002 (hectares), (continued) Land use, area under Land use, Land use, arable land arable land Year cereal production (% of land area) Unused arable land 97,723,006 1982 9 1,007,640 10.48 6,715,366 1983 11.92 18,420,456 111,220,996 92,800,540 12.00 19,525,543 1984 92,388,480 111,914,023 1985 88,712,460 12.95 32,092,553 120,805,013 90,393,500 1986 12.95 30,406,476 120,799,976 1987 90,299,940 13.04 3 1,293,053 121,592,993 1988 89,373,390 13.10 32,815,625 122,189,015 13.22 31,838,783 123,286,013 1989 9 1,447,230 13.26 30,122,352 1990 93,555,600 123,677,952 13.26 29,533,142 123,671,982 1991 94,138,840 13.27 3 1,165,732 123,761,992 1992 92,596,260 13.28 3435 1,877 123,858,997 1993 89,307,120 13.29 36,050,622 123,956,002 1994 87,905,380 13.30 34,284,996 124,054,966 1995 89,769,970 13.31 31,509,211 124,151,971 1996 92,642,760 13.31 3 1,740,057 124,143,017 1997 92,402,960 13.58 34,104,173 126,635,023 1998 92,530,850 14.33 41,618,692 1999 92,O 12,270 133,630,962 14.70 52,015,272 137,126,972 2000 85,051,700 15.40 60,635,122 143,6250 12 2001 82,989,890 2002 80,993,330 Source: World Development Indicators 2003 Note: Used and unused arable land are calculated


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Table 1.4A: Electricity Production, Major Sources, 1971-2001 (GWh) Electricity production, Total

Production Production from fiomcoal % hydroelectric % Year increase sources increase sources increase 30000 97.5 13 1971 138400 0.25 152400 13.33 34000 97753 1972 10.12 11.76 -0.04 166800 38000 97713 1973 9.45 13.16 -0.89 43000 96845 1974 1.20 168800 195840 4.65 14.27 45000 110665 1975 16.02 104360 1976 3.72 203 130 1.33 -5.70 45600 223404 22.83 47600 128181 1977 9.98 4.39 14.84 2.56552 -6.30 23.77 44600 158652 1978 281950 3.05 50100 163493 1979 9.90 12.33 164149 1980 6.63 300630 0.40 58210 16.19 1981 309270 2.03 167482 2.87 12.61 65550 182282 1982 5.95 327680 13.50 74400 8.84 351440 1983 7.25 86360 196869 8.00 16.08 1984 377390 7.38 86780 223954 13.76 0.49 4 10690 263806 1985 8.82 6.44 92370 17.79 1986 9.46 449530 302.528 14.68 2.34 94530 497270 342724 1987 10.62 100010 13.29 5.80 1988 545210 376908 9.64 109150 9.97 9.14 584810 1989 7.26 407981 118400 8.24 8.47 1990 62 1200 442453 6.22 126720 8.45 7.03 1991 677550 9.07 499160 125090 12.82 - 1.29 1992 753940 566615 132470 1 1.27 13.51 5.90 1993 837300 6 16720 11.06 8.84 151819 14.61 1994 928083 695179 10.84 12.72 167400 10.26 1995 1007726 744140 8.58 7.04 190577 13.85 1996 1080018 823692 7.17 10.69 187966 -1.37 1134471 1997 867362 5.04 195983 5.30 4.27 1998 1166200 883028 2.80 1.81 208000 6.13 1999 1239300 964281 6.27 203807 9.20 -2.02 2000 1355600 1061954 9.38 10.13 2224 14 9.13 200 1 1471657 8.56 1121973 5.65 277432 24.74 Source: World DeveloDment Indicators 2003 Electricity production includes coal and hydroelectric sources plus miscellaneous sources Note: GWh (Gigawatt-hour) = 1000 MWh (Megawatt-hour; MWh = 1000 kwh (Kilowatt-hour). %

~

~~~~

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Table 1.4B: Sources of Electricity, 1971 and 2001 (% of total) Electricity production from coal sources Electricity production from hydroelectric sources Electricity production from natural gas sources Electricity production from nuclear sources Electricity production from oil sources Source: World Development Indicators 2003

1971 70.46 0.00 0.00 21.68 7.87

200 1 76.24 18.85 0.37 1.19 3.22

Be it further noted that China’s foreign exchange reserves have been progressively increasing, standing at US$ 659 billion on March 31, 2005. China has been successfully engaged in malung acquisitions of raw materials at commercial market rates encompassing recent deals with the neighboring economies of Mongolia and India, in addition to ones with remote countries across the Pacific in Latin America inclusive of Cuba. d) Environmental gap: It is well known that industrialization of her economy will impact on China’s environment and in the absence of an appropriate environmental protection policies, China’s human capital will be adversely impacted. The productivity of the Chinese economy will be negatively impacted and China’s ability to compete in the world market with quality and cost competitive manufactured products will be compromised. Environment is indeed a global issue. The Kyoto Protocol merits urgent attention of the governments of the world. The sensational news stories reminding the people of the world of the increase in the volume of global air pollution as the billion-plus people in China move on to drive automobiles at half the rate of driving population in the rest of the world must not receive misplaced emphasis. Mature industrialized economies must assume their respective responsibilities first. A newly industrialized economy, as China is, will then follow the proper course. Neither USA (which is the largest contributor to industrial pollution) nor China has been a signatory to the Kyoto Protocol. Can China be expected to sign the Kyoto Protocol when the United States of America, the most leading and largest industrialized economy has not signed it? They will do as we do. e) Market gap: Currently much of China’s manufactures are exported to the world market enabling China to earn export revenues in


15

convertible foreign currencies. From this pool, repatriation of profits home by overseas investors in China with Foreign Direct Investment (FDI) providing for one hundred percent foreign ownership and management became feasible. True, the world market for the consumption of Chinese manufactures cannot be unlimited; indeed there is currently much concern for the Chinese exports of specific products, particularly textiles. Will China impose export duties? Or will the foreigners impose import duties? In this context, the exploration of China’s domestic market will open a new frontier. As China becomes an affluent economy, China’s 1.3 billion consumers will create an enormous domestic market. If each person consumes an additional one dollar each year, the market will be hugely large (see Chapter 6). f ) Service sector gap: This sector covers the money and financial market, transportation by sea, air and land, and communications inclusive of telecommunication. The growth in China’s manufacturing sector must be supported by a comparative growth of the service sector. This inter-sectoral gap contributes to serious economic bottlenecks, accounting for periodic inflationary pressures China has been exposed to. Table 1.5: Sectoral Shares of GDP (%) . , 1970 1980 1991 2000 Agriculture 42.2 25.6 11.8 11.9 Industry 44.6 51.7 75.9 64.0 Service 13.2 22.7 12.3 24.1 Total 100.0 100.0 100.0 100.0 Source: Asian Development Outlook, Asian Development Bank, Manila, 1998, p. 239; figures for 2000 ibid, p. 213; figures for 1991 ibid, p. 293

Table 5 presents the sectoral shares of GDP. As of 2000, the industrial sector’s share of GDP has grown to be about two-third of the total. China has emerged as a leading industrial economy. The share of the agricultural sector of GDP has expectedly declined from 42.2% in 1970 to 11.9% in 2000. China’s economic development profile has been what it should be. The agricultural sector’s total output continues to grow as productivity has increased. Be it noted that the decline in the agricultural sector’s share of GDP follows from the fact that China’s total

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GDP due to the expansion of its industrial sector has immensely increased. Has the service sector grown enough to support the overall growth of the Chinese economy? g) Economic policy gap: A market economy, be it socialist or capitalist, must have a macroeconomic policy framework with monetary and fiscal policy guidelines. Restructuring of the People’s Bank of China (PBOC) warrants a review. Management of fiscal policy and national budgetary policy by the Chinese Government merits a review too. The macroeconomic framework will provide tools to soften the economy and contain its surprise exposure to possible financial crisis, as experienced by several Asian economies in 1997-1998.

3. Challenges Ahead: A Macroeconomic Agenda Challenges ahead of China are, of course, overwhelming. There is no one-step magic formula for any economy. This is true for China with her one billion-plus people and relative abundance of endowment of natural resources, inclusive of petroleum. We have also discussed above the specific mitigating factors for China’s continued growth at an accelerated rate of 10 percent. We now identify three most urgent issues of concern. (a) Notwithstanding the scenario presented above, China cannot sustain a rate of growth of her GDP at an annual rate of 10 percent for an indefinite period. A process of SOFTENING is in order. (b) Income distribution in its two facets - (a) inter-regional across China’s 34 administrative units and (b) intra-regional amongst income classes within a given province or a region, remains to be addressed. (c) Progressive augmentation of high-tech oriented productivity of Chinese manpower to minimize cyclical fluctuations in the process of progression of China’s industrial revolution merits serious attention. In addition, the Chinese economy must continue to remain competitive in the global market as other competing economies will successfully make high-tech productivity gains.

China 3 Industrial Revolution

17

The three issues are inter-related and they can be managed by a wellspecified macroeconomic agenda, appropriately formulated and administered. We have argued that the macroeconomic framework will provide tools to soften the economy, as and when necessary. Macroeconomic policies may appropriately be managed to minimize inter-regional income distribution, while fiscal policies can be used to adjust income distribution across diverse income classes in a given region. Macroeconomic policies can also be managed to plan for upgrading China’s human capital by way of allocating budgetary funds for progressively better education and health care. Reallocation of available limited resources must focus on higher education and advanced research. In addition, macroeconomic policies can be directed to help correct the imbalance in inter-sectoral growth rates between manufacturing and service sectors. As a permanent member of the Security Council, China has a leadership position in the United Nations Organization with its present membership of 191 sovereign nation states. China has earned her membership of the International Monetary Fund anci The World Bank, each with a current membership of 184 sovereign nation state economies - often referred to as the Breton Woods Institutions. China recently became a member of The World Trade Organization (WTO), at present a 148 member-nation group with an agenda of global free trade. Of course, China is a member of the World economic community. No sovereign nation-state economy can maximize its economic gain in splendid isolation. The European Union paradigm based on the emerging concept of continental economic regionalization will be a learning model for China and her fellow Asian economies.

4. China’s Economic Reform: Industrialization and Internationalization “To be rich is glorious.” The proclamation was loud and clear. In the late 1970s the fact that China’s communist economy failed to deliver what it promised to China’s one billion-plus people became pronounced. An agenda for economic reform was formulated. The new Communist Party leadership successfully defeated the Gang of Four and took full

18

M. Dutta

responsibility for the implementation of China’s economic reform agenda. Commitment was total and they went on to implement the agenda (Dwight Perkins 1975, 1986, 1988, 1990; Nicholas R. Lardy 1998; Gregory C. Chow 1994, 2002; Dutta 1995, 1996, 1998, 1999, 2002, 2004.a, 2004.b, M. Dutta & Mary Merva 1990; Dutta, Chang PeiKang & Shao-Kung Lin 1990; Dutta & Zhang Zhongli 1991; Wu Jiapei, Liang Youcai & Zhang Yaxiong 1995; Zhang Zhongli et a1 1991 (in Chinese); Zhang Zhongli et a1 1995 (in Chinese); Tsao James T. H. 1985; Hooley, Richard & Jang Hee Yo0 2002; Gary H. Jefferson 1990; Calla Wiemer & Cao Heping 2004). The immediate focus on agricultural reform was pragmatic. The food supply for a billion-plus people was an urgent consideration. The commune system of the earlier regime was replaced by the Family Responsibility System. Land now belonged to the family of the farmer, not to the Commune, as was the case in earlier communist regime under which the farmer worked and got a share of the output, the rest going to the government. The family responsibility system of course required the family of the farmer to assume the responsibility of delivering the output as expected. Did the family own the land? Could the farmer transfer the land to the next generation? So many issues came up for consideration and the leadership responded to them promptly and forcefully by a series of what we might call executive orders. The Family Responsibility System worked to give market incentive to farmers and the value-added in agricultural sector output became a record. It became a success story. The Green Revolution came to China as it did in many other economies in earlier decades. Table 6 presents annual data on Sectoral Shares of China’s GDP for 1960 through 2003. In 1960, Agricultural Sector’s share was 22.32 percent and in 2002, its share, as expected, declined to 14.62 percent. For the Industrial Sector, the share in 1960 at 44.89 percent moved up to over 50 percent in 2002. The share of the Service Sector at 32.80 percent in 1960 was at 33.08 percent in 2002; its share remained rather unchanged. Be it noted that in 2004, the industrial sector’s share has moved up to about two-third of China’s GDP. Figures 2A through 2F point to the fact that in earlier decades of reform the value added in the agricultural sector was more pronounced.

China s Industrial Revolution

19

Table 1.6: Sectoral Shares of GDP, Value Added, 1960-2003 (% of GDP) Year Agriculture Industry Services 44.89 32.80 1960 22.32 3 1.90 32.59 1961 35.51 28.71 32.00 1962 39.29 26.92 33.15 1963 39.93 26.09 35.33 38.57 1964 26.97 35.09 1965 37.94 24.43 37.98 1966 37.59 25.76 33.98 40.26 1967 26.67 42.15 31.18 1968 26.45 35.56 1969 37.99 24.29 40.49 1970 35.22 23.79 42.15 1971 34.05 24.09 1972 32.86 43.06 23.54 43.1 1 1973 33.35 23.40 1974 33.88 42.73 21.88 45.72 1975 32.40 21.72 45.43 1976 32.85 23.45 29.42 47.13 1977 23.74 48.16 1978 28.10 21.44 47.38 1979 31.17 21.39 48.52 1980 30.09 1981 31.79 46.39 21.83 Source: World Development Indicators 2004

Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Agriculture Industry Services 21.72 33.27 45.01 22.37 44.59 33.04 24.68 43.31 32.01 28.52 43.13 28.35 28.87 27.09 44.04 29.3 1 43.90 26.79 30.21 25.66 44.13 31.95 43.04 25.00 3 1.34 27.05 41.61 33.43 24.46 42.1 1 34.3 1 21.77 43.92 32.70 19.87 47.43 3 1.93 20.23 47.85 30.69 20.5 1 48.80 30.09 20.39 49.5 1 30.93 19.09 49.99 32.13 18.57 49.29 32.95 17.63 49.42 33.42 16.35 50.22 34.07 15.84 50.10 33.53 15.38 5 1.09 14.62 52.29 33.08

In the later decades the emphasis shifted progressively to the industrial sector. The service sector did not appear to have expanded to match the demand of the immensely growing industrial sector. Figure 3 below presents China’s sectoral employment profile. China began as an agriculture-dominant, pre-industrial economy. In 1980, 68.7% of employment was in its agricultural sector, declining to 53.5% .

_..

the same time period has been around a fifth of the total employment; 18.2%, 19.0%, and 17.5% in 1980, 1990, and 2000, respectively. The profile of employment in the service sector has been 11.7% in 1980, 9.5% in 1990, and 12.3% in 2000. A vast majority of the Chinese continues to depend on the agricultural sector for their employment and income. Compared with the employment profile of the mature industrialized economies of the world, China continues to be much too

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M. Dutta

Figure 1.2A ~~

Value Added Sectoral Shares of GDP, 1960

Agricu Iture

Industry Services

Source: based on data from World Development Indicators 2004

Figure 1.2B


AgricuItu re Industry Services


21


Figure 1.2C


AgricuItu re W Industry Services


Figure 1.2D

Value Added Sectoral Shares of GDP, I990

Ag ricuIt ure W Industry


M. Dutta

22

Figure 1.2E

Value Added Sectoral Shares of GDP,2000

AgricuIt ure Industry Services


Figure 1.2F




23

dependent on its agricultural sector. China’s industrial progress has yet to cover her one-billion plus people across the vast territory. (Note: Percentages in Figure 3 do not add up to 100.) Figure 1.3 Sectoral Share of Total Employment in China 111

0 Employment 8n industry (% of total

70 0 -

employment)

60.0

F

-

l 4 0 0 ~

E

$

30.0

10.0

I

19 0

200 -

~

0.0 7 1960

1990 Year

Sectoral sum: 98.6 percent 82 percent Source: World Development Indicators, The World Bank

2000

76.7 percent

The reform agenda for the manufacturinghndustrial sector, the Enterprise Responsibility System, failed to accomplish parallel success. Indeed, two simple reasons stood in the way: (1) The scale of production became an important factor for the minimization of unit cost of a product and to make the products cost and quality competitive, and (2) production in the industrial sector is relatively more capital intensive, and the situation was further challenged by the fact that competitively modem and productive machines and equipment, call it the physical stock of capital (IS),was to be imported from abroad. Let us note that the success of the Family Responsibility System in the agricultural sector made two substantive contributions to the reform in the manufacturing sector. First, the value-added in the agricultural sector pointed to the productivity gain per unit of labor (N). More was

24

M Dutta

produced by fewer farmers. Surplus farmers now became available to migrate to the manufacturing sector and eased the labor demand. Secondly, success of the reform plans in the agricultural sector augmented farmers’ incomes and they were ready to spend money on consumption of goods and services, produced by the manufacturing sector for sale in the market. Both the supply and demand levers became responsive features of China’s emerging socialist market economy. The challenge for China to implement its agenda for reform in the manufacturing sector was to import capital goods from the world market. The preliminary efforts to invite Contractual Joint Ventures (CJV), with contractual profit, then with Equity Joint Ventures ( E N ) without assured profit commitment, failed to work mainly because entrepreneurial cooperation between China’s state enterprises, owned and managed one hundred percent by the Chinese Government, and foreign investors from the capitalist market economies abroad, failed to materialize. Special arrangements apart for petroleum, Foreign Direct Investment (FDI), owned and managed by foreign investors one hundred percent, resolved the situation. Foreign investors were attracted to China by three factors: (a) relatively abundant labor supply at a consequently low wage rate; (b) relatively abundant endowment of natural resources waiting to be exploited; (c) a potential market of one billion-plus consumers in China. China wanted a successful inflow of foreign investment as their domestic savings, given the low income base, could not do the job. They needed employment and income and deepening of the Chinese economy. Given the textbook statement of the Cobb-Douglass production function, aggregate level of output (Q) is a function of aggregate stock of labor (N) and aggregate stock of physical capital (K), per unit of Chinese labor more capital input became the need of the hour. It could not be done without substantive reform of the manufacturing sector. Be it noted that the inflow of FDI into China over the past 25 years has surpassed US$ 400 billion (Table 7 ) . A marriage between China’s socialist market economy and the savings-rich, high-income capitalist market economies


25

of the world happily came to take place. China is perceived to be one of the most foreign investment friendly economies of the world. Foreign investors were able to repatriate profit from their investments in China home by way of exporting a part of their Chinese products to the world market and earning export revenues in convertible currencies. Repatriation of profit home encouraged further investment in China by foreign investors. Indeed, the story is one of a win-win game plan. At this phase of China’s industrial revolution, China imported technology and know-how from abroad. They were available in mature industrialized economies and their importation, u la FDI, and their adaptation to the indigenous resources and labor - both unskilled as well as skilled, especially in engineering - plus natural resources, became the key to China’s industrial revolution. Indeed, much of the success story of Asia’s newly industrialized economies, especially in the Northeast and Southeast Asia, followed the paradigm of internationalization and industrialization. I have referred to it as the paradigm of “adaptive innovation” (see Dutta & Tantum 1988, p. 17-46). The focus was on innovation, so that adaptation of imported technology could contribute to the level of industrialization, enabling the pre-industrial, agriculture-dominant economies of Asia to manufacture cost and quality competitive products, part of which could be exported to the world market. They earned export revenues in convertible currencies which became the resource pool for the repatriation of profits home by the foreign investors and also for their continued augmentation of investments in China. Lawrence R. Klein (1990) emphasized the fact that the growth model was tmly “importexport led” while others referred to it as the export-led growth model (see Chapter 4). 5. Progression of China’s Industrial Revolution China has successfully accomplished her present phase of industrial revolution. China now must be ready to accept the challenge of the next phase. Progression of industrial revolution is a process and the process can be sustained only by proper augmentation of human capital of China. In this presentation I argue that one of China’s three challenges is

26

M Dutta

necessary resource allocation toward human capital, with necessary and sufficient provisions for education, health care, and environmental protection for its man-power. Progression of industrial revolution is a process of the global economies and for China to sustain her competitive ability in the world market, participation in the process is a challenge.

6. Inflow of Foreign Direct Investment: A Digression Table 7 relates the inflow of FDI into China to the growth GDP from 1981 through 2002. During 1981-1992, the share was relatively marginal. In 1993 the share jumped to 6.4% from the previous high of 2.7% in 1992. For 1996-1998, the share declined to about 5%, while for 1999-2002 it further declined to a share of about 4%. Table 1.7: GDP and Foreign Direct Investment (FDI) Inflows, 1981-2002 (constant 1995 US$ billions) Year GDP FDI, net (BOP) FDI, net inflows (% of GDP) 1981 172 236 0.14 1982 188 400 0.21 1983 208 583 0.28 1984 240 1,178 0.49 1985 272 1,482 0.54 1986 296 1,878 0.63 1987 331 2,852 0.86 1988 368 3,826 1.04 1989 383 3,797 0.99 1990 398 3,910 0.98 1991 434 5,034 1.16 1992 496 13,229 2.67 1993 563 35,865 6.37 1994 634 39,467 6.23 1995 700 35,849 5.12 1996 768 37,769 4.92 1997 835 41,125 4.92 1998 900 41,619 4.62 1999 964 37,687 3.91 2000 1,041 36,995 3.55 2001 1,119 42,119 3.76 2002 1,209 47,080 3.89 Source: World Development Indicators 2003, calculated Note: Total FDI for period (BOP, constant 1995 US$ millions): 433,980


27

Figure 1.4 Impact of FDI

50.00 45.00

40.00

35.00

a

B3 25.00 30.00

5 20.00

L

15.00 10.00

5.00 0.00

Year

L tGDPgrowth -tFDI, net inflows +Gross domstic savings -Y- Gross capital formtion --e m l o y m n t Growth

Source: based on data ffom World Development Indicators 2003

Figure 4 shows the correlation amongst GDP growth, net inflows of FDI, gross domestic savings, gross capital formation, and employment growth. The profile demonstrates that China’s socialist market economy is in general following the patterns of a market economy. Table 8 below presents the relevant data set used for Figure 4 above. In Table 9 we present the relationship between capital formation and FDI. The difference between column 1 and column 2 is the amount required in FDI to compensate for insufficient savings, if any. The exercise will have to be further continued once a disaggregation of inflows from “other sources” has been completed. Table 10 extends the analysis to correlate gross domestic savings and gross domestic capital formation. (Note gross domestic savings in Table 10 below are calculated: GDP x gross domestic savings percentage.) China’s rate of industrialization and GDP growth rate became spectacularly high and China became a competitor in the world economy. Countries that invested in China made profits at a market rate and experienced economic growth without inflation. Much to the surprise of many, the traditional Phillips Curve came to be held in abeyance and no

28

M Dutta

inverse relationship between a higher rate of employment and growth and the price level became evident in USA since late 1990s. The pattern seems to continue. This may explain what has been called New International Forces. Table 1.8: Impact of FDI, 1981-2002 FDI, net GDP Employment Gross capital inflows growth Growth formation (% of GDP) (annual %) (annual %) (“hof GDP) 1981 0.14 5.20 3.26 32.51 1982 0.2 1 9.10 2.91 33.24 1983 0.28 10.90 3.21 33.79 1984 0.49 15.20 2.51 34.42 1985 0.54 13.50 2.24 37.77 8.80 2.06 37.70 1986 0.63 1987 0.86 11.60 2.38 36.13 1988 1.04 11.30 2.40 36.81 1989 0.99 4.10 1.67 36.05 3.80 2.33 34.74 1990 0.98 1991 1.16 9.20 1.77 34.77 1992 2.67 14.20 1.40 36.17 1993 6.37 13.50 1.03 43.30 1994 6.23 12.60 1.10 41.19 1995 5.12 10.50 1.17 40.83 1996 4.92 9.60 1.02 39.58 8.80 1.10 38.22 1997 4.92 1998 4.62 7.80 0.93 37.71 1999 3.91 7.10 1.02 37.41 8.00 0.78 36.33 2000 3.55 2001 3.76 7.50 38.49 2002 3.89 8.00 40.42 Source: World Development Indicators 2003, calculated. Year

Gross domestic savings (% of GDP) 32.86 34.80 34.54 34.38 33.64 34.82 36.10 35.75 35.27 37.95 38.1 1 37.72 41.78 43.06 43.13 4 1.73 42.98 42.34 40.50 39.00 40.88 43.37

Joint ventures are operationally more problematic unless the cooperating economies with joint ventures are at parallel level of industrialization with competitive ability to absorb market shocks. (Paradigms that worked for the reconstruction of WWII-ravaged economies in Europe and Asia must remain out of our discussion. Inflow of joint ventures into several other Asian countries in the post-WWII decades under one or another mutual pact also do not belong to our discussion.)


29

Table 1.9: Capital Formation, FDI, 1982-2002 (constant 1995 US$ mil.) Gross FDI Year Savings less Capital Formation 440.46 727.03 1982 667.70 131.44 1983 1,303.98 -2,888.15 1984 2,043.29 -18,083.48 1985 2,329.30 - 14,321.14 1986 3,647.54 -5,043.29 1987 4,844.78 -7,429.26 1988 4,670.25 -5,544.58 1989 4,840.32 10,542.65 1990 6,086.39 13,629.60 1991 17,971.92 15,564.82 1992 41,600.79 2 1,021.32 1993 41,802.87 25,357.15 1994 37,849.20 16,092.05 1995 39,756.57 11,642.22 1996 45,742.09 34,708.47 1997 47,725.67 36,272.87 1998 43,811.01 24,032.88 1999 44,999.18 21,771.27 2000 54,026.43 19,849.17 2001 2002 27,882.90 56,675.98 Source: World Development Indicators 2003 Note: all data calculated, S-I, FDI inflows * GDP, (S-I)+FDI

Difference 1,167.49 799.15 -1,584.17 -16,040.18 -11,991.83 -1,395.75 -2,584.48 -874.34 15,382.97 19,715.98 33,536.75 62,622.11 67,160.02 53,941.25 51,398.78 80,450.56 83,998.54 67,843.89 66,770.45 73,875.60 84,558.88

Joint ventures between corporate units from mature industrialized rich economies and corporations in newly industrializing economies will have to overcome pragmatic considerations. What will be the basis of partnership? If the foreign investors will be allowed to own more than 50 percent of the investment, the domestic business leaders who built up the industry to begin with will be reduced to a position of junior partnership. If the foreign investors will be invited to own less than 50 percent, they will remain condemned to junior partnership forever. A fifty-fifty partnership may result in a novel paradigm of non-action. Let me restate the six points I have argued in support of foreign direct investment (see Dutta 1991, 1999, 2000; Dutta & Merva 1990, see Chapter 4). (a) With commitment to profit maximization, FDI will bring with it optimum technology and management style. They will have to

30

M Dutta

compete with foreign investors in China from other investing countries. Since the ownership is 100 percent, technology and management style will remain 100 percent under the investing corporate leadership. (b) To begin with foreign investments from mature industrialized countries where employment rate is high and wage rate is consequently high, foreign investors will depend on local labor; ordinary labor will find jobs and earn relatively higher incomes. Foreign investors cannot bring all skilled workers: engineers, accountants, economists, research scientists, and managers from their respective home countries as costs would be too high. They will search for talent in China and create jobs for them at competitively high salaries. Table 1.lo: Gross Domestic Savings and Gross Capital Formation, 19602002 (constant 1995 US$ billions) Year

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

Gross capital Gross capital Gross capital Gross domestic formation formation formation savings (% of GDP) (% change) (% of GDP) 24.45 35.54 9.68 18.11 -60.4 5.08 10.51 -47.53 16.48 70.61 8.67 12.58 20.10 45.21 23.17 43.59 18.07 27.13 25.20 22.62 19.44 -23.90 17.22 19.13 6.20 18.28 19.84 13.70 20.79 3 1.89 29.02 53.40 28.96 34.82 29.55 9.20 29.37 33.33 27.40 -4.30 27.22 38.12 29.44 14.40 29.91 39.34 29.01 3.20 28.76 44.10 30.17 12.10 30.19 41.06 27.93 -6.90 28.23 44.96 28.49 9.50 28.84 56.25 38.02 25.10 37.70 58.16 36.51 3.40 35.82 61.36 35.19 5.50 34.93 59.40 32.51 -3.20 32.86

Gross domestic savings

25.92 28.13 27.06 32.08 3 1.56 36.01 33.13 36.42 53.17 54.37 57.16 56.56


31

(c) Foreign investors will have an interest to repatriate profits home, at least a part of it. To do so, they will export some of their products manufactured in China to the world market to earn export revenue in convertible foreign currencies. In the process, the products manufactured in China will be introduced to the world market and win global consumer acceptance. The net result is China’s emergence as a member of the world economy. (d) As China’s exports grow, her foreign exchange reserve grows and contributes to her international credit rating. China’s ability to offer credit instruments in the international market warrants recognition. By the end of 2003, China’s foreign exchange reserves reached the benchmark of US$ 434 billion, increasing to US$ 659 billion as of March 3 1,2005. Table 1.10: Gross Domestic Savings and Gross Capital Formation, 19602002 (constant 1995 US$ billions), (continued) Gross capital Gross capital Gross capital Gross domestic formation formation formation savings (% of GDP) (% change) (Xof GDP) 1982 64.62 33.24 8.80 34.80 1983 71.80 33.79 11.10 34.54 1984 85.37 34.42 18.90 34.38 1985 109.69 37.77 28.50 33.64 1986 117.48 37.70 7.10 34.82 1987 124.41 36.13 5.90 36.10 1988 138.97 36.81 11.70 35.75 1989 140.64 36.05 1.20 35.27 1990 140.36 34.74 -0.20 37.95 1991 151.87 34.77 8.20 38.11 1992 171.46 36.17 12.90 37.72 1993 214.15 43.30 24.90 41.78 1994 247.56 41.19 15.60 43.06 1995 285.93 40.83 15.50 43.13 1996 308.62 39.58 7.94 41.73 1997 324.23 38.22 5.06 42.98 1998 344.91 37.71 6.38 42.34 1999 366.43 37.41 6.24 40.50 2000 384.27 36.33 4.87 39.00 200 1 437.76 38.49 13.92 40.88 2002 496.42 40.42 13.40 43.37 Source: World Development Indicators 2003, calculated

Year

Gross domestic savings 65.35 71.93 82.48 91.61 103.16 119.37 131.54 135.09 150.90 165.50 187.02 235.17 272.91 302.02 320.26 358.94 381.18 390.47 406.05 457.61 524.30

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M Dutta

(e) In the process, the volume of world trade has expanded enabling China to make a contribution to global economic welfare. China’s economic gain is essentially a component of the world economic gain. (f) Competition from foreign investors will contribute to the upgrading of efficiency of China’s state enterprises by way of inducing them to produce cost and quality competitive products for the Chinese consumers. If they fail to do so, they will be required to accept the market decision and accept insolvency andor liquidation. Protection of state enterprises from market competition became responsible for the poor performance of the Chinese economy. Competition from the foreign investors will correct the situation and contribute to the overall efficiency of the Chinese economy in general (see Wen-Hui Wei 2004 for a survey of official studies by various Ministries of the Chinese Government in support of the above six points. See also Chapter 4). Note: The policy of marketization of state enterprises has been in progress (see Chapter 7).

7. Sources of FDI: A Digression Continued A review is in order. Inflows of FDI into China have come from mature industrialized countries: USA, Canada (North America), Japan, Korea, Hong Kong, and European Union (EU), supplemented by inflows from Taiwan, Free Trade Ports (Virgin Islands, Cayman Islands, and Samoan Islands), and Association of South East Asian Nations (ASEAN). In 2002, 28.8 percent of FDI into China came from North America, Japan, Korea, and EU. Taiwan had a share of 7.4 percent. Be it noted that Taiwan became a high income industrialized economy with a history of its own. Principals of the pre-communist market economy of Mainland China migrated to Taiwan with their entrepreneurial leadership and global market access with available capital funds. They offered an integrated strategy for economic development and industrialization with the rest of the world, especially with the USA. Successful management of the macroeconomic policy enabled Taiwan to escape from the Asian Financial Crisis of 1997-1998. Taiwan became a savings surplus country and investment opportunities in China were not missed. Independent of

Table 1.11: R e a l i i FDI Inflw irih China by Selected CourpbiirRegions (198162003) Free Hang Kaig Taiwan Karea Trade Pests USA 1986 1987 1988 1989 I990 1991 1992 1993 1994 1995 1996 1997 1998 I999 2000 2001 2002

dmt

56

Amt.

x

1.33 1.59 2.07 2.04 2.02 2.58 7 .71 17.44 19.82 20.19 20.85 21.55 18.51 16.36 15.50 16.72 17.86

59.3% 68.7% 64.3% 60.1% 57.9% 59.2% 70.0% 63.4% 58.7% 53.3% 50.0% 47.6% 40.6% 40.5% 38.1% 35.7% 33.9%

n.a.

n.8.

n.8.

n.8.

n.a.

ma.

n.a. 0.15 0.22 0.47 1.05 3.1 4 3.39 3.16 3.47 3.29 2.92 2.60 2.30 2.98 3.98

n.a. 4.4% 6.3% 10.3% 9.5% 1I.4% 10.0% 8.4% 8.3% 7.3% 6.4% 6.4% 5.6% 6.4% 7.5%

Amt.

%

Ant.

n.a.

n.a.

n.8.

n.a.

n.8.

ma.

n.a.

n.8.

n.a.

n.a.

n.8.

n.a.

n.a.

n.a.

ma. n.a. 0.12 0.38 0.73 I.05 1 .50 2.23 I.80 I.27 1.49 2.15 2.72

n.a.

n.a.

n.8.

n.a.

60.01 eo.01 0.01 0.13 0.38 0.66 2.06 4.48 3.24 4.74 6.65 8.1 8

4.1% 4.1% 4.1% 0.4% I.O% 1 6% 4.5% 9.8% 8 .0% 11.6% 14.2% 15.5%

0.33 0.26 0.24 0.28 0.46 0.32 0.51 2.06 2.49 3.08 3.44 3.24 3.90 4.22 4.38 4.43 5.42

Amt.

%

1. I % 1.4% 2.2% 2.8% 3.6% 4.9% 4.096 3.2% 3.7% 4.6% 5.2%

Unik US$ billion Japan

YQ Amt. 14.7% 11.2% 7.5% 8.3% 13.2% 7.3% 4.6% 7.5% 7.4% 8.2% 3.2% 7.2% 8 6% 10.4% 10.3% 9.5% 10.3%

0.26 0.22 0.51 0.36 0.50 0.53 0.71 I.32 2.08 3.11 3.68 4.33 3.40 2.97 2.92 4.35 4.19

ASEAII

EU

YQ Amt.

%

Amt.

-

0.1 5 0.05 0.18 0.18 0.17 0.26 0.25 0.65 I.51 2.1 4 2.74 4.19 3.98 4.48 4.48 4.18 3.71

6.7% 2.2% 5.6% 5.3% 4.9% 6.0% 2.3% 2.4% 4.5% 5.7% 6.6% 9.3% 8.7% 11.1% 11 .O% 8.9% 7.0%

0.02 0.04 0.04 0.1 0 0.06 0.09 0.27 1 .01 I.87 2.62 3.1 8 3.42 4.21 3.29 2.84 2.98 3.20

0.9% I.7% 1 .3% 2.9% I.7% 2.1 % 2.5% 3.7% 5.5% 7.0% 7.6% 7.6% 9.2% 8.1 % 7.0% 6.4% 6.1%

1I6% 9.5% 16.0% 10.6% 14.3% 12.2% 6.5% 4.8% 6.2% 8.3% 8.8% 9.6% 7.5% 7.4% 7.2% 9.3% 7.9%

0th

21103 17.7U 33.1% 3.77 7.0% 4.49 8.496 7.63 14.3% 4.20 7.896 5.05 9.4% 3.93 7.3% n.8. n.8. Source: Ministry of Commerce of the P. R . China, China Statistical Yearbook vsious bsues. Free Trade Ports imludes: Cayman Islands,Virgin Islands, and Samoan. FDI reported prior to 1988 irclude ather foreign investment. W W

M. Dutta

34

Table 1.12: Share of FDI Stock in China, 2002 (%) Hong Kong & Macao Taiwan Japan ASEAN

46.8 7.4 8.1

6.5 Korea 3.4 EU 7.6 North America 9.7 Free Trade Ports 6.8 Other Countries/Regions 3.7 Source: Ministry of Commerce of PRC, China Statistical Yearbook, various issues.

Figure 1.5: Source-Countiy Composition of FDI Stock by the End of 2902

Other CourtriesiRegiom,

3.?%

7 Hong h n g &Macao. 48 8 %

North Anenca. Q 7%

Japan. 8.1 % -/

Taiwany.4%

Source: Ministry ofCommerce ofP. R. China. ChaStatistical Yearbook various issues. Note: Free Trade Ports include: Virgm Islands, CaymanIslands andSamoan. North America includes USA andCanada. Adapted from t h e Doctoral Dissertation byWenhui Wei, 2004.

the hostile political relationship between Taiwan and China, the economic relationship between the two economies has been very productive. It has been pointed out that Taiwan’s investments in China have been profit oriented, given the shared ethnicity, language, culture, religion, and understanding of the Chinese business procedures which is often too complex for other foreign investors (see Dutta 1999). China does not consider FDI from Taiwan as foreign investment while Taiwan enjoys the freedom to make its investments in special zones designated for foreign direct investments (FDI) and benefit from consequent


35

structural privileges for FDI effective in these special zones. It is to the economic gain of all the peoples on both sides of the Taiwan Strait. (Note: China is demanding investors from Taiwan to employ more local labor at all levels. However, given the level of industrialization of Taiwan, which approximates the level of mature industrialized economies, Taiwan’s wage level is very high and the Taiwanese investors in China cannot afford to bring workers from home for employment in China.) It is to be noted that in 2002, as much as 53.6 percent of FDI came fiom Hong Kong/Macao and Free Trade Ports. ASEAN share in the year was 6.5 percent. It has been suggested by some that 60.1 percent of FDI into China came from the Chinese diaspora. Is this an overstatement? Hong Kong and Singapore in ASEAN have historically been outposts of world financial centers under the British imperial regime, and Macao under Portugal’s imperial regime. One is tempted to point out to the fact the ownership of the Hong Kong Shanghai Banking Corporation (HSBC) belongs neither to Hong Kong nor to Shanghai. There is no easy way to obtain data for the specific ownership of FDI flows from these sources into China or for that matter into any other country. National ownership of the FDI flows into China from Free Trade Ports, which offer tax shelters to all foreign nationals, remains to be carefully analyzed. Exclusivity of national ownership of all FDI inflows into China fiom all these sources can at best be rationalized by the fact that their destination is China. China is a very FDI friendly economy with competitively high profit earnings and provisions for repatriation of profits home a la exports of at least a part of products manufactured in China to the world market and earning of export revenues in convertible currencies. More research remains to be done. China is an attraction for foreign direct investments (Hsiao and Hsiao 2004). What is important for an economy in its plan for accelerated rate of industrialization and economic growth is to be perceived by the rest of the world as a foreign investment friendly country, especially FDI friendly, without making a particular case for inflows of investments from the specific country’s diaspora. Do we know of another economy with a Hong Kong - Macao - Taiwan trio to help facilitate FDI inflows? In 2002, China received slightly more that 50 percent of FDI inflows

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M Dutta

from countries with ability to deliver the 6-point scores we have discussed earlier.

8. China is Aware of Challenges Ahead Let us review the three arguments we have stated to begin with: 1. No economy can continue to grow at an average annual rate of 10 percent indefinitely. Bottlenecks in terms of shortages of labor, specific skills of labor, physical capital, and technology emerge in the process and crisis management will be in order. We do not plan to discuss if the Republic of Korea borrowed too much and invested too much, or if Thailand made a commitment to over-investment. Nor will our plan be to examine the economic-cum-political debacles in Indonesia and in the Philippines. How Malaysia got out of the financial crisis at the soonest possible time has been discussed elsewhere. However Asian Financial Crisis of 1997-1998 has been a painful reality. Table 1.13: Per Capita Productivity of Labor (N) at an Annual Rate Country Yo United States 1.2 United Kingdom 2.3 West Germany 3.4 France 3.7 South Korea 5.3 Japan 5.9 Source: Global Competition: The New Reality Report of the President’s Commission on Industrial Competitiveness, Washington, DC, 1985, Government Publication, p. 28

Bottlenecks have been a part of the growth process of most mature industrialized economy inclusive of the USA, the richest economy in this world of ours. This has been a part of the free market economy and the study of the theory of business cycles has been so crucial. In 1980s, the USA experienced a productivity gap and the latest recession in 2002 is on record. It took some efforts to correct the productivity gap. High-tech production a la computerization of the production process became a solution. American productivity in the 1990s became competitively high. Soon came the bubble in Silicon Valley, and the recession in 2002


37

followed. Failure of the centrally planned command economies of communist countries with no target for accelerated rate of industrialization and growth is on record. The option is to plan for the softening of the high rates of growth to minimize adverse shocks to a given economy. This is not to return to the thesis of the Sustainable Rate of Growth of an economy, as many economists argue for. An accelerated rate of industrialization and growth of GDP is a necessary condition for a pre-industrialized agriculture-dominant economy, as was China, or the economy cannot become a competitive actor in the world market, as we have argued earlier. 2. China’s inter-regional income distribution remains a challenge. The challenge is no less for income distribution across the classes of peoples in a given region. True, this is a challenge for most mature industrialized economies. In the United States, amongst the fifty states in the Union, the income gap between the top five states and the bottom five states have been noted. Income gap across classes in one state, say the State of New Jersey, which is one of the top five states based on family median income, is well documented. Several hundred millionaires and billionaires live in the state along with millions of low income and poor New Jerseyans who continue to face serious economic hardships. Even so, China cannot afford to ignore her share of the income distribution problem, across the administrative units or within a given unit. (China defines 34 units: 23 Provinces inclusive of Taiwan, 5 Autonomous Regions including Tibet, 4 Centrally Administrative Municipalities with same power as provinces, Beijing and Shanghai being two of them, and 2 Special Administrative Regions (SARs) comprising of Hong Kong and Macao). If one man in an economy is poor the rest of the people remain a little bit poorer. China must be able to share her affluence with all the people of China across all the provinceshnits over the immense territory. The World Development Indicators reported in 2001 nearly 17% of people in China were living on less than $1 a day and nearly 47% of the population was living on less than $2 a day. Reportedly at the opposite end, 10% of the people in China have become progressively high income groups. The World Bank Indicators reports the income distribution

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profile of China ranked by per capita consumption when data refers to consumption shares by percentiles of population: the lowest 20% at 4.7%, second 20% at 9.0%, third 20% at 14.2%, fourth 20% at 22.1%, highest 20% at 50.0%, and with the top 10% at 33.1%. China, with her gross national income per capita at US$ 960, (2002 ibid, p. 14, calculated using the World Bunk Atlas Method) lags significantly behind several of her Asian neighbors. 3. Accelerated rate of growth cannot be sustained if productivity, defined by average annual output per unit of labor, is not increasing to match the growth rate. This relates to the augmentation of human capital by way of making sufficient provisions for education health care and environmental pollution containment. Chinese labor has been known for its competitive ability and skill. Now China must accept the global challenge. Free movement of labor is an essential part of open economic policy, with free flow of trade in goods and services and free flow of investment. One model is to allocate available limited resources toward necessary augmentation of the supply of human capital in the economy. The other model is to adapt immigration and naturalization laws to invite necessary quantity and quality of labor from other countries. Many mature industrialized countries inclusive of USA, Germany, France, United Kingdom, Japan Australia, and New Zealand have been receiving immigrants with necessary skill by following this model. However, at a given time there is a limited supply of human capital in the global market. The core issue is the addition of available human capital by optimum allocation of resources to that end. Given the immense magnitude of the Chinese economy, China must prioritize allocation of resources to face this challenge.

9. Macroeconomic Agenda I argue that an appropriate macroeconomic agenda can address all these challenges. Senator Clinton has written a famous monograph, It Takes a Village. Each individual in splendid isolation will never become what he or she should ideally become. We need to belong to a village, to a group, to a society, and we accept membership of a nation-state economy.


39

Several hundred years ago, an Indian political economist Chanakya (also known as Kautilya) wrote a treatise, Arthashastra, which taught the principles of taxation, a core area of macroeconomic agenda for India. (The book is now translated and published in English but not widely circulated). Adam Smith in his Wealth of Nations advised his readers what is good for the East India Company is not necessarily good for the people of England. How much can we learn from his “Canons of Taxation?’’ Karl Marx in his Das Capital presented an articulate treatise on macroeconomics, as Lawrence R. Klein refers to in his The Keynesian John Maynard Keynes in his General Theory of Revolution. Employment, Money, and Interest made an eloquent exposition of the theory of macroeconomics. As China moved on to the paradigm of the Socialist Market Economy, the theory of macroeconomics poses to be a critical study (see Dutta-Chang-Lin 1990). Allocation of available limited resources toward maximization of economic gains of a group of people who have unlimited ends leads to what we may call the theory of decision-making. The optimum decision-making will result in optimum output and income creation and its optimum distribution to the factors of production will follow. That is the study of economics. For the study of economics to be complete, it must cover both its micro and macro components. In the traditional communist economic model, individual actors, households, and business units, were denied freedom to choose and the central planning authority made resource allocations as per their adopted agenda. In the extreme case of capitalist market economy, the individual actors assume their freedom of choice, for households the doctrine is one of consumer sovereignty, and for business units the doctrine is profit maximization. However, the system cannot be operationally successful in the absence of an optimum macroeconomic framework. The framework will provide a single currency for the system to be managed by a lawfully constituted monetary authority. Provision will also be made for a fiscal system to be managed by a social authority, a government representative of the people of the system. A macroeconomic framework for a market economy, be it capitalist or socialist, is very much in order. Even the proactive supply-side

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economists who argue that government is the problem, not a solution to all problems, and advocate a return to the pure market system by way of a tax-cut paradigm, have failed to propose a zero rate of taxation and a zero government establishment. Indeed “gently expanding” government activity was the theme of President Eisenhower, who could not be accused of being a champion of liberalism. For his or her survival and fuller manifestation, an individual’s belonging to a “village”, to a social group, managed by a representative government, hopefully democratic and pluralistic, must be the order. 10. China’s Macroeconomic Structure: The People’s Bank of China (PBOC) & the Government Budget: The Case for Restructuring

10.1

The People’s Bank of China & China’s Monetary Policy

China’s macroeconomic structure defines her monetary and fiscal policy. The People’s Bank of China (PBOC) is China’s central bank with the lawful authority and responsibility to formulate and administer China’s monetary policy. The PBOC thus discharges the two core functions of a central bank - by way of determining the quantity of money to be supplied to the Chinese economy at a given time and the core rate of interest (Table 14). The figures below point to the correlation between money supply, growth of GDP, and rate of inflation (Figure 6) and money supply and interest rates (Figure 7). Economic theory teaches us an increase in money supply is necessary to support growth of GDP. However if growth fails, an increase in money supply will result in an increase in the rate of inflation. China has experienced periodic inflations and adopted necessary measures to contain inflation. Formulation of a proper monetary policy and its implementation must warrant attention. Figure 7 relates money supply and interest rates. Further research will be needed to analyze three different types of interest rates and its correlation with money supply.

41

China ’s Industrial Revolution

Table 1.14: Money and Rates of Interest, 1978-2002 Money Money and Deposit (current quasi money interest Year LCU) (M2) M2 rate (in billions) (% of GDP) (in billions) (“A) 34.02 58.04 24.12 1978 41.67 92.15 27.46 1979 5.40 54.30 114.88 33.19 1980 5.40 64.58 134.52 37.52 1981 5.76 75.25 148.84 40.07 1982 5.76 87.35 174.89 41.95 1983 5.76 105.58 244.94 44.01 1984 7.20 128.69 301.73 1985 47.26 385.90 7.20 162.96 55.01 1986 197.70 457.40 1987 7.20 59.80 548.74 8.64 2 16.43 58.81 1988 237.82 62.08 583.42 1989 11.34 700.95 1990 279.50 70.29 8.64 898.78 1991 334.24 76.98 7.56 1,171.43 1992 7.56 399.54 80.57 1,546.94 1993 487.58 86.63 10.98 1,967.43 1994 559.75 88.33 10.98 2,308.35 1995 92.05 644.64 10.98 2,756.38 1996 100.79 773.55 7.47 1997 3,480.65 112.78 941.79 5.67 1998 3,869.05 1,134.21 126.00 3.78 4,697.64 1999 138.06 1,331.01 2.25 2000 5,454.10 1,495.48 2.25 143.63 2001 6,168.85 150.22 1,681.43 2.25 2002 7,266.54 163.76 1,979.57 1.98 Source: World Development Indicators 2003 Note: M2 calculated from World Development Indicators

Real Lending interest interest Inflation, rate rate CPI (%) (“A) (annual %)

1.21 2.67 7.41 6.07 2.20 -2.02 3.17 2.72 -2.79 2.33 3.49 1.79 0.68 -3.12 -7.44 -0.99 3.93 7.76 9.00 8.22 4.86 4.61 5.62

5.04 5.04 7.20 7.20 7.20 7.92 7.92 7.92 9.00 11.34 9.36 8.64 8.64 10.98 10.98 12.06 10.08 8.64 6.39 5.85 5.85 5.85 5.31

7.22 18.74 18.33 3.06 3.54 6.34 14.58 24.24 16.90 8.32 2.81 -0.84 -1.41 0.26 0.46 -0.77

Two comments are in order. Let us first examine the issue of independence of the PBOC. Typically a central bank enjoys a degree of independence from the political authority running the government. The central banking law defines that authority by giving a fixed tenure to the office of the principals of the central banks. In the USA, the Chairman of the Federal Reserve System is nominated by the President and

M. Dutta

42

approved by the United States Senate, has a fixed tenure, and cannot be removed from the office for the period without going through the process of impeachment. The European Central Bank (ECB), established on Figure 1.6 ~~~

~~~~~

Percentage Changes in Money Supply, GDP Growth, and Inflation (CPI) 50 00

40 00

a, 3000

w

rn

L

5 2000 2 Q

I 1000 0 00

-10 00

Year

I

tGDP growth (annual %) ~

-Money and quasi money (M2) growth (annual %) tInflation, consumer pnces (annual %) ~~~


Figure 1.7 Money Supply and I

n

t

e

r

e

s

p

50.00

40.00

30.00

a,

w

m

+a

20.00

C

Q

2

10.00

a,

n.

I

-10.00

-20.00

year I -Real

interest rate (%)

I

-c Lending interest rate (%)

+Money

and quasi money (M2) grawlh (annual %)


' I

China 3 Industrial Revolution

43

January 1, 1999, manages the monetary policy for the twelve EU members. The six members of the ECB’s Executive Committee have a fixed tenure for seven years and they cannot be removed during their tenure. They of course are barred from seeking reappointment. True, individual members at a time may be a member of one or another political party. However, the independence a la fixed tenure ensures that the decisions taken by the individuals for developing and administering the monetary policy will be immune from political and partisan politics in a pluralistic democratic form of government. China may reform the Central Bank Act and ensure this independence of the monetary authority as exercised by the PBOC (Dutta 1995, 2002, UNITAR Workshop, July 04, 2002, and 2000 (translated and published in Japanese 200 1, abridged versions in Korean and Chinese 2002), 1996, 1996, and (1998, mimeo an invited lecture at the international symposium on the occasion of the 40th founding anniversary of SASS, Shanghai, China); Lawrence R. Klein 1995, 1998, 1990, 1994, 1979, 1980; John M. Letiche 2000, 1998, 1993; Robert P. Forrestal 1995; Otmar Issing 2001, 1999, 1996). Independence based on fixed tenure and immune from easy political interferences will enable the principals of PBOC to make an independent non-partisan review of the state of the economy and make necessary decisions with respect to the quantity of money to be supplied and the core rate of interest where market conditions will be the dominant factors. The PBOC authority will, of course, make presentations to the National People’s Congress and to the governmental authorities with their evaluations of the state of the economy. The PBOC will also make periodic direct reports which may be called Red Reports. Transparency is the issue. Let no telephone power make them do what they elected not to do based on their review of the state of the economy. The significance of the role of monetary policy management can hardly be overstated. In recent years, Federal Reserve System raised the core rate of interest five times in a year in 1998 and reduced it 11 times in 2002. In 1998 the goal was to contain the rate of growth of GDP and thus the rate of inflation. In 2002, the objective was to induce growth. The process of managing monetary policy continues as it should. Among others, international uncertainty and decline in consumer

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confidence were cited as two of many other difficult points monetary policy could not address. We all have read the prophetic assertion that it is easy to make a horse not to drink water, and it is not easy to make the horse drink water. The issue of the consumer confidence level must remain the focus. One concludes that international uncertainty cannot be contained by monetary policy. In my presentation at the Shanghai Conference in 1994, 1 made a second point: Given the dimension of the Chinese economy spread over an immense geographical territory, and given the inter-regional differences in the state of the Chinese economy across all her provinces and administrative units, there exists a good case for institution of regional PBOC system under the umbrella of the PBOC in Beijing. The Federal Reserve System in USA has done very well with its twelve regional Federal Reserve Banks (FED). Each regional FED has the special responsibility for studying the state of the economy in its region and make necessary adaptations of the monetary policy, subject of course to the approval of the Federal Reserve System. One of the three issues of post-industrial revolution challenges stated in this study is interregional income distribution. Each regional PBOC will do its job, under coordination of the PBOC in Beijing, and the monetary policy can be related to the exigencies of regional divergences. On June 3rd, 2002, at a personal conference with Vice Governor Shuqing Guo at his office in Beijing, I was assured that necessary legal provisions are in place for the institution of regional PBOCs. The process of implementation of the program is a matter of time. I was advised that independence of PBOC Governor by way of giving himher a fixed tenure had never been an issue under consideration of the Chinese authority. 10.2 Exchange Rate

Management of foreign exchange reserves and China’s exchange rate relates to the monetary policy formulated and administered by the PBOC. China’s currency is pegged to US$ 8.28 (2002) at a Unitary Rate (World Development Indicators, The World Bank 2004, p. 280). Given the Purchasing Power Parity (PPP) conversion rate at 1.8 and the Ratio of


45

PPP conversion factor to the official exchange rate, The World Bank reports the real effective exchange rate (index 1995 = 100) is 121.4 for 2002. Table 1.15: Foreign Exchange Reserves, 1977-2002 (current US$ billions) Total reserves Total reserves Gold Year (includes gold) less gold Reserves 1977 4.46 2.35 2.11 1978 4.45 1.56 2.89 1979 8.71 2.15 6.55 1980 10.09 2.55 7.55 1981 10.11 5.06 5.05 1982 17.15 11.35 5.80 1983 19.83 14.99 4.85 1984 21.28 17.37 3.92 1985 16.88 12.73 4.15 1986 16.42 11.45 4.96 1987 22.45 16.30 6.15 1988 23.75 18.54 5.21 1989 23.05 17.96 5.09 1990 34.48 29.59 4.89 1991 48.17 43.67 4.49 1992 24.85 20.62 4.23 1993 27.35 22.39 4.96 1994 57.78 52.91 4.87 1995 80.29 75.38 4.91 1996 111.73 107.04 4.69 1997 146.45 142.76 3.69 1998 152.84 149.19 3.66 1999 161.41 157.73 3.69 2000 171.76 168.28 3.49 200 1 220.06 215.61 4.45 2002 297.74 291.13 6.61 Source: World Development Indicators 2003 Note: Gold reserves are calculated, Total Reserves - Total Reserves minus gold

Given China’s foreign exchange reserve at some US$ 659 billion on March 31, 2005, pressure on China to make its currency convertible is mounting. The issue warrants more careful investigation. Pegging the currency to the US dollar is not unique to China. Other currencies have been so pegged to the US dollar. Ever since the fixed gold value of the

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US dollar was removed on August 15, 1971, exchange rate coordination has become an issue of concern. The International Monetary Fund (IMF) struggles to do its assignment for coordination of exchange rates of 184 member nations. A return to 100 percent gold standard, as some economists hoped for, failed to materialize. At a conference of the Group of Five in New York City in 1987 the leading five industrialized rich countries made an exclusive arrangement. The G-5 soon became G7, and now with Russia, it is the G-8. At the same time, as of January I, 1999, twelve EU economies inclusive of Germany, France, and Italy adopted one currency and for them the exchange rate management ceased to be an economic issue for intra-EU flows of trade and investment. Most of the remaining member nations of IMF contributed marginal shares to the M F capital fund based on their respective shares of world output, which were marginal. The restructuring of the IMF and the World Bank remains an issue of concern. Pending that, pegging currencies of China and of other countries to that of a dominant currency, the US dollar, which represents about a fifth of world output, may remain a valid option. The euro of the EU may soon emerge as a competing currency for pegging, as the euro’s share of world output will be competitively large, or even larger. A country with a huge foreign exchange reserve is expected to make investments abroad (Table 15). China is doing so by buying US bonds at a present value of US$ 700 billion. This matches the fact that much of China’s foreign exchange reserve is earned on exports of manufactured products in China, much attributable to foreign direct investments in China. Two ranking members of economics profession, Lawrence R. Klein and Robert A. Mundell have expressed their views in this respect.

10.3 China’s National Budget and Fiscal Policy The Chinese Government budget provides the other aspect of China’s macroeconomic framework. The tax policy will be a tool to correct the imbalance of income distribution amongst various income groups in a province or a region. Adam Smith’s “Canons of Taxation” warrant a revisit. A progressive tax policy must be the norm. Revenues collected and expenditures incurred by the government will close the budget each


41

fiscal year. The options are a balanced budget or a deficit or a surplus budget. Accumulation of deficits over time will give us the sum of national debt, if any. The budget deficit may be related to the economy’s gross domestic product (GDP) as national debt beyond a limit will compromise the credit rating of the government, nationally as well as internationally. In framing the annual budget, the government will have to make a decision how much to allocate to military, law and order, defense, and security and how much to allocate to civil expenditures for education, basic research, health care, and environmental protection. They are items with externalities and private market can hardly meet the demand for such goods and services. Private education and health care provisions have limited scope. Environmental protection by private efforts shall remain a remote possibility. Hence social action under government programs will be in order. These expenses will contribute to human capital formation and help China maintain her competitive level of productivity, enabling China to produce goods and services, cost and quality competitive, for both domestic and world markets. The fiscal policy of the government will be an important factor for correcting the imbalance of income distribution across income classes in each provinceh-egion and also for progressive augmentation of human capital which will enable China to be a competitive actor in the world economy. Education and basic research must receive priority consideration. Competition is global. The core principle of economics teaches us that effective global competition will contribute to the maximization of global economic gains. Given the population base of China, facilities for higher education and basic research warrant substantive expansion (Table 16). Some recent studies have reviewed the scope for higher education and basic research in overseas academic centers. Will they come back home or engage in more advanced research and academic work overseas? Let another study examine such issues. We conclude that there is room for reviewing China’s priorities for higher education and basic research in the immediate future. The World Bank compilations for China and USA are revealing.

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Table 1.16: Public Expenditure on Education & Scientific & Technical Research, 1980-1999 Year

Public spending on education, total (% of GDP) 2.51 2.51 2.59 2.61 2.51 2.51 2.57 2.27 2.17 2.21 2.34 2.23 2.02 1.86 2.39 2.46 2.47 2.49 2.18

Public spending on education, constant 1995 US$ billions 4.11 4.32 4.86 5.44 6.02 6.83 7.61 7.51 7.99 8.47 9.30 9.68 10.02 10.47 15.15 17.23 18.96 20.79 19.65

Scientific and technical journal articles

1980 1981 1,100 1982 1983 1984 1985 1,943 1986 2,911 1987 3,146 1988 3,989 1989 4,325 1990 4,999 1991 4,986 1992 5,602 1993 5,882 1994 6,093 1995 6,995 1996 7,2 12 1997 9,08 1 1998 10,155 1999 11,675 Source: World Development Indicators 2003 Note: Public spending on education calculated, public spending on education (%) * GDP

11. Economic Regionalization The European Union with its Euro revolution has offered a challenging new economic paradigm (Dutta 2004, 2002, 2001, 1999). Three simple principles define this paradigm: Integration of economies of a region, observed to be together on the map of the world. It denies the togetherness under the old imperial model where Hong Kong was together with the British Empire and Macao was together with the Portuguese empire. The collapse of the imperial model is real. Economies of the region become integrated into one common market with free flow of trade, free flow of investment and fiee movement


49

of labor within the region given a common economic policy with regard to the rest of the world. (c) The intra-regional macroeconomic framework with its monetary and fiscal policy parameters well specified and transparent for operational effectiveness. European Union (EU) is a learning model. In 2004, the Europeanization of Europe has been completed, as EU membership expanded to 25 from 15. The issue is not one of replication of the EU in Asia. EU must however be a learning model. It provides unity in diversity, economic unity with diversities in language, religion, culture, and lifestyle. This unity based on geography removes the potential of intra-regional conflicts and wars. One common economy placed in one common geography aims at maximization of intra-regional economic prosperity. The concept of sovereign nation state based economic units, hitherto much in common, is under challenge and intra-regional economic groupings in various forms have been widely noted in postWWII and post Cold War decades (Dutta 1999, 1985). Not withstanding the recent negative referendums in France and the Netherlands over the EU constitution, the concept of the New Europe will prevail over the one of Old Europe as far as one can foresee. As I emphasized in my presentation at the Harvard Asia Business Conference (Dutta 2004), Asian countries may not have to wage a series of wars to learn why the EU model came to materialize. I have written extensively on Asian economic community with its micro-and-macro economic parameters (Dutta 2000,2001). Ever since 1998, Korea, China, and Japan along with Singapore, Malaysia, Thailand, Indonesia, and the Philippines have been meeting regularly to explore the possibilities of Asian monetary and fiscal cooperation. These conferences are held at the sub-cabinet level and no communiquk is issued to the public. This has been referred to as the 3 plus 5 model. In 2003, the Asian Economic Summit held in Indonesia invited India and Myanmar, Laos, Cambodia, Vietnam, and Brunei Darussalam, making it a 4 plus 10 model. Their belonging to the map of Asia is obvious. The Asian Economic Community (AEC) will have a competitive share of world output and trade. The post-WWII Breton

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A4 Dutta

Wood Institutions, the World Bank and the International Monetary Fund, have failed to deliver what they promised to the vast majority of the poorer countries in the world, and now warrant urgent restructuring (Stiglitz 2002). In my presentation at the UNITAR Workshop at the United Nations Headquarters in New York City (Dutta 2002), I argued that with USA, EU, and AEC, each unit with a competitive share of world output and trade will make competitive contributions to the share capital of these institutions and will share equal responsibility for its functional effectiveness. The African Economic Union (AEU) is being explored and a Preparatory Committee headed by President of South Africa has been constituted. A Secretariat has also been established. The American Hemispheric Economic Cooperation with all the economies in the North and South Americas, excluding the Republic of Cuba has been under study. Since 1997, Free Trade Area of the American Hemisphere (FTAA) has been subject of several hemispheric conferences. The AsiaPacific Economic Cooperation (APEC) has made little progress. One reason, I argue, that the belonging together of the 21 sovereign nationstate member economies of APEC is not observed to be on the map of Asia. If the Atlantic Ocean has been a divide between Europe and the American Hemisphere, the Pacific Ocean is a larger divide between the 21 APEC members, some on the far shore of the Pacific and others on the American shore. Continental economic regionalization minimizes interstate border disputes and thus enables a better allocation of available resources to non-defense, civilian activities. Historical disputes amongst neighboring sovereign nation state economies have contributed to regional conflicts, even wars. People of Asia must learn how to avoid death and destruction fiom such conflicts. Hence a new Asian Economic Community with shared commitment of member states on the map of Asia towards economic cooperation must be the agenda. China has been a leading participant in the 3 plus 5 model of Asian economic community. China continues to lead in the 4 plus 10 model. China will be a natural leader in the Asian Economic Community. The continental economic regionalization will be the message of the European Union (EU) paradigm. If Europe has taken one half of one


51

century to accomplish what has been accomplished, the presence of EU as a learning model will help progression of the paradigm in other continents (see Chapter 3).

12. Conclusion China’s industrial revolution has been a subject of study by many. This study offers to add to the fast growing literature on this subject. We begin by stating three issues of concern for China’s transitional economy. (a) The need for softening the rate of growth, because no economy can grow at an average annual rate of 10% for an indefinite period. (b) China’s income distribution problem both inter-regional and intraregional - warrants urgent attention. (c) Progressive augmentation of China’s productivity is very much in order, so that China can sustain her ability to compete in the world market. We argue for a restructuring of the macroeconomic framework of China’s socialist market economy. Further reform of monetary and fiscal policies will help restructure China’s macroeconomic order. Indeed, proper restructuring of the macroeconomic framework will help China address the above three issues. In addition, we argue for continental economic regionalization of Asia where China must play a leadership role. China’s economic accomplishment is an eloquent testimony to the fact that the socialist market economy has anchored itself into the core principle of the market economy by way of offering incentives to production agents in all sectors of the economy toward maximization of economic gains. China’s economic reform agenda adopted the open economic policy, because without internationalization, China’s industrialization would not have been operationally successful. The process of marketization of China’s state owned and managed enterprises must be progressively completed. China is now a member of the world economic community and must accept its share of responsibility for doing what all remains to be done for the world economy.


CHAPTER 2 CHINA’S ECONOMIC PRESENCE

1. The Chinese Economy

Based on the latest figures, China’s holding of as much as US$ 700 billion in US government bonds makes her America’s second largest creditor, Japan with her holding of US$ 800 billion being the first. China’s overwhelming economic presence has recently been the subject of much discussion. China’s foreign exchange reserve has also been very large, earning her an excellent international credit rating. Over the past 25 years China has successfully invited several hundred billion dollars of foreign investment, especially in the form of Foreign Direct Investment (FDI). If China’s exports have earned a global market, superior quality and cost/price competitiveness of Chinese exports have received consumer acceptance globally. Chinese textile exports to America and Europe have passed the market test of consumer sovereignty. The threats to contain Chinese textile exports are dictated by extra-economic factors and will make consumers in Europe and America poorer in terms of their satisfaction. The World Trade Organization has delivered its verdict against the governmental subsidies for the cotton farmers in both America and Europe. Mature industrialized economies have now been found to be exposed to a serious technology gap. This gap can be filled by research and innovation and their applications to industrial products. The history of the Industrial Revolution and its progression has been based on basic research and its follow-up application to the production of goods and services. To accomplish the agenda, availability of human capital, based on education and health care must be in order. In the absence of a duly 53

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defined macroeconomic policy, with its well specified monetary and fiscal guidelines, the technology gap can hardly be met. Recently, we in the USA have been required to learn terms such as “jobless growth” and “outsourcing of investments with assured corporate profits,” in the context of ever increasing budget deficits and mounting national debts, much of which is owned by foreigners inclusive of several Asian Central Banks. Much has been written about the low wage rate in China and other newly industrializing economies in Asia. To complete our understanding of the unit cost of Chinese exports vis-a-vis that of our competing domestic products, we must calculate firstly the unit cost of products in trade in terms of executive salaries, inclusive of senior management at diverse ranks plus legal and accounting expenses. Secondly, much has been written about corruption in China, and corruption in USA, often referred to as enronism, but we have no estimate of the unit cost of competitive corruption in manufactured goods in trade with China. Thirdly, we lack a firm estimate of how much of the Chinese exports to USA are products of the American and other foreign corporations with investments in China. Finally, a thorough analysis of the economic impact of the revaluation of the Chinese currency vis-a-vis China’s holding of US bonds of US$ 700-plus billions is in order. Did the fixed yuan-dollar rate become a fact for consideration for the massive inflow of foreign direct investments in China in the 1990s and on? To avoid losses, China must sell her holding of US bonds at the current exchange rate or it must ask for a revaluation of its holdings in dollar-bonds before she can begin to consider a free float of the yuan. We must take into consideration the economic impact of somehow forcing China to sell her holdings of US bonds; bond prices will go down and the long run rate of interest in USA will go up. This inverse relationship will adversely impact our investment and economic growth and will induce inflationary pressure, which will further reinforce the downturn of the US economy. The global economy is so interrelated, and our effort to cause economic injury to a foreign economy in aclose economic relationship, as China is, will cause parallel economic injury to our home economy. Can we compete in making advancements in technological frontiers? The concern for deindustrialization of the US economy is real and our ability

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to gain technological competitiveness can and must revitalize our industries, be it textiles, shoes & leather goods, toys, Christmas trees, automobile, steel, camera, pharmaceuticals, computer chips or potato chips. China’s socialist market economy opened up the Chinese economy to the rest of the world. China’s internationalization and industrialization must be an occasion for celebration for the rest of the world, especially for mature industrialized economies. To draw an arbitrary line and dictate that China must not cross it, outcompeting the industrial leaders cannot be the true message of globalization. Globalization must enable the pre-industrialized poorer economies of the world to industrialize and become competitive actors in the world market. Indeed, this much-broader competition in the global market will optimize economic gains for the world at large, consumers as well as business units, in all participating countries.

2. The Socialist Market Economy “To be rich is glorious.” The proclamation was loud and clear and the action followed with national commitment and resolve. China boldly noted the failure of the communist command economy and inaugurated a new era of a socialist market economy in the 1970s. People in the United States, led by then-President Nixon ‘‘rediscovered” China, an economy of a billion people with a relatively large endowment of natural resources waiting to be exploited and marketed. China’s economic potentials were obvious. The Chinese leaders correctly noted that in the absence of market competition, productivity in communist China’s economy remained very low. Hence the process of economic reform began with a focus on marketization. China’s agenda became to restructure its economy as a socialist market economy. In 1970, as much as 42.2 percent of China’s Gross Domestic Product (GDP) came from the agricultural sector. China was agriculture-dominant and hugely labor abundant, hence a relatively low wage-rate traditional economy. The provision for food for more than one billion consumers became an obvious priority.

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The commune system of the earlier communist regime was promptly and forcefully replaced by “the family responsibility system.” The land belonged to the farmers who assumed the responsibility to do the farming and produce the output. Once they paid their dues to the state, the farmers enjoyed having the rest of their output for themselves. If the farmers produced more than what they used to do, they stood to gain. A progressive increase in the use of money for exchanges of farm products in China’s agricultural sector has facilitated reform. A village-level industry flourished and farmers added value to their products and earned more. The incentive system motivated the farmers to do better. The land could be transferred to the successors if only they continued to assume responsibility. The state did not fail to do its share by way of providing extension services inclusive of irrigation and water supply improvements, research in developing better seeds and fertilizers, construction of rural roads and transportation, rural banking and marketing facilities. Through the decade of the 1980s, a series of legislative actions followed to take care of the issues of agricultural reform. The Green Revolution became a success story. Productivity of the Chinese farmers recorded notable progress. However, the issue of land-ownership in the way ownership is defined in non-communist free market economies continued to be an issue of concern.

3. Industrialization and Internationalization

In 1970, the sectoral shares of China’s GDP from industrial and service sectors were 44.6 and 13.2, respectively, typical for a traditional preindustrialized economy. Industrialization of the Chinese economy became the agenda. The success of the family responsibility system in the agricultural sector prompted the leadership to introduce the enterprise responsibility system for the modernization of the industrial sector. Did it work? Industrialization of the Chinese economy faced two real problems: (a) A large volume of capital for investment, and that for a longer period of time as modern industrialization, highly capital intensive as it

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is, warrants a careful analysis of the lag operator. (b) As China’s traditional economy did not generate the necessary level of income and savings to support the need for investment, the logical choice for China was to invite investment from relatively savingsrich mature industrialized economies. Necessary legislative actions followed. Plans to invite foreign investments by Contractual Joint Ventures (CJV) and the non-contractual Equity Joint Ventures (EJV) did not produce notable results. “Wholly foreign-owned” or FDI (foreign direct investment with one hundred percent foreign ownership) became a pragmatic way for the capitalist economies to make investments in China’s socialist market economy. For the 1994-1999 period, the average annual inflow of FDI into China has been US$40 billion (ADB 2001). Of course, investments from Hong Kong and Taiwan into China became an independent process. The term “Golden Triangle of China” has long been familiar. I have argued that there has been a rationally pragmatic economic engagement in the immediate region (Dutta 1999). China elected to industrialize its economy at an accelerated rate, not at the sustainable rate of industrialization and growth of GDP. China wanted to do as good as the neighboring economies in East Asia, beyond what Japan did since the 1970s, and China did so. Indeed, I have argued that a period of accelerated rate of industrialization and growth of GDP can and has enabled China to be a competitive actor in the world market. If the target rate of annual growth of GDP for the mature industrialized economies is set at about 3 percent, and a newly industrializing economy follows the same target rate, the income gap will continue to persist and there will be no way for it to ever to catch up and compete in the world market. Indeed, the experience of the newly industrialized economies of Northeast Asia and Southeast Asia has demonstrated this point. China matches the record of Northeast Asia with an average annual rate of growth of GDP at some 9-plus percent for 1979-2000. Of course, the process must be followed by a timely “softening” of the economy by proper management of monetary-and-fiscal policies. The challenges of the Asian Financial Crisis of 1997-1998 must be a learning experience. China managed to escape from it, but did experience periodic high rates

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of inflation even though the management of money supply worked to contain it on each occasion. Table 1 presents the outcome of China’s industrialization. The accomplishment is on record. The agricultural sector’s share of GDP has expectedly declined. The productivity of the Chinese farmers has increased as the total output of the sector continues to increase to meet the growing demand for agricultural products inclusive of food. This also helps release workers who were formerly farmers for work in the industrial sector which has increased its share of GDP to two-third of the total in 30 years. One must hasten to point out the imbalance between the sectoral shares of GDP of the industrial and service sectors. We shall not examine here if it creates bottlenecks in the economic structure and contributes to periodic inflationary pressures. We will return to this in the next section. Table 2.1 : Sectoral Shares of GDP (“A) 1970 1980 2000 Source: ADB 2001

Agriculture 42.2 25.6 11.9

Industry 44.6 51.7 64.0

Service 13.2 22.1 24.1

Total 100.0

100.0 100.0

The case for rational exuberance promoted economic engagement between the labor-abundant, agriculture-dominant traditional economy of China with relatively large endowments of unexplored natural resources and the capital-rich, technology-abundant mature industrialized economies (Dutta 1999, 2000). China has been a success story. Progression of the story of economic success of China can and must follow. With industrialization and better employment and income for China’s billion-plus consumers comes the creation of an enormous market for the rest of the world. Assuming a 50 percent base of population, China’s 650 million-strong labor force will continue to add to the productivity of the world economy. The economic gain cannot and will not remain limited to the people of China. It must be noted that the economic phenomenon of the 1990s in the USA, where a high rate of growth of GDP and a low rate of unemployment with relatively low rate of inflation coexisted will be a subject of re-examination of the now


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famous Phillips curve. One wonders if it is the reverse case for stagflation of the 1970s. The situation continues and has become a global phenomenon. Indeed it is being referred to as New Forces in the international market (see Chapter I), yet to be fblly comprehended. The economic gains to China can be summed up with more precision. Before that, we must examine how China paid for foreign direct investment which became the key to China’s industrialization. Chinese trade has phenomenally increased with total exports and imports increasing at an annual rate of 11 percent for 1979-2000. Of course, this is a familiar index of an economy’s openness, i.e. internationalization. We have stated above that China’s industrialization at an accelerated rate was possible only with substantive inflow of foreign savings-andinvestments. Foreign investors from remote countries as well as from the immediate region (Hong Kong, Macao, and Taiwan) made investments in China for economic gains to earn profits on their investments. The repatriation of profits on investments in China became an issue as China’s currency remained to be a global convertible currency. The necessary step had been to export a part of the newly manufactured products from FDI to the world market and thus earn export revenue in convertible currencies. This became the pool of funds first for repatriation of profits by foreign investors and then for inducing the foreign investors to add to their investments in China. They turned out to be profitable and hence contributed to additional inflow of foreign investments in China. Two by-products of the process are: (a) China’s labor, skilled and ordinary, helped foreign investors to manufacture products which became cost-and-quality competitive in the world market. The consumers in the world market accepted them much to their satisfaction as they purchased products no less in quality but cheaper, or products better in quality and price-competitive. The rule of the game is consumer sovereignty. At a conference in Hong Kong in June 1987, I described this as an “adaptive innovation” paradigm (DuttaTantum, 1988);

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(b) Foreign investors found China a market for investment and China imported their plant and equipment plus technological know-how. Hence it is not an export-led growth model, as some have suggested. It is indeed an import-export-led growth model (Lawrence R. Klein 1990). Exporting a part of the newly manufactured products in China to the world market and earning export-revenue in convertible currencies became the only route to pay for the imports of capital goods, technology-rich plant and equipment from the mature industrialized economies. China’s industrialization resulted with her opening up her market to the rest of the world, i.e., internationalization. China’s economic presence became a reality. I therefore argue that the two simple parameters for measuring the dimension of an economy are: the individual economy’s shares of world output (GDP) and trade (exports). Table 2 presents China’s key economic indicators. Table 2.2: China’s Key Economic Indicators, 1980-1999 Year GDP (1995 US$ billions) GDP Growth Rate (%) 1980 164.5 6.0 1981 173.9 5.7 1982 190.6 9.6 1983 211.3 10.9 1984 243.4 15.2 1985 274.1 12.6 1986 297.5 8.5 1987 330.8 11.2 1988 366.1 10.7 1989 381.2 4.1 1990 396.4 4.0 1991 432.8 9.2 1992 494.5 14.3 1993 561.5 13.5 1994 633.5 12.8 1995 700.2 10.5 1996 767.3 9.6 1997 835.1 8.8 1998 900.2 7.8 1999 963.7 7.1 Source: World Development Indicator (see also Wei-Dutta 2002)

GDP (PPP) 456.3 508.2 562.5 623.2 747.4 882.0 1031.9 1247.3 1464.6 1521.9 1589.8 1771.4 2106.9 2442.9 2798.0 3230.7 3580.2 3880.2 4151.4 4534.9

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GDP in Purchasing Power Parity (PPP) is equivalent to GDP in an international currency, with an international dollar as the unit. If the average Chinese worker produced the same basket of goods and services and purchased it in US dollars, the Chinese GDP would explain the PPP estimates, facilitating international comparisons of GDP estimates. Further exposition of this estimate is not in order.

4. Privatization and Industrialization China’s accomplishment in terms of industrialization and accelerated rate of growth of GDP has been widely noted. However, it remains to be pointed that much more remains to be done if China is to emerge as a competitor in the global market. In 2000, China’s per capita income was US$ 768, far below the world average at US$ 5,439 and also less than that of the average lower-middle-income countries at US$ 1,210. Be it noted that China’s per capita GDP steadily moved up from US$ 167.6 in 1980 to US$ 768.8 in 2000 (all figures are in 1995 US$, see Wei-Dutta 2002). Table 3 presents a comparative picture of economies in Northeast Asia. China has to pursue its course of industrialization and China’s economic planners have taken note of it. The first step was the purposeful anchoring of the Chinese economy to internationalization by way of inviting inflow of foreign investments, with FDI as the notable agenda-item. Further industrialization will call for further capital inflow which can be facilitated by privatization of China’s state enterprises, enterprises owned and managed by the state. Table 2.3: GNP Per Capita, 1999 (constant 1995 US$) China (GDP) 768 Hong Kong (GDP) 22,990 Taiwan (GNP) 12,439 South Korea (GNP) 9,700 Japan(GNP) 39,640 Source: World Bank, The World Development Report, 1996 (see also Dutta 1999)

Productivity of the Chinese workers must be increased if their per capita income is to be competitively high in Northeast Asia. The secret

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to augmenting the productivity of the Chinese workers warrants investment of more capital per unit of labor, i.e. the familiar capital-labor ratio must be better than what it is now. In addition, various estimates suggest that China will have to create jobs for approximately 8 million new job entrants into China’s labor force every year. That calls for more investment and more inflow of foreign investment. FDI may continue to play its role in China and its successful industrialization will of course continue to be a point of attraction. The successes of the newly industrialized and/or industrializing economies in Northeast Asia and Southeast Asia must convey the message for privatization. The State owned and managed enterprises of China cannot and will not successhlly attract joint ventures. The rule of the game of the market economy limits such collaboration. Can China’s state enterprises be taken over by foreign investors as wholly foreign-owned enterprises? The Chinese economic planners have turned to privatization of stateenterprises. Foreigners as well as Chinese people can buy stocks of privatized enterprises. The Chinese government also can own stocks of the newly privatized enterprises. This is a familiar market-oriented mode of industrialization. Expectedly, the process of privatization will accelerate and contribute to China’s progressive industrialization.

5. The Service Sector of China We have shown above that the service sector’s share of China’s GDP has failed to match the spectacular growth of her industrial sector’s share of GDP. It is well-known that in a mature industrialized economy the service sector’s share of GDP is far larger than that of the two other sectors. Table 4 presents some relevant data and Table 5 compares China with the economies in Northeast and Southeast Asia. The service sector includes money, banking, insurance and financial services, communication and telecommunication, health-education, and consumer protection. In a newly industrializedindustrializing economy such as China, her industrial progress and consequent volume of manufactured products cannot be effectively and promptly marketed in the absence of adequate financial market and transportation facilities.

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The productivity of Chinese workers will be conditioned by their health, education, and protection against consumer malpractice. In this respect, China is lagging behind most of her neighbors. Singapore and Taiwan have earned the distinction of mature industrialized economies (Table 4). Historically, Hong Kong, now under Chinese sovereignty, has enjoyed the benefits of an economic structure similar to that of Singapore with its hugely large service sector. Table 2.4: Sectoral Shares of GDP (PPP), 1999 (“h) Agriculture Industry Service Source: Issing 2001

Euro-regime 2.8 28.5 68.7

USA 1.6 27.3 71.1

Japan 1.8 36.4 61.9

Table 2.5: Sectoral Shares of GDP, 2000 (%) Agriculture Industry Korea 14.2 37.8 China 11.9 64.0 Taiwan 2.4 34.6 Thailand 9.9 44.5 Singapore 0.1 33.2 Malaysia 8.7 46.8 Indonesia 16.7 43.5 Philippines 19.9 34.4 Source: ADB 2001, Figures for Korea 1980 (see Dutta 2002)

Service 48.1 24.1 63 .O 45.7 66.6 44.6 39.8 45.7

China has invited j oint ventures with international corporations in this respect and the outcome is expected to be positive. Membership to the World Trade Organization requires China to open its market for overseas financial institutions in the area of banking and insurance. Hong Kong, which has a resourceful service sector with international banking and insurance industries, will add to China’s resources in this regard. In addition, China’s successful economic engagement with Taiwan, which has a service-sector share of GDP as high as 63.0 percent in 2000, will be yet another source of support. Be it noted that Shanghai and other business centers in China have allocated resources to build up service sector inputs toward supporting China’s industrialization and rate of growth of GDP at an accelerated rate. Be it noted that given the

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magnitude of the Chinese economy, her service sector warrants a much faster expansion.

6. WTO’s 143’d Member: Dimension of the Chinese Economy

In December 2001, China became the 143rdmember of The World Trade Organization (WTO), and Taiwan followed as its 144thmember. Much is expected of China’s membership of WTO. It certainly adds to China’s economic presence in the world market. I have argued that an individual economy’s share of world output (GDP) and trade (exports) provide an empirical measure of an economy’s dimension in the world market. China is one sovereign member of the world economy. To begin with, we review the world market defined by these two parameters (Table 6). Table 2.6: Shares of World GDP (PPP) and Exports, 1999 (%) (Percentage) GDP (PPP) Exports (X) Source: Issing 2001

Euro-regime 16.2 18.9

USA 21.9 15.2

Japan 7.6

9.1

Total 45.7 43.2

Table 2.7: China’s Shares of World GDP (PPP) and Trade-Exports & Imports (“h) (Percent) 1987 GDP (PPP) 5.31 Exports (X) 1.19 1.22 Imports (M) Source: World Bank Yearbook 2001, (adapted from Dutta 2002)

1997 10.00 2.55 2.19

In 2000, seven hundred million people in Euro-regime, USA, and Japan enjoyed a little over two-fifths of world output (GDP) and trade (X). Indeed, if we add up the totals of a select group of mature industrialized economies including United Kingdom and Canada, the totals will approximate to 75 percent world output (GDP) and Trade (exports). China’s shares of world output (GDP) and trade (exports) have been marginal. Table 7 presents the data for 1987 and 1997, pointing to China’s shares and its changes over a decade of industrialization. For


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trade data, we present both imports and exports. China’s WTO membership will be essentially conditional on the economic data. Extraeconomic factors, any and all, must remain beyond this study. 7. Challenges Ahead: Ownership of the Means of Production in

China’s Socialist Market Economy: China and Asian Economic Community Much has been written about challenges ahead of China. Some are critical of the Chinese data as made available. Much has been written about China’s political system and absence of pluralistic democratic form of government, inequality of income distribution and inter-regional income disparity, industrialization and environmental pollution, public health and education for the Chinese worker. Extra-economic factors have often been of much concern. We shall limit our discussion to two specific economic issues China must address in the new millennium as China’s industrialization and economic growth continues to progress toward making China a competitive actor in the world market. Firstly, the issue of ownership of the means of production in China’s socialist market economy merits careful attention. The idea that land belongs to the farmer, not to the commune, became the cornerstone of the policy for reforms in the agricultural sector. The ownership of land is no more an open question. Wholly-owned foreign ownership or FDI became an important policy measure for reform in the industrial sector. Privatization of state-owned-and-managed enterprises has become an integral part of the new industrial policy. China’s economic planning for China’s socialist market economy has successfully progressed under China’s imaginative and pragmatic leadership. The means of production are owned by the people of China or by the individual owners. The decision must be made and guidelines for the enforcement of the decisions must be transparent. China may elect to adopt the market economy with social control and direction. One can learn lessons from mature capitalist market economies. Recent experiences of the US economy, the leading successful capitalist economy, can be a learning model. Enronism has

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become a term in media economics. The doctoring of profit-and-loss accounts of private business corporations and manufacturing of information, call it “dis-information,” for selling financial products have recently become a part of our knowledge and education. Earlier they enriched our economic vocabulary by introducing terms such as “swallowing poison pills,” “hostile take-over bids,” and “irrational exuberance” and the US stock market crash of October 1987 continues to dominate our economic literature. As China progresses toward progressive marketization of the economy, China must develop institutional safeguards against potential raids by enemies of the free market system. Such institutional safeguards are part of the mature industrialized capitalist economies. Even so, challenges are real. China must make necessary legislations. Specific institutional safeguards apart, a modern capitalist free market economy has to have a well-structured macroeconomic framework, with well-defined monetary and fiscal guidelines which are transparent and enforceable. Indeed, in the absence of such a macro-economic framework, micro-economic actors, individual families as well as business units, can hardly enjoy economic freedom. The leadership for formulating and managing the monetary policy rests with an autonomous central bank whereas fiscal policy is left to the charge of the executive branch of the government, subject of course to the approval and consent of the legislative branch. The People’s Bank of China (PBOC), China’s central bank, must enjoy its autonomy and be accountable for the administration of China’s monetary policy. In a conference in Shanghai (Dutta 1995a) I made a presentation in this regard. Much remains to be done. China’s government program for fiscal policy management must be made transparent so that investors in China’s socialist market economy remain advised and act accordingly. In a pluralistic democracy, open debates help promote awareness and encourage intelligent participation on the part of citizens. China must define the parameters of China’s macro-economic framework to help privatization of the economy progress to its optimum level. One can argue that the absence of a well-structured macroeconomic framework was very much responsible for the Asian Financial Crisis of 1997-1998. Central banks in most of the affected countries did not enjoy


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a necessary and sufficient level of autonomy to formulate and manage their respective monetary policies. Management of fiscal policies by the executive branches of the governments of these countries became subject to extra-economic considerations. Monetary and fiscal policy coordination often failed to materialize. China must be able to develop proper safeguards against future financial crisis which may impact China quite negatively. Indeed, an individual economy with marginal shares of world output and trade can hardly be expected to be able to develop a rational macroeconomic framework, more so, when it is dependent on foreign investment in one form or another for the industrialization of their respective economics with consequent impacts on flow of funds and exchange rate fluctuations. Indeed, if China elects to institute a free market economy, business cycles will be a part of the free market economy. Coordination of monetary and fiscal policies has been helpful in containing both duration and amplitude of a business cycle and the Great Depression has been made to remain a part of history. Secondly, can China elect to remain a sovereign nation-state economy in splendid isolation and hope to become a competitive actor in the world economy over the course of time? China must answer the question. I have argued that the European Union and the Euro-regime must be a learning model (Dutta 2002,2000, 1999, 1992) for an agenda for the Asian Economic Community inclusive of China. Germany, France, Italy and United Kingdom joined eleven other sovereign nationstate economies in Western Europe and the European Union (EU) is now a dynamic reality. As of January 1999, twelve of the fifteen adopted one currency, the Euro, managed by one central bank, the European Central Bank in Frankfurt, with English as its official language. The process was initiated soon after World War I1 and progressed through the Treaty of Rome in 1958, Single European Act in 1986, and the Maastricht Treaty in 1992. The 15-member EU is one integrated economic unit with free flow of trade and investment and free movement of labor without any intra-regional barriers. Towards the rest of the world, the EU has one common economic policy with no exceptions. The EU is represented as one member in the WTO with one vote. Economic regionalism can work and it has been working. Of course, there are problems yet to be

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resolved. The EU will accept the challenges as that is the well-known course of progress. Will one money lead to one Europe for the 12 EU members who have voluntarily surrendered their monetary sovereignty and joined the EU regime under one common central bank, the European Central Bank? Will the 3 EU members who continue to be members of the EU ftee trade regime ever join the Euro-regime? Will the 2004 expansion of Europe to admit 10 new members contribute to specific problems? Will the 25 members of the EU vote for one political constitution? Will Europeanization of Europe with some eight hundred million people belonging to one common geographical unit, the continent of Europe, as observed on the map of the world despite diversities of language, culture, religion, and life-style, be the learning model for the rest of the of the world? Table 2.8: Shares of GDP and Trade of East Asia: China, Hong Kong, Taiwan, Korea, Japan (%) 1987 GDP (PPP) Trade (Exports) Trade (Imports) Source: adapted fiom Dutta 2002

15.86

14.75 10.95

1997 21.21 17.88 16.03

Table 2.9: Shares of GDP and Trade of Euro, EU, and US, 1997 (%) Euro GDP (PPP) 15.88 Trade (Exports) 3 1.56 Trade (Imports) 29.53 Source: adapted from Dutta 2002

EU 20.24 39.28 37.22

us 21.00 14.23 16.34

East Asia inclusive of China, Hong Kong, Taiwan, Korea and Japan is evidently a competitive actor in the world market. The EU is very much a competitive actor with its shares of world output and trade. Prior to the formation of the EU, the United Kingdom, Germany, France, Italy, each four larger member-economies of EU, had much smaller shares of world output and trade, share for each for both output and trade being limited to about 2 percent, which made Japan to be the second largest economy in terms of her shares of world output and trade.


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The EU presents a new paradigm of economic regionalization based on “a map-of-the-world view” of a region and with a common intraregional market with well defined micro-and-macro economic parameters (Dutta 2002). I have discussed the case of the supra-national macro-economy (Dutta 1992, 1995a, and 1995b). China must make its decision to vote for the Asian Economic Community. Economic regionalization can and will optimize competition in the world market and thus maximize global economic gains. Indeed, globalization with regionalization may be the new map of the world economy. The case for the continental Asian economy inclusive of India and South Asia plus the South Pacific economies remains to be explored. Research on free the trade area of China and East Asia has been reported. The ASEAN (Association of South East Asian Nations) Free Trade Area (AFTA) is in experiment. In the 1980s, the Closer Economic Relations Act contributed to the free trade area of Australia and New Zealand. Deliberations on SAFTA (South Asian Free Trade Area) have been in progress. Recently the Prime Ministers of India and China talked about the feasibility of a China-India free trade area, encompassing over 2 billion people, slightly more than a third of the world population., Ever since 1998, conferences of sub-cabinet level officials fi-om China, South Korea, and Japan have been frequently held to review the scope and feasibility of regional economic cooperation for monetary and fiscal policies. Indeed, the concept of a free trade area for a regional group of sovereign nation state economies cannot be functionally optimal without a shared commitment to an intra-regional macroeconomic framework of monetary and fiscal policies. The familiar 3 plus 5 model (Japan, South Korea, and China, plus Singapore, Malaysia, Thailand, Indonesia, and the Philippines) have in 2003 broadened to the 4 plus 10 model, adding India, and Myanmar, Laos, Cambodia, Vietnam, and Brunei Darussalam in Southeast Asia (see Chapter 1).

8. Conclusion Dwight Perkins in his Treatise on China invited us to study the profile of the Asian Giant. Harry Harding introduced China’s second revolution to the rest of the world. Gregory Chow first offered to help us to

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understand the Chinese economy, and then added another volume to explain the process of economic transition China has experienced. Economists who have specialized on China have made their scholarly contributions. Much more remains to be learned. What we know about the Chinese economy is much less than what we should know.

CHAPTER 3 CHINA AND ASIAN CONTINENTAL ECONOMIC COMMUNITY: INTRA-COMMUNITY MACRO- AND MICROECONOMIC PARAMETERS

China’s economic presence is a reality. The potential of the Chinese economy is not in question. Given her shares of world output and trade, can China be a competitive actor in the world market? Based on the figures of 2003, the shares of world output of the USA and the European Union-25 are at 26 percent and 29 percent, respectively (Dutta 2005). Be it noted that the EU-15 and the EU-12, who have joined the Euro-regime, each have competitive shares of world output. Prior to the constitution of the EU, Japan had the second largest share of world output, but now is a distant third. One view is that given her accelerated rate of growth of about 10 percent a year, China will catch up to the USA in just a few years. In chapter one, we have discussed if China can sustain her rate of growth at that high rate for the years to come. The projection of such a trend growth rate assumes that the competing mature industrialized economies will be unable to outcompete China over time by increasing their productivity. We shall present the data below that the output figures of China in purchasing power parity (PPP) ranks her in the top group of world economies. It is well known that PPP recasts the actual data in a unique way with mathematical economic cosmetic. Indeed, the per capita income of China continues to be far below that of the industrialized economies. The successfid experiment of the industrialized economies in the Western Europe warrants China’s attention. The European Union (EU) now with 25 sovereign nation state economies has offered a new paradigm of regonal economic integration. Each individual member economy had marginal shares of world output: eleven of the fiReen each with less than one percent, and four, Germany, France, UK, and Italy, each had less than 2 percent of the world output, allowed Japan to become the second largest economy. In what follows, we will first present 71

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relevant data for the EU-15 as an integrated economic unit enjoying a competitive share of world output. We then add graphic presentations to show the EU-15 compared with various Asian regional groupings. China can play a leadership role in an Asian continental economic cooperation. Indeed, much has been written about China and an East Asian economic union. China, Japan and Korea have been in substantive economic engagements. Taiwan has been an economic partner of China albeit the political dialogue across the Taiwan Straight has remained constrained. Following the recent visit to India by the Chinese Prime Minister, the case for China and India Free Trade Area has become a subject for debate. Reference must be made to the 3 plus 5 model (KoreaChina-Japan and Singapore-Malaysia-Thailand-Indonesia-Philippines) which have held regular economic summits since 1998. In 2003 at the Asian Economic Summit in Jakarta, the 3 plus 5 model expanded to become the 4 plus 10 model, as invitations were extended to India and five new members of the Association of South East Asian Nations (ASEAN), M y m a r , Cambodia, Laos, Vietnam, and Brunei Darussalam. Will China play a leadership role in this regard? 1. Interdependence of Globalism and Regionalism

The inter-dependence of globalism and regionalism was eloquently highlighted by the distinguished scholar-politician Saburo Okita (1989). The concept of globalism with nearly 200 sovereign nation state economies of very diverse dimensions continues to elude us. We know that there are 191 countries on the United Nations 0membership roster, with Switzerland electing to be its latest member in 2002. The International Monetary Fund (IMF) and The World Bank (WB), each now has 184 members. The World Trade Organization (WTO), following admission of People's Republic of China (I'RC) and Taiwan to its membership in 2001 has 148 members. Only with regionalism, based on the integrated economic grouping of a set of sovereign nation state economies belonging to a continental region as observed on the map of the world, can globalism be operationally successkl. Each regional economic group with its competitive shares of world output and trade can be a competitive actor in the global market, and the principle of competition will effectively contribute to the

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maximization of economic gains for all the micro-economic actors, households as well as business units, in all regions of the world. In what follows let us review the two factors which have contributed to this new economic dialogue.

1.1. The Post- WWlI Infrastructure of Globalization and New World Post-WWII efforts to globalization, supported by institutional infrastructures, consisting of the United Nations 0, the International The World Trade Monetary Fund (IMF), The World Bank Organization (WTO), and a whole host of others, have yet to produce optimum results. The rich and the poor economies of the world continue to be divided into two blocks - the North consisting of a selected group of rich economies and the South with the membership of a very large number of poor nations. The market competition has been reduced to a duopolyduopsony framework of the world market. Protest demonstrations in recent years at several annual conferences on globalism, be it in a city in North America, Europe, or Latin America, warrant a more careful review. The WTO continues to struggle for a reconciliation of trade concerns between the rich and the poor nations of the world. Persistence of trade conflicts amongst the rich trading nations continues to remain an issue. If investment did not go to economies of relative labor abundance and consequent low-wage cost per unit of product, labor migrated to laborscarce economies with relative full employment and high wage rate, A la necessary modification of immigration and naturalization laws. The International Labor Organization (ILO) watched the process and could hardly ensure freedom of labor movement. The phenomenon of illegal immigration, widespread as it is, continues to plague the rich nations, much to the agony of the millions of distressed people whose labor is greatly in demand in the countries complaining against illegal immigration. The Asian Financial Crisis in 1997-1998 opened the debate and produced an endless flow of literature on the crisis, albeit after the crisis. In an invited presentation at a panel discussion on “Restructuring Breton Woods International Financial Structure,” sponsored by The United Nations Institute for Training and Research (UNITAR), I argued that the

w),

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post-WWII global economic system has become dysfunctional (Dutta 2002, see also Stiglitz 2002).

1.2. The European Union (EU) The second factor we must consider is the successful experimentation of the new paradigm of economic regionalization in Europe in the post-WWII decades. Beginning with the European Coal and Steel Community (ECSC) that became effective July 1952 with Germany, France, Italy, and Benelux countries (Belgium, the Netherlands, and Luxemburg) which evolved into a customs union of six ECSC countries in 1953, the European Union (EU) progressed through the Treaty of Rome (1958), One Europe Treaty (1986), and the Maastricht Treaty (1992) to become an economic union of 15 sovereign nation economies of Europe. On January 1, 1999, 12 of the 15 EU member economies “voluntarily surrendered” their monetary sovereignty and adopted one currency, the Euro, under the management of one intra-regional central bank, the European Central Bank (ECB), with its headquarters in Frank€urt, Germany, adopting English as its official language. The UK, Sweden, and Denmark are the three out-members of the EU who have not yet joined the Euro-regime. In 2004, 10 more sovereign nation state economies of Europe, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Malta, and Cyprus became members of the EU. Four other nations are on the list of candidates. Turkey, marginally on the geography of the European continent as observed on the map of the world, is in a negotiating process, expectedly a longer one of some ten years. Turkey’s belonging to the map of Europe is just “token” and its membership of the EU cannot be routine. Geography, not religion, race, language, or life-style, is the core of unity for the EU: one economic unit on one geographic unit. The European Union has acted affirmatively on core economic issues, both micro and macro. Intra-regional free flow of trade and investment and free movement of labor for the 15 EU member economies must be the centerpieces of microeconomic integration. The EU is one member in the WTO and as such, is represented by one member in the WTO with one vote for all 15 member economies. Adoption of one common currency with some necessary institutional provisions for fiscal policy cooperation


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came to complete the macroeconomic integration for the EU. However, the process of integration will be completed only when the three outmembers join the Euro-regime and the euro phased in for the new 10. The intelligent guess is that the issue for the three is not if to join the Euro-regime, but when to join the euro club. Will one money lead to one Europe (see Issing 1996). I have ventured to suggest that the incompatibility of EU membership without membership of the Euroregime will soon be too pronounced. Two points of clarification are in order. Firstly, one common currency for the Euro-regime may not be equated with the concept of a optimum currency area (Mundell 1961, 1970, 1999). Secondly, the concept of sovereignty and its divisibility between monetary and political contents warrants careful appreciation (see Dutta 1995, 2000a, and 2000b). Be it noted that the EU is not a "fortress" economic union. The EU's commitment to the principle of competition is pronounced and the EU as an integrated economic unit will compete in the global economy. One can argue that the EU will be the learning model for a synthesis of regionalism and globalism. I have argued that the core of the emerging new economic regionalization paradigm must relate to (a) a map-of-the-world view of a continental region, and (b) an intra-regional, multilateral, and cooperative effort to map an economic region on to a geographic region, independent of linguistic, religious, racial, and lifestyle diversities (Dutta 1999).

1.3 Will the EU Survive the Challenge of Political Integration? As of 2004, the fact of economic integration of the 25 member economies is on record. However, political integration continues to be elusive. The One Europe Act of 1986 was followed by the Maastricht Treaty in 1992, giving the EU its common intra-EU, macroeconomic agenda. The EU successfully adopted several programs for functional integration relative to environment, immigration, anti-terrorism, and security. The EU-15 has established legislative, judicial, and executive offices, and the new 10 have also joined these institutions. Twelve of the EU-15 have joined the Euro-regime with one currency under one common central bank. The EU has yet to accomplish its political integration. To that end, a constitution was drafted in 2004 which will give the EU one common

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political entity headed by one Executive Head with a cabinet consisting of members in charge of foreign policy, defense, finance, and so on. Under the EU protocol, each of the 25 member states must approve the draft constitution before its implementation. The voting was to be completed by November 2006. As of May 2005, ten member states approved of the draft while two rejected it. Thirteen more members remain to vote on the constitution. The EU leaders have elected to have a period of “reflection” and postponed the voting for about six months until mid-2007. Will the EU be a federation? Or will it be a confederation? The debate has been familiar. The draft constitution has sought to balance the right of each member state, based on the principle of equality of member states, independent of their population base and economic dimension against the democratic doctrine anchored to the EU population where one person, one vote will be the principle. The core issue however is a choice between the Old Europe and the New Europe. On the map of the Old Europe there are a large number of sovereign nation state economies in varied colors, each with its own flag and constitution, and a small population base with marginal shares of world output and trade. The New Europe will have one sovereign political entity in one color with one flag and one constitution, albeit it will be multi-lingual, multi-religious, and multicultural. However, under the New Europe, the European Union (EU) will have competitive shares of world output and trade (Table 7). In population, the EU will be the third largest unit next to China and India, while the USA will become the fourth largest unit. In terms of world GDP, the EU-25 will have a larger share than that of the USA while in terms of shares of world trade, the EU will be substantively ahead of the USA. The choice for the New Europe is for the Europeans to make. One cannot ignore that there is a sense of crisis after the negative referendum first in France and then in the Netherlands in May 2005. The EU is a bold and innovative paradigm truly unprecedented in history. Its political integration process may not be as easy as its economic integration process since 1958 has been. The United States of America began with the thirteen colonies and became a viable political entity during 1776-1789. It was not until 1959 when Alaska (49th)and Hawaii (50*) became the last two states to join the USA. The process was


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eventful as it progressed through the Civil War (1861-1865), the settlement of the frontier with wars involving deaths and destructions, and annexation of colonies under challenging historical contexts. One also notes that the USA established the Federal Reserve System by an act of Congress in 1911, establishing one money under the FED as late as 1913. Democracy based on one person, one vote became effective in the USA only in 1965. The collapse of the imperial model of integration of remote economies under a foreign flag has been read. The EU must be ready to face its challenges. The New Europe, not the Old Europe, does point to their greater economic welfare. One notes with a degree of confidence that the EU successfully overcame its past challenges. I refer to the one in 1998 when the EU members signed the Amsterdam Treaty making it possible to expand membership of the EU. As per the EU protocol, each of the 15 member states had to approve of the Treaty before it could go into effect. Fourteen members approved of it, while Ireland cast the only dissenting vote. Following the EU charter, Ireland held a second referendum in October 2002, when the Irish people finally approved the Treaty. The EU-15 became the EU-25 in 2004. A period of debate and dialogue is very much in order and the EU leadership has voted for it. They have not voted to abandon the draft constitution for the political integration of the EU-25; they have extended the time frame until mid-2007, and very rightly so. The New Europe is too important and Europeans must learn how to get along as members of the one European entity, economic as well as political. Let the New Europe, as a competitive actor, take its own place on the map of the world. This process cannot be immune from challenges. Indeed, the EU will be a true learning model for the Asian continental regional grouping. Challenges will be a reality and the EU experience must be a part of the learning model for the sovereign nation states of Asia, the home of approximately one half of the world’s population. 2. Asia-Pacific Economic Cooperation (APEC)

The pull-factor of successful industrialization at an accelerated rate for the select group of East Asian economies beyond Japan since the 1970s and the

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normalization of the economic relationship with the People's Republic of China (PRC) in 1970s combined with the push factor of European economic regionalization in the post-WWII decades resulted in the institution of the Asia Pacific Economic Cooperation (APEC) in 1989. Nine sovereign nation state economies on the two shores of the Pacific Ocean and in the South Pacific, led by USA, Canada, Japan, Australia, and New Zealand, elected to become members of the APEC (see Dutta 1999). In 1992, China, Taiwan and Hong Kong joined the group. Currently, APEC membership has grown to 21 economies inclusive of Russia. India and South Asia, not touched by the waters of the Pacific, do not belong to APEC membership. As the Atlantic Ocean is a natural divide between Europe and the Americas, so must the Pacific Ocean be no less a divide between Asia and the Americas. APEC, with membership of economies on the two shores of the Pacific, will always lack geographic unity observable on the map of the world. Annual APEC summit meetings have been truly colorful as the principals of the 21 member countries, wearing the national costume of the host country, lend themselves to be a subject of the global media. However, APEC has little to its credit in terms of accomplishment even for the effective promotion of an intra-APEC free trade regime. They have voted for the hture oriented 10/20 formula and effectively shelved the issue until 2010 and 2020. In addition, the fact that discussions at the APEC summit meetings in 2003 and 2004 focused more on antiterrorism, defense, and security, left economic issues with marginal attention, much to the disappointment of many who are engaged in studying the economics of APEC. Of course, terrorism is an overwhelming challenge. Students of economics who relate globalism to regionalism, as I do, note with much care that the American Hemispheric Economic Union is a subject of more intensive study. The Organization for African States recently is reported to have discussed the feasibility to "reinvent" itself as the African Economic Union following the model of the EU (The Nav York Times, 2001). Recently, the case for Australian-New Zealand economic integration with one common currency, possibly managed by one intra-regional common central bank, has been investigated (Grimes, Holmes & Bowden, 2000).

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3. Can the EU Be a Learning Model?

3.1. Unity in Diversity: Pan-European Culture and Civilization Exclusivity of culture, religion, language, race, and color has long been considered the base for the identity of so many traditional sovereign nation states and their economic exclusiveness. The fact is that a modern sovereign nation state economy is colorfully .touched by the multiplicity of culture, religion, language, race, color, performing arts, and lifestyles. Technology and knowledge defy all borders. The EU illustrates this fact of multiplicity and points to a pan-European experience, a new European life-style. Any suggestion to imply that these factors are irrelevant must be ignored. They continue to be significant in defining the European civilization by the panEuropean experience, a unity in diversity (see Dutta 1992, 1999, 2000a, 2000b, 2001; Issing 1996, 2001; Kojima 2000; Letiche 1997; Mazzucelli 1997; Monnet 1978; Schroeder 2000).

3.2. Intra-EU Micro- and MacroeconomicAgenda An economic union based on one commodity, be it coal andor steel, was of course very limited. A customs union or fi-ee trade area (FTA) by specific agreements amongst a group of neighboring nation state economies is of course, suboptimal. A more comprehensive economic regionalization involving several sovereign nation state economies belonging to the map of Europe became the new order. The European Economic Community (EEC) progressed on to the European Union (EU) and adopted a well-formulated microeconomic agenda for intra-regional free flow of trade and investment, and free movement of labor. This contributed to the emergence of an integrated intra-regional European fi-ee market. However, this EU intraregional free market could not be functionally effective in the absence of an intra-regional macroeconomic agenda with well-specified and transparent monetary and fiscal policy guidelines. Following the One Europe Act of 1986, the EU member countries accomplished this by signing the Maastricht Treaty in 1992. On January 1, 1999 came the one central bank and one common currency.

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3.3. The Principle of Inclusion, Not Exclusion Member economies belonging to the map of Europe were welcome if and only if a candidate country was willing and able to accept the responsibility. In 1957, six members signed to join the EEC, effective January 1, 1958. In five successive stages, EU membership rose to 15 in 1995 (Table 1). Table 3.1: EU Membership 1957 Belgium 1957 FranCe 1957 Y1957 IdY 1957 Lwembowg 1957 The Netherlands 1973 Denmark 1973 Ireland 1973 UK 1981 Greece 1986 Porillgal 1987 Spain 1995 Austria 1995 Finland 1995 Sweden Source: http://www.diplomatie.fdhonde/euro/euO 1.gb.html.

3.4. EU’s CompetitivelyLarger Economic Base: EU vis-a-vis USA In 1998, the EU, with a GDP base of US$7.8 trillion (PPP) and a population base of 374 million, emerged as a competitive actor in the world market visa-vis USA with a GDP base of US$ 8.5 trillion and a population base of 273 million. Japan with a GDP base at US$ 3.0 trillion and a population base of 126 million was now a distant third. In the pre-EU regime, the four larger economies, Germany, France, UK, and Italy, each with GDP at US$ 1.8 trillion, US$ 1.3 trillion, US$ 1.3 trillion, and US$ 1.2 trillion, respectively, placed Japan as the second largest economy of the world, next to USA, albeit a distant second. In the pre-EU regime, Japan was quite far ahead of each of the big four of the EU. The global economic spectrum has thus undergone a major change (Table 2).


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The EU added to its GDP base US$0.6 trillion (PPP) and a population of 75 million after the new 10joined its membership in 2004 (Table 3).

Table 3.2: EU GDP and Population, 1998 GDP (PPP) (US$ Percentage (%) Population Percentage ('h) billions) (millions) 236 3.04 10.2 2.73 Belgium 59.0 15.76 1.32 17.02 FranCe 82.1 21.93 Y1813 23.38 56.7 15.15 1181 15.23 Italy 0.1 1 0.4 14 0.18 Lwcembourg 15.8 4.22 The Netherlands 349 4.50 124 1.60 5.4 1.44 Denmark Ireland 67 0.86 3.6 0.96 UK 1252 16.15 59.1 15.79 Greece 143 1.24 10.7 2.86 Porngal 145 1.37 9.9 2.64 646 K.33 39.2 10.47 Spain Austria 185 2..39 8.1 2.16 Finland 104 1..34 5.2 1.39 Sweden 175 2..26 8.9 2.38 Total 7754 100 374.3 100 USA 8511 272.7 Japan 2903 126.2 Source: World Factbook 1999, see also Schroeder (2000). Note: PPP, purchasing power parity.

Table 3.3: EU plus 10: GDP (PPP) and Population, 1998 GDP (PPP) (US$billions) 10 CmhRepublic 117 Estonia 8 HwwY 75 Poland 263 Slovenia 20 Latvia 10 Lithuania 18 Malta 5 Slovakia 45 Total 571 Source: World Factbook 1999, see also Schroeder (2000)

Cyprus

Population(millions) 0.8 10.3 1.4 10.2 38.6 2.0 2.4 3.6 0.4 5.4 75.1

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Table 4 shows that the comparative standing of the Euro-regime with its 12 in-members, in terms of GDP and population, vis-A-vis USA and Japan, is retained. Table 3.4: The 12-member Euro-regime-GDP Belgium FIallCX?

YItaly

Luxanbourg The Netherlands Ireland Greece

GDP (PPP) (US$ billions) 236 1320 1813 1181 14 349 67 143 145

and Population, 1998 Population(millions)

10.2 59.0 82.1 56.7 0.4 15.8 3.6 10.7 9.9 39.2 8.1

p o w spain 646 Austria 185 104 5.2 Finland Total 6203 300.9 USA 8511 272.7 Japan 2903 126.2 Source: World Factbook 1999, see also Schroeder (2000). Note: PPP, purchasing power parity.

3.5. Shares of World Tradefor Member Economies of EU and the Euro-Regime If there were an alpha-beta-gamma economy with a US$ 10 trillion GDP base, trading with no other economies in the world, the rest of the world would have little concern for that economy and let it remain in splendid isolation. An individual economy’s economic interaction with the rest of the world can be measured by its trade with others. We consider that an individual economy’s share of world exports will be a quantifiable measure of its economic relationship with other economies (see Dutta 2000a, 2000b, p. 77-83; Issing 200 1). In my papers (Dutta 2000a, 2000b) I have presented data on annual export share of each member economy of EU for 1970 through 1997. Over the three decades, the individual export shares for the four larger economies of Germany, France, UK, and Italy vary within the range of


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5% and 9% of world exports. For the 11 other EU members individual export shares vary within the range of 1% and 3%, their respective shares of world export being rather marginal. The EU is one trading unit with one membership of the WTO, as referred to earlier. The EU-15’s share of world exports for the same period fluctuates around 40% of world exports. For the Euro-regime the share varies around 35% of world exports. All trade figures cited in my papers are in 1995 US dollars and not adjusted for intra-EU, cross-border exports. Table 5 presents the comparative figures, adjusted for intra-Euro-regime trade, presented by Professor Issing. Table 3.5: Shares of World Exports, 1999 (%) Emregime USA Japan 18.9 15.2 9.1 Sham of world exports Exportsof goods and services(% of GDP) 16.9 10.3 10.7 Importsof goods and services (% of GDP) 15.9 13.2 9.1 Source: Issing (2001, p. 3). Note: World exports is net of intra-Euro-regime trade flows.

One concludes from Table 5 that the Euro-regime of the 12 inmembers of the EU has a competitively large share of world trade as well as larger shares of exports and imports of goods and services as a percent of GDP vis-a-vis USA and Japan. The Euro-regime has 18.9 percent of world exports when the shares of USA and Japan are at 15.2% and 9.1%, respectively. For exports and imports of goods and services as percentages of GDP, the Euro-regime’s shares are much larger than USA’s, and Japan is a remote competitor, several percentage points behind the Euro-regime. In Table 6 we present the shares of world GDP in 1999 and population in 2000. It shows that the Euro-regime commands competitive shares of world GDP (PPP) with a substantively larger population base. Obviously the competition in the world market must be related to the leading actors at present in the market. The importance of a competitive open market has been the primary lesson in economics. To the extent that world competition will be more effectively operational by the EU and the Euroregime, it will help the process of optimization of economic gains for all microeconomic actors, households and business units, belonging to all the economies of the world. Economies beyond Europe, USA, and Japan will

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be able to import quality and cost competitive goods and services and they will sell their exports to a more competitively efficient global market. Table 3.6: GDP Shares (PPP) (in millions) and Population (%) EUIWlCgitTE

Sham of world GDP (1 . 999) , Population (2000) Source: Issing (2001, p. 3).

16.2 302

USA 21.9

272

Japan 7.6 127

I have argued that the two simple parameters based on an individual economy’s shares of world output and exports may determine its competitive position in the world market, denoting the two as GDP/GDPw and X/Xw. The EU experiment points to the fact that its capital-rich, industrialized member-economies individually could hardly be able to command competitive shares of world output and exports. Thus, the model of regional economic union is pragmatic and preferred. Assuming all other things are equal, two of the world’s most populous economies, China and India, each with relatively large endowments of natural resources, may independently achieve a similar miracle in the future. But other things are seldom equal, hence, the case for learning from the EU model must prevail (Dutta l999,2000a, 2000b). Taking the WTO, now with 148 sovereign nation state member economies, three of them, the EU, USA, and Japan, with some 700 million people in 2000, command nearly one-half of world output and trade (Table 7). One way to make globalization real is to welcome the EU model and promote continental regional economic unions, each with competitive shares of world output and trade, which will provide effective support to the paradigm of globalism. If and when the model of continental economic regionalization will relate to the rest of the rest of the world remains an open question. The world market with three competitively large regionally integrated economic units, the USA, the EU, and the Asian Economic Community, each with a competitive share of world output and trade will make the principle of competition operationally successful, contributing to the optimization of economic gains, not only for the three units, but also for the world as a whole. If not, globalization will result in the domination of

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Table 3.7: Shares of World GDP (PPP), World Exports, and Population (%, millions) GDP- PPP (1999) World Exports (1999) Population (2000) Euro-Regime 16.2 18.9 302 USA 21.9 15.2 272 Japan 7.6 9.1 127 Total 45.7 43.2 701 Rest of the world 54.3 56.8 6052 Note: Calculated from World Development Indicators 2001, World Bank

the vast number of sovereign nation state economies, each with a marginal share of world output and trade, by a select group of economies, each commanding overwhelmingly large shares of world output and trade. Indeed, in the absence of the EU, the USA with its shares of world output and trade would be the most dominant economy (Table 7). The EU, the USA, and the Asian Economic Community will counterbalance each other and enrich global competition. 3.6. Richer and Poorer Member Economies in E U Compact

Eleven of the fifteen member economies of EU were relatively more advanced in terms of industrialization and affluence, while four, Greece, Spain, Portugal, and Ireland, lagged behind. All four are members of the Euro-regime. The EU set up the European Fund to undertake projects for intra-EU structural reforms so that all member economies would be able to compete in the EU free market. Indeed, drawing upon OECD findings, Schroeder (Schroeder 2000, p. 26) presents an instructive progress report showing that Ireland, Spain, and Portugal have made substantial progress toward closing their income gap with Germany in terms of per capita income (Table 8). Table 3.8: GDP (PPP) Per Capita (%) Yp o w

Spain Ireland Source: Schroeder (2000, p. 28).

1987 100 20 42 47

1998 100 66 75 84

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Here is a successful catching up process contributing to EU scores. Indeed, Ireland, Spain, and Portugal have graduated to the richer group while Greece continues to struggle.

3.7. Freedom of Labor Movement Intra-regional free movement of labor in EU came in two stages: work permits and complete free movement. Any and all warnings of chaos proved to be untrue. Millions of workers from poorer member economies did not move to richer and more industrialized, hence relatively labor-scarce EU economies. It is equally true that all corporations fiom the richer and relatively labor-scarce, high wage economies did not move their manufacturing units to the labor-abundant, relatively low-wage rate EU member economies, creating employment havoc in their respective home economies. Rather, a harmonized movement of investment fiom the relatively savings-surplus member economies to create employment where labor was relatively abundant and unemployed along with some movement of labor from the high-unemployment economies to low-unemployment economies contributedto a market-inducedbalance in the labor market. 3.8. Fluctuations of Exchange Rate: Euro vis-&is US Dollar From Oanda’s historical database, relative to the US dollar, the euro traded at a low of US$ 0.8360 on October 24,2000, then soared to a high of US$ 1.3644 on December 3 1,2004. Even after the two negative votes on the EU constitution in France and the Netherlands in May 2005, the euro traded at US$ 1.2066 as of June 30, 2005; it continues to be several basic points above US$1,1674, the rate at which euro began trading on January 1,1999. Let the market determine the euro-dollar exchange rate. The discourse on the ewo-dollar exchange rate must take note of the fact that there has been a fundamental structural change. I have argued that the value of a currency in the global market must represent the share of the goods and services its economy produces. As of 2003, the EU-25 has a share of 29 percent of world output while the US dollar’s share is at 26 percent. The share of world trade, exports as well as imports, of the EU-25 is far larger than that of USA (Dutta 2005). The 25 member


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economies of the EU produce the largest share of world output, and engage in the largest share of world trade, exports as well as imports. True, three members of the EU-15, UK, Denmark, and Sweden are not yet members of the Euro-regime and the ten new members of the EU will have to go through a process of becoming members of the Euro-regime. The concept of equilibrium exchange rate is subject to much debate. Researchers have reported the euro-dollar exchange rate fluctuations both in terms of nominal rate and effective rate (Coppel, Durand & Visco 2000). Further careful research on this problem will shed light on these fluctuations.

4. Asian Economic Community (AEC) Let us review the lessons fi-om the EU and Euro-regime.

4.1. The Map of Asia is as Real as the Map of Europe The pan-Asian culture and civilization is as real as the concept of the panEuropean culture and civilization; the message is the same: unity in diversity. The grim history of intra-regional hostilities and wars in Europe and Asia cannot be allowed to stand in the way of the continental economic unity. Chinese leadership has made the proclamation: “To be rich is to be glorious” (see Chapter 1). Efforts toward the AEC in the absence of a comprehensive intra-Asian micro- and macroeconomic agenda will be unsuccessful. Much has been talked about the potentials of a free trade area, which cannot be functionally operational without free flow of investment and some form of free movement of labor. This intra-Asian microeconomic structure must be supported by the intra-Asian macroeconomic framework. A replication of the EU model is not a necessary condition, but the EU model as it evolved over almost half a century since World War I1 presents a comprehensive learning model for Asia and for other continental economic regionalization.

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4.2. Membership of the AECMust Be Anchored in the Principle of Inclusion In Europe, the economic regionalization initiative in 1958 came fiom the six European States, mostly in Western and Central Europe. Over time its membership has grown to 25 sovereign nation state economies. In Asia, three East Asian economies, Japan, Korea, and China, plus the original five members of Association of South East Asian Nations (ASEAN), Singapore, Malaysia, Thailand, Indonesia and Philippines, appear to have under study a 3 + 5 intra-regional economic model with a shared monetary and fiscal policy agenda. Five nations, Myanmar, Cambodia, Laos, Vietnam, and Brunei Darussalam, have since joined ASEAN. They, along with India were invited to participate in Asian Summit meetings for the first time in 2003. Belonging to the continental map of Asia will be the benchmark for inclusion.

4.3. Uniformity of the Level of Industrialization of the AECMembers Some argue that beyond Japan, most of these economies have been traditional, agriculture-dominant economies and may not be ready for an intra-regional economic integration. Uniformity, relative uniformity, of the level of industrialization of EU’s member economies has not been subject of research. Belonging to the map of Europe, became the key issue. Let us explore this issue. Based on sectoral shares of GDP (PPP) in 1999, Issing (2001) presents a comparative profile of the Euro-regime, USA, and Japan (Table 9). In Table 10 we present the profile of industrialization for the select economies of Northeast and Southeast Asia. Table 11 presents comparative GDP shares of the three sectors of the economies of Northeast and Southeast Asia selected for this study and of 15 EU economies for 1988 and 1997; the trend of industrialization is evident. A comparison of the 1970 figures of the above countries will point to the fact that these Asian economies have progressed to a higher level of industrialization at an accelerated rate since 1970s. They are no longer agriculture-dominant,traditional economies and they have proved much to the surprise of many that industrialization in Asia can progress beyond Japan.

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Table 3.9: Sectoral Shares of GDP (PPP), 1999 (%) Agriculture senices

Total Source: Issing (2001).

EurO-regime 2.8 28.5 68.7 100

USA 1.6 27.3 71.1 100

Japan 1.8 36.4 61.9 100

Table 3.10: Sectoral Shares of GDP, 2000 (%) Agnculm 1.8 Jwn Korea 14.2 china 11.9 Taiwan 2.4 Thailand 9.9 Singapore 0.1 Malaysia 8.7 16.7 Indonesia PhIllppitleS 19.9 Source: Asian Development Bank 200 1. Note: Figures for Korea 1980

h d w 36.4 37.8 64.0 34.6 44.5 33.2 46.8 43.5 34.4

senice 61.9 48.1 24.1 63.0 45.7 66.6 44.6 39.8 45.7

Total 100 100 100 100 100

100 100 100 100

In Table 11A and Table 11B, we present the profile of industrialization of Northeast and ASEAN-5 and the EU. We present the profile based on annual data of sectoral shares of GDP for the same set of economies since 1980 (Graph 17 through Graph 25). We present the relevant data for (a) the EU-15 countries in Graphs 17-19, (b) the Northeast Asia inclusive for China, Hong Kong, Taiwan, Japan, and Korea in Graphs 20-22, and (c) for Southeast Asia, the ASEAN-5, Indonesia, Malaysia, Philippines, Singapore, and Thailand, in Graphs 2325. GDP shares from the agricultural sector of all these economies are declining and shares of industrial and service sectors are moving upward. Be it noted that there are variations in the historical progression of the profile of industrialization for member economies in each group, inclusive of EU. We extend the analysis for a historical profile based on data on sectoral share of GDP for 1980 through 1998 for the set of countries and regions in Asia and Europe.

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Table 3.1 1A: Sectoral Share of GDP Based on Value Added Asia, 1980-1998 (“A) corn@ Japan

Industry

china

Hong Kong

Phlllppines

Indonesia

Malaysia

Thailand

Singapore

India

Bangladesh

Pakistan

Sri Lanka

Nepal

Services

1980 41.92 3.68 54.40 48.52 30.09 2 1.39 31.72 0.82 67.46 38.79 25.12 36.10 41.72 23.97 34.31 37.83 21.91 40.26 28.68 23.24 48.08 38.11 1.28 60.60 23.77 37.78 38.46 23.82 38.09 38.09 24.92 29.52 45.56 29.64 27.55 42.81 11.92 61.77 26.31

1981 41.92 3.52 54.56 46.39 31.79 21.83 31.83 0.68 67.49 39.17 24.89 35.94 41.21 23.36 35.43 37.16 20.76 42.08 30.10 21.36 48.54 37.86 1.21 60.93 24.62 36.46 38.92 24.92 30.69 44.39 22.60 30.83 46.57 27.99 27.70 44.31 12.36 60.90 26.73

1982 41.44 3.41 55.14 45.01 33.27 21.72 30.02 0.68 69.31 38.83 23.35 37.82 37.90 23.94 38.15 34.92 20.47 44.62 29.51 18.55 51.94 36.82 1.07 62.11 25.20 34.92 39.89 25.69 30.53 43.78 22.26 31.56 46.18 26.29 26.37 47.35 12.86 61.01 26.14

1983 40.77 3.38 55.85 44.59 33.04 22.37 31.85 0.61 67.54 39.23 22.37 38.40 39.80 22.78 37.42 35.51 19.38 45.11 30.58 20.06 49.36 37.99 0.90 61.11 25.16 35.84 38.99 25.17 30.44 44.39 22.07 30.26 47.67 26.34 28.26 45.40 12.80 60.30 26.90

1984 41.19 3.31 55.50 43.31 32.01 24.68 32.21 0.52 67.27 37.91 24.75 37.34 39.18 22.75 38.07 35.51 19.36 45.13 31.98 17.57 50.45 39.23

1985 40.98 3.19 55.83 43.13 28.35 28.52 29.89 0.48 69.63 35.07 24.58 40.35 35.90 23.24 40.85 35.51 19.30 45.19 31.84 15.81 52.35 36.63 0.85 0.75 59.92 62.61 25.70 26.06 34.22 32.77 40.08 41.17 24.50 23.87 32.30 32.05 43.20 44.08 22.71 22.47 27.92 28.54 49.38 49.00 26.32 26.20 28.66 27.69 45.02 46.11 12.60 15.11 60.99 51.71 26.41 33.18

1986 40.31 3.00 56.70 44.04 27.09 28.87 30.34 0.44 69.21 34.58 23.95 41.48 33.81 24.27 41.92 35.51 19.21 45.28 33.08 15.66 51.25 37.55 0.62 61.82 26.24 31.45 42.31 23.19 31.00 45.80 23.35 27.62 49.03 26.60 27.09 46.31 15.85 51.46 32.68


91

Table 3.1 1A: Sectoral Share of GDP Based on Value Added

Japan

china

Hong Kmg

Philippines

Indonesia

Malaysia

Thailand

Singapore

India

Bangladesh

Pakistan

Sri Lanka

Nepal

40.37 2.83 56.79 43.90 26.79 29.31 29.36 0.36 70.28 34.43 24.01 41.56 36.34 23.39 40.27 35.51 19.34 45.15 33.34 15.73 50.92 37.35 0.51 62.15 26.27 31.10 42.64 22.18 31.27 46.54 24.02 26.25 49.73 27.44 26.96 45.60 15.83 50.72 33.45

2.67 56.61 44.13 25.66 30.21 27.64 0.32 72.04 35.16 22.96 41.88 37.27 22.48 40.25 35.51 19.32 45.17 34.58 16.18 49.24 38.07 0.39 61.53 26.26 32.10 41.63 22.44 29.76 47.80 24.38 26.02 49.60 26.68 26.34 46.98 16.17 50.90 32.93

2.61 56.47 43.04 25.00 31.95 26.66 0.28 73.07 34.90 22.69 42.41 38.35 21.66 40.00 35.51 19.25 45.24 36.25 15.08 48.67 36.67 0.32 63.01 27.09 30.87 42.04 23.02 28.55 48.43 23.89 26.95 49.16 26.76 25.63 47.62 16.54 50.37 33.09

2.54 56.30 41.61 27.05 31.34 25.27 0.26 74.47 34.47 21.90 43.62 39.12 19.41 41.47 40.35 18.72 40.93 37.22 12.50 50.28 34.81 0.27 64.92 27.09 30.76 42.14 23.62 28.27 48.11 25.19 25.98 48.83 25.97 26.32 47.71 16.24 51.63 32.13

2.37 56.42 42.11 24.46 33.43 23.06 0.23 76.71 34.01 20.98 45.00 40.40 18.26 41.34 41.26 17.22 41.52 38.66 12.65 48.69 35.48 0.22 64.30 25.78 31.05 43.18 23.99 28.29 47.72 25.76 25.66 48.57 24.98 26.75 48.27 17.89 48.64 33.48

2.25 57.38 43.92 21.77

34.31 20.89 0.20 78.91 32.84 21.82 45.34 39.64 18.68 41.68 41.19 16.51 42.30 38.06 12.30 49.65 34.92 0.20 64.88 26.14 30.41 43.44 24.67 27.30 48.03 25.45 26.20 48.36 24.44 25.86 49.70 20.86 45.88 33.25

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Table 3.1 1A: Sectoral Share of GDP Based on Value Added

2.06 58.72 china 47.43 19.87 32.70 Hong Kmg 18.49 0.19 81.32 Ph_llrppines 32.68 21.60 45.71 Indonesia 39.68 17.88 42.44 Malaysia 41.55 15.69 42.76 Wand 38.90 10.41 50.70 Singapore 34.00 0.17 65.83 India 25.75 30.34 43.91 25.80 Bangladesh 24.77 49.42 Pakistan 25.26 24.82 49.93 Sri Lanka 25.77 24.64 49.59 2 1.25 Nepal 43.33 Services 35.42 Source: World Development Indicators

38.26 2.14 59.60 47.85 20.23 31.93 16.43 0.17 83.40 32.53 22.00 45.47 40.64 17.29 42.07 42.18 14.12 43.70 39.04 10.75 50.21 33.23 0.16 66.60 26.24 30.11 43.65 26.02 24.27 49.71 24.91 25.33 49.76 26.39 23.77 49.84 21.72 43.07 35.22

38.16 1.94 59.90 48.80 20.51 30.69 16.08 0.14 83.77 32.06 21.63 46.31 41.80 17.14 41.06 42.22 12.72 45.06 39.01 11.08 49.91 34.00 0.17 65.83 27.17 28.35 44.47 26.18 24.80 49.01 24.53 25.89 49.59 26.71 23.01 50.28 22.75 41.76 35.49

37.80 1.88 60.32 49.51 20.39 30.09 15.50 0.13 84.38 32.09 20.62 47.30 43.46 16.67 39.87 45.45 12.59 41.96 40.91 9.60 49.48 34.61 0.18 65.21 26.09 29.26 44.65 26.52 24.16 49.32 25.01 25.20 49.80 26.45 22.43 51.12 22.92 41.51 35.58

37.18 1.74 61.07 49.99 19.09 30.93 14.71 0.12 85.17 32.21 18.69 49.10 44.33 16.09 39.58 44.64 11.15 44.21 41.30 9.73 48.97 34.53 0.15 65.32 26.13 27.49 46.39 27.09 23.13 49.78 24.50 26.36 49.15 26.90 21.87 5 1.23 22.86 41.43 35.70

48.73 18.39 32.88

31.61 16.90 51.50 45.28 19.54 35.18 43.55 13.16 43.28 41.16 11.19 47.65 35.22 0.13 64.64 24.74 29.32 45.94 27.92 22.19 49.89 24.69 26.42 48.89 27.54 21.11 5 1.35 22.16 40.49 37.35

93


Table 3.1 1B: Sectoral Share of GDP Based on Value Added European Union, 1980-1998 (“3) CoLmlIy

Finland

Sweden

Denmark

Netherlands

Belgium

1980 39.63 9.81 50.57 33.62 3.68 62.71 28.87 5.50 65.63 32.21 3.47 64.32 33.51 2.08 64.41

1981 39.24 9.12 51.64 32.48 3.76 63.77 27.00 5.92 67.08 32.34 4.01 63.66 30.99 2.23 66.78

1982 38.37 9.03 52.60 32.47 3.76 63.77 27.12 6.45 66.44 31.88 4.17 63.95 31.48 2.30 66.22

1983 38.29 8.77 52.94 33.04 3.83 63.13 27.08 5.55 67.37 31.88 4.1 1 64.01 31.39 2.44 66.17

1984 37.97 8.70 53.33 34.30 3.81 61.89 27.57 6.28 66.16 32.26 4.01 63.72 30.72 2.33 66.95

1985 36.88 8.26 54.86 34.43 3.69 61.88 27.88 5.64 66.48 32.37 3.93 63.70 31.35 2.19 66.46

1986 36.35 7.72 55.93 34.95 3.58 61.47 28.63 5.26 66.11 30.20 4.16 65.65 30.74 2.12 67.13

30.69 4.02 65.29

2.17 2.31 109.35 104.10 30.51 30.32 3.74 3.88 65.61 65.95

Lwrembourg

FranCe

33.73 4.24 62.03

32.54 4.14 63.32

31.67 4.58 63.75

31.36 4.23 64.40

Y-

Greece a member of EU started with a 14 percent share of GDP from the agricultural sector in 1980 and in 1995 this share came down to 11 percent, a very modest decline. Greece’s share of GDP from its industrial sector at 25 percent in 1980 did not move upward while its share of GDP from its service sector moved up some 10 points over the same period. In general, a preliminary review of the sectoral shares of GDP of the ten new EU members tells us a different story of the levels of industrialization. In Northeast Asia, China’s profile substantially differs from that of other economies in the region, albeit Hong Kong in this group has a very

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Table 3.1 1B: Sectoral Share of GDP Based on Value Added European Union, 1980-1998 (“A),(continued) com&y

Services

1980 39.29 5.79 54.92

1981 37.87 5.38 56.75

1982 37.00 5.15 57.M

1983 36.10 5.27 58.64

1984 35.62 4.68 59.70

1985 35.17 4.48 60.34 37.30 5.92 56.79

24.97 14.22 60.82

24.64 14.23 61.13

23.32 14.71 61.97

23.16 13.53 62.72

23.34 14.04 62.62

23.40 13.80 62.81

61.05 35.67 5.62 58.72 37.49 7.13 55.38 23.87 12.87 63.26

33.40 3.29 63.31 40.91 1.98 57.11

8.74 60.65 33.20 3.27 63.52 37.77 2.03 60.20

35.89 4.36 59.76 42.64 2.15 55.20

35.53 4.01 60.45 42.17 2.26 55.57

34.77 3.77 61.46 42.26 2.35 55.39

34.31 3.57 62.12 41.91 2.08 56.01

32.99 3.75 63.26 40.85 2.36 56.79

1986 34.65 4.30

special economic structure. In Southeast Asia, apart fiom Singapore which has its own unique economic structure, Thailand presents a profile noticeably different from that of other four member economies. In addition, a third point remains to be noted. In Northeast Asia, several member economies have their respective shares of GDP from their respective service sectors moved upward, demonstrating their profiles of post-industrialized economic structure and their progressive advancement to the level of matured industrialized economies. Taiwan with its service sector at a very high level is a reference point. Japan of course is the leader. As we review the historical profile of the economies in Europe and Asia under study, we venture to make the following points: Firstly, each economy has its own profile which has evolved through its own history

95


Table 3.1 1B: Sectoral Share of GDP Based on Value Added European Union, 1980-1998 (%), (continued) CmnQJ

Finland

Sweden

Denm;nk

Netherlands

Belgium

1987 36.90 6.63 56.48 35.12 3.40 6 1.48 28.58 4.55 66.87 28.27 3.96 67.77 29.46 1.94 68.59

1988 37.10 6.53 56.37 34.79 3.24 61.98 27.96 4.35 67.68 28.65 3.92 67.43 30.27 1.88 67.85

1989 -1990 35.40 37.29 6.42 6.60 58.17 56.10 33.79 34.82 2.94 3.21 63.27 61.97 26.12 27.00 4.25 4.69 69.03 68.31 28.86 28.85 4.03 4.26 67.11 66.89 30.02 30.29 1.82 2.16 68.16 67.56

1991 32.17 5.56 62.27 31.76 2.47 65.77 26.17 3.99 69.83 28.56 3.94 67.49 28.46 1.81 69.73

5.09 63.82 29.95 2.30 67.75 26.55 3.78 69.67 27.48 3.62 68.91 28.03 1.66 70.32

2.02 104.11 29.58 3.54 66.87

1.93 98.69 29.80 3.34 66.87

1.83 88.54 29.31 3.50 67.20

1.20 93.30 28.81 3.02 68.17

124 95.91 28.06 2.83 69.11

1.44

1.32

41.86

42.66

1992 31.09

Luxembourg

FranCe

1.63 88.96 29.17 3.41 67.42

YServices

involving war and peace, and the continental economic integration in Europe has not been conditioned by varying levels of industrialization of the member economies. A search for a larger market with competitive shares of world output and trade brought the reality of Europeanization of Europe. The same will also be the agenda for an Asian continental economic cooperation, with one integrated economy on the map of Asia. Secondly, this model is immune fiom the stigma of the imperial model which collapsed under its historical circumstances. Third and finally, the paradgm of continental economic integration will facilitate restructuring the postWWII Breton Wood international financial institutions, which will help

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Table 3.1 1B: Sectoral Share of GDP Based on Value Added European Union, 1980-1998 (“A),(continued) country

SL2lViceS

1987 34.07 4.08 61.86 35.26 5.45 59.29 36.61 7.31 56.08 22.83 12.55 64.63

1988 - 1989 34.02 33.97 3.61 3.49 62.38 62.54 35.07 35.33 4.84 5.30 59.83 59.63 37.57 38.69 6.25 5.85 55.47 56.18 22.56 21.94 13.06 12.79 65.27 64.38

1990 33.39 3.21 63.40 34.94 4.63 60.43 36.68 6.38 56.94 21.81 11.30 66.89

1991 32.32 3.35 64.33 34.48 4.14 61.39 36.06 525 58.70 20.60 12.62 66.78

32.05 3.15 64.80 32.83 3.50 63.66 35.79 4.28 59.93 19.90 11.21 68.90

1992

9.61 60.54 32.64 3.24 64.11 37.65 1.97

9.76 60.66 32.52 3.13 64.35 37.03 1.78

9.68 61.75 32.22 3.12 64.66 36.65 1.88

8.00 61.19 32.22 3.12 64.66 35.03 1.87

7.43 61.66 32.29 2.72 64.98 32.84 1.81

7.74 61.59 31.50 2.43 66.07 31.81 1.88

60.38

61.19

61.47

63.10

65.36

66.31

integration of globalism and regionalism.

4.4. Asian Continental Economic Base in Terms of Its Shares of World Output and Trade Several issues, such as intra-Asian structural economic reform, the free movement of labor, and fluctuations of Asian currencies vis-a-vis euro and US dollar can be addressed independently. In Tables 12 through 17, we present GDP (PPP) in billions and export-import figures in 1995 constant US$ billions. Our presentations cover data for 1987 and 1997, so that we have a more comprehensive time profile of change over the decade. Trade analysis in these tables includes both exports and imports. Relative shares of an individual economy and of an individual region, as designated in the

97


Table 3.1 1B: Sectoral Share of GDP Based on Value Added European Union, 1980-1998 (%), (continued) COmlq Finland

Sweden

Denmark

Netherlands

Belgium

1993 31.80 5.17 63.04 29.56 2.1 1 68.33 26.54 3.55 69.91 27.17 3.14 69.69 27.37 1.55 71.09

1994 33.20 5.58 61.22 30.30 2.18 67.52 26.45 3.63 69.92 26.79 3.33 69.88 27.63 1.46 70.91

1995 35.03 4.46 60.51

1996 34.29 4.02 61.69

1997

26.80 3.99 69.21 26.87 3.10 70.03 28.10 1.20 70.71

27.30 1.16 71.54

27.62 1.13 71.25

1.08 95.79 27.43 2.34 70.22

1.01 10323 26.67 2.41 70.92

1.01 101.95 26.61 2.37 71.01

0.89 104.00 26.14 2.32 71.53

0.80 101.83 26.21 2.25 71.54

1.15 44.29

1.08 44.32

1.06 44.18

1.10 44.19

1.09 44.15

1998

Luxembourg

FlallG2

Y-

study, have not varied very much. It should be noted that the AEC, beginning with the 3 + 5 model, will have a competitive share of world output and trade (Tables 14 and 15). Table 12 presents figures on GDP and trade of the 12 Euro countries and of USA. Table 13 relates to same data sets relative to all 15 EU member economies. It is instructive to note that GDP figures (PPP) of 10 of the 15 EU countries, Austria, Belgium, Denmark, Finland, Greece, Ireland, Luxembourg, the Netherlands, Portugal, and Sweden, as late as in 1997, remain less than 1 percent of world GDP, while Spain's share at 1.68 percent in 1997 comes next. Germany, France, Italy, and the UK,

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Table 3.1 1B: Sectoral Share of GDP Based on Value Added (continued) European Union, 1980-1998 (‘A), counby 1993 1994 1995 1996 1997 31.29 2.97 65.74 31.80 3.55 64.65 35.64 3.75 60.61 19.73 10.53 69.74

31.27 2.90 65.83 31.67 3.30 65.04 35.43 3.96 60.60 18.70 11.16 70.14

31.46 2.87 65.67

30.81 2.82 66.37

2.98 25.57 35.21 3.93 60.86 17.70 10.62 71.68

3.45 25.06

7.24 62.72 30.78 2.23 66.99 31.38 1.84

626 62.01 30.83 2.25 66.92 31.59 1.76

5.65 60.59 30.48 1.54 67.97 31.74 1.90

30.49 1.44 68.07 31S O 1.83

66.64 66.78 Source: World Development Indicators

66.36

66.67

1998

30.50 2.63 66.87

each have a share of 3-plus percent, while the United States maintains a share of 21 percent. Following economic integration, the EU and the Euroregime’s shares came to be 20 percent and 16 percent, respectively, in 1997. The net result is: the two economic units across the Atlantic, the EU and the USA, have become competitive actors in the world market. Table 14 deals with relevant data for East Asian economies, China, Hong Kong, Taiwan, Korea, and Japan, and offers a quick comparison with those of the Euro-regime, EU, and USA. Table 15 covers ASEAN-5 and also adds figures for the same three economic units, the EU, the Euroregime, and the USA. Table 16 presents the related data sets for South

99


Table 3.12: GDP and Trade of Euro Countries in 1987 and 1997

Austria Belgium Finland FlanCI2 YGreece

Ireland

GDP % ofworld GDP 1987 1997 189.38 122.93 0.49 0.52 245.65 165.16 0.63 0.70 107.87 75.04 0.28 0.32 1260.55 855.32 3.25 3.64 1858.89 4.79 149.76 99.73 0.39 0.42 78.15 34.2

EXPORT % of world eqmi 1987 1997 56.65 104.61 1.45 1.40 126.66 209.2 3.23 2.79 30.69 57.81 0.78 0.77 215.74 404.39 5.40 5.50 701.48 9.37 15.27 23.14 0.3 1 0.39 66.95 21.30 0.54 0.89 170.77 317.79 4.36 4.25 12.42 22.28 0.32 0.30 271.58 155.86 3.98 3.63 19.56 37.64 0.50 0.50 73.26 167.73 1.87 2.24 2362.60 1327.20 33.86 31.56 400.50 1065 10.22 14.23 3919.7 7485.5

IMPORT % of world import

1987 57.17

1.42 118.56 2.94 29.28 0.73 224.18

5.56 18.18 0.45 21.56 0.53 168.89 4.19 12.22 0.30 149.98 3.72 20.25 0.50 67.40 1.67 1286.14 31.89 572.73 14.20 4032.52

1997 105.99 1.44 194.74 2.65 44.58 0.61 356.38 4.85 652.8 8.89 34.34 0.47 56.72 0.77 276.69 3.77 19.32 0.26 242.99 3.31 45.24 0.62 162.31 2.21 2169.10 29.53 1200.40 16.34 7346.30

0.15 0.20 847.05 1234.40 3.61 3.18 Luxembourg 5.75 15.33 0.02 0.04 TheNetherlands 218.97 350.71 0.93 0.90 Porngal 90.19 149.85 0.38 0.39 410.98 653.25 spain 1.75 1.68 Total 4071.31 6160.93 17.33 15.88 USA 5006.72 8149.82 21.31 21.00 World total 23492.08 38800.99 Source: World Bank Yearbook 2001 Note: 1. GDP is PPP-adjusted international $ billions; 2. export and import are in 1995 constant US$ billions at market price (not adjusted for intra-EU trade.); 3. the second row of each country states percentages. Italy

Asian economies and the three economic units. Finally, Table 17 presents AustraliahJew Zealand plus the three economic regimes. It is evident that in 1997, the shares of world GDP and world export and imports for the select group of Northeast Asia and Southeast Asia (Tables 14 and 15) add up to (21.21 + 4.06) 25.27% of world GDP,

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Table 3.13: GDP and Trade of EU Countries in 1987 and 1997

A h a Belgium

GDP

EXPORT

% of world GDP

% of world export

1987 122.93 0.52 165.16 0.70

Denmark Finland FmCe

75.04 0.32 855.32 3.64

Y99.73 0.42 34.2 Ireland 0.15 847.05 IdY 3.61 5.75 Luxembourg 0.02 218.97 The 0.93 90.19 Poltugal 0.38 410.98 Spain 1.75 135.99 Sweden 0.58 832.98 UK 3.55 Total 5502.77 23.42 USA 5006.72 21.31 23492.08 World total Source: Same as Table 3.12k Greece

1997 189.38 0.49 245.65 0.63 132.01 0.34 107.87 0.28 1260.55 3.25 1858.89 4.79 149.76 0.39 78.15 0.20 1234.4 3.18 15.33 0.04 350.71 0.90 149.85 0.39 653.25 1.68 187.75 0.48 1239.96 320 7853.5 20.24 8149.82 21.00 38800.99

1987 56.65 1.45 126.66 3.23 45.47 1.16 30.69 0.78 215.74 5.50

15.27 0.39 21.30 0.54 170.77 4.36 12.42 0.32 155.86 3.98 19.56 0.50 73.26 1.87 66.31 1.69 223.39 5.70 1824.19 46.54 400.50 10.22 3919.67

1997 104.61 1.40 209.20 2.79 69.26 0.93 57.81 0.77 404.39 5.40 701.48 9.37 23.14 0.31 66.95 0.89 317.79 4.25 22.28 0.30 271.58 3.63 37.64 0.50 167.73 2.24 113.83 1.52 372.88 4.98 2940.57 39.28 1064.95 14.23 7485.47

IMPORT % of world i m p o ~

1987 57.17 1.42 118.56 2.94 41.08 1.02 29.28 0.73 224.18 5.56

18.18 0.45 21.56 0.53 168.89 4.19 12.22 0.30 149.98 3.72 20.25 0.50 67.40 1.67 62.86 1.56 228.58 5.67 1778.64 44.11 572.73 14.20 4032.52

1997 105.99 1.44 194.74 2.65 63.13 0.86 44.58 0.61 356.38 4.85 652.8 8.89 34.34 0.47 56.72 0.77 276.69 3.77 19.32 0.26 242.99 3.31 45.24 0.62 162.31 2.21 93.05 1.27 386.06 5.26 2734.35 37.22 1200.38 16.34 7346.28

101


Table 3.14: GDP and Trade of East Asian Countries in 1987 and 1997 GDP

E)(PORT

IMPORT

% of world GDP

% of world export

% of world import

1987 1997 1987 1997 1987 1997 124726 3880.21 46.53 190.82 49.06 160.65 5.31 10.00 1.19 2.55 1.22 2.19 wchina 77.79 153.22 76.43 230.66 69.23 238.86 0.33 0.39 1.95 3.08 1.72 3.25 Taiwan 148.40 291.40 71.41 141.26 50.54 136.81 0.63 0.750 1.82 1.89 1.25 1.86 Korean 280.49 703.96 67.36 203.76 52.31 183.54 Republic 1.19 1.81 1.72 2.72 1.30 2.50 Japan 1971.91 3199.26 316.41 572.10 220.38 457.62 8.39 8.25 8.07 7.64 5.47 6.23 1177.48 441.52 578.14 1338.61 Total 3725.85 8228.04 16.03 10.95 14.75 17.88 15.86 21.21 2169.05 1286.14 1327.20 2362.63 Eun, 4071.31 6160.93 29.53 31.89 33.86 31.56 17.33 15.88 2734.35 1778.64 1824.19 2940.57 Eu 5502.77 7853.50 37.22 44.11 46.54 39.28 23.42 20.24 1200.38 572.73 400.50 1064.95 8149.82 USA 5006.72 16.34 14.20 10.22 14.23 21.31 21.00 4032.52 7346.28 7485.47 3919.67 World total 23492.08 38800.99 Source: World Bank Yearbook 2001. Note: (1) GDP is PPP-adjusted international $ billions; (2) export and import are in 1995 constant US$ billions at market price; (3) the second row of each country states percentages.

china

(17.88 + 5.20) 23.08% of world export, and (16.03 + 5.67) 21.70% of world imports. It follows that the Asian continental economy will thus be able to advance to a level of effective competition in the world market. The process will further contribute to the maximization of world economic gains. The principle of inclusion will progressively lead to the admission of economies of South Asia and the South Pacific to the Asian Economic Community. The learning model will be the EU as it moves on to Europeanization of Europe with European economies in one continental unit. We follow the above analyses by graphic presentations which show the annual data for the 1975-1999 time period for the economies of Asia, individual economies, and each sub-regional total: Northeast Asia exclusive of Japan, Northeast Asia inclusive of Japan, Southeast Asia-5, Northeast and Southeast Asia-5, South Asia-5, Northeast exclusive of Japan, Southeast-5 and South Asia-5, Northeast, Southeast, Euro and

M Dutta

102

Table 3.15: GDP and Trade of ASEAN Countries in 1987 and 1997

Indonesia Malaysia PhilipitleS Singapore Thailand Total

Eun, EU USA

World total

GDP

EXPORT

IMPORT

YOof world GDP

YOof world export

% of world impcnt

1987 270.64 1.15 63.39 0.27 165.92 0.71 28.14 0.12 143.09 0.61 671.19 2.86 4071.31 17.33 5502.77 23.42 5006.72 21.31 23492.08

1997 644.82 1.66 185.76 0.48 276.50 0.7 1 77.95 0.20 390.37 1.01 1575.41 4.06 6160.93 15.88 7853.50 20.24 8149.82 21.00

1987 28.29 0.72 26.40 0.67 13.39 0.34 38.18 0.97 20.55 0.52 126.81 3.24 1327.20 33.86 1824.19 46.54 400.50 10.22

1997 62.06 0.83 94.11 1.26 36.57 0.49 122.66 1.64 73.50 0.98 388.92 5.20 2362.63 31.56 2940.57 39.28 1064.95 14.23

1987 28.79 0.7 1 19.09 0.47 13.58 0.34 43.34 1.07 20.25 0.50 125.05 3.10 1286.14 31.89 1778.64 44.11 572.73 14.20

1997 75.16 1.02 95.62 1.30 43.75 0.60 129.93 1.77 72.02 0.98 416.48 5.67 2169.05 29.53 2734.35 37.22 1200.38 16.34

38800.99

3919.67

7485.47

4032.52

7346.28

Source: World Bank Yearbook 2001. Note: (1) GDP is PPP-adjusted international $ billions; (2) export and import are in 1995 constant US$ billions at market price; (3) the second row of each country states percentages

USA, Northeast exclusive of Japan, Southeast-5, South Asia-5, Euro, and USA, without specific graphic presentations for the EU. We move fi-om the decade based analyses presented in Tables 12 through 17 to an extended analysis based on annual data over a quarter of a century. Our objective is to capture any substantive variation in relative shares of world output and trade for the individual sovereign nation economies, the sub- groups they belong to, the sum of the sub-groups, and its relevance for the Euro-regime and the USA. The graphic presentations refer to the two parameters, shares of world output and world export, as we have argued at the outset. Graph 1 relates to shares of world GDP for Northeast Asia - China, Hong Kong (China), Korea, Taiwan (China), and of the group. Graph 2 relates to the shares of world exports for the above economies and of

103


Table 3.16: GDP and Trade of South Asian Countries in 1987 and 1997

B~gldeSh India Nepal Pakistan Sri Lanka Total

Eun, EU USA

World total

GDP % of world GDP 1987 1997 94.67 170.82 0.40 0.44 1962.31 904.62 5.06 3.85 27.27 13.34 0.07 0.06 229.05 114.35 0.59 0.49 56.31 28.67 0.15 0.12 2445.76 1155.65 4.92 4071.31 17.33 5502.77 23.42 5006.72 21.31 23492.08

6.30 6160.93 15.88 7853.50 20.24 8149.82 21.00 38800.94

EXPORT

IMPORT

% of world export 1987 1997 1.38 5.21 0.04 0.07 15.70 45.10 0.60 0.40 128 0.34 0.02 0.01 9.30 5.76 0.12 0.15 529 2.49 0.07 0.06 66.18 25.68 0.88 0.66

% of world impofi 1987 1997 2.62 726 0.10 0.06 63.04 27.40 0.86 0.68 1.83 0.60 0.02 0.01 14.12 9.91 0.19 0.25 6.70 3.70 0.09 0.09 92.96 44.23

132720 33.86 1824.19

46.54 400.50 10.22 3919.67

2362.63 31.56 2940.57 39.28 1064.95 14.23 7485.47

1.10 1286.14 31.89 1778.64 44.11 572.13 14.20 4032.52

127 2169.05 29.53 2734.35 37.22 1200.38 16.34 7346.28

Source: World Bank Yearbook 2001. Note: (1) GDP is PPP-adjusted international $ billions; (2) export and import are in 1995 constant US$ billions at market price; (3) the second row of each country states percentages.

the group. Graph 3 covers shares of world GDP of the above group inclusive of Japan. Graph 4 refers to shares of world export of the above group inclusive of Japan. Graph 5 deals with shares of world GDP of ASEAN-5 (Indonesia, Malaysia, Philippines, Singapore, and Thailand and the group total). Graph 6 covers shares of world export for the above group of economies. Graph 7 covers shares of world GDP of Northeast inclusive of Japan and Southeast-5. Graph 8 records shares of world export for the economies in Graph 7. Graph 9 describes shares of world GDP for South Asia-5-Bangladesh, India, Nepal, Pakistan, Sri Lanka and the group. Graph 10 presents shares of world export for the economies in Graph 9 and its total. Graph 11 presents shares of world GDP for the three sub-regional groups, Northeast, Southeast, and South Asia. Graph 12 does the shares of

M Dutta

104

Table 3.17: GDP and Trade of ANZ in 1987 and 1997

Australia Newzealand Total Euro

EU USA World total

GDP % of world GDP 1987 1997 251.35 425.30 1.07 1.10 45.65 68.69 0.19 0.18 297.01 493.98 1.26 1.27 407'1.31 17.33 5502.77 23.42 5006.72 21.31 23492.08

6160.93 15.88 7853.50 20.24 8149.82 21.00 38800.99

EXPORT

IMPORT

% of world e x p i 1987 1997 41.72 83.92 1.12 1.06 19.19 12.68 0.26 0.32 54.40 103.11 1.39 1.38

% of world impo~ 1987 1997 39.49 93.00 0.98 127 11.15 19.24 028 0.26

132720 33.86 1824.19

46.54 400.50 10.22 3919.67

2362.63 31.56 2940.57 39.28 1064.95 14.23 7485.47

50.64 1.26 1286.14 31.89 1778.64 44.11 572.73 14.20 4032.52

112.24 1.53 2169.05 29.53 2734.35 37.22 1200.38 16.34 7346.28

Source: World Bank Yearbook 2001. Note: (1) GDP is PPP-adjusted international $ billions; (2) export and import are in 1995 constant US$ billions at market price; (3) the second row of each country states percentages.

world export for the groups in Graph 11. Graph 13 presents shares of world GDP for the groups - non-exclusive of Japan, Southeast Asia, Euro, and USA. Graph 14 presents the shares of world export for the groups in Graph 13. Graph 15 presents of shares of world GDP of the groups in Graph 13 plus the South Asian total. Graph 16 records shares of world export for groups in Graph 14 adding the South Asian total. The annual data-based graphic presentation covering the time period 1975-1999 shows a pattern for the regional shares of world output and export in support for the case we argue for regional economic integration. In Section 4, we have discussed the issue of divergent levels of industrialization of Asia's newly industrializedindustrializingeconomies and its relevance for the integration of Asian economic community. In Table 10 we have presented the level of industrialization of the selected economies of Northeast and Southeast Asia in 2000. Table 11 presents related data at two discrete time points, 1988 and 1997 for ASEAN-5, Northeast Asia-5, and EU-15. In Graphs 17 through 25, we make graphic presentations of levels of industrialization. Graphs 17 to 19 present the

105


Table 3.18: GDP, Share of World, 1975-1999 (%) COUNTRY

china HongKongChina

JF Korea, Rep. Taiwan N d e a s t Asia Total (Ex.Japan) Northeast Asia Total (Inc.Japan) Indonesia Malaysia Philippines Singapore Thailand SoutheastAsia Total Bangladesh

India Nepal Pakistan Sri Lanka south Asia Total

Eun, unitedstates

Austria Belgium Denmark

Finland FI-rmce

YGreece

Ireland *dY

hembow3 Netherlands Poltugal spain

Sweden United Kingdom

1975 3.14 0.18 8.35 0.71

1916 2.93 0.20 824 0.75

1977 2.97 0.21 825 0.80

1978 3.13 022 8.29 0.83

1979 3.23 0.24 8.40 0.86

1980 3.33 025 8.42 0.83

0.78 0.20 0.79 0.08 0.42 2.27 0.36 3.57 0.06 0.37 0.1 1 4.47 19.81 22.16 0.61 0.86

0.77 0.21 0.82 0.08 0.44 2.33 0.36 3.45 0.06 0.37 0.11 4.34 19.74 22.25 0.61 0.86

0.81 0.22 0.83 0.09 0.46 2.40 0.35 3.54 0.06 0.37 0.11 4.42 19.49 22.24 0.61 0.83

0.85 0.22 0.84 0.09 0.49 2.48 0.35 3.58 0.06 0.37 0.11 4.47 19.18 22.42 0.59 0.82

0.89 023 0.84 0.09 0.49 2.56 0.36 325 0.06 0.36 0.11 4.14 19.07 22.26 0.59 0.81

0.94 0.24 0.87 0.10 0.50 2.66 0.36 3.37 0.05 0.39 0.11 428 19.03 21.57 0.59 0.82

0.35 4.23

0.33 4.18

0.32 4.14

0.3 1 4.09

0.32 4.06

0.33 3.99

0.49 0.14 3.91 0.03

0.49 0.13 3.96 0.03

0.49 0.14 3.90 0.03

0.50 0.15 3.86 0.03

0.49 0.14 3.91 0.03

0.49 0.15 3.94 0.03

0.39 2.10 0.72

0.40 2.06 0.69

0.41 2.04 0.65

0.40 1.98 0.63

0.41 1.90 0.63

0.42 1.89 0.63

106

M Dutta

Table 3.18: GDP, Share of World, 1975-1999 COUNTRY China Hong Kong, China Japan Korea,Rep. Taiwan Northeast Asia Total (Ex. Japan) Northeast Asia Total (Inc.Japan) Indonesia Malaysia Philippines Singapore Thailand SoubeastAsia Total Bangladdl India

Nepal

Pakistan Sri Lanka South AsiaTotal Eun, unitedstates

Austria Belgium Denmark Finland FranCe

1981 3.43 0.27 8.48 0.87

rh),(continued)

0.98 0.25 0.87 0.1 1 0.53 2.75 0.38 3.50 0.06 0.41 0.12 4.47 18.72 21.50 0.57 0.79

1982 3.72 027 8.64 0.92 0.62 5.54 14.17 1.oo 0.27 0.91 0.12 0.55 2.84 0.40 3.62 0.06 0.43 0.12 4.62 18.87 20.71 0.58 0.80

1983 3.97 028 8.53 0.99 0.65 5.89 14.42 1.04 0.28 0.90 0.12 0.55 2.89 0.40 3.76 .0.05 0.44 0.12 4.77 18.51 21.16 0.58 0.77

1984 4.35 0.30 8.44 1.02 0.65 6.32 14.76 1.10 029 0.80 0.12 0.56 2.87 0.40 3.72 0.06 0.44 0.13 4.74 18.01 21.46 0.55 0.75

1985 4.73 0.28 8.47 1.05 0.63 6.70 15.17 1.09 028 0.71 0.11 0.57 2.76 0.40 3.77 0.06 0.46 0.12 4.82 17.71 21.49 0.54 0.74

1986 4.95 0.30 8.38 1.12 0.63 7.01 15.40 1.14 0.27 0.71 0.11 0.58 2.80 0.40 3.81 0.06 0.47 0.12 4.86 17.46 21.58 0.53 0.71

0.33 3.95

0.33 4.03

0.33 3.96

0.33 3.84

0.32 3.75

0.32 3.69

0.48 0.15 3.88 0.03

0.48 0.15 3.87 0.02

0.46 0.15 3.79 0.02

0.45 0.15 3.70 0.02

0.45 0.15 3.68 0.02

0.44 0.14 3.64 0.02

0.42 1.85 0.62

0.43 1.86 0.62

0.42 1.84 0.61

0.39 1.78 0.61

0.39 1.74 0.60

0.38 1.72 0.58

YGreece Ireland Italy

Luxanbourg Netherlands p o w spain

Sweden UnitedKingdom


107

Table 3.18: GDP, Share of World, 1975-1999 (%), (continued) COUNTRY

china Hong Kong China

Japan Korea, Rep. Taiwan Noriheast Asia Total @x. Japan) NortheastAsia Total (Inc. Japan) Indonesia Malaysia PhlllppillS SitlgapOE Thailand Sou&east Asia Total Bangladesh

India Nepal Pakistan Sri Lanka

SouthAsiaTotal EurO unitedstates

Austria Belgium Denmark Finland FrallC42

1987 5.3 1 0.33 8.39 1.19 0.63 7.47 15.86 1.15 0.27 0.71 0.12 0.61 2.86 0.40 3.85 0.06 0.49 0.12 4.92 17.33 21.31 0.52 0.70

1988 5.62 0.34 8.53 1.26 0.61 7.84 16.37 1.12 028 0.72 0.13 0.66 2.90 0.40

0.32 3.64

0.06 0.5 1 0.12 5.15 17.32 21.04 0.5 1 0.70 0.38 0.32 3.65

1989 5.62 0.34 8.59 128 0.64 7.88 16.47 1.18 0.30 0.73 0.13 0.71 3.05 0.39 4.17 0.06 0.52 0.12 5.26 17.32 21.18 0.52 0.70 0.37 0.33 3.66

1990 5.71 0.34 8.83 1.37 0.66 8.07 16.90 1.25 0.3 1 0.73 0.14 0.77 321 0.40 4.32 0.06 0.53 0.12 5.43 17.46 21.10 0.53 0.7 1 0.36 0.32 3.67

0.42 0.15 3.61 0.02

0.42 0.15 3.59 0.03

0.42 0.15 3.55 0.03

0.38 1.75 0.58 3.55

0.39 1.76 0.57 3.56

0.39 1.77 0.56 3.51

4.06

0.41 0.16 3.56 0.03

1991 6.16 0.35 9.05 1.48 0.68 8.67 17.72 1.35 0.34 0.71 0.15 0.83 3.38 0.41 429 0.06 0.55 0.13 5.44 17.50 20.71 0.54 0.7 1 0.36 0.30 3.67 5.31 0.42 0.16 3.57 0.03

1992 6.89 0.37 8.93 1.53 0.69 9.48 18.41 1.41 0.36 0.69 0.15 0.88 3.50 0.42 4.43 0.06 0.58 0.13 5.62 17.40 20.97 0.53 0.70 0.35 0.29 3.64 5.32 0.41 0.16 3.53 0.03

0.40 1.80 0.56 3.46

0.40 1.82 0.55 3.37

0.40 1.80 0.53 3.28

YGreece

Ireland IdY Luxembourg

Netherlands Portugal

spain Sweden

UnitedKingdom

M. Dutta

108

Table 3.18: GDP, Share of World, 1975-1999 (%), (continued) 1993 7.69 0.38 8.77 1.58 0.71 10.35 19.12 1.47 0.39 0.69 0.18 0.93 3.66 0.42 4.54 0.07 0.59 0.14 5.76 16.87 21.14 0.53 0.67 0.34 028 3.52 5.15 0.40 0.16 3.43 0.03

1994 8.39 0.39 8.54 1.65 0.73 11.15 19.69 1.52 0.41 0.69 0.19 0.98 3.78 0.43 4.71 0.07 0.60 0.14 5.94 16.77 21.27 0.52 0.66 0.35 0.28 3.49 5.14 0.40 0.17 3.39 0.04

1995 9.09 0.38 8.38 1.74 0.72 11.94 20.32 1.59 0.43 0.70 0.19 1.03 3.95 0.43 4.89 0.07 0.61 0.14 6.14 16.56 21.00 0.51 0.65 0.35 0.28 3.43 5.06 0.39 0.18 3.36 0.04

1996 9.57 0.39 8.44 1.79 0.73 12.48 20.93 1.64 0.46 0.70 020 1.06 4.06 0.43 5.03 0.07 0.61 0.14 6.28 16.14 20.94 0.50 0.63 0.34 027 3.32 4.90 0.39 0.19 326 0.04

1997

1998

1999

10.00 0.39 825 1.81 0.75 12.96 21.21 1.66 0.48 0.71 0.20 1.01 4.06 0.44 5.06 0.07 0.59 0.15 6.30 15.88 21.00 0.49 0.63 0.34 028 325 4.79 0.39 020 3.18 0.04

10.57 0.36 7.82 1.67

10.93 0.36 7.60 1.77

1.45 0.43 0.69 0.19 0.89 3.65 0.45 526 0.07 0.59 0.15 6.52 15.93 21.30 0.49 0.63 0.34 029 3.26 4.79 0.39 0.21 3.16 0.04

1.43 0.45 0.68 0.20 0.89

5.40 0.07 0.60 0.15 6.68 15.77 21.37 0.49 0.63 0.33 029 3.23 4.70 0.39 023 3.08 0.04

0.39 p o w Spain 1.73 0.51 Sweden United Kingdom 329 Source: World Bank Yearbook 2001

0.39 1.73 0.51 328

0.38 1.70 0.51 3.28

0.38 1.68 0.49 322

0.39 1.68 0.48 320

0.39 1.71 0.48 3.19

0.39 1.72 0.48 3.17

COUNTRY

china Hong Kong, china Japan Korea,Rep. Taiwan NE Asia Total @x. Japan) NE Asia Total @c. Japan) Indonesia Malaysia Philrppines Singapore Thailand SoutheastAsia Total Bangladesh India Nepal Pakistan Sri Lanka SouthAsia Total Eun, unitedstates

Austria Belgium Denmark Finland FmnCe

YGreece

Ireland Italy Lwcembourg Netherlands

3.64 0.46


109

Graph 1 Share of World Total GDP: Northeast Asia Countries (Exclude Japan) I+China

Kong, Chma +Korea,

+Hong

Rep +Taiwan

-8-NortheastAsa

Total (ExcludeJapan)

I

14% 12%

1O K

E

8%

0

2

2

6% 4%

2%

0%

~ ?

I

?

Z

Z

~

,

Z

E

Z

~

Z

?

?

~

?

~

. - - - Z Z ? ? ? ? ? Z

~

Year

Source: World Development Indicator 200 1 and Asian Development Bank Indicator 2001. Note: 1) GDP is PPP-adjusted International $ billions. 2) Export and Import are in 1995 constant US$ billions.

Graph 2 Share of World Total Export: North East Asia Countries (Exclude Japan) +Hong

I-+China

Kong, China X- Korea, Rep +Tarwan

+Northeast

Asia Total (Exclude Japan)

1

10% -

*

8% -

6% -

p" 4% -

O%J

~

c m

,

, c c

c m

, w

,

, ~

,

,

c c m m m m 7 m- v m . m- m

~

,

,

m

m

, ~

m

,

,

m

m

o

,

,

m

m

Year

Source: Same as Graph I

-

,

,

m

m

,

N

m

,

, m

,

,

o

m

m

, ~

m

, m

: : z : z z : : : : z z z z : : z z

m

, ~

m

w

~

M. Dutta

110

Graph 3 Share of World Total GDP: Northeast Asia Countries (Include Japan) (+China

+Hong

Kong. China +Japan

+Korea,

Rep. +Taiwan

+Northeast

Asia Total (Include Japan)

25%

20% -

E

15% -

a,

Graph 4 Share of World Total Export: North East Asia Countries (Include Japan) I+China

+Hong

Kong, China +Japan

+Korea,

Rep. +Taiwan

+Northeast

Asia Total (include Japan)

j


111

Graph 5 Share of World Total GDP: ASEAN 5 Countries

I+

Indonesia +Malaysia

+Philippines

+Singapore

+Thailand

+Southeast

Asia Total

1

5%

Graph 6 Share of World Total Export: ASEAN 5 Countries

I+ 5%

J-

4% -4 .

t

3%--

6J n

--

Indonesia +Malaysia

+Philippines

-+-Singapore +Thailand

+Southeast

Asia Total

I

112

M Dutta

Graph 7 Share of World Total GDP: Northeast Asia and ASEAN j+Northeast

Asia Total (Exclude Japan) -a- Southeast Asia Total -4-

Japan

X

Northeast Asla Total (Include Japan)

I

25%

20%

I

5%

Year

Source: Same as Graph 1

Graph 8 Share of World Total Export: Northeast and South Asia I tNortheastAsia Total (Exclude Japan) +Southeast

Asia Total +Japan

20%

18% 16% 14% 4.

0

2

12% 10%

Q

n.

8%

6% 4%

2%

0%

Year


+Northeast

Asia Total (include Japan)

I

113


Graph 9 Share of World Total GDP: South Asia Countries j+Bangiadesh

+India

+Nepal

+Pakistan

*Sri

Lanka +South

AsiaTotal

I

8% 7%

6%

”

5%

g 4% 0

n 3% 2% 1% 0%


Graph 10 Share of World Total Export: South Asia Countries /+Bangladesh

+India

+Nepal

+Pakistan

1.0%

0.9% 0.8%

0.7%

E 0.6% 0.5%

c 0.4% 0.3%

Year


+Sri

Lanka +South

Asia Total

I

114

M Dutta

Graph 11 Share of World Total GDP: 3 Asian Regions I-+Northeast Asia Total (Exclude Japan) +Southeast Asia Total ,sia Total S O + .& / --)c Northeast Asia Total (Include Japan)

I

20%

E

15%

rm p“

10%

5%

0%


Graph I 2 Share of World Total Export: 3 Asian Regions I-cNortheast Asia Total (Exdude Japan) +Southeast

Asia Total +South

20%

g 10% --

al

8%-6%

~~

4% --

2%

T

Year


Asia Total +Northeast


1

China and Asian Continental Economic Communi&

115

Graph 13 Share of World Total GDP: 4 Groups j+NortheasI

Asla Total (Exclude Japan] +SoutheastAsla

Total

ii

N R O +Unled

Stales -A-Northeast Asla Total (Include Japan)

1

25%

20% --

..

15% --

0

e

0 10% -~

5%

T

Graph 14 Share of World Total Export: 4 groups +Northeas1

Asia Total (Exclude Japan) +Southeast

Asia Total -4-EURO

40%

30%

Year


-X-United States +Northeast


116

M Dutta

Graph 15 Share of World Total GDP: 5 Groups

--

NortheastAsia Total (ExcludeJapan) -Southeast Asla Total EURO +United States

6

+South Asia Total &Northeast Asia Total (Include Japan)

25%

20%

-

15%

a

e

0 10%

5%

0%


Graph 16 Share of World Total Export: 5 Groups +Northeast -+EURO

20%

15% 10% 5%

Asia Total (Exclude Japan) +Southeast Asia Total +United Stales

+South *Northeast

Asia Total Asia Total (Include Japan)

117


Graph 17 EU: Value Added Share of Agricultural Sector of GDP

+-Finland +Sweden +Denmark -X- Netherlands -x- Belgium +Luxembourg +France -Germany Spain Porlugal +Greece ++Ireland -Y -Austria 0 United Kmgdon

1980 1981 1982 1983 1984 1985 1986 198719881989 1990 1991 1992 199319941995 19961997

Year


Graph 18 EU: Value Added Share of Industrial Sector-of GDP 45

.-

I

*

. ..c ...

~

04

I

I

:

I

I

I

I

I

I

I

I

I

I

I

I

I

1

1

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Year


Ireland

M. Dutta

118

Graph I 9 EU: Value Added Share of Service Sector of GDP 120 -+-Finland -D- Sweden

100

+Denmark -X- Netherlands *Belgium +Luxembourg +Frame -Germany -Italy Spain Portugal +Greece “I--. Ireland +Austna

80

s c

5

g

60

P

40

20

0 1980 19811982 19831984198519861987 I98819891990 19911992 1993 1994 199519961997

Year

Source: Same as Graph 1 Note: In some years Luxembourg’s share of service sector of GDP were more than 100%. Further data check follows.

Graph 20 Northeast Asia: Value Added Share of Agricultural Sector of GDP +China 35

+Hang Kong,China +Japan

+Taiwan

+Korea

I

1

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year

Source: Same as Graph 1 Note: Taiwan’s industrial sector includes: mining, manufacturing, electricity, gas and water, and construction. Its service and etc. sector includes: trade, transport and communications, finance, public administration, and others.

119


Graph 21 Northeast Asia: Value Added Share of Industrial Sector of GDP I+China

t H o n g Kong, China +Japan

I

Taiwan +Korea

X

60

04

I

I

I

I

I

I

~

1

I

I

I

I

1

I

~

I

I

I

zz zz 2z az az q- p- !- g- ?g m s z 3 s a ; x s s Z L L L z z z z Z Year

Source: Same as Graph 1 Note: Taiwan’s industrial sector includes: mining, manufacturing, electricity, gas and water, and construction. Its service and etc. sector includes: trade, transport and communications, finance, public administration, and others.

$ n

- - - - -

~40

30 -20 -10

~~

d 5

1

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Graph 23 ASEAN: Value Added Share of Agricultural Sector of GDP

I+

Indonesia +Malaysia

-4-

Philippines +Singapore

+Thailand

1

30 25 -~

-

20 --

s e n

15-10 ~-

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year


Graph 24 ASEAN: Value Added Share of Industrial Sector of GDP +Indonesia

+Malaysia

+Philippines

X

Singapore +Thailand

10

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year


121


Graph 25 ASEAN: Value Added Share of Service Sector of GDP I+lndones,a

+Malaysia

-4-

Philippines

H Singapore +-Thailand

1

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Year


EU-15 economies’ shares of GDP based on value added to agricultural, industrial, and service sectors, respectively. Graphs 20-22 relate to the comparable sets of data for Northeast Asian economies. Finally, Graphs 2325 describe the profile of the select group of Southeast Asian economies. In the graphic presentations, based on annual data for 1980-1998, efforts have been made to capture changes in the profiles of industrialization of these economies, which could have been missed in our review of related data at one time point (Table 10) or at two discrete time points (Table 11). Data for Graphs 1 through 25 are presented in Tables 1 1 through 18. Needless to add, what has been done here is much less than what remains to be done. 5. Conclusion

The conclusion for economic integration in Asia can be supported by the empirical evidence, based on the two parameters, its shares of world output and trade vis-his the respective shares of EU and USA. Indeed, each individual Asian economy, inclusive of China and India, economies with nearly 2.5 billion people combined, has marginal shares of world GDP and of world exports. Historically, for years Japan enjoyed the second largest ranking, next to the USA in terms of shares of world output and trade. After the formation of the EU and the introduction of the euro, Japan has become

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a distant third. An Asian regional economic integration will be a plus for the paradigm of globalism. The 3 + 5 model may be the promising first step (see Kojima 2000; Letiche 2000).

CHAPTER 4 FOREIGN DIRECT INVESTMENT (FDI) IN CHINA - AN ECONOMIC APPRAISAL: A STRUCTURAL CHANGE

We have analyzed earlier how China’s economic reform agenda for the industrial sector based on the Enterprise Responsibility System failed to obtain the expected outcome. Efforts to invite inflow of foreign investment, in substantive quantities and for the long term, by way of joint ventures with Chinese enterprises, owned and managed one hundred percent by the Chinese government, did not work. Foreign Direct Investment (FDI) fully owned and managed by foreign investors became the most viable option and FDI in China became a huge success. Soon of course, with Phase 3 of China’s invitation to foreign investment in 1992, great volumes of foreign investments came to China in many and varied forms of business cooperation. We have also discussed the specific factors that made investments in China so attractive to foreign investors (see Chapter 1). In 2004, China received US$ 64 billion in FDI, for a cumulative total of US$ 563.8 billion. The United States, Japan, South Korea, and Taiwan were the most important source countries. Walt Whitman Rostow (1985) called upon his fellow economists to focus research onto “technology and supply.” The emphasis should be on hndamental science, promoting human capital. It is to be noted that the “establishment”supply-side economists have indeed been found to be much too dependent on monetary and fiscal policies, and their core program has been anchored to massive tax cuts. The issue of structural divergences across two regional markets remains to be explored. The shiR of emphasis to research on technology, productivity, and supply involves taking into consideration the emerging structural differences and divergent changes between the United States and other mature industrialized economies on one side, China and other newly industrialized and industrializing economies of 123

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Asia on the other side. Insistence on ignoring the impact of structural differences may prove too costly to all trans-Pacific economic partners engaged in vastly growing investment and trade. Monetary and fiscal policy mixes are not likely to be adequate measures to correct the trade and budget imbalances of the United States. They are necessary conditions in managing a market economy, capitalist or socialist, but they cannot be sufficient conditions. The point that structural adjustments are necessary for correcting cross-countq economic imbalances must be the maintained hypothesis. The economic growth of Japan in the post-WWII decades was followed by other East Asian economies, such as the Asian NICs (newly industrializing countries: South Korea, Taiwan, and Hong Kong) and the ASEAN group (Association of South East Asian Nations: Thailand, Malaysia, Singapore, Brunei, Indonesia, and the Philippines). It has been the subject of many studies. Their economic growth profiles, as noted by the accelerated rate of growth of their respective GDPs, fit into the paradigm of the structural divergence hypothesis. Not much was foreseen for the emerging competition fiom Asia’s newly industrialized economies. Some even argued that industrialization of Asian economies beyond Japan was questionable. Indeed, the pre-industrialized, agriculture-dominant economies of Asia moved on to industrialization at a very high rate, each reaching a competitively substantive capital-intensiveproduction frontier. 1. China’s Economic Reform and Structural Change of the Chinese Economy In the 1970s, China adopted her economic reform agenda, and the structure of the Chinese economy and its production map embraced massive changes. China imported plant and equipment from mature industrialized economies and paid for them by exporting their new manufactures. Adaptation of the imported technology to indigenous resources required innovation, so that quality and cost competitive products could be manufactured and exported to the world market. This is what we have called the paradigm of Adaptive Innovation (Dutta & Tantum 1988). The structural divergence hypothesis relates to the successful integration of industrialization with internationalization.

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Much has been written in support of open economic policy. As industrializationin China progressed, the emphasis on product quality and unit cost became a point of importance. The comparatively low wage rate was of course a positive factor, but with more capital input per worker, the unit cost was expected to increase, even when one calculates the Incremental Capital Output Ration (ICOR) and makes necessary adjustments. In this regard, two other ratios, the Incremental Professional Output Ratio (IPOR) and the Incremental Management Output Ration (IMOR) can be computed (see h t t a & Tantum 1988). Per unit of output, the appointment of Chinese professionals such as engineers, scientists, accountants, computer programmers, economists, and financial analysts, helped contain the unit cost, as their compensation rates were modest, much less than what it would have been if they were to be hired from the home countries of foreign investors. The relative abundance of labor, both skilled and unskilled, in China has been a fact. The Incremental Professional Output Ratio (IPOR) thus became more cost-effective. The management cost per unit of output also was restrained by inviting Chinese professionals with management aptitude to join top management. If all top managers were to be recruited from the home countries of the foreign investors, the IMOR would be adversely impacted. In addition, the scale of production became a positive factor. With imported plant and equipment, embodied with updated technology, the scale of production could not remain small, as it was under the Chinese state enterprises of the pre-reform Communist regime. The Socialist market economy is the new order and the commitment is to the principle of market competition and incentive. Economic research concerning comparative cross-country competitiveness will benefit significantly from studies of production maps of competing economies where input definitions could not have remained narrowly limited. As the rest of the world marvels at the accomplishment of China’s Industrial Revolution, a study of the process that China experimented with great success will certainly be a plus to our understanding of the Chinese economy. 2. Special Economic Zones (SEZs)

The first step for China was to provide warm hospitality to foreign

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126

investors. They were welcomed by the Chinese officials at all levels and China, under its Communist government, soon earned the honor of being the foreign investment friendly country. China set up several Special Economic Zones (SEZs) for the location of foreign direct investments with valuable provisions for transportation, telecommunication, and financial market facilities. To begin, SEZs were set up predominantly in the eastern coast of China, with convenient access to the world market for the importation of capital goods, machines and equipment, and for the exportation of the newly manufactured products toward profit repatriation. We have called it a win-win situation, with foreign investors ,. maximizing their profits and China optimizing her industrialization. Table 1 presents an analysis of phased inflows of FDI into China in three successive stages: (a) 1979-1983, (b) 1984-1991, and (c) 1992-1999. Table 4.1 : FDI Inflows into China (current prices) Phase Phase 1 Phase 2

Phase 3

years 1979-1983 1984-1991 1984-1988 1989-1991 1992-1999

FDI inflow (US$ millions) 1,802 21,546 10,301 11,245 282,653

Annual average (US$ millions) 360 2,693 2,060 3,748 35,331

Annual rate of increase (“A) 55.4 27.2 38.1 11.0 32.1

Note: Compiled from Table 1, OECD: FDI - STUDY - CHINA, Document-2-2000

Phase 1: 1979-1983. The SEZs established were: Shenzhen, Zhuhai, and Shantou in Guangdong Province, and Xiamen in Fujian Province. Phase 2: 1984-1991. SEZs were established in all of Hainan Province and fourteen coastal cities across ten provinces. During Phase 2, total FDI inflow reached a high of US$ 10.3 billion during 1984-1988,increasing at an annual rate of 38.1 percent. The recession in 1989 discouraged FDI inflows. Then came the Tiananmen incident and its negative impact, and the annual rate of FDI inflow slowed to only a modest increase of 11 percent in 1989-1991. However, Chinese official policy promptly moved to reverse the downturn in 1992. Phase 2 came in two steps, 1984-1988 and 1989-1991, with each step progressively broadening of the scope of foreign investments. Phase 3: 1992-1999. Phase 3 came in the spring of 1992. The Chinese government

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adopted a new broad-based, nation-wide FDI policy resulting in the acceleration of FDI inflows into China. FDI surged into new SEZs Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai. In 1985, the expansion of the open coastal areas covered the Yangtze River Delta, the Pearl River Delta, the Xiamen-Zhangzhou-Quanzhou Triangle in southern Fujian province, the Shandong Peninsula, the Liaodong Peninsula, Hebei, and Guangxi. In addition, China established 15 free trade zones, 32 capital cities of inland provinces and autonomous regions and 53 new-and-high-tech industrial development zones in large and medium sized cities. In 1993, the founding of the Shanghai-Pudong New Zone on the other side of the Huangpu River evolved into a massive project with businesses from more than 60 countries and regions making the zone their homes. A large number of Chinese businesses have found Pudong to be a convenient headquarters, facilitating business interaction with foreign investors. Some 5,900 ForeignFunded Enterprises (FFEs) and over 5,000 Chinese domestic f m from all over China operate in Pudong, making it the home of six ‘pillar’ industries: (a) automotive, including spare parts and components, (b) microelectronics and computers, (c) household electrical appliances, (d) bio-medicines, (e) optics, and (f) mechanical and electricalproducts. China does not make any cash grants to induce foreign investments. However, fiscal policy is appropriately tailored to this end. China has offered special tax benefits to foreign investors in Special Economic Zones and Technical Development Zones. Let us add that such fiscal inducements have been very familiar in the mature industrialized economies: In the five SEZs in southern China, the main tax benefits consist of a 15 percent corporate tax, plus a benefit of “2 + 3 years,” meaning no tax for the first two years, then tax at a low rate of 7.5 percent for the next three years. In Economic and Technological Development Zones, for companies operating for over 10 years, the benefits are similar to those in Special Economic Zones, as stated above. In the Pudong Zone, benefits are similar to those offered to foreign investors in SEZs.

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d) In China’s 52 Hi-Tech Development Zones, benefits are as they are in Economic and Technological Development Zones. e) Investment in Specific Cities: In China’s 14 coastal cities and 20 cities in the country’s interior regions, tax benefits consist of a reduced corporate tax rate of 24 percent or a corporate tax rate of 15 percent in the case of top priority projects. In addition, the law provides for special tax benefits for integrated circuits industries in China. Phase 3 initiatives brought substantive results as it extended an open invitation to inflows of foreign investments. Table 2 below offers the data for foreign loans, FDI, and other foreign investments from 1992 through 2000. The inflow of FDI, including equity joint ventures, contractual joint ventures, foreign-funded enterprises, share-holding enterprises, and cooperating development projects surged from US$ 4.37 billion in 1991 Table 4.2: Realized Foreign Investment in China, 1992-2000 (US$ billions) Total Foreign Loan Loan from foreign government Loan kom international financial organization Export credit Loan &om foreign commercial bank Issue bond to abroad FDI Equity Joint Venture Contractual Joint Venture Foreign-fimded Enterprises Share-holding Enterprise Cooperating Development Other foreign investment Issue stock to abroad International Leasing Compensation Trade Processing and Assembling

1992 19.20 7.91 2.57 1.31 0.99 1.78 1.27 11.01 6.11 2.12 2.52

1993

1994 1995 1996 43.21 48.13 54.80 11.19 9.27 10.33 12.67 3.04 2.40 2.77 3.45 2.27 1.47 2.71 3.00 1.22 2.19 2.67 1.33 3.27 1.86 1.40 1.49 1.39 1.35 0.78 3.40 27.51 33.77 37.52 41.73 15.35 17.93 19.08 20.75 5.24 7.12 7.54 8.11 6.51 8.04 10.32 12.61

38.96

0.25 0.28

0.42 0.26

0.68 0.18

0.59 0.29

0.26 0.41

0.04 0.17 0.07

0.05 0.09 0.12

0.02 0.09 0.07

0.03 0.21 0.04

0.09 0.16 0.16

Foreign Direct Investment (FDI) In China -An Economic Appraisal

129

to US$ 11.01 billion in 1992, then jumped to US$ 40.71 billion in 2000. Foreign Loans consisting of loans from foreign governments, loans from international financial organizations, export credits, loans from foreign commercial banks, and bond issues in overseas capital market were at US$ 7.91 billion in 1992 and climbed up to US$ 10.00 billion in 2000. Other foreign investments stood at US$ 0.28 billion in 1982, increasing to US$ 8.64 billion in 2000. FDI which now included equity joint ventures, contractual joint ventures, foreign-funded enterprises, shareholding enterprises, and cooperating development projects, remained the dominant item. Be it noted that in 1992, Phase 3 truly became the turning point in China’s invitation to foreign investments. Total realized foreign investment at US$ 19.20 billion in 1992 took a great leap forward to US$ 59.36 billion in 2000. Table 4.2: Realized Foreign Investment in China, 1992-2000 (US$ billions), (continued) 1998 1999 2000 1997 Total 63.95 58.92 52.66 59.36 Foreign Loan 12.02 11.00 10.21 10.00 Loan from foreign government 3.62 2.90 3.32 Loan from international fmancial organization 1.63 3.00 2.61 Export credit 1.29 1.84 1.03 Loan from foreign commercial bank 3.07 2.26 2.47 Issue bond to abroad 2.41 1.00 0.80 FDI 45.28 45.58 40.32 40.71 Equity Joint Venture 19.58 18.84 15.84 14.34 Contractual Joint Venture 8.92 9.34 8.22 6.60 Foreign-funded Enterprises 16.15 16.52 15.54 19.26 Share-holding Enterprise 0.29 0.60 0.29 0.13 Cooperating Development 0.34 0.29 0.38 0.38 Other foreign investment 6.66 2.33 2.13 8.64 Issue stock to abroad 5.14 0.62 0.61 6.93 International Leasing 0.32 0.38 0.19 0.03 Compensation Trade 0.09 0.09 0.01 0.01 Processing and Assembling 1.11 1.24 1.32 1.27 Source: Ministry of Foreign Trade and Economic Cooperation, PRC, and China Statistical Yearbook 2001

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Table 4.3: FDI, External Loans and Other Foreign Investment, 19791998 (Yo) FDI Foreign Loans Other Total 31.2 3.5 100.0 65.3 Source: MOFTEC, adapted from OECD: MOFTEC Study, December 2000

Table 3 sums up the fact that about two-thirds of foreign investment into China during 1979-1998 came as FDI, as widely defined, and about a third came as foreign loans. Figure 1, based on data in Table 4 below, analyzes total foreign investment for 1984-2000, breaking down the total into foreign loans and FDI in its broader context which continued to dominate the inflow of foreign investment into China. Figure 4.1 Utilization of Foreign Investment 1984-1998

70 50

2c 40 - 30 .P I20 10

0

Year

Source: China Statistical Yearbook, various issues

Table 4, providing data on Foreign Loans and FDI for 1979-1983, plus annual data for 1984 through 2000, adds to the data base in Table 3. It points out that as of 1992, when Phase 3 expanded China’s invitation to inflows of foreign investments, FDI took a quantum leap fiom US$ 4.37 billion in 1991 to US$ 11.01 in 1992, progressing to US$ 40.71 billion in 2000. The inflows of FDI certainly led China’s Industrial Revolution. Other foreign investments inclusive of foreign portfolio investment and

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131

international leasing, plus bonds issued by China in overseas capital markets accounting for approximately 3.5 percent of the total capital inflow into China during 1979-1998, played a limited role. Its annual share in total capital inflow into China also has been quite modest. For China, external loans were a major source of capital inflow in 1980s. From Phase 3 of FDI inflows beginning in 1992, FDI inflows have taken the leading position and continue to be the principal contributing factor toward China’s high rate of industrialization and GDP growth, Table 4.4: Utilization of Foreign Capital in China, 1979-2000 (US$ billions) Total Foreign Year Investment Foreign Loan 1979-1983 14.62 1984 2.70 1.29 1985 4.45 2.5 1 5.01 1986 7.26 1987 8.45 5.80 1988 10.23 6.49 1989 10.06 6.29 1990 10.29 6.53 1991 11.55 6.89 1992 19.20 7.91 1993 38.96 11.19 1994 43.21 9.27 1995 48.13 10.33 1996 54.80 12.67 1997 64.41 12.02 1998 58.56 11.oo 1999 52.66 10.21 2000 59.36 10.00 Source: China StatisticalYearbook, various issues

Foreign Direct Investment 2.69 1.42 1.96 2.24 2.3 1 3.19 3.39 3.49 4.37 11.01 27.52 33.77 37.52 41.73 45.26 45.46 40.32 40.71

3. Sources of FDI into China

Hong Kong and Macao have now been returned to Chinese sovereignty. Taiwan’s share of FDI in China reached a high of 11.41 percent in 1993 and was 6.45 percent in 1999 (Table 5). Shares of USA and Japan each averaged at about 10 percent during the period. Shares of EU and ASEAN (Singapore, Thailand, Malaysia, Indonesia, and the

Table 4.5: FDI Inflow into Chma from Source Countrieskgions, 1986-1999, (US$ Mdions) TaiW USA Japan EU ASEAN HK &Macao Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Amount 1,328.71 1.598.21 2,095.20 2,077.59 1.913.42 2,486.87 7,709.07 17,881.25 20,174.81 20,500.19 21,257.71 21,026.65 18,929.93 16,631.69

%

59.22 69.08 65.6 61.24 54.87 56.96 70.03 64.91 59.75 54.64 50.95

46.44 41.64 41.35

Amount

154.79 222.4 446.41 1,050.50 3,138.59 3,391.04 3.161.55 3,474.84 3,289.69 2,915.21 2,598.70

YO

4.56 6.38 10.68 9.54 11.41 10.04 8.43 8.33 7.27 6.41 6.45

Amount 326.17 262.8 235.96 284.27 455.99 323.2 511.05 2,063.12 2,490.80 3,083.01 3,443.33 3.239.15 3,898.44 4,215.86

% 14.54 11.36 7.39 8.38 13.08 7.4 4.64 7.5 7.38 8.22 8.25 7.16 8.58 10.46

Amount 263.35 219.7 514.53 356.34 503.38 532.5 709.83 1,324.10 2,075.29 3,108.46 3,679.35 4,326.47 3,400.34 2,973.08

YO 11.74 9.5 16.11 10.5 14.44 12.2 6.45 4.81 6.15 8.28 8.82 9.56 7.48 7.37

Amount YO 178.53 7.86 52.71 2.28 157.27 4.92 187.61 5.53 147.35 4.23 245.62 5.63 242.97 2.21 671.24 2.44 1,537.69 4.55 2,131.31 5.68 2,737.06 6.56 4,171.15 9.22 3,978.73 8.75 4,479.06 11.11

Amount

60.46 87.82 266.46 1,002.89 1,871.57 2,61527 3,175.87 3,425.63 4,194.13 3,274.97

Source: Ministry of Foreign Trade and E c ~ n ~ m iCooperation, C P.R. China and China Statistical Yeahook 2001

%

Totd Amount

1.73 2.01 2.42 3.64 5.54 6.97 7.61 7.57 9.23 8.12

2,243.73 2,3 13.53 3,193.68 3,392.57 3.487.11 4.366.34 11,007.51 27,514.95 33,766.50 37.520.53 41,725.52 45,257.04 45,462.75 40.318.71

k

5

Foreign Direct Investment (FDI) In China - A n Economic Appraisal

133

Figure 4.2 Source Country Composition of FDI in China (1986-1999)

' -+- Hong Kong & Macao 1 *North

America

t-Japan

+Taiwan --31t EU

-0-

Southeast Asia

80%

40%

E 30%

g 2

20% 10% 0%

Year

Source: China Statistical Yearbook, various issues.

Philippines) have maintained an upward trend, with Singapore dominating the ASEAN share. Figure 2 is a graphic presentation of the competitive position of source countries of foreign investments in China for 1986-2000. Hong Kong and Macao have lead positions and they were followed by Taiwan, Japan, North America (USA and Canada), EU, and ASEAN-5. Hong Kong, until recently an imperial colony of the United Kingdom, was a global capital market. Macao, a former Portuguese colony, also served as a center for much international capital flow. We have argued that inflows of investments into China from these two sources can be traced to diverse source countries (see Chapter 1). 4. FDI Inflow into China by Sector: The Focus on the Industrial and Manufacturing Sector

Table 6 presents FDI inflow into China by sectors for 1997-2000 in terms of number of projects and amounts, both approved and realized in

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US$ millions. Over this time period, the number of projects in the primary sector, consisting of agriculture, hunting, forestry and fishing, and mining and quarrying came to a total of 3,887. The secondary sector, including industry and manufactures, received the largest number of projects, 56,223, averaging over 14,000 projects annually. The tertiary sector had 19,955, coming to some 5000 projects a year. The focus was of course on the secondary sector of industry and manufacturing leading China’s Industrial Revolution. Table 6 also provides an inter-sectoral breakdown of FDI inflow by amounts in US$ millions, both approved and realized. For both approved and realized, the secondary sector received dominant shares of the total FDI inflow, over US$ 127 billion was approved and over US$ 102 billion realized. Next came the tertiary sector and the primary sector, in that order. The tertiary sector covers (a) electric power, gas and water (generating power) production and supply, (b) construction, (c) transportation, storage, postal and telecommunication services, (d) wholesale and retail trade and catering services, (e) real estate management, (f) social services, (g) health care, sports and social welfare, (h) education, culture and arts, radio, film and television, and finally (i) others follow. Allocations for items (g) and (h) have been meager. This would adversely impact China’s human Table 4.6: FDI Inflow into China by Sector, 1997-2000

Primary Sector Agriculture, hunting, forestry and fishing Mining and Quarrying Secondary Sector Tertiary Sector Electric Power, Gas and Water ProductiodSupply Construction Transportation, Storage, Postal, Telecom Wholesale & Retail Trade and Catering Services Real Estate Management Social Services Health Care, Sports and Social Welfare Education, Culture and Arts, Radio, Film and TV Other Sectors National Total

Number of Projects 1997 1998 1999 2000 892 983 968 1044 762 821 814 876 130 162 154 168 14716 13477 12042 15988 3984 5376 5317 5278 142 116 107 156 455 318 247 233 205 306 274 279 825 852 1198 1184 862 834 669 684 1400 1634 1474 2679 31 40 28 38 29 19 14 34 895 838 391 465 21001 19799 16918 22347


135

Table 4.6: FDI Inflow into China by Sector, 1997-2000, (continued) Amount Approved (US$ millions) 1997 1998 1999 2000 Primary Sector 1782.1 2056.4 1793.9 1989.5 Agriculture, hunting, forestry and fishing 1065.3 1204.2 1471.7 1483.1 Mining and Quarrying 716.8 852.2 322.2 506.4 Secondary Sector 27064.6 30827.2 25331.8 44254.3 Tertiary Sector 22156.8 19218.4 14097.3 16135.7 Electric Power, Gas and Water ProductiodSupply 3655.8 1968.1 1635.2 1226.9 Construction 3119.5 1750.1 1096.2 830.9 Transportation, Storage, Postal, Telecom 2622.1 2301.2 1114.0 1416.6 Wholesale & Retail Trade and Catering Services 1839.0 1313.5 1204.1 1435.1 Real Estate Management 6222.3 6647.5 4177.9 5232.1 Social Services 2668.9 3011.9 3016.8 4254.6 Health Care, Sports and Social Welfare 143.0 141.7 67.3 154.3 Education, Culture and Arts, Radio, Film and TV 69.7 22.1 60.7 83.3 Other Sectors 1816.5 2062.2 1725.2 1501.9 National Total 51003.5 52102.1 41223.0 62379.5

Amount Realized (US$ millions) 1997 1998 1999 2000 Primary Sector 1568.0 1201.8 1267.3 1259.2 Agriculture, hunting, forestry and fishing 627.6 623.8 710.2 675.9 Mining and Quarrying 940.3 578.1 557.1 583.3 Secondary Sector 281 19.8 25582.4 22603.3 25844.2 Tertiary Sector 15569.3 18678.5 16448.1 13611.4 Electric Power, Gas and Water ProductiodSupply 2071.9 3102.8 3702.7 2242.1 Construction 1437.8 2064.2 916.6 905.4 Transportation, Storage, Postal, Telecom 1655.1 1645.1 1551.1 1011.9 Wholesale & Retail Trade and Catering Services 1401.9 1181.5 965.1 857.8 Real Estate Management 5169.0 6410.1 5588.3 4657.5 Social Services 1988.0 2963.2 2550.7 2185.4 Health Care, Sports and Social Welfare 195.4 97.2 147.7 105.9 Education, Culture and Arts, Radio, Film and TV 74.0 68.3 60.7 54.5 Other Sectors 1576.1 1146.1 965.1 1590.9 National Total 45257.0 45462.8 40318.7 40714.8 Source: China Statistical Yearbook, 1999,2000 and 2001 issues.

capital stock. It is to be noted fiom Table 7A below that 59.6 percent of the total contracted FDI by the end of 1998 came for the manufacturing sector. The real estate sector follows with 24.4 percent. The distribution industry,

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consisting of wholesale and retailing, catering, transport, warehouse, and telecommunications, received 6 percent. The remaining 10 percent is spread over all other sectors of the economy including agriculture, forestry, animal husbandry and fishing, scientific research, technical service, education, broadcasting, film and television industry, healthcare, sports and social welfare, and others. China’s planners decidedly placed an emphasis on the manufacturing sector; the sector’s share of GDP became as high as two-third of the total. Table 7A also details contracted FDI by sectors at the end of 1998 in terms of numbers of projects contracted and contracted value in US$ billions. The manufacturing sector has 73 percent of contracted projects with 59.6 percent of the contracted value. The real estate sector comes next with 9.9 of the contracted projects and 24.4 percent of contracted value, and the remaining sectors with some 17 percent of the contracted projects and 16 percent of the contracted value remained rather marginal beneficiaries. Table 4.7A: Contracted FDI by Sector by the End of 1998 (US$ billions) Sector Manufacturing Real Estate Distribution industry Wholesale, Retailing, Catering Transport, Warehouse, Telecommunication Construction Agriculture, Forestry, Animal Husbandry, Fxhg Scientific Research Technical Service Education, Broadcasting, Film & Television Healthcare, Sports & Social Welfare Other Sectors Total

Number of Share Contracted Share Projects (“h) Value (“h) 249352 73.0 365.55 59.6 33877 9.9 149.98 24.4 21279 6.2 36.93 6.0 17558 5.1 21.96 3.6 3721 1.1 14.97 2.4 8826 2.6 18.86 3.1 9534 2.8 10.83 1.8 2410 0.7 1.87 0.3 1317 0.4 2.04 0.3 999 0.3 4.62 0.8 13944 4.1 23.05 3.8 341538 100 613.72 100

Source: China Statistical Yearbook. various issues

Table 7B further details inter-sectoral distribution of FDI into China for 1993-1998. The sectors specified are agriculture, industry, construction, communication, trade, real estate, and other. Industry dominates the pattern, receiving as high as 68.9 percent of FDI intlow in 1996 and averaging 58.4 percent for the 1993-1998 period. The real estate sector comes next,


137

Table 4.7B: Distribution of FDI by Sector, 1993-1998 (%) Agriculture Industry Construction Communication Trade Real Estate Other Total

1993 1.1 45.9 3.5 132 4.1 39.3 4.8 100

1994 1.1 50.1 2.7 2.3 4.5 27.2 12.1 100

1995 1.5 69.8 2 2 3.5 18.5 1.8 100

1996 1.6 68.9 2.7 2.2 3.2 17.9 3.5 100

1997 2.1 54.5 6.1 5.1 3.6 12.2 16.4 100

1998 2.3 59.2 3.4 4.4 2.5 12.8 15.5 100

1993-1998 1.5 58.4 3.1 2.5 3.6 23.3 7.5 100

Source: China Statistical Yearbook, various issues, FDI Statistics, MOFTEC.

receiving at an annual average rate of 23.3 percent of FDI inflow for the time period. Table 8 points to two specific patterns for approved FDI flows into China for 1987-1996. First, with the initiation of Phase 3 in 1992, there is a general increase in the inflow of FDI in all sectors. Secondly, the intersectoral FDI inflow pattern requires attention. The secondary sector consisting of manufacturing dominates the trend; the primary and the tertiary sectors lag behind. Indeed, that has been the guideline of the Chinese planners, at least for this period. For the primary sector of agncultural products, they did not plan for substantive FDI inflows because this sector already responded positively to China’s economic reform agenda based on the Family Responsibility System. In the tertiary sector, the emphasis on electricity and power generation, transportation, and communication still warrants attention. The transportation and communication components call for expansion so that the progress of China’s Industrial Revolution can be sustained. To sustain China’s annual growth at the present 9-plus percent rate, prompt expansion of transportation and communication services must be a top priority. The Chinese authorities have taken note of this. According to China’s state-run news agency, Xinhua, China is entering “the age of mass car consumption” (“Special Report: Cars in China,” The Economist, June 4th, 2005, p. 24-26). The demand for automobiles is increasing at a very rapid rate. The special report adds, “with 5 million car sales in 2004, China is already the world’s third largest car market, after America (with sales of 17 million) and Japan (with sales of 5.9 million)...At the same time China has been pouring billions into its highway network. By

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the end of 2004, China had 21,000 miles of motonvays, more than double the 2000 figure (none 17 years ago).” The process must continue to meet ever growing demand for transportation by China’s Industrial Table 4.8: Approved FDI Flows into China by Industry, 1987-1996 (US$ millions) Primary Sector Agriculture, hunting, forestry and fishing Mining, quarrying, and petroleum Secondary Sector Tertiary Sector *Electricity, water distribution, construction Wholesale Trade Post and telecommunication Finance Real estate Business services Health and social services Other services Total

1987 125 125 1776 1597 55 29 16 1471 1 11 14 3709

1988 1989 211 121 209 121 2 .. 4021 4664 872 757 119 67 64 67 91 52 12 .. 530 524 7 4 5 36 44 7 5296 5600

1990 1991 123 220 122 220 0.4 5569 9623 852 2046 181 134 107 174 37 95 453 1504 32 19 38 64 5 56 6596 11977

1992 1993 1994 1995 1996 680.8 1272 1026 1747 1152 Primary Sector Agriculture, hunting, forestry and fishing 678 1192 973 1736 1139 Mining, quarrying, and petroleum 3 81 534 12 13 32667 51174 43899 61648 50486 Secondary Sector 23467 55341 35504 26392 19498 Tertiary Sector *Electricity, water distribution, construction 1839 3878 2394 1918 2001 1444 4607 3922 3427 2347 Wholesale Trade 1534 1490 2030 1679 1599 Post and telecommunication 8 79 436 54 Finance 18080 43717 23862 17835 12851 Real estate 62 588 274 278 175 Business services 395 478 1979 837 354 Health and social services 97 452 608 345 171 Other services 58123.5 111435.7 82679.8 91282 73276 Total Source: Data from 1987-1996 are from Ministry of Foreign and Economic Cooperation, Almanac of China’s Foreign Economic Relations and Trade, various issues and Statistics on FDI in China, 1998. Data kom 1997 to 2000 are from China Statistic Yearbook, 1999,2000 and 2001 issues. * Heavy water for power generation

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Revolution. Conservation of cost and price by way of making small cars with fuel efficiency and building up of the financial market for credit facilities for car purchases with a prudent interest rate policy have become parts of the policy package for China’s auto industry and monetary authorities, respectively. The concern for successful coordination of the relevant policies for all concerned is certainly a concern. The progress report is encouraging. Table 4.9: Approved Inward FDI Stock in Several Industries of China, 1987-2000 (US$ millions) Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Agriculture % Amt. 697 3.01 906 3.19 1027 3.02 1149 2.83 1369 2.60 2047 1.85 3238 1.46 4211 1.38 5947 1.50 7086 1.51 8151 1.57 9355 1.63 10827 1.76 12310 1.82

Manufacturing Amt. % 18574 80.33 22595 79.51 27259 80.13 32828 80.83 42451 80.72 75117 67.85 126291 56.85 170190 55.83 231837 58.53 282323 60.15 309388 59.45 340215 59.43 365547 59.56 409801 60.61

Construction Wholesale Trade Amt. % Amt. % 363 1.57 1446 6.25 1510 5.31 482 1.70 1577 4.63 549 1.61 730 1.80 1683 4.14 864 1.64 1857 3.53 3301 2.98 2703 2.44 6581 2.96 7908 3.56 8975 2.94 11830 3.88 10893 2.75 15256 3.85 12894 2.75 17603 3.75 16014 3.08 19442 3.74 17764 3.10 20756 3.63 18860 3.07 21960 3.58 19691 2.91 23395 3.46

Total Amt. 23123 28419 34019 40615 52592 110715 222151 304831 396112 469388 520392 572494 613717 676097

Source: Approved FDI inflow data up to 1997 are from Ministry of Foreign Trade and Economic Cooperation, Almanac of China’s Foreign Economic Relations and Trade, various issues and Statistics on FDI in China, Beijing 1998. Approved FDI inflow data from 1998 to 2000 are from China Statistical Yearbook, 1999, 2000 and 2001 issues. 1999 approved FDI stock data are from the website: http://www.moftec.gov.cn/motlec cn/tisi/wzti/wztij tienu.htm1. Note: 1) Approved FDI stock data from 1987-1998 are estimated by accumulatively subtracting annual approved FDI inflow from 1999 approved FDI stock. Approved FDI stock in 2000 are estimated by adding 2000 approved FDI inflow to 1999 approved FDI stock. 2) Due to the change in statistics on industrial composition of sectors, many industries’ data are not reported here. The data reported above are also rough estimates and subject to future modification.

Attention must be drawn to the fact that the allocation of FDI to health care, education, and related services which contribute to the development of an optimum stock of human capital has been conspicuously marginal. Can

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China sustain her rate of growth at an annual rate of over 9 percent in the absence of human capital and consequent productivity gains (see Chapter l)? Table 9 above extends the inter-sectoral impact of approved inward FDI stock in the selected sectors of agriculture, manufacturing, construction, and wholesale trade, both in terms of amounts in US$ millions and percentage of FDI for 1987-2000. 5. The Real Estate Boom The growth of the real estate sector is indeed a necessary corollary of an accelerated rate of industrialization of the Chinese economy. Several factors are to be noted: The industrialization of the Chinese economy, at an accelerated rate contributing to a rate of growth of GDP at an average annual rate of 9-plus percent for over twenty-five years, necessitated migration of labor from China’s agriculture-based rural areas to her urban centers and their demand for housing followed. The rate of growth of population has been a general factor in most industrialized countries, and the attraction of more people to live in cities where facilities for education, health care, and recreational activities are relatively better. Financial markets inclusive of banks, insurance companies, stock exchanges, and catering services to the industries with necessary recruitment opportunities locate themselves in cities. Foreign investors add to the real estate boom by way of offering residential facilities to their employees. In general, the employer in China is still expected to provide housing facilities for employees. Finally, speculation always adds to bubbles and busts. Based on data in Table 8, in Table 10A we calculate the share of real estate investment relative to investment in tertiary sector and to total investment in China for 1987-1996. For further exposition, a graphic presentation of the findings follows in Figure 3.

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Table 4.10A: Investment in Real Estate: Percent of Tertiary Sector and Percent of Total Investment, 1987-1996 (US$ millions) ~~

Tertiary Sector Real estate Real Estate as a % ofTertiary Sector Real Estate as a % oftotal investment Total

1987 1988 1989 1990 1991 1597 872 757 852 2046 1471 530 524 453 1504 92.11% 60.78% 69.22% 53.14% 73.51% 39.66% 10.01% 9.36% 6.86% 12.56% 3709 5296 5600 6596 11980

Tertiary Sector Real estate Real Estate as a % of Tertiary Sector Real Estate as a % oftotal investment Total

1992 23467 18080 77.04% 31.11% 58124

1993 55341 43717 79.00% 39.23% 111436

1994 35504 23862 67.21% 28.86% 82680

1995 1996 26392 19498 17835 12851 67.58% 65.91% 19.54% 17.54% 91282 73276

Source: Based on Data from Table 4.8

Figure 4.3 Investment in Real Estate --t Real

Estate as a % of Tertiary Sector +Real

Estate as a % of total investment

100%

90% 80% 70% 60%

f

50% 40%

30% 20% 10% 0%

1987

1988

1989

1990

1991

1992

Year

Source: Based on Data kom Table 4.10A

1993

1994

1995

1996

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The concern for a real estate bubble has been noted by Chinese authorities. Indeed, the concern is global, covering mature industrialized economies inclusive of the US, Australia, New Zealand, Europe, Singapore, and Japan. Never before have real estate prices risen so fast in so many countries. However, efforts have been made by the Chinese government to initiate appropriate monetary-and-fiscal policies to contain the situation. The PBOC has recently raised its core rate of interest and the government has raised taxes and imposed restrictions on certain kinds of real estate transactions. Imposition of taxes on profits fiom a quick resale of real estate must be a case in point. In May 2005, seven key ministries and government authorities of China promulgated measures to do what was necessary in this regard. Macroeconomic parameters to control and direct the market economy have been set to work. Table 4.10B: Enterprise Units and Employment in Real Estate Development, 1997-2001 Year 1997 Enterprises Employment 1998 Enterprises Employment 1999 Enterprises Employment 2000 Enterprises Employment 2001 Enterprises Employment

Domestic Total Funded 21286 17202 683217 578927 24378 19960 825888 708738 25762 21422 880257 767187 27303 23277 971942 862245 29552 25509 1062319 949580

State- Collective- HK, Macao, Foreign owned owned TaiwanFunded Funded 1989 2095 50000 54290 7958 4538 3214 1204 332834 134939 83784 33366 7370 4127 3167 1173 312240 127370 80216 32854 6641 3492 2899 1127 292252 116416 79066 30631 5862 2991 2959 1084 257695 109826 81668 31071

Source: China Statistical Yearbook 2002

Tables 10B and 1OC detail the real estate market pattern for 1997-2001 in terms of number of enterprises (units), employment, and prices. Most of the enterprise units are domestic funded, 17,202 of 21,286 in 1997 moving up to 25,509 of 29,552 units in 2001. State and Collective-owned units are both limited. Foreign Funded units are marginal. However, enterprises with funding fiom Taiwan, Hong Kong, and Macao constitute a separate specific category. The real estate market has been known to be employment-

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intensive: employment rose to 1,062,319 individuals in 2001 fiom 683,217 in 1997. The number of enterprises increased nearly 50% during this fiveyear period while the percentage increase in employment surpassed 55%. This uptrend has continued to the point that the concern for a housing bubble has become an issue, inviting monetary and fiscal policy actions by the Chinese authorities. A review of the prices below points to two explanatory comments: (a) that the selling price over the five-year period has increased moderately, and (b) that the market for Economical Housing responds to affordability. However, since then the price situation has changed dramatically. The National Bureau of Statistics and Commission of Development and Reform conducted a survey reporting that housing prices in 35 cities in China have increased nearly 9% in the first half of 2005. Shanghai is experiencing the most extreme housing price increases, with the average price exceeding 10,000 yuan per square meter at the end of 2004. A recent survey conducted by the Chinese Academy of Social Sciences “shows the current ratio between family debt and disposable income is 155% in Shanghai and 122% in Beijing, while five years ago very few Chinese families had any debt at all” (Xinhua, December 19,2004). Table 4.10C: Selling Price of Houses, 1998-2001 Selling Price of Houses (yuan/sq.m) Residential Buildings Economical Houses

1998 2063 1854 1035

1999 2053 1857 1093

2000 21 12 1948 1202

200 1 2170 2017 1240


6. Transport, Post and Telecommunication Services in the Tertiary Sector Some facts for transport, post, and telecommunication services in the tertiary sector follow. Are they optimal for China’s Industrial Revolution? Tables 11A, 1lB, 1 1C and 11D present data on staff and employed workers in transport, post and telecommunication services, basic conditions of transport, number of civil motor vehicles owned, and main communication capacity of telecommunication, respectively. A cross country comparison with Asia’s newly industrialized economies

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will point to China’s competitive standing. The Chinese authorities are prepared to take necessary action. Reportedly, in 2004, China’s cell phone ownership exceeded 300 million, car ownership was nearly 30 million, and aircraft departures added up to 1.2 million (Time, June 27, 2005).

Table 4.1 1A: Staff and Employed Workers in Transport, Post and Telecommunication Services, 200 1 Transportation Method Railway Highway Pipeline Waterway Air Transport Supporting & Auxiliary Services Other Post & Telecommunication Services Source: China Statistical Yearbook 2002

Employed Persons 1,789,271 1,090,348 17,918 326,206 121,499 1,457,460 21,490 1,113,472

Table 4: I IB Basic Conditions of Transport, 1998-2001 Item Length of Transport Routes (10000 km) Total Passenger Traffic (10000 persons) Total Passenger-Kilometers (100 million) Total Freight Traffic (10000 tons) Total Freight Ton-kilometers (100 million) Number of Civil Motor Vehicles Owned (10000) Number of Other Motor Vehicles (10000) Number of Civil Transport Vessels Volume of Freight Handled in Major Coastal Ports (10000 tons) Source: China Statistical Yearbook 2002

1998 351.02 1378717 10636.7 1267200 38046 1319.3 2770.72 260208 92237

1999 363.16 1394413 11299.7 1292650 40496 1452.94 3456.96 242043

2000 365.79 1478573 12261 1358124 44212 1608.91 4168.06 229676

2001 402.39 1534122 13155.1 1401177 47591 1802.04 4724.05 210786

105162 125603 142634

Table 4.11C: Number of Civil Motor Vehicles Owned (10,000 vehicles) Total Number % Increase Privately Use % Increase Business Use % Increase 1990 551.36 81.62 31.30 2001 1802.04 226.84 770.78 844.35 764.39 2342.13 Source: China Statistical Yearbook 2002


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Table 4.1 1 D: Main Communication Capacity of Telecommunications Capacity of Long- Capacity of Local Length of Long distance Telephone Office Telephone Capacity of Mobile Distance Optical Exchanges Exchanges Telephone Exchanges Cable Lines Year (circuit) (1 0 000 line) (10 000 subscribers) (W 1990 161370 1231.8 5.1 3334 200 1 7035769 20569.5 21926.3 399082 Source: China Statistical Yearbook 2002

7. FDI Inflow into China by Regions: Productivity Analyses China’s open economic policy and FDI inflow began with special economic zones and preferential regimes in fourteen coastal cities. Following the reform in 1992, the FDI began to move to Central and Western regions. Yet the Western region remains far behind. In the Eastern Region, Guangdong’s performance has been spectacular, drawing almost 30 percent of the national total of FDI during 1983-1998. Jiangsu and Fujian, each with about ten percent of the total, ranked second and third, respectively. Over time, the shares of each province has changed, Guangdong’s moderately declining while the shares of other coastal provinces - Jiangsu, Fujian, Zhejiang, Shandong, Tianjin, and Hubei, are increasing. Of course, much more remains to be done for inter-regional balance for China’s industrialization. To appreciate the regional distribution of investment in fmed assets in China, Table 12A, a review of Table 12B, pointing to the huge inter-regional gaps with reference to several key economic indicators, including GDP, per capita consumption, gross industrial output, exports and imports, fiscal revenue, and per capita GDP is very much in order. The Western region has a vast geographical area with the least population while the Eastern region has the overwhelming majority of the population with little more than one seventh of China’s total land area of 952.1 square kilometers. Table 4.12A: Regional Distribution of Investment in Fixed Assets, 19931998 (%) Eastern Region

Total

87.8

Central Region Western region 8.9 3.3 Source: OECD-MOFTC STUDY December 2000

100

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Table 4.12B: China’s Regional Economic Indicators, 1998 Region East 50,793 Population (10 000) Area (km2) 130.1 GDP (1 00 million yuan) 48,553.5 Per capita consumption (yuan) 4,079.2 Gross Industrial output (100 million yuan) 78,668.7 2,752.2 Import and export (US$lOO million) Fiscal revenue (1 00 million yuan) 3,012.1 11,533.3 Per capita GDP (yuan) Source: China Statistical Yearbook 1999

Central 44,033 283.5 23,113.7 2,405 29,642.8 218.5 1,223.2 5,399

West 28,510 538.5 11,552.1 1,967 10,736.7 113.0 748.8 4159

Total 123,336 952.1 8,3219.2 8,451.2 119,048.1 3,083.7 4,984.1 21,091.3

Provinces with higher GDP, per capita income, level of accumulated FDI stock, and level of telecommunications, and better transportation infrastructure have been noted to be the destination of FDI inflows. Indeed, given the vastness of the Chinese economy, the two most critical factors have been transportation and telecommunication. In addition, China continues to lack an optimum service sector consisting of well-structured money and financial markets to support its rapidly growing manufacturing sector (see Chapter 5). We have discussed earlier that China must build up its human capital to sustain its high rate of growth. Could China allocate more FDI to education, research, health care, environment, and other related items which impact human capital formation? As stated before, allocations to these items in China’s service or tertiary sector have been marginal. The preference seems to have been to take care of all those only after the success of China’s Industrial Revolution.

8. Productivity Analyses: FFE in China’s Manufacturing Sector Table 13 presents statistical evidence that China has followed a direction towards capital and technology intensity, away from her traditional labor intensive modes of production. However, as much as 50 percent of China’s manufacturing sector output continues to be labor-intensive. Of course, capital intensity at 22.73 percent and technology intensity at 26.85 percent in the remaining 50 percent of China’s manufacturing sector by the end of 1995 is quite an achievement. The changes in the pattern merits attention and the trend is expected to be progressive.


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Table 4.13: Sectoral Composition of Factor Intensity in Foreign Funded Enterprises (FFE) in China’s Manufacturing Sector, 1995 (%) Labor Intensive 50.42

Capital Intensive 22.73

Technology Intensive 26.85

Total 100

Source: The Third National industrial census 1997; the calculation is based on the total asset of FFEs at the end of 1995. Adapted from the MOPEC-OECD Study, December 2000. Note: Labor-intensive sectors include: food processing, food manufacturing, textiles, clothing & other fiber products, leather & fur products, timber processing, furniture, paper & paper products, printing, cultural, educational and sports goods, rubber products, plastic products, non-metal mineral products, metal products, and others. Capitalintensive sectors include: beverage manufacturing, tobacco processing, petroleum refining & coking, chemical materials & products, chemical fibers, ferrous metal smelting & pressing, non-ferrous metal smelting and pressing, and transport equipment. Technology-intensive sectors include: medical & pharmaceutical products, general machinery, special machinery, electrical machinery & equipment, electronics & telecommunicationequipment, instruments & meters.

9. China’s Foreign Trade: A Great Leap Forward Table 14 lends robust support to the thesis that China experienced the Import-Export-led industrialization and growth model, as we have argued earlier. China’s was not an export-led growth model as such (see Chapter 1). Exports of goods and services at US$ 38.47 billion in 1978 increased dramatically to US$ 468.69 billion in 2002, a percentage increase of over 1,100%. Imports of goods and services at US$ 22.05 billion in 1978 boomed to US$ 379.49 billion in 2002, a percentage increase of over 1,600%. The current account balance, (X-M), moved up from US$ 16.42 billion to US$ 89.20 billion, a percentage increase of nearly 450% for the 26 year period. It is evident that X+M at US$ 60.52 billion in 1978 went up to US$ 848.18 in 2002 and this percentage increase of (X+M) over 1,300% over the time period points to China’s economic presence in the global economy. China adopted an open economy policy and has earned a hefty reward. The accomplishment is unprecedented indeed. With their strong commitment to earn export revenues in convertible currencies of the world, which alone would help profit repatriation to their respective home offices, foreign investors did play a decisive role in this regard. China’s becoming a member of the WTO initiated a new dimension in this regard (see Chapter 6). In 2004,

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China’s exports (X) of goods and services was US$ 593 billion vis-a-vis her import (M) total of US$ 561 billion, contributing to a surplus (X-M), which was greater than that of the previous year. China’s major trading partners are Japan, the European Union (EU), the United States, South Korea, and Taiwan. Trade accounts with Hong Kong, now an autonomous unit of China, remain very impressive. Table 4.14: Foreign Trade, 1978-2002 (constant 1995 US$ billions) Year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 200 1 2002

Exports of goods Exports of goods Imports of goods Imports of goods X-M export and services and services (“3) and services and services (“3) revenue 38.47 4.60 22.05 4.93 16.42 47.1 1 18.10 6.35 7.04 29.02 50.87 21.58 7.87 29.29 7.61 59.33 27.08 8.21 32.25 8.56 3 1.42 28.99 60.41 7.35 8.90 60.01 27.50 7.51 32.51 8.26 26.33 42.20 68.53 9.47 9.42 7.42 14.12 62.51 69.93 9.99 9.42 14.71 61.01 70.42 11.83 20.12 13.68 55.98 76.09 13.65 13.40 14.12 68.49 13.06 81.89 13.47 13.51 70.47 83.94 12.73 29.15 14.32 59.15 88.30 17.53 29.94 16.09 69.91 99.84 19.43 20.00 17.96 91.03 111.03 19.50 -1.37 127.51 18.60 17.08 126.14 16.55 23.45 141.34 157.89 25.32 16.09 21.69 151.88 23.99 167.97 13.17 18.88 153.62 21.03 166.79 34.33 18.30 170.70 205.03 23.07 43.7 1 17.29 176.00 21.92 219.71 37.26 19.20 215.77 22.29 253.03 61.75 23.20 268.62 25.87 330.37 64.58 23.08 297.58 25.47 362.16 468.69 28.86 379.49 25.91 89.20

Source: World Development Indicators 2003

Figure 4 is a presentation of China’s trade data in Table 14. The data clearly shows an upward trend both in volumes and in percentages. The positive current account balance, excepting one year 1993, also presents a trend. There is a jump in the trade balance fiom US$ 13.17 in 1996 to US$ 34.33 in 1997 (figures are in 1995 US$ billions). The trend sets a pattern.

Foreign Direct Investment (FDO In China -An Ecortomic Appraisal

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Figure 4.4 Foreign Trade -c- Exports --x-

Imports -e-

Balance X-M

500 h

.--0

400

300 y1

rn

$

200

'0

E

+

C

100

.-

0)

g

LL

o -100 Year

Source: Based on data fi-om China Statistical Yearbook 2003

10. Inflow of Foreign Investments into China and Economic Impact

Attraction for investment in China has been universal (Hsiao & Hsiao 2002), coming from all over the world (Table 5 and Figure 2). Northeast Asian economies, South Korea, Taiwan, and Hong Kong (then a British colony), led the group. The USA and Japan, each with about 10 percent of the total, came next. The European Union (EU) countries having a share of about 7 percent of the total follow closely. The original members of ASEAN have a respectable share of about 7 percent of the total. Australia, Canada, East Europe, other Asian countries, other developing countries, Latin America, and Africa have made their respective shares of modest investments in China. In wholly foreign-owned corporate units, the ownership right to technology could be relatively safe; this is generally true for FFEs. Top management expectedly came from the home country of the foreign investor. A foreign investor also needed to secure local participation in the top management. Three specific points merit evaluation:

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a) First, local talents could help familiarize members of the top management coming from the foreign country about Chinese market patterns and labor market, as well as the market for the supply of indigenous raw materials. b) Secondly, the development of a market in China for their respective products could be truly effective only with the successful collaboration of available local talents with top management from the home country of the foreign investor. Foreign direct investment with its long term agenda for profit maximization must explore market development and market penetration in the host country. China’s huge domestic market is a major point for consideration by the foreign investors. The speculative flow of funds with its market freedom to move in and out of a specific economy adds an element of volatility which a newly industrializing country may not be able to accommodate. c) Finally, the local talents would help for meaningful communications with local consumers, governmental authorities, and media. Foreign investors had to compete for their respective shares of the Chinese market. They owned their respective corporate units substantively, often wholly and filly. Each investor assumed the total risk. Profit or loss, the verdict of the market was to be accepted. It was in the interest of each foreign investor to bring optimum technology and management, then continue on to employ Chinese talents at all levels, inclusive of professionals and managers. They manufactured products with high quality and low unit cost, so that those products could be sold to the world market. The commitment to make the manufactured products in China cost and quality competitive in the world market has been the core of the adaptive innovation model, as discussed earlier. Of course, all products could be consumed locally by China’s billion-plus people, but the sale proceeds in the Chinese yuan, which is not a convertible currency, could not be used for repatriation of profits home by the foreign investors. Hence there is a strong motivation to earn export revenue in convertible international currencies. From this pool of hard currency based export revenues, a part could be used for profit


15 1

repatriation to their respective home offices and the remainder could be reinvested in China, truly a win-win situation. Most Chinese exports are manufactured products and FDI led this sector of the Chinese economy. Be it further noted that the rest of the Chinese industries inclusive of China’s state enterprises, grew in tandem with FDI and FFE in general. FDI broadened the market in China and thus stimulated the consequent expansion of the rest of China’s industrial economy. Their products claim a share of China’s growing export market. Reportedly, as of 2004, some 50 percent of China’s total exports originated in China’s FDI-led Enterprises (see Chapter 6). Indeed, FDI enterprises have helped to expand China’s export market. They had a global network for marketing with corresponding budgets for publicity and advertisement. A typical Chinese enterprise, be it a state enterprise or a new private, market-oriented enterprise with their limited budgets, could hardly engage in a global marketing campaign. Once the FDI enterprises created the global market for Chinese manufactures by way of consumer acceptance in markets abroad, the progression of China’s share of the world market accelerated and helped China achieve surpluses in the country’s current account balances. These surpluses further reinforced foreigners’ decisions to add to their investments in China. Many others who had not yet invested in China now decided to do so. As of August 2005, the FDI impact on China’s export promotion has reached a new high with the internet use in China growing hugely. The internet is being used to market Chinese products to the world consumers, minimizing the cost of global marketing. The American internet company Yahoo has just made a US$ 1.7 billion joint investment with China’s Alibaba.com. I have stated earlier that China invites competing investments fiom abroad. The Yahoo-Alibaba.com venture will add to competition in internet investments in China by other foreign groups inclusive of Microsoft, Google, and eBay. The rest of the world must continue to marvel at China’s commitment to the market principle of competition. China’s international credit rating has steadily moved up. Oversubscription to the bonds issued by China in the global capital markets has been featured news stories in recent years. The critical evaluation of FDI enterprises in China’s industrial revolution and economic presence in the world cannot be overstated. China has offered a paradigm of the success

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story of foreign direct investment. Foreign investors have been welcome but cannot hope to become rulers of China. China’s open economic policy opened up profitable investment opportunities to all countries, and mzrket competition amongst foreign investors from many countries became an Table 4.15: National and Regional Labor Productivity, 2001 (10,000 yuadperson) Region National Total Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong Henan Hubei Hunan Guangdong Guangxi Hainan Chongqing Sichuan

Guizhou Yunnan Tibet Shaanxi Gansu Qinghai Ningxia Xinjiang

Overall Labor Realized Pre-tax Profits Original Value of Fixed Assets per Unit of Labor Productivity per Unit of Labor 53.8 2.3 39.0 118.4 42.6 41.1 26.5 21.0 44.3 27.5 30.0 91.0 76.0 55.5 31.9 49.7 24.8 47.7 43.1 13.7 32.5 59.1 41.1 27.3 71.5 26.1 25.0 33.8

6.9 1.o 2.3 0.2 2.1 2.4 1.8 2.2 3.6 1.6 1.1 1.o 1.o 0.8 1.4 2.4 1.o 0.7 3.2 0.8 -0.2 3.2 0.2 0.7 0.8

96.3 26.9 14.1 15.2 18.5 19.8 16.1 20.6 83.2 33.1 20.0 21.3 54.1 10.4 39.1 41.2 21.8 7.8 46.2 21.1 17.4 48.7 15.7 13.1 12.7

51.2 19.2 11.5 20.6 30.0

1.o 0.3 -0.2 0.4 1.1

34.7 17.8 20.9 6.1 19.7


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unprecedented economic success for the people of China as well as for the people of so many countries with foreign investments in China. It has indeed contributed to economic gains for the people of the world at large. Table 15 relates to productivity indices. In the absence of data exclusively for FDI, one can argue that inflow of foreign investments contributing to China’s Industrial Revolution has resulted in higher capital and technology intensity, away &om labor intensity. Table 13 reveals the situation as of 1995 and the situation has progressed since then. The findings below support the profile of productivity gains for the Chinese economy, national as well as regional. Three measures are computed: (a) Overall Labor Productivity, (b) Realized Pre-tax Profits per Unit of Labor, and (c) Optimum Value of Fixed Assets per Unit of Labor. In 2001, Beijing and Shanghai are far ahead of the national estimates for all three measures, and Jiangsu is a close third. One ventures to suggest that without massive inflow of foreign investments, China would not score as well she did. In Tables 16A through 16F, a review of the Post-Industrial Revolution profile of profitability of the Chinese economy is presented. China is compared with Hong Kong, ASEAN-4 (Thailand, Malaysia, Indonesia, and the Philippines), NE-s (Singapore, The Republic of Korea, and Taiwan), the US, and the EU, for all industries and for six specific categories (food products, timber, pulp and paper products, chemical products, textiles, electrical equipment, and automotives). Tables are in the same format, including six categories, food products, timber, pulp and paper products, chemical products, textiles, electrical equipment, automotive, plus totals for “all industries” and “all regions.” Table 16A deals with ratios of ordinary profits and total assets of manufacturing as of March 1996 and Table 16B presents the same data as of March 1999. China is emerging as a competitive economy for all industries and for all regions globally, and also in five of the six specific categories, with a negative rating in one category, food products, by 1999. Tables 16C and 16D present ratios of ordinary profits and sales in manufacturing, respectively. They point to the same general pattern: China’s record in the category of food production continues to remain a challenge. Tables 16E and 16F show dividend rates in manufacturing for the same dates and the picture is quite positive. China has

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emerged as a highly competitive economy for “all industries” and for “all regions,” and also for all six categories inclusive of food product. Table 4.16A: Ratios of Ordinary Profits/Total Assets, Manufacturing, March 1996 China ASEAN4 NIEs3 US EU AllRegions Food products -5.4 4.1 10.8 4.4 -1.4 6.4 .. 5.7 Timber, pulp, paper products -2.7 6.4 Chemical products 5.1 2.9 8.5 3.8 3.2 5.9 2.8 3.8 6.7 -3.7 8.3 2.8 Texti1es Electrical equipment 1.9 5.9 6.2 4.3 -0.3 4.1 Automotives 1.4 8.1 5.4 1.0 -0.8 3.1 All industries 1.7 5.5 6.5 2.7 1.3 4.2 Source: Ministry of Economy, Trade and Industry, The 6th Survey of Overseas Business Activities

Table 4.16B: Ratios of Ordinary Profits/Total Assets, Manufacturing, March 1999 Food Products Timber, pulp, paper products Chemical products Texti1es Electrical equipments Automotives All industries

China HK ASEAN4 NIEs3 US EU AllReeions -5.4 18.6 12.0 2.8 3.0 2.6 4.4 1.2 .. 2.6 4.3 2.5 .. -0.4 0.2 3.6 -0.8 3.6 8.9 4.2 4.5 0.5 -0.7 5.6 1.4 3.9 9.9 3.0 2.1 8.0 4.5 5.4 -7.0 -2.5 -1.2 3.8 .. -3.9 10.1 6.2 3.2 4.5 1.4 6.7 1.8 5.5 2.6 2.1 2.5

Source: Same as Table 4.16A

Table 4.16C: Ratios of Ordinary Profits/Sales, Manufacturing, March 1996 Food products Timber, pulp, paper products Chemical products Textiles Electrical equipment Automotives All industries Source: Same as Table 4.16A

China ASEAN4 -3.1 3.5 -7.6 6 3.6 2.9 4.9 1.7 4.3 2 4.4 1.9 4.5

NIEs3 6.3 7.3 4.7 2.9 3.3 3.9

US 1.6 8.4 5.3 -3.7 2.2 0.5 1.8

EU -2.3 .. 3.6 10 0.1 -0.6 1.1

AllRegions 3.4 10.7 7.1 4 2.3 1.7 3.1


155

Table 4.16D: Ratios of Ordinary Profits/Sales, Manufacturing, March 1999 China HK ASEAN 4 NIEs 3 Food products -58.7 -278.3 7.2 1.6 .. 3.4 8.3 Timber, pulp, paper products 2.0 Chemical products 0.3 2.1 -2.3 9.4 Textiles 0.3 -0.8 6.3 3.7 Electrical equipment 1.5 2.8 2.7 -4.0 .. -5.2 2.7 Automotives 4.8 0.6 0.9 1.5 4.4 All industries

US 3.1 3.4 9.4 3.7 -4.0 2.7 1.7

EU All Regions 1.0 2.0 -1.0 -1.0 5.4 5.4 3.4 3.4 -0.8 -0.8 2.4 2.4 1.9 1.9


Table 4.16E: Dividend Rates, Manufacturing, March 1996 China ASEAN4 NIEs3 0.9 7.4 29.1 Timber, pulp, paper products 0.8 Chemical products 5.8 11.2 8.5 Textiles 5.3 17.5 56.9 Electrical equipment 6.0 9.5 15.3 Automotives 3.5 21.3 11.9 All industries 4.3 9.5 13.9

Food products

US 10.2 0.5 8.1 3.1 3.2 2.5 3.4

EU 0.5 .. 3.3 20.9 6.1 1.6 5.3

Allregions 9.9 5.9 9.6 13.9 7.0 5.6 7.1


Table 4.16F: Dividend Rates, Manufacturing, March 1999 Food products Timber, pulp, paper products Chemical products Textiles Electrical equipment Automotives All industries

China 3.9 3.3 4.3 11.4 6.7 8.7 6.8

HK ASEAN 4 NIEs 3 83.6 6.7 7.4 .. 1.8 10.3 2.0 10.9 1.3 31.2 6.8 20.7 22.8 9.9 27.5 .. 6.3 19.7 28.4 5.9 19.2

US 2.8 24.9 28.1 1.9 2.0 3.1 7.2

EU All Regions 1.3 5.2 .. 4.3 5.3 12.3 22.3 10.7 6.7 7.7 3.1 6.7 5.8 7.5


11. Job and Employment Proffie in China’s Investment and Industrialization Plan

As illustrated in Table 17 and Figure 10, China’s dependence on its primary sector for employment at 83.5 percent in 1952 declining modestly to 50 percent in 2001 is to be noted. The secondary sector’s

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employment share at 7.4 percent in 1952 rose to 22.3 percent in 2001 while the tertiary sector’s share at 9.1 percent in 1952 moved up to 27.7 percent in 2001. In the context of the fact that over the time period, China’s share of gross domestic product from the secondary sector has risen to some 60 percent (see Chapter 5)’ the sector’s employment profile is not high enough. The share of employment in the primary sector continues to be dominant, albeit with a declining trend, which is what it should be as per lessons in economic development. As per economic theory, the trends of employment profile for both secondary and tertiary sectors are positive. The inter-sectoral employment shift is expected to progress in the years to come. Figure 5 below demonstrates the trends in the three sectors. Pending further research, we may refer to three possible explanations for continued high employment in China’s primary sector. First, China’s primary sector now includes village level industries encouraging farmers to process their primary agricultural products and add value to them, consequently augmenting their annual incomes (see Chapter 7). Secondly, given the 1.3 billion population base, China’s secondary sector will have a limited capacity to absorb the available labor force in employment in that specific sector. Thirdly, China’s service sector remains to grow optimally. Table 4.17: Percentage of Sectoral Employment, 1952-2001 (%) Year Total (per 10,000 persons) Primary Sector 1952 20729 83.5 1957 23771 81.2 1962 25910 82.1 1965 28670 81.6 80.8 1970 34432 1975 38168 77.2 1978 40 152 70.5 1979 4 1024 69.8 1980 42361 68.7 1981 43725 68.1 1982 45295 68.1 1983 46436 67.1 1984 48197 64.0 1985 49873 62.4 1986 51282 60.9 60.0 1987 52783

Secondary Sector 7.4 9.0 7.9 8.4 10.2 13.5 17.3 17.6 18.2 18.3 18.4 18.7 19.9 20.8 21.9 22.2

Tertiary Sector 9.1 9.8 9.9 10.0 9.0 9.3 12.2 12.6 13.1 13.6 13.4 14.2 16.1 16.8 17.2 17.8


157

Can China build up village level industries to meet the employment demand for her 600 million plus labor force (Johnson 2002,2004,2000)? In what follows we extend our analysis of China’s employment profile. Table 18 relates to employment in state-owned units by sectors. Employment in the manufacturing sector experienced overall declines from 1978-2001; a similar patter prevails in several other sectors including the primary sector consisting of (a) farming, forestry, animal husbandry and fishery, (b) mining & quarrying, (c) construction, (d) geological prospecting and water conservancy, and (e) wholesale and retail trade. Sectors showing an increasing trend in employment include (a) production and supply of electricity, gas, and water, (b) transport, storage, post & telecommunications services, (c) finance and insurance, (e) real estate, (f) social services, (g) health care, sports, and social welfare, (h) education, culture & arts, radio, film & television, (i) scientific research and polytechnic services, (j) government agencies, party agencies, and social organizations, and (k) others. It is to be noted that total employment in state-owned units have remained more or less same, with the exception of a temporary increase during 1990 to 1997 following Phase 3 of the FDI initiative. Indeed, the government in the socialist market economy of China has a definitive role to Play. Table 4.17: Percentage of Sectoral Employment, 1952-2001 (%), (continued) Year Total (per 10,000persons) Primary Sector 1988 54334 59.4 60.0 55329 1989 1990 60.1 64749 1991 59.7 65491 1992 58.5 66152 1993 66808 56.4 1994 67455 54.3 1995 68065 52.2 1996 68950 50.5 1997 69820 49.9 49.8 1998 70637 1999 71394 50.1 72085 2000 50.0 2001 73025 50.0 Source: China Statistical Yearbook 2002

Secondary Sector 22.4 21.6 21.4 21.4 21.7 22.4 22.7 23.0 23.5 23.7 23.5 23.0 22.5 22.3

Tertiary Sector 18.3 18.3 18.5 18.9 19.8 21.2 23.0 24.8 26.0 26.4 26.7 26.9 27.5 27.7

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158

Figure 4.5

-

Sectoral Employment

Primary Sector -Secondary

Sector

Tertiary Sector

Year

Source: Based on data fiom China Statistical Yearbook 2002

Table 4.18: Employment in State-owned Units by Sector, 1978-2001 (10,000 persons) Year

Total

1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

7451 8019 8990 10346 10664 10889 10920 10890 10955 10949 10766 8809 8336 7878 7409

Farming, Forestry, Animal Mining and Husbandry, and Quarrying Fishery 774 588 740 62 1 706 726 786 737 727 797 717 792 834 672 820 653 834 634 809 592 588 772 525 596 525 500 448 475 402 440

Production and ManuSupply of Confacturing Electricity, Gas, struction and Water 2449 102 447 2601 112 475 2975 134 545 3395 183 538 3482 193 557 3526 203 577 3444 220 663 3321 230 629 3326 237 605 3218 250 595 257 577 301 1 1883 242 444 1648 239 399 1415 233 372 1194 229 336

159


Table 4.18: Employment in State-owned Units by Sector, 1978-2001 (10,000 persons), (continued) Year

1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Geological Prospecting and Water Conservancy 177 187 196 194 196 199 142 135 132 126 125 113 108 107 102

Transport, Storage, Post, and Telecom Services 465 498 585 660 682 693 664 677 677 684 68 1 584 568 549 518

Wholesale and Retail Trade, & Finance & Real Social Catering Insurance Estate Services Services 907 42 28 107 33 130 1005 63 93 32 181 800 40 236 947 145 43 251 993 154 48 269 1037 166 1014 182 55 293 59 308 1054 196 61 315 1061 203 1055 208 63 329 1037 210 64 345 694 208 63 322 608 205 61 319 53 1 200 60 314 447 193 59 310

Scientific Education, Health Care, Culture and Arts, Research and sports, & Radio, Film and Polytechnic Social Welfare Television Services 1978 183 674 91 1980 217 757 104 1985 272 925 129 1990 323 1112 148 1991 340 1151 151 1992 356 1183 153 1993 356 1180 153 1994 368 1227 165 1995 379 1265 167 1996 390 1322 166 1997 402 1362 167 1998 410 1408 155 1999 415 1433 153 2000 419 1447 147 2001 425 1455 137 Source: China Statistical Yearbook 2002 Year

Government & Party Agencies, and Social Organizations 417 476 69 1 903 946 969 1014 1007 1019 1068 1074 1079 1084 1086 1084

Others

34 40 42 74 95 84 72 76 80

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Table 19 covers the employment status in the non-government sector, inclusive of units of other types of ownership for 1996-2001 as grouped by registration status. During this period, share-holding corporations, foreign funded units, and units with Hong Kong, Macao, and Taiwan funds lead the job market. Limited liability corporations have taken the lead since 1998. Again, there were demonstrated preferences for several sectors including (a) manufacturing, (b) wholesale and retail trade, (c) construction, (d) mining and quarrying, (e) social services based on total employment in each group in 2001. The sectors (a) geological prospecting and water conservancy, (b) health care, sports, and social welfare, (c) education, culturelarts, radio, fihn/TV, and (d) farming, forestry, animal husbandry, and fishery, received expectedly limited preference by non-government owned enterprises. Table 4.19: Employment in Units of Other Types of Ownership by Sector, 1996-2001 (10,000 persons) Registration Status and Sector Total Grouped by Registration Status Cooperative Units Joint Ownership Units Limited Liability Corporations Share-holding Corporations Ltd. Others Units with HK, Macao, & Taiwan Funds Foreign Funded Grouped by Economic Sector Farming, Forestry, Animal Husbandry and Fishery Mining and Quarrying Manufacturing Production and Supply of Electricity, Gas, and Water Construction Geological Prospecting and Water Conservancy Transport, Storage, Post, Telecommunication Services Wholesale and Retail Trade & Catering Services Finance and Insurance Real Estate Trade Social Services Health Care, Sports and Social Welfare Education, Culture/Arts, Radio, FildTV Scientific Research and Polytechnic Services Others

1996 941.67

1997 (085.53

1998 1627.63

48.51

42.61

357.28 8.84 259.10 267.94

460.15 17.53 274.85 290.39

132.77 46.17 474.68 401.35 8.43 284.29 279.94

3.87 4.34 728.37 10.71 28.20 0.05 11.78 84.95 7.72 11.21 44.13 0.5 1 1.15 3.24 1.43

4.14 6.79 826.71 13.83 33.72 0.05 17.09 100.06 12.48 12.80 48.89 0.53 1.25 4.60 2.59

5.06 56.96 1143.57 28.68 91.49 0.10 37.73 148.88 21.90 19.26 61.02 0.98 1.52 6.43 4.04

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The upward trend in employment growth in all fifteen sectors must be noted. Total employment at 9.4 million in 1996 grew to 21.4 million in 2001. It is evident from Table 19 that the largest numbers of jobs were created in the manufacturing sector, which attracted the bulk of foreign investments into China. The role of foreign direct investment in China’s successful industrialization at a fast rate remains the thesis. Further employment profiles by sectoral breakdown follow: scientific & technical employment (Tables 20), private enterprises and self-employed individuals (Table 2 l), and urban private enterprises and self-employed individuals (Table 22). The privatization initiative in China’s socialist market economy has truly been a point of reference (Table 23). Table 4.19: Employment in Units of Other Types of Ownership by Sector, 1996-2001 (10,000 persons), (continued) Registration Status and Sector Total Grouped by Registration Status Cooperative Units Joint Ownership Units Limited Liability Corporations Share-holding Corporations Ltd. Others Units with HK, Macao, & Taiwan Funds Foreign Funded Grouped by Economic Sector Farming, Forestry, Animal Husbandry and Fishery Mining and Quarrying Manufacturing Production and Supply of Electricity, Gas, and Water Construction Geological Prospecting and Water Conservancy Transport, Storage, Post, Telecommunication Services Wholesale and Retail Trade & Catering Services Finance and Insurance Real Estate Trade Social Services Health Care, Sports and Social Welfare Education, Culture/Arts, Radio, FildTV Scientific Research and Polytechnic Services Others Source: China Statistical Yearbook 2002

1999 1785.38

2000 1934.49

2001 2141.95

139.96 43.92 588.08 408.85 18.72 295.08 290.77

150.39 39.90 665.75 441.71 23.43 298.89 314.42

147.30 43.02 809.64 46 1.69 36.80 315.30 328.21

4.63 82.78 1225.25 34.80 101.38 0.18 47.81 157.02 25.14 22.15 69.14 1.05 2.02 6.37 5.66

6.14 98.02 1305.49 40.08 111.43 0.24 53.83 161.26 25.54 26.37 82.89 1.16 3.19 12.24 6.63

6.65 112.08 1390.80 47.02 153.95 0.46 63.77 176.92 32.06 32.43 97.51 1.72 3.78 14.11 8.72

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China’s ability to compete with mature industrialized economies and also with Asia’s newly industrialized economies for productivity has been an issue of concern (see Chapters 1 and 7), and scientific and techcal employment truly relates to cross-country productivity analysis. Data in Table 20 tell us that China had a total of 30.5 million scientists and technicians in 2001, with one-seventh in the manufacturing sector. For obvious reasons, the education, culture and arts, radio, film and television sector with 11.7 million has the largest share of employment. Table 4.20: Scientific and Technical Employment by Sector, 2001 (10,000 persons) Year Total Farming, Forestry, Animal Husbandry, and Fishery Mining and Quarrying Manufacturing Production and Supply of Electricity, Gas, and Water Construction Geological Prospecting and Water Conservancy Transport, Storage, Post, & Telecommunications Services Wholesale and Retail Trade & Catering Services Finance and Insurance Real Estate Social Services Health Care, Sports, & Social Welfare Education, Culture and Arts, Radio, Film and Television Scientific Research and Polytechnic Services Government Agencies, Party Agencies, and Social Organizations Others

National Total 3053.3 76.8 83.0 439.0 64.7 147.0 30.6 105.9 133.2 163.9 25.9 65.7 344.9 1167.6 86.7 95.5 22.8


Table 2 1 presents the historical profile of China’s employment growth in private enterprises including the self-employed. The total increases fkom 21.4 million in 1989 to 74.7 million in 2001. Further details based on the sectoral breakdown indicate that, over time, employment has grown in all sectors of the Chinese economy. The wholesale and retail trade and catering services sector is the dominant one in this case because it is expected these enterprises and individuals will focus on providing services. The manufacturing sector naturally follows, and employment in social services is growing rapidly as the income level of the Chinese people increases. As we

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Foreign Direct Investment (FDI) In China -An Ecorrornic Appraisal

have discussed earlier, in the 1990s, China’s economic reform agenda for the industrial sector made rapid progress, following the 1992 inauguration of Phase 3 of China’s open invitation to foreign investments. The private enterprises and self-employed emerge as contributors to the process and points to the fact of the progressive role of the private sector in China’s socialist market economy. Table 4.2 1: Employment in Private Enterprises and Self-Employed Individuals by Sector, 1989-2001 (10,000 persons) Year

Total

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

2142.0 2274.3 2491.5 2699.5 3312.0 4424.2 5569.5 6188.2 6791.1 7823.5 8262.5 7476.5 7474.1

Farming, Forestry, Mining and Animal Husbandry, Quanying and Fishery 2.6 0.6 0.4

Manufacturing

Construction

441.4 469.2 549.9 578.8 691.4 1003.6 1253.5 1388.3 1518.5 1774.7 1932.3 1932.9 1975.2

24.8 23.3 27.3 26.9 35.0 50.5 69.5 77.5 85.9 115.3 129.3 144.8 166.6

35.7 57.0 119.5 183.5 255.0 362.1 416.2 339.0 246.1

Transport, Storage, Post, & Telecommunication Services 165.0 182.0 200.5 207.1 254.6 360.9 419.4 468.6 501.2 559.9 564.7 445.7 417.4

61.4 66.5 68.1 80.6 78.7 69.2 67.9

Wholesale and Retail Trade & Catering Services 1989 1272.6 1990 1321.0 1991 1446.2 1992 1592.2 1993 1926.6 1994 248 1.O 1995 3020.4 1996 3300.0 1997 3585.6 1998 4013.5 1999 4161.6 2000 3621.7 2001 3617.2 Source: China Statistical Yearbook 2002 Year

Social Services 214.3 251.9 244.4 283.9 334.4 412.2 552.3 612.6 680.6 795.0 853.8 776.0 808.5

Others 21.3 26.3 22.7 10.6 34.3 59.1 73.5 91.2 96.3 122.4 125.9 147.1 175.3

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Table 22 relates to employment in urban private enterprises and the selfemployed while Table 21 covers overall employment in private enterprises plus self-employed. Table 22 gives data for the three individual years, 1978, 1980, and 1985, followed by time series data for 1990 through 2001. A discussion of the manufacturing sector is in order. When we review the data provided by Tables 21 and 22, we can see that private enterprises and the self-employed play a relatively limited role in the manufacturing sector of the urban economy. This lends support to the argument that village level industries have come to play a significant role in China’s economy in general. In addition, it seems most likely that the self-employed will have a dominant role in the non-urban economy. In the urban economy, many more workers are corporate employees. In general, the growth trends in employment for the total and for each sector have been positive. The role of private enterprises and the self-employed still merit further careful investigation. Will China’s socialist market economy progress to a capitalist market economy? Will China’s socialist market economy be contained as a controlled market economy in the absence of a pluralistic democratic form Table 4.22: Employment in Urban Private Enterprises and SelfEmployed Individuals by Sector, 1978-2001 (10,000 persons) Year

Total

1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

15.0 81.4 450.1 670.5 759.5 837.9 1115.7 1557.4 2045.0 2328.8 2669.0 3231.9 3466.9 3404.0 3658.0

Farming, Forestry, Animal Husbandry, and Fishery

Mining and Quarrying

0.2 1.9 0.6 0.4 6.7 5.4 13.4 17.7 31.8 43.4 44.0 40.5 39.4

10.2 10.3 10.8 13.9 12.4 12.3 13.2

Manufacturing Construction

3.0 9.5 51.4 91.3 128.0 129.6 175.4 271.8 339.0 400.1 450.6 563.9 601.7 632.7 716.6

1.o 0.4 5.1 4.6 7.9 5.9 10.8 17.9 28.1 33.9 38.8 55.2 64.9 79.7 97.8

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of government? Let the critics continue their debate. Based on OUT analysis, massive inflows of foreign investment induced China’s industrialization in the 1990s in tandem with all other sectors of the economy, urban as well as non-urban, and experienced a rate of substantive growth. There has been a structural change of the Chinese economy and the mature industrialized economies must be prepared to accept it. Table 23 presents the profile of growth in China’s private enterprises at the end of 2001 in rural and urban areas in terms of numbers of employers and employed persons. The table also gives number of the total number of enterprises, employed persons, and employers. Two million enterprises owned by 4.6 million employers offered employment to 27.1 million people. To break down, in the urban area, some 3 million employers offered jobs to 15.3 million employees while some 1.6 million employers gave employment to 11.9 million people in the rural areas. The urban areas created more jobs as industrialization centered mostly in those areas. Table 4.22: Employment in Urban Private Enterprises and SelfEmployed Individuals by Sector, 1978-2001 (10,000 persons), (continued) Transport, Storage, Post, Wholesale and Retail & Telecommunications Trade & Catering Year Services Services 1978 1.o 9.0 0.8 1980 57.1 1985 22.3 325.0 1990 36.4 43 1.2 1991 46.1 489.0 1992 47.5 550.7 1993 62.3 714.9 1994 95.7 973.5 1995 111.0 1265.8 1996 131.8 1419.1 1997 153.6 1617.7 1998 190.3 1896.2 1999 202.3 2024.7 2000 178.4 1924.3 2001 180.4 1997.9 Source: China Statistical Yearbook 2002

Social Services 1.o 13.4 44.4 106.4 78.2 93.6 132.8 167.2 241.9 274.5 315.7 397.2 447.2 438.5 484.9

Others

9.9 10.6 12.8 26.0 35.6 41.4 50.1 71.8 69.7 97.6 127.7

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Table 4.23: Employers and Employment in Private Enterprises, 2001 (in 10,000s) Total

Enterprises Employed Persons Employers Urban Areas Employed Persons Employers Rural Areas Employed Persons Employers Source: China Statistical Yearbook 2002

National Total 202.9 2713.9 460.8 1526.8 298.8 1187.1 162.1

In Table 24, we present data for the average wage rate for 1978-2001 with a disaggregation for fifteen sectors. Table 25 extends the analysis of average wage rate of staff and workers by sector in terms of ownership for 2001: state-owned units,urban collective units, and urban other types of ownership. The average wage in the urban collective-owned units overall and for all sectors is relatively lowest. The State-owned units come next. Table 4.24: Average Wage of Staff and Workers by Sector, 1978-2001 (Yuan) Year

1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 200 1

Production Farming, Forestry, Mining and Manuand Supply Construction Total Animal Husbandry, Quarrying facturing of Electricity, and Fishery Gas, Water 597 676 850 714 470 615 752 854 1035 855 616 762 1324 1112 1239 1362 1148 878 2073 2718 2656 2384 1541 2140 2289 2942 2922 2649 1652 2340 2635 3209 3392 3066 1828 271 1 3348 371 1 4319 3779 2042 3371 4283 6155 4894 4679 4538 2819 7843 5785 5169 5757 5500 3522 8816 6249 5642 6482 6210 4050 5933 9649 6655 6833 6470 4311 7064 7242 10478 7456 7479 4528 11513 7982 7794 7521 4832 8346 12830 8735 8750 8340 5184 937 1 14590 9484 9774 9586 5741 10870


167

Table 4.24: Average Wage of Staff and Workers by Sector, 1978-2001 (yuan), (continued) Geological Wholesale/ Finance Transport, Storage, Retail Trade Real Social Year Prospecting and Post, & Telecom and Estate Services & Catering Water Services Insurance Conservancy Services 548 392 610 551 708 1978 694 692 694 475 720 895 1980 832 1154 1028 777 1007 1406 1985 1275 2097 2243 2170 1818 2465 2426 1990 2255 2507 2431 1981 2707 2686 1991 2204 3222 1992 3106 2844 2829 3114 4320 3588 3740 2679 3717 4273 1993 6712 3537 5450 6288 5026 5690 1994 4248 5962 7330 5982 7376 6948 1995 8406 4661 1996 6581 8337 6778 7870 4845 7160 9734 8600 1997 9190 7553 10633 10302 8333 5865 1998 795 1 9808 1999 8821 12046 11505 9263 6417 10991 2000 7190 9622 12319 13478 12616 10339 2001 10957 14167 8192 16277 14096 11869

Education, Scientific Health Care, Culture and Arts, Research and sports, & Radio, Film and Polytechnic Social Welfare Television Services 1978 573 545 669 1980 718 700 85 1 1124 1985 1166 1272 1990 2209 21 17 2403 1991 2370 2243 2573 1992 2812 2715 3115 1993 3413 3278 3904 5126 1994 4923 6162 1995 5860 5435 6846 1996 6790 6144 8048 1997 7599 6759 9049 1998 8493 7474 10241 9664 1999 8510 11601 2000 10930 9482 13620 2001 12933 11452 16437 Source: China Statistical Yearbook 2002 Year

Government & Party Agencies, and Social Organizations 655 800 1127 2113 2275 2768 3505 4962 5526 6340 6981 7773 8978 10043 12142

Others

3371 5213 6295 7184 6838 8481 10068 11098 12590

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Average wages in other types of ownership are highest. Other types of ownership include FFEs as we have argued before, and they offer competitively higher wages and salaries to their staff persons and workers. Table 26 is a presentation of percentage wage change of staff and workers by sector fiom 1978-2001. The lowest percentage increase is in the farming, forestry, animal husbandry, and fishery sector (1 121.49%), while the highest is in the social services sector (2927.81%). This sector is relatively more robust because of China’s need to provide social services for her country’s huge population. However, the average wage rate in this sector of 392 yuan in was too modest, indeed the lowest initial sectoral wage. The production and supply of electricity, gas and water sector began with an average of 850 yuan in 1978 and records an increase of 1616.47 percent. The percentage increase is similar for government agencies, Table 4.25: Average Wage of Staff and Workers by Sector Under Three Ownership Types, 2001 (yuan) Item National Total Grouped by Enterprises, Institutions and Agencies Enterprises Institutions Agencies & Organizations Grouped by Sector Farming, Forestry, Animal Husbandry and Fishery Mining and Quarrying Manufacturing Production and Supply of Electricity, Gas, and Water Construction Geological Prospecting and Water Conservancy Transport, Storage, Post and Telecommunication Services Wholesale and Retail Trade & Catering Services Finance and Insurance Real Estate Trade Social Services Health Care, Sports and Social Welfare Education, Culture and Arts, Radio, Film and Television Scientific Research and Polytechnic Services Government & Party Agencies and Social Organizations Others

Total State-Owned Units 10870 11178 10453 11491 12125

10619 11640 12136

5741 9586 9774 14590 9484 10957 14167 8192 16277 14096 11869 12933 11452 16437 12142 12590

5702 9446 9590 14132 10299 11005 14318 8220 16605 13111 11254 13340 11591 16218 12152 11488

169


party agencies, and social organizations, manufacturing, and geological prospecting and water conservancy sectors. Figure 6 is the graphic presentation of the percentage increase in the average wage rate for the same period. The following sectors experienced growth exceed 2000%: (a) social services, (b) finance and insurance, (c) real estate, (d) scientific research and polytechnic, (e) health care, sports and social welfare, and (0 education, culture and arts, radio, film and TV. The remaining sectors all had growth exceeding 1000%. Note that the percentage increase in the finance and insurance sector at 2568.36 percent is the second highest and its initial average wage at 610 yuan in 1978 was high enough to draw China’s attention to recognize the necessity to build up its financial sector (see Chapter 5 ) . The average wage in 2001 in this sector became Table 4.25: Average Wage of Staff and Workers by Sector Under Three Ownership Types, 2001 (yuan), (continued)

Item National Total Grouped by Enterprises, Institutions and Agencies Enterprises Institutions Agencies & Organizations Grouped by Sector Farming, Forestry, Animal Husbandry and Fishery Mining and Quarrying Manufacturing Production and Supply of Electricity, Gas, and Water Construction Geological Prospecting and Water Conservancy Transport, Storage, Post and Telecommunication Services Wholesale and Retail Trade & Catering Services Finance and Insurance Real Estate Trade Social Services Health Care, Sports and Social Welfare Education, Culture and Arts, Radio, Film and Television Scientific Research and Polytechnic Services Government & Party Agencies and Social Organizations Others Source: China Statistical Yearbook 2002

Urban Units of Other CollectiveTypes of owned Units Ownership 6867 12140

6667 8518 8960

12136 14628

5654 5517 6088 12250 7260 7605 6322 5428 10914 10658 7950 9638 7304 12137 9487 9621

8473 11246 11074 17256 11139 11892 18737 11584 25662 16621 16142 17045 15951 19506 28156

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Table 4.26: Percentage Wage Change of Staff and Workers by Sector, 1978-2001 (yuan) Year Total Farming, Forestry, Animal Husbandry, and Fishery Mining and Quarrying Manufacturing Production and Supply of Electricity, Gas, and Water Construction Geological Prospecting and Water Conservancy Transport, Storage, Post, & Telecommunications Services Wholesale and Retail Trade & Catering Services Finance and Insurance Real Estate Social Services Health Care, Sports, & Social Welfare Education, Culture and Arts, Radio, Film and TV Scientific Research and Polytechnic Services Government &Party Agencies, and Social Organizations Others Source: Based on data f?om China Statistical Yearbook 2002

1978 615 470 676 597 850 714 708 694 551 610 548 392 573 545 669 655

..

2001 10870 5741 9586 9774 14590 9484 10957 14167 8192 16277 14096 11869 12933 11452 16437 12142 12590

Figure 4.6 Percent Change in Wages by Sector, 1978-2001

II----

item

Source: Based on data from China Statistical Yearbook

%Change 1667.48 1121.49 1318.05 1537.19 1616.47 1228.29 1447.60 1941.35 1386.75 2568.36 2472.26 2927.81 2157.07 2001.28 2356.95 1753.74


171

the highest of all sectors reported, at 16,277 yuan. The trend in general and in each sector is positive pointing to China’s economic achievement. China’s economic performance has earned her the status of becoming the seventh largest economy of the world in 2004.

12. Investment in Fixed Assets: Capital Construction and Innovation In this section we discuss China’s investment in fixed assets. We argue that in the process industrialization, China’s economic planners noted the importance of building up the aggregate stock of physical capital (K) in the Chinese economy. Their relative abundance of manpower already gave them a lead in terms of aggregate stock of labor (L). To be a competitive partner in the world economy, China’s priority for investment in fixed assets must be appreciated. Table 27 details investment in fxed assets in several categories: (a) Ownership: (a) state-owned, (b) collective-owned, (c) collective owned-rural, (d) individuals (e) individuals-rural, (f) joint ownership, (g) share holding, (h) foreign funded, (i) units with funds from Hong Kong, Macao, and Taiwan, and (j) others. (b) Channel of management: (a) capital construction, (b) innovation, (c) real estate development, and (d) others. (c) Source of funds: (a) state budgetary appropriations, (b) domestic loans, (c) foreign investment, (d) fundraising, and (e) others. (d) Use of funds: (a) construction and installation, (b) purchase of equipment and instruments, and (c) others. For 2000 to 2001, year over year, total investment increased by 13 percent. FFEs seem to have stabilized and the rate of increase was 7.8. However, investment in fvred assets with fimds fiom Hong Kong, Macao and Taiwan jumped up 22.4 percent. Individuals in the economy registered an increase of 15.3 percent. Joint ownership was the only sector to record a decline. For channels of management, real estate development leads with 27.3 percent increase. The emphasis on capital construction with an increase of 10.4 percent is notable. More importantly the case of innovation with an increase rate of 16.0 percent points to the emphasis Chinese planners placed

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on competitive productivity. A review of the source of funds further points to the fact that inflow of foreign investment in fixed assets has stabilized. The budgetary appropriations with 20.7 percent increase dominate the situation. In terms of use of funds, the percent increases in construction and installation (1 1.8%) and purchase of equipment and instruments (13.5%), relate to China’s conscious efforts to be competitive in productivity in the global market. The historical profile based on time series data for 1980-2001 for fvred investment by ownership (Table 28), by sources of funds (Table 29A), and by use of h d s (Table 29B) follows. In terms of ownership, the foreign Table 4.27: Total Investment in Fixed Assets (100 million yuan) Item Total Investment Grouped by Ownership State-owned Units Collective-owned Units Rural Individuals Economy Rural Joint Ownership Economic Units Share Holding Economic Units Foreign Funded Economic Units Economic Units with Funds from Hong Kong, Macao and Taiwan Others Grouped by Channel of Management Capital Construction Innovation Real Estate Development Others Grouped by Source of Funds State Budgetary Appropriation Domestic Loans Foreign Investment Fundraising Others Grouped by Use of Funds Construction and Installation Purchase of Equipment and Instruments Others Source: China Statistical Yearbook 2002

2000 329 17.73

2001 372 13.49

%Change 13.0

16504.44 4801.45 3791.62 4709.36 2904.26 94.73 4061.88 1313.21

17606.97 5278.57 4235.72 5429.57 2976.56 94.52 5663.49 1415.40

6.7 9.9 11.7 15.3 2.5 -0.2 39.4 7.8

1293.05 139.61

1583.29 141.68

22.4 1.5

13427.27 5107.60 4984.05 9398.81

14820.10 5923.76 6344.1 1 10125.52

10.4 16.0 27.3 7.7

2 109.45 6727.27 1696.24 17270.28 5306.86

2546.42 7239.79 1730.73 19903.12 6566.92

20.7 7.6 2.0 15.2 23.7

20536.26 7785.62 4595.85

22954.88 8833.79 5424.83

11.8 13.5 18.0

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173

investment share is evidently declining. The role of state-owned and collective owned units maintain an upward trend. The role of individuals is becoming more and more visible in terms investment. The process of privatization, often referred to as marketization, is in notable progress. For source of funds, the category of fundraising and others, with 55.4 percent share in 1981, leading progressively to 69.6 percent in 2001, is very much in the lead and warrants further research. In terms of use of funds, construction and installation have shares of fixed investment beginning in 1981 with 71.8 percent, and came down to 61.7 percent in 200 1. About a quarter of total fixed investment has gone to purchase of equipment and instruments.

Table 4.28: Total Investment in Fixed Assets by Ownership, 1980-2001 (100 million yuan) State-owned CollectiveOther Types Year Total Units owned Units Individuals of Ownership 1980 910.9 745.9 46 119 1985 2543.2 1680.5 327.5 535.2 1986 3120.6 2079.4 391.8 649.4 1987 3791.7 2448.8 547 795.9 1988 4753.8 3020 711.7 1022.1 1989 4410.4 2808.2 570 1032.2 1990 4517 2986.3 529.5 1001.2 1991 5594.5 3713.8 697.8 1182.9 1992 8080.1 5498.7 1359.4 1222 1993 13072.3 7925.9 2317.3 1476.2 1352.9 1994 17042.1 9615 2758.9 1970.6 2697.6 1995 20019.3 10898.2 3289.4 2560.2 3271.5 1996 -22974 -12056.2 -3660.6 -3211.2 -4046 1997 24941.1 13091.7 3850.9 3429.4 4569.1 1998 28406.2 15369.3 4192.2 3744.4 5100.3 1999 29854.7 15947.8 4338.6 4195.7 5372.7 2000 32917.7 16504.4 4801.5 4709.4 6902.5 372 13.5 17607 5278.6 5429.6 8898.3 200 1 Source: China Statistical Yearbook 2002 Note: a) Other types of ownership refer to the types of ownership other than state-owned units, collective-owned units and individuals economy, including joint ownership economic units, share holding economic units, foreign funded economic units, and economic units with funds fkom Hong Kong, Macao, and Taiwan, etc.

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Table 4.29A: Total Investment in Fixed Assets by Fund Source, 19812001 (Yo) State Budgetary Domestic Loan Appropriation 1981 28.1 12.7 1982 22.7 14.3 1983 23.8 12.3 1984 23.0 14.1 1985 16.0 20.1 1986 14.6 21.1 1987 13.1 23 .O 21.0 1988 9.3 1989 8.3 17.3 1990 8.7 19.6 1991 6.8 23.5 27.4 1992 4.3 23.5 1993 3.7 22.4 1994 3.0 20.5 1995 3.0 19.6 1996 2.7 18.9 1997 2.8 19.3 1998 4.2 19.2 1999 6.2 2000 6.4 20.3 19.1 2001 6.7 Source: China Statistical Yearbook 2002

Year

Foreign Investment 3.8 4.9 4.7 3.9 3.6 4.4 4.8 5.9 6.6 6.3 5.7 5.8 7.3 9.9 11.2 11.8 10.6 9.1 6.7 5.1 4.6

Fundraising and Others 55.4 58.1 59.2 59.0 60.3 59.9 59.1 63.8 67.8 65.4 64.0 62.5 65.5 64.7 65.3 66.0 67.7 67.4 67.8 68.2 69.6

Figures 7 and 8 present graphic expositions based on these data. Let us restate that China’s goal is clearly to enrich productivity of the Chinese economy. How else can China compete with the mature industrialized economies in the world market? Table 30 sums up total investment by ownership units in 2001. Stateowned units have the largest volume of investment. In rural areas, collective ownership and individuals both play a significant role. Share holding has a noteworthy share of the total. Foreign funded and funds from Hong Kong, Macao, and Taiwan play a noticeably limited role. Table 31 covers the historical profile of investment in capital construction and innovation for 1957-2001. Figure 9 is an exposition of the historic trend and tUrning points in mid-80s and early to mid-1990s are visible. In 1996, both categories experienced a serious drop in investment due to the Taiwan crisis and the pending return of Hong Kong to Chinese sovereignty. The

175


Table 4.29B: Total Investment in Fixed Assets by Fund Use, 1981-2001

(%I Construction and Installation 1981 71.8 1982 70.8 1983 69.5 1984 66.4 1985 65.1 1986 66.0 1987 65.3 1988 65.2 1989 67.9 1990 66.6 1991 65.2 1992 . 63.9 1993 62.7 1994 63.3 1995 65.8 1996 66.0 1997 62.6 1998 62.9 1999 63.0 2000 62.4 2001 61.7 Source: China Statistical Yearbook 2002

Year

Purchase of Equipment and Instruments 23.3 23.7 25.1 27.8 28.2 27.3 27.4 27.5 25.3 25.8 26.1 26.3 25.4 25.4 21.3 21.5 24.2 23.0 23.6 23.7 23.7

Others 4.9 5.5 5.4 5.8 6.7 6.7 7.3 7.3 6.8 7.6 8.7 9.8 11.9 11.3 12.9 12.5 13.2 14.1 13.4 13.9 14.6

government moved to protect domestic industries and went so far as to remove tax incentives that attracted foreign investment. It compares to writing off the value of investment under adverse circumstances. Finally, Table 32 presents a historical profile of fund sources for 1978, 1980, and 1985, then 1990-2001. State budgetary appropriations apart, foreign investment appeared to have peaked in late 1990s. Domestic loans, fund raising, and miscellaneous sources have continued to be options for obtaining investment for capital construction. However, a closer scrutiny will be instructive. In the process of industrialization of the Chinese economy, the income level of the people moved up. Their savings also increased and became the source of domestic loans. China’s ability to raise funds in the world market has become a phenomenon. We have argued before that foreign investors helped export their manufactured products in

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Figure 4.7 Investment In Fixed Assets by Fund Source LState Budgetaly

4-Foreign

Appropriation

Inwstrnent

Domestic Loans +Fundraisinq

and Others

Year

Source: Based on data from China Statistical Yearbook 2002

Figure 4.8 Investment in Fixed Assets by Fund Use

1 +Construction

and Installation +Purchase

of Equipment and Instruments -Others

I


I

Foreign Direct Investment (FDq In China - An Economic Appraisal

177

Table 4.30: Total Investment in Fixed Assets by Ownership Units, 2001 (100 million yuan) Item Total State-owned Units Collective-owned Units Rural Individuals Rural Joint Ownership Share Holding Foreign Funded Economic Units Funded by HK, Macao, Taiwan Others Source: China Statistical Yearbook 2002

Total Investment 372 13.49 17606.97 5278.57 4235.72 5429.57 2976.56 94.52 5663.49 1415.40 1583.29 141.68

Table 4.3 1: Investment in Capital Construction and Innovation, 19572001 (100 million yuan) Year 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

1971 1972 1973 1974 1975 1976 1977 1978 1979

Investment in Capital Construction 143.32 269.00 349.72 388.69 127.42 71.26 98.16 144.12 179.61 209.42 140.17 113.06 200.83 312.55 340.84 327.98 338.10 347.71 409.32 376.44 382.37 500.99 523.48

Investment in Innovation 7.91 10.06 18.30 27.89 28.64 16.02 18.50 21.77 37.29 45.38 47.55 38.51 46.09 55.53 76.47 84.83 100.02 115.48 135.62 147.50 165.93 167.73 175.88

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China to the world market to earn export revenue in convertible currencies which would facilitate their repatriation of profits home. The Chinese authorities lent total support to the export promotion process. The process was successful, and China’s positive current account balance led to a major increase in her foreign exchange reserve and subsequent upgrading of her international credit rating. The news stories of oversubscription to China’s bond issues abroad followed. Recently, China’s stock exchanges have made provisions to allow foreigners to purchase specific types of Chinese financial instruments, further augmenting the country’s foreign exchange reserve. One must add to that recently (2003-2005), the Chinese authorities have invited massive inflows of foreign fimds into two areas: (a) financial sector Table 4.3 1: Investment in Capital Construction and Innovation, 19572001 (100 million yuan), (continued) Year 1980 1981 1982 1983 1984 1985 1986 1987

Investment in Capital Construction Investment in Innovation 558.89 187.01 442.91 195.30 555.53 250.37 594.13 291.13 743.15 309.28 1074.37 449.14 1176.11 619.21 1343.10 758.59 1988 1574.31 980.55 1989 1551.74 788.78 1990 1703.81 830.19 1991 2115.80 1023.23 1992 3012.65 1461.10 1993 4615.50 2195.85 1994 6436.74 2918.61 1995 7403.62 3299.35 1996 -8610.84 -3622.74 1997 9917.02 3921.94 1998 11916.42 4516.75 1999 12455.28 4485.08 2000 13427.27 5107.60 200 1 14820.10 5923.76 Source: China Statistical Yearbook 2002 Note: Before 1981, data on the investment in innovation included other investments in fixed assets of state-owned units.


179

Figure 4.9 Investment in Capital Construction and Innovation, 1953-2001 --c Inwstrnent in Capital Construction -c- lnwstrnent in Innowtion

2.000

1,500

-

1,000

c

.-

3

500

; ; . C

$

0

-500

-1,000

I

Year


Table 4.32: Investment in Capital Construction by Fund Source, 19782001 (100 million yuan) Year

1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 200 1

State Budgetary Appropriations 389.21 300.1 1 381.18 363.59 348.45 307.87 43 1.76 434.57 491.67 (524.38) 574.51 1021.32 1478.88 1594.07 2052.3 1

Domestic Loans

41.22 187.92 378.62 527.07 831.48 1117.55 1583.45 1646.24 (1938.86) 2239.88 2814.36 2972.04 3586.35 3637.15


Foreign Investment 28.16 53.65 73.52 224.05 239.96 334.15 456.15 912.03 1055.42 (1235.43) 1351.92 1445.78 1064.15 852.18 898.13

Fund-Raising

Others

83.62 163.90 339.99 529.92 746.73 1242.92 1991.25 2820.48 3 121.86 (3778.83) 4432.24 4870.26 4857.15 5233.10 6231.09

91.76 207.62 253.59 296.24 608.57 584.48 899.98 (965.00) 1036.13 1461.22 1467.25 1396.78 1443.09

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and (b) internet marketing of the Chinese products, especially to the rural areas inclusive of village level industries. Foreign banks and financial institutions have been purchasing stakes in Chinese banks. Foreign money funds and hedge funds are engaged in exploring markets in China. For the internet market, foreign corporations have been active in capturing their shares of the huge Chinese market (see Chapters 5 and 6). 13. China’s Socialist Market

China’s agenda of market-oriented economic reforms since 1979 has made revolutionary progress. Individual initiatives, based on profit maximizing goals have become a phenomenon. China today is the seventh largest economy of the world and continues to grow at the fastest sustainable rate. However, based on shares of investment and shares of employment, the role of government continues to remain dominant. The US State Department estimates that “the state-owned sector still accounts for about 40 percent of GDP.” Nevertheless, the Chinese economic planning authority has set its priority in terms of investment in fured assets, capital construction and innovation. Inflow of foreign investments in the secondary sector consisting of manufactures and industries played its role in the progress of China’s industrial revolution for the last quarter century. Indeed, the Chinese authorities have determined their new priorities for the recent years, and have made the appropriate provisions for inflows of foreign investments in banking and financial sectors of the economy as well as utilizing the internet to promote the market Chinese products. The success of China’s industrialization program has also contributed to innovative sources for funding, as we have discussed above. To sustain industrialization of the Chinese economy, the core base of fixed assets with the emphasis on capital construction and innovation must continue. The rest of the world must accept the fact. A policy of sustained economic cooperation with China will optimize economic gains for the world as a whole.

CHAPTER 5 CHINA’S MONEY & FINANCIAL MARKET

China’s Industrial Revolution has been very dependent on the growth of its manufacturing sector, and the corresponding sectoral share of China’s gross domestic product (GDP) has moved up to above 60 percent since 1970. The GDP basket has become larger and larger, with the World Bank ranking China as the seventh largest economy based on GDP (PPP) the past two years. Consequently, the share of China’s agricultural sector’s GDP declined, even as this sector’s total output continued to increase. China’s service sector has failed to grow at a rate that could sufficiently support China’s industrial growth. The increasing intersectoral imbalance in China’s accelerated economic growth certainly became a constraint and contributed to occasional inflationary pressures (see Chapter 1). Transportation and telecommunication are two major components of the service sector, and China has done quite well in this upgrading these areas. We have also discussed China’s real estate market as a component of the tertiary or service sector (see Chapter 4). In this chapter we shall focus on China’s money and financial market. Banking, insurance, stock markets, and related financial institutions must develop optimally to sustain and support China’s Industrial Revolution. In the pre-reform Communist command system, the government owned and operated all banks. Indeed, the role of money and banking was marginal. Farmers, as members of a commune, produced specific products and received their shares in kind. They could exchange it for products manufactured by state enterprises. The state enterprises, wholly owned and operated by the government, received their low-tech capital goods and raw materials from the government and delivered finished products back to government agencies as per specification. Wage earnings that could be used to purchase goods and services from the limited markets available were pre-determined. One can argue that the 181

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system provided for a limited role for currency transactions and the role of money as a medium of exchange was rarely market determined. In a capitalist market economy, money functions not only as a medium of exchange, but also as a store of value. People hold their savings in cash, the most liquid wealth. In the Communist economy, the government was responsible for all savings and owned and managed all investments. China’s economic reform brought in a socialist market economy that resulted in a major transformation of its money and banking market. Money assumed its proper place as legal tender, a medium of exchange, and a store of value. To support and sustain the Industrial Revolution, it became imperative to restructure China’s banking and related financial institutions. China’s rapidly expanding foreign trade called for market institutions with authority to issue letters of credit. The establishment of lawfully constituted insurance corporations to help facilitate exports and imports in traded goods and services became imperative. The role of money broadened as demand for financial institutions with proper financial products to help people hold their savings became pressing. Rather exclusive focus on the industrial and manufacturing sector of the economy in Phase 1 of the marketization of the Chinese economy must be appreciated by the fact that the planning authorities anticipated the need for an optimum monetary policy to be associated with an optimum fiscal policy. If and only if necessary macroeconomic parameters based on monetary and fiscal policy guidelines, transparent and justiciable, were put in place, could the reform agenda in the primary and secondary sectors ushering in a market economy be functionally successful (Dutta 2005,2002). 1. The PBOC and Major Banks of China

The People’s Bank of China (PBOC) is the central bank of China with power and responsibility to formulate and administer China’s monetary policy. As the country’s central bank, the PBOC manages the quantity of money to be supplied to the economy at any given time and the core rate of interest for borrowing. In addition, the PBOC has the task of regulating the institutions in China’s money and financial markets.

China’s Money and Financial Market

183

The PBOC was established in 1948 with its headquarter in Shijiazhuang, Hebei. In 1949, following the Communist revolution, all banks in China were nationalized and incorporated in the PBOC, and the central office was moved to Beijing. It was the only bank for central and commercial banking in China until 1978. Following the economic reform agenda in the 1980s, the People’s Bank of China Law was enacted in 1985, delegating all commercial banking functions to four independent but state-owned banks, and the PBOC assuming the exclusive assignment as China’s central bank. The four banks are: the Bank of China (BOC), the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), and the Agricultural Bank of China (ABC). In 1994, the government established three policy banks at the next stage: the China Development Bank, the Export-Import Bank of China, and the Agricultural Development Bank of China. These policy banks finance infrastructure projects and other long-term, state-supported and non-profit projects. Below these state-owned seven are second-tier state-owned, stockholding banks, held by government and private entities. In the 1990s, several joint-stock commercial banks were established, including the Shanghai Pudong Development Bank, the Shenzhen Development Bank, the China Merchants Bank, and the China Minsheng Bank. These four banks are all listed on the domestic stock market. According to one report, 168 foreign banks from 38 countries have set up representative offices in 25 Chinese cities. It should be noted that thousands of rural and urban cooperative banks have also been a part of China’s financial market. They have progressively merged into banks. Table 1 below presents the domestic banks as well as branches and employment. At an international economic conference at the Shanghai Academy of Social Sciences in 1992, I argued that in the context of the vastness of the country, the concept of regional central banking, as per the American model, could help balance China’s inter-regional economic development (Dutta 1992). At subsequent conferences with the authorities of the PBOC in Beijing, I was assured that the PBOC decided for the change; the PBOC now has nine regional PBOCs. The US Federal Reserve System has twelve regional Feds.

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Table 5.1 : Number of Institutions and Employees in the Banking Industry, 200 1 Banking Institution Total The People’s Bank of China Industrial and Commercial Bank of China Agricultural Bank of China Bank of China Construction Bank of China Agricultural Development Bank of China Bank of Communications Export Import Bank of China Shanghai Pudong Development Bank National Development Bank CITIC Industrial Bank China Everbright Bank China Minsheng Banking Corp., Ltd China Huaxia Bank China Merchants Bank Guangdong Development Bank Fujiang Industrial Bank Shenzhen Development Bank Co., Ltd Yantai House Saving Bank Source: China Statistical Yearbook 2002

Branches 118,691 2,228 28,345 44,4 18 12,529 23,925 2,275 2,838 3 240 37 340 31 105

17 293 5 60 255 172 80

Employees 1,878,677 166,984 429,709 490,999 184,529 419,157 59,487 57,602 523 5,743 3,516 8,850 7,249 3,094 5,025 12,922 11,009 5,815 5,089 1.375

The issue of independence of the central bank of a sovereign nation state economy must warrant attention. At the 1992 conference, I also made a case for such independence for the Governor of the PBOC. Of course, the Chairman of the American Federal Reserve System is appointed by the President, subject to the consent and advice of the US Senate. However, the Chairman cannot be removed during his tenure of four years, albeit the appointment is renewable for successive terms. Impeachment would be the only process, and that process has complex regulations. For the European Central Bank (ECB) of the European Union set up on January 1, 1999, the President cannot be removed during the seven year tenure and is not subject to reappointment. This independence is a key provision for any central bank’s authority to formulate and administer monetary policy without undue political interference.

China ’s Money and Financial Market

185

The Governor of the PBOC is appointed by the National People’s Congress and the Law does not stipulate any immunity from being removed during the five-year term. For the Governor of the PBOC, formulation and management of the nation’s monetary policy independent of the executive branch of the Chinese government remains an issue to be explored. To quote current PBOC Governor Zhou Xiaochuan, “if the market can solve the problem, let the market do it. I am just a referee. I am neither a sportsman nor a coach.” The executive branch of the government is responsible for the country’s fiscal policy. Further research for the coordination of monetary and fiscal policies is in order. One important reform item for consideration will be the institution of a system to ensure the safety of people’s savings with the banks. The Federal Deposit Insurance Corporation (FDIC) has done a very successfuljob in the USA. Will China have its own version of FDIC? The Bank of China (BOC) is China’s main international banking institution, originally founded in 1912, and later reorganized. It now specializes in foreign exchange management. The BOC’s major activities include commercial banking, inter-bank deposits and loans, purchase and sale of gold and foreign currencies, participation in international loan syndications, issuance of bonds in international markets, export credit financing, overseas banlung services, overseas remittances, and banking transactions for foreign-owned enterprises. The Industrial and Commercial Bank of China (ICBC), established in 1984, took over the branch network of the PBOC. The ICBC, now with its more than 28,000 branches across China and an investment banking subsidiary in Hong Kong, has successfblly assumed the duties of local currency lending and deposit-taking for Chinese industrial and commercial enterprises, plus trade related services and issuance of letters of credit. The China Construction Bank (CCB), set up as early as 1954, specializes in capital construction investments with priority given to projects related to energy, communication, transportation, housing, and land development. The CCB has a domestic investment banking subsidiary, China International Capital Co., Ltd (CICC).

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The Agricultural Bank of China (ABC), set up in 1979, took over the rural banking activities of the PBOC, providing banking services to rural businesses and individuals, and remains responsible for the development of the agricultural and rural sector of the economy. Funds allocated by the central government to that end are managed by the ABC. Investment banking has taken root in China’s fast growing financial market. The China International Capital Corporation (CICC), established in 1995 as a joint venture between China Construction Bank (CCB), Morgan Stanley, and three other smaller shareholders, underwrites domestic equities, accepts equity stakes in foreign investments in China, manages mergers and acquisitions, raises project finances, and manages foreign exchanges. Indeed, the Bank of China (BOC) and the China Development Bank (CDB) have also moved into investment banking. As we have stated earlier, the two core functions of the central bank of an economy, in this case the PBOC, is to determine the quantity of money to be supplied and the core rate of interest at which money supply will be made. By controlling the two parameters, the PBOC can manage China’s monetary policy, be it to promote an expansion or to contain speculative growth. Tables 2 and 3 present the data on money supply and interest rates, respectively, and they are what they are expected to be in relation to the historic expansion of China’s economy since 1990s. The percentage increase in each category of money supply lends support to China’s economic expansion. The annual percentage change of M2 varied between 26.52% in 1991 and 25.26% in 1996, reaching a high of 37.3 1% in 1993. Since 1997, the rate of change of M2 has come down from 19.58% to 12.27% in 2000, recording an upturn to 17.60% in 2001. For M1 and MO a parallel pattern of annual percentage with minor variations can be noted. M2 does not follow the same pattern as MO and M1. The money market in China remains to be developed. It appears as of now the MO and M1 components are directly responsive to monetary policy. M2 seems to be slower to react to changes in the money supply. In general, the period of growth for 1991-1996 is followed by a period of containment for 1996-2000. Overall, for 1990-2001, the growth rate of M2 has been 935.10%, 761.38% for M1, and 493.28% for MO.

187


The rule of the game is straightforward. For China’s industrialization and accelerated growth rate, it was necessary for money supply to grow. It did so. However, if and when an increase in money supply fails to translate into a corresponding increase in real output, the rate of inflation will threaten the economy’s growth. Indeed, China experienced serious inflation during 1988-1989 and 1993-1994, which was swiftly contained. Table 5.2: Money Supply, 1990-2001 (100 million yuan) Year 1990

Money and Quasi-Money % change IM2) 15293.4

Money (MI) 6950.7

Currency in % change Circulation % change IMO’r 2644.4

1991

19349.9

26.52

8633.3

24.2 1

3 177.8

20.17

1992

25402.2

3 1.28

11731.5

35.89

4336.0

36.45

1993

34879.8

37.31

16280.4

38.78

5864.7

35.26

1994

46923.5

34.53

20540.7

26.17

7288.6

24.28

1995

60750.5

29.47

23987.1

16.78

7885.3

8.19

1996

76094.9

25.26

28514.8

18.88

8802.0

11.63

1997

90995.3

19.58

34826.3

22.13

10177.6

15.63

1998

104498.5

14.84

38953.7

11.85

11204.2

10.09

1999

119897.9

14.74

45837.2

17.67

13455.5

20.09

2000

134610.3

12.27

53 147.2

15.95

14652.7

8.90

2001

158301.9

17.60

59871.6

12.65

15688.8

7.07

1990-2001 935.10 761.38 493.28 Source: Based on data fiom China Statistical Yearbook 2002 Note: The statistics coverage of the table before 1992 is according to China national bank and rural credit union, and that since 1992 is according to Banking Survey.

As per economic theory, interest rates will follow the pattern of money supply so that administration of the monetary policy can be effective. Table 3 records three types of interest rates, deposit interest rate, real interest rate, and lending interest rate. As expected, real interest rate, which is the inflation-adjusted rate of interest, notably declined for 1991-1996, a period of expansion, and the trend was reversed for 19961999, a period of contraction. In general, both the deposit and lending interest rate followed the patterns of expansion and contraction.

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Table 5.3: Interest Rates, 1980-2002 (%) Year Deposit interest rate Real interest rate 1980 5.40 1.21 1981 5.40 2.67 1982 5.76 7.41 1983 5.76 6.07 1984 5.76 2.20 1985 -2.02 7.20 1986 7.20 3.17 1987 2.72 7.20 8.64 1988 -2.79 1989 2.33 11.34 8.64 1990 3.49 1991 1.79 7.56 1992 0.68 7.56 -3.12 1993 10.98 1994 -7.44 10.98 10.98 1995 -0.99 3.93 7.47 1996 1997 7.76 5.67 9.00 3.78 1998 8.22 2.25 1999 4.86 2.25 2000 4.61 2.25 200 1 2002 1.98 5.62 Source: World Development Indicators 2003

Lending interest rate 5.04 5.04 7.20 7.20 7.20 7.92 7.92 7.92 9.00 11.34 9.36 8.64 8.64 10.98 10.98 12.06 10.08 8.64 6.39 5.85 5.85 5.85 5.31

Figure 1 offers a graphic presentation of percentage changes of money supply, for 1991-2001 in all three categories, M2, M1, and MO. The periods of expansion in early 1990s and that of contraction in late 1990s are to be noted. In general, the patterns follow the discussion above. The trend of percentage change in the supply of currency in circulation (MO) with its sharper turns is notable for both periods. Authorities can and do act for the supply of currency in circulation with more immediate impact. We may note three points of upturn in money supply in Figure 1: a) 1992-1993 following Phase 3 of inflow of foreign investment, b) the 1997 accession of Hong Kong which broadened China’s economy and international economic relations, c) to counteract the spreading Asian Financial Crisis of 1997-1998.

China s Money and Financial Market

Figure 5.1 Percentage Change of Money Supply, 1991-2001 45%

40% 35%

30%

25% 0

8 20%

a

15%

10%

5% 0%

Year -Money

(Ml)

Source: Based on data fiom China Statistical Yearbook 2002

Figure 5.2 Foreign Exchange Reserves, 1978-2001

1 +Foreign

Exchange Resere

1

2500 2000

1500 1000

500 0

-500 Year


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Table 5.4: Foreign Exchange Reserves, 1978-2001 (US$ 100 million) Year Foreign Exchange Reserve 1978 1.67 1979 8.40 1980 -12.96 1981 27.08 1982 69.86 1983 89.01 1984 82.20 1985 26.44 1986 20.72 1987 29.23 1988 33.72 1989 55.50 1990 110.93 217.12 1991 194.43 1992 211.99 1993 5 16.20 1994 735.97 1995 1050.49 1996 1398.90 1997 1449.60 1998 1546.75 1999 1655.74 2000 2001 2121.65 Source: China Statistical Yearbook 2002

% increase

402.99 -254.29 -308.95 157.98 27.41 -7.65 -67.83 -21.63 41.07 15.36 64.59 99.87 95.73 -10.45 9.03 143.50 42.57 42.74 33.17 3.62 6.70 7.05 28.14

In the past, when the government banks lent money to government approved projects, interest rates played a limited role in determining China’s money supply. This is no longer the case, and the marketization of the money market is steadily in progress. Figure 2 shows the major upward trend of foreign exchange reserves beginning in 1993 as a result of increased foreign trade. China needed to earn foreign exchange in convertible currencies to help profit repatriation by foreign investors. As shown in Table 4, reserves have jumped from US$ 2.71 billion in 1981 to US$ 212 billion 20 years later in 2001. China’s foreign exchange reserve reached US$ 711 billion as of June 2005. Recently, the PBOC has begun to tighten monetary policy by raising the core rate of interest and revaluing the yuan to contain anticipated overheating in the Chinese economy.


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The PBOC also has the responsibility for the management of gold reserves. China’s reserve has been steady at 12.67 million Troy ounces since 1981, but the reserve has recently jumped up to 19.29 million ounces. 2. China’s Financial Market

Historically, with the help of large investments by Britain, Shanghai became a leading financial center in Asia. The former European banking buildings on the Bund have become a tourist attraction because the economic doctrines of the Communist Party did not accommodate these capitalist financial institutions. With the economic reform program, the post-reform financial market remained in Shanghai and the principal stock exchange was established there. According to recent reports, some of the old banking buildings on the Bund are being restored to banking business. Table 5.5: Number of Listed Companies, 1990-2001 Shenzhen Shanghai Ashare A&H A&B B Share Stock Stock Only Share Share Only Exchange Exchange 8 10 2 10 1990 14 8 6 14 1991 18 29 24 53 53 1992 183 3 34 6 183 106 1993 77 29 1 171 227 6 54 4 1994 120 242 11 58 12 135 323 188 1995 43 1 14 69 16 1996 530 293 237 17 76 25 745 383 627 362 1997 18 80 26 85 1 43 8 727 413 1998 484 19 82 26 949 822 463 1999 1088 955 5 14 572 19 86 28 2000 200 1 1154 646 508 1025 23 88 24 Source: China Statistical Yearbook 2002 Note: A Shares are denominated in yuan. B Shares are denominated in US and HK dollars. H Shares are incorporated in China and traded on the Hong Kong stock exchange.

Year

National

Table 5 above presents data for both Shanghai and Shenzhen stock exchanges, with number of listed companies in each. Shanghai, with a

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listing of 8 companies in 1990, had 646 in 2001. Shenzhen, beginning with only 2 listings in 1990, has moved up to 508 in 2001. The total listings on these two exchanges have gone up from 10 in 1990 to 1154 in 200 I . Though B and H shares have a limited volume, the volume of A shares has increased from 10 in 1990 to 1025 in 200 1. Indeed, this high rate of growth is a consequence of China’s industrialization based on the principle of market economy. However, compared to other newly industrialized Asian economies and a select group of mature industrialized economies, one can argue that much more remains to be done. Table 5.6: Key Indicators for Shanghai Stock Exchange, 1991-2002 Total Turnover in Value (yuan 100 mil.) 45.72 323.84 2608.89 25482.40 55153.84 27661.45 29842.54 34335.79 35992.13 49901.47 44 144.03 48527.72

Total Turnover in Volume (100 mil. shares) 0.04 18.83 155.08 656.76 513.99 1102.33 1216.45 1127.95 1560.42 2437.65 1819.95 1781.10

Market Value for Stocks (yuan 100 mil.) 1991 29.43 558.40 1992 2195.70 1993 2600.13 1994 1995 2525.66 5477.81 1996 9218.07 1997 10625.92 1998 14580.47 1999 26930.86 2000 27590.56 2001 2002 25363.72 Source: http://www.sse.com.cn/sseportal/en-us/ps/md/sh-b-hd.j sp

Number o f Listed Companies 8 30 106 171 188 293 383 438 484 572 646 715

Table 6 presents the growth picture of Shanghai stock exchange for 1991-2002 in terms of total turnovers in value and volume, plus market value of stocks. For the dimension of the Chinese economy, much more remains to be done. China needs many more stock exchanges if she is to compete in the global market. The US economy does not limit itself to just the New York Stock Exchange or the Chicago Mercantile Exchange. Following the now-fashionable mode of comparison of four major national economies, the two most-populous, China and India, and the two richest, USA and Japan, China lags behind the other three in terms of numbers of stock exchanges, listings of corporations on the


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exchanges, and the volume of turnover. India has a well structured stock market with exchanges in various cities and competitively huge trading turnovers. As an emerging competitor in the world market, China can and must do the needful to further broaden the stock exchange component of her financial market. Hong Kong, now under the Chinese sovereignty, with its internationally competitive stock exchange, has added much to China’s needs in this regard. The debate that the two largest exchanges, Hong Kong and Shanghai, will compete with each other to the point of harming the overall Chinese economy must be rejected. Based on companies listed and market capitalization value in respective national currencies, Table 7 below presents a cross country comparison of ten leading stock exchanges in nine countries, USA, Japan, India, China, Germany, United Kingdom, Australia, Canada, and Malaysia. For China, data for the Shanghai and Shenzhen stock exchanges have been reported together, but the Hong Kong Exchange is listed separately because of Hong Kong’s autonomous status. Given the dimension of each economy, China lags far behind. The New York Stock Exchange, with 2779 listed companies and a market cap of US$ 20.8 trillion as of July 2005, tops the list. The London Stock Exchange has listed 3159 companies and has a market capitalization of E4128 billion as of July 2005 and the Tokyo Stock Exchange (domestic only), with a listing of 2276 companies and a market capitalization value of q364.5 trillion as of 2004, follows. The Bombay Stock Exchange of India, located in a country with a comparable population and GDP base as China, has a listing of 4730 companies with a market capitalization value of Rs 16.86 trillion as of December 2004. Bursa Malaysia, situated in a country with a smaller economic dimension and much smaller population base, has 1003 listings with a market cap of RM 705.5 billion as of August 2005. The combined Shanghai and Shenzhen stock exchanges in China have total listings of 1224 companies and a market capitalization value of RMB Y3.83 trillion as of 2002; they are not competitively large enough given the fact that the Chinese economy enjoys the world’s largest population base and is ranked seventh in world

GDP.

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Table 5.7: Cross Country Stock Exchange Comparison Companies Latest Countries Exchange Listed Market Cap figures USA New York Stock Exchange 2779 $ 20.8 trillion Jul-05 Japan Tokyo Stock Exchange 2004 (domestic only) 2276 .Y 364.5 trillion India Bombay Stock Exchange 4730 Rs 16.86 trillion Dec-04 HK, China Hong Kong Exchange 521 $4.17 trillion Jul-05 China Shanghai & Shenzhen Stock Exchange 2002 1224 RMB % 3.83 trillion Germany Frankfurt Prime and General Standard 779 € 636.9 billion Aug-05 UK London Stock Exchange Primary 3159 E 4128.7 billion Jul-05 Australia Australia Stock Exchange 1550 $992.5 billion Jul-05 Canada Toronto Stock Exchange 1497 $ 1.74 trillion Jul-05 Aug-05 Malaysia Bursa Malaysia 1003 F W 705.5 billion Source: nysedata.com, tse.or.jp, bseindia.com, hkex.com.hk, deutsche-boerse.com, londonstockexchange.com, asx.com.au, klse.com.my, ysx.com, China Statistical Yearbook 2003

The insurance industry is an important component of an economy’s financial market. In the absence of proper insurance coverage, credit facilities fi-om banks and other financial institutions will cease to be available. Consequently, all trade, especially foreign trade, will come to a halt. As of 2001, there are 35 Insurance institutions in two categories, (a) Domestic Funded - some state-owned and others share-holding corporations, with 182,778 employees, and (b) Joint Venture and Foreign Investment based, with 2,724 employees (Table 8). State-owned insurance institutions have five national corporations, plus provincial, county, prefecture/city, department store, and various other branches inclusive of four branches at colleges and schools. Share-holding corporations have national corporations, first and second level filiales, branches, and departments. In this second category there are 21 institutions, 7 are foreign fimded insurance filiales with 1,121 employees and 14 are foreign hnded insurance branches with 1,603 employees.


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Table 5 8: Number of Institutions and Employees in the Insurance Industry, 200 1 Insurance Institutions

Institutions

Employees

Total

35

185502

Domestic Funded Insurance Institutions

14

182778

National Corporations

5

1163

Provincial Branches

72

8073

Branches at Separate Planning Cities

10

1566

Business Departments at Provincial Capitals

37

4222

PrefectureKity Branches

State-owned

825

38228

PrefectureKity Business Departments

101

4365

County Branches

4288

56330

County Business Departments

513

497 1

Business Offices or Departments

1851

2804

Colleges and Schools

4

354

Others

29

64 1

National Corporations

9

3704

First Level Filiales

123

28203

Second Level Filiales

11

432

Branches

301

24436

Offices or Business Departments

455

3238

Others

6

48

21

2724

7

1121

Share-holding Corporations

Joint-venture and Foreign Investment Insurance Institutions Foreign Funded Insurance Filiales

Foreign 14 - Funded Insurance Branches Source: China Statistical Yearbook 2002 Note: Number of employed persons excludes marketing and agents.

1603

China’s Money and Financial Market 197

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In Table 9, we present a broad-based picture of sixteen stock market indices of the world for 2000-2004 at year end, including the monthly breakdown for 2004. They are Australia - A1 Ordinaries index, Germany - DAX Capital Value index, Hong Kong - S&P/HK Ex, LargeCap index, Korea - Composite Stock index, Kuala Lumpur - Composite Index, London - FTSE 100 index, New York - Dow Jones Industrial Average, Paris - CAC 40 index, Shanghai - A share index, Shenzhen - A-share index, Singapore - Straits Times index, Switzerland - SPI General index, Taiwan - Taipei weighted stock index, Thailand - Bangkok SET index, Tokyo - Nikkei 225 index, and Toronto - composite index. For the annual data, 2000-2004, Shanghai and Shenzhen point to uniformly declining patterns, while the other fourteen exchanges show fluctuating patterns, with an overall downturn in 2002. Certainly the bursting of the tech bubble caused some markets to fall, but the adverse impact on global business confidence following the World Trade Center attack on September 11, 2001 has resulted in a persistent uncertainty in the world markets that they may only be beginning to recover from. Economies more dependent on the US economy of course had a more immediate and direct negative impact. Australia, Korea, Kuala Lumpur, Singapore, Taiwan, Thailand, and Toronto exchanges recorded a gain in 2004 over 2000, indicating that these economies are recovering, even booming. The picture has not been as bright for the Germany, Hong Kong, London, Paris, Switzerland, and Tokyo exchanges, which showed a dip in 2004 from their respective figures in 2000. The New York Dow Jones Industrial Average has remained relatively unchanged: from 10,768.85 in 2000 to 10,783.01 in 2004. For the monthly data for 2004, Shanghai and Shenzhen show the similar downward pattern for the monthly data of 2004 while ten of the other exchanges show that for the year, 2004 posted strong gains in the market. Aside from the Mainland exchanges, only Taiwan and Thailand also record downturns. Figure 3, based on monthly fluctuations of the sixteen stock exchanges demonstrates the relative positions of Shanghai and Shenzhen very prominently. However, monthly fluctuations remain to be more carefblly appraised.


20 1

3. Foreign Banks and Financial Institutions in China We have noted above that the China International Capital Co., Ltd (CICC) engaged in investment banking in 1995 in collaboration with US investment bankers. China’s accession to the World Trade Organization (WTO) in 2001 has opened China’s financial market to foreign financial institutions without client restrictions for foreign currency business. As of 2003, foreign financial institutions are allowed to provide services to Chinese enterprises in local currency, Renminbi (RMB), now the Chinese Yuan. As of 2006, they will be free to sell services to all Chinese clients without restriction, and at the same level as the Chinese banks do. The rights to offer yuan loans to foreign companies and individuals have progressed beyond the pilot programs in Guangdong and Shanghai. Several Japanese and South Korean banks have been permitted to provide yuan services in Dalian, Liaoning, and Tianjin. With a modest beginning in the mid-1980s in Shanghai-Pudong and other Special Economic Zones (SEZs), foreign banks have extended their busincsscs to 24 cities and have been given licenses to do business in the local currency, albeit with specific restrictions. The PBOC defines their scope of their operations, sets the guidelines for compliance, and supervises them with authority to examine and audit their operational management and financial accounts. Transparency in operational rules is a crucial point. Table 10 gives a description of banks approved for foreign-currency transactions, inclusive of ownership structure and cities of locations. Xiamen International Bank in Xiamen is a joint venture with 25 percent foreign equity participation. All other foreign banks have branches allowed to operate only in specific cities. The British bank, Hongkong Shanghai Banking Corporation (HSBC), with its historic relationship with China, has set up many branches in so many cities in two batches. The first batch of HSBC locations are in Shanghai, Puxi, Beijing, and Guangzhou, and the second batch are in Shenzhen, Tianjin, Dalian, Qingdao, Wuhan, and Xiamen. A second UK bank, Standard Chartered, has a branch in Shanghai. Two American banks, Citigroup and J.P. Morgan-Chase, have also located their branches in Shanghai. The two Hong Kong banks, Bank of East Asia and Wing Hang Bank, have branch

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offices in several Chinese cities including Guangzhou, Shanghai, Shenzhen, Zhuhai, Xiamen, Dalian, and Xian. The Dutch bank, ABN Amro, and Singapore bank, United Overseas Bank, each have a branch in Shanghai. Table 10 also includes Chinese banks with 100 percent domestic ownership and branches nationwide. They are Bank of China (BOC), Industrial & Commercial Bank of China (ICBC), CITIC Industrial Bank, Table 5.10: Banks Approved for Foreign-Currency Transactions, 2002 Bank Foreign Banks

Xiamen International Bank Citibank (US)

Bank of East Asia (HK)

HSBC (UK)

Ownership Structure

Location

Joint venture with 25 percent foreign equity participation Xiamen Branch Shanghai Guangzhou, Shanghai, Shenzhen, Zhuhai, Xiamen, Branch Dalian, and Xian First batch: Shanghai (2, includes sub-branch in Puxi), Branch Beijing, Guangzhou Second batch: Shenzhen, Tianjin, Dalian, Qingdao, Branch Wuhan, and Xiamen Branch Shanghai, Guangzhou Branch Shanghai Branch Shenzhen Branch Shanghai

HSBC (UK) Hang Seng (HK) Standard Chartered (UK) Wing Hang Bank (HK) ABN Amro (Netherlands) United Overseas Bank (Singapore) Branch Shanghai JP Morgan Chase & Co. Branch Shanghai Domestic Banks 100 percent Domestic Nationwide Bank of China Industrial & Commercial Bank of China 100 percent Domestic Nationwide 100 percent Domestic Nationwide CITIC Industrial Bank China Merchants Bank 100 percent Domestic Nationwide Agricultural Bank of China 100 percent Domestic Nationwide Source: US-China Business Council 2003 Note: Foreign funded financial institutions are limited to only one branch a year with high licensing fees. Access to yuan business continued to be regulated until July 21, 2005 when the yuan unpegged from the dollar.


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Agricultural Bank of China (ABC), and China Merchants Bank. Shanghai has continued to be the home of the largest number of foreign bank branches. As of August 24, 2005, China’s foreign currency regulator has approved of business in inter-bank foreign exchange forwards market by nine foreign banks including HSBC, Standard Chartered, Citibank, Societe Generale, Deutsche Bank, Credit Suisse First Boston, ING Bank, Mizuho Corporate Bank, Bank of Montreal plus five Chinese domestic banks, toward attaining China’s commitment for further liberalization of China’s financial market, with the target date of 2006. Since then, the situation has been in rapid progress as the world’s leading financial institutions, including Goldman Sachs, Merrill Lynch, UBS, Allianz, the Royal Bank of Scotland Group, Deutsche Bank, Singapore’s DBS Group, and many others from around the world, are competing to claim their respective shares of the Chinese market. Just this year, earnings from investment banking in China are reportedly second only to that in the USA. Hong Kong, as one of the most important financial centers in the world with offices of most of the biggest international financial institutions, is playing a highly constructive role in China’s financial markets. As foreign banks have made investments in China either by way of buying stakes in the Chinese banks or by setting up branch offices, Chinese banks have engaged in overseas investments. Table 11 below lists six cases as of 2002: (a) Bank of Shanghai with World Bank’s International Finance Corporation (IFC), (b) Bank of Shanghai with HSBC of the UK, (c) Nanjing City Commercial Bank with IFC, (d) Xian Commercial Bank with IFC and the Canadian Bank of Nova Scotia, (e) Shenzhen Development Bank with Newbridge Capital of USA, and finally (f) the Shanghai Pudong Development Bank with Citigroup of USA. On Beijing’s part, there is need to reduce their banks’ stakes in bad loans and to expand their money and financial markets to continue sustaining their annual accelerated rate of growth of GDP of about 9 percent per annum. Have Chinese instituted optimal macroeconomic parameters with well specified monetary and fiscal polices?

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Table 5.1 1: Chinese Banks with Foreign Investment in 2002 Bank Entity Foreign Party Bank of Shanghai World Bank’s International Finance Corp. (IFC) Bank of Shanghai HSBC (UK) Nanjing City Commercial Bank IFC Xian Commercial Bank IFC, Bank of Nova Scotia (Canada) Shenzhen Development Bank Newbridge Capital (US) Shanghai Pudong Development Bank Citigroup (US) Source: Asian wall Street Journal adapted from US-China Business Council 2003

4. Joint Venture Securities Companies

In preparation for accepting membership to the WTO in the summer of 2002, China approved the establishment of joint venture securities companies. The first of such companies came into operation as early as the end of 2002. Soon came the China Euro Securities Company formed from the merger of Credit Lyonnais Securities Asia and the Xiangcai Securities Company, which undertook a full range of investment banking activities. Both of Morgan Stanley’s joint ventures with China Construction Bank (CCB) and Bank of China International, the wholly owned Hong Kong branch of the Bank of China, were in operation before China became a member of the WTO. The formation of joint venture entities progressed rapidly through October 2002, facilitating China’s entry into the WTO. The China Security Regulatory Commission (CSRC) truly had a proactive schedule: (a) Joint ventures of Germany’s Allianz AG with Guotai Junan Securities Co. and France’s SG Asset Management Ltd. with Huabao Trust and Investment Co., Ltd., were authorized, resulting in 33 percent foreign ownership in each case. (b) Two months later, a joint venture between the Dutch-Belgian Fortis Investment Management and Haitong Securities Co., Ltd., again with a 33 percent stake for the foreign partner was approved by the Chinese authorities. (c) A joint venture undertaking by four Chinese financial institutions, China Merchants Securities (40 percent), China Power Finance Co., China Huaneng Finance Co., and COSCO


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Finance Co., (each with 10 percent stake) with ING Investment Management of the Netherlands (30 percent) became a more innovative model. In fall 2002, China instituted two reform measures to facilitate foreign investment in China’s state enterprises. The first was the 1995 ban on the transfer of shares of state enterprises on a special list was removed and a set of guidelines became operative for state enterprises not on the list. The second reform measure partially opened the market of the yuan-denominated A-shares to foreign investors (Table 5). The designation of a select group of foreign financial institutions as Qualified Foreign Institutional Investor (QFII) by the PBOC and related regulatory authorities inclusive of CSRC became a step forward because QFIIs were allowed to invest in A shares, albeit through domestic trustees, but with provisions for repatriations of profit and principal.

5. China’s Growing Consumer Credit Market The emergence of a growing consumer finance market added much to the expansion of China’s financial market. By the end of 2002, assets in yuan savings accounts totaled US$ 1 trillion, up 17.8 percent from 2001; housing loans dominated the market and automotive loans also rose in anticipation of finalization of necessary rules by the PBOC. The big four state banks and some second tier banks have offered credit cards and wealth management services. Foreign banks are ready to capture their share of this segment of China’s financial market. The absence of a mature credit assessment mechanism has been a limiting factor. Credit rating institutions in Beijing, Shanghai, and other cities have come into existence. Data from banks, tax authorities, customs, industry, commerce, and other relevant authorities provide the base for credit ratings. A standard payment system quickly followed. In March 2002, 80 Chinese financial institutions invested in China UnionPay Co., Ltd, and went on to link ATMs and payment systems of banks nationwide by 2005. Visa International Service Association and Mastercard International Inc. have since followed. China has 668 million credit

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cards, but almost all have only debit card privileges. According to one estimate, China has only 5 million truly revolving credit cards, with a total of US$ 555 million outstanding consumer credit earlier this year, which is rather marginal compared to over US$ 1 trillion consumer credit outstanding in the USA. The economics of consumption-led growth remains to be explored.

6. The Challenge to Reconstruct the Financial Sector

As I have argued earlier in Chapter 1, the limited growth of China’s financial market is a major challenge. To sustain her industrial growth, China must act to close the inter-sectoral gap (Table 12). China needs a much larger money and financial market with many more banks, insurance companies, related financial institutions, and diversity of financial products. Table 5.12: Sectoral Shares of GDP, 1980-2001 (“h) Year Primary 1980 30.1 1981 31.8 1982 33.3 1983 33.0 1984 32.0 1985 28.4 1986 27.1 1987 26.8 1988 25.7 1989 25.0 1990 27.1 1991 24.5 1992 21.8 1993 19.9 1994 20.2 1995 20.5 1996 20.4 1997 19.1 1998 18.6 1999 17.6 2000 16.4 2001 15.2 Source: China Statistical Yearbook 2002

Secondary 48.5 46.4 45.0 44.6 43.3 43.1 44.0 43.9 44.1 43.0 41.6 42.1 43.9 47.4 47.9 48.8 49.5 50.0 49.3 49.4 50.2 51.1

Tertiary 21.4 21.8 21.7 22.4 24.7 28.5 28.9 29.3 30.2 32.0 31.3 33.4 34.3 32.7 31.9 30.7 30.1 30.9 32.1 33.0 33.4 33.6


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China’s inter-sectoral shares of GDP for 1980-2001 only emphasizes the fact that China’s profile does not fit into the one of mature industrialized economies. The tertiary sector’s share has grown modestly over the period, and the share of the primary sector continues to be significant. In Chapter 4, we have discussed that during the 1990s China’s economic planners emphasized the secondary sector for China’s industrialization at an accelerated rate. The focus on the tertiary sector was rather marginal. We may add that that the two specific items in the sector, real estate, transportation, and telecommunication, received preference. Based on a carehl analysis of the available data, money and financial markets, banking, and insurance, were left to be developed at a later phase. Based on the latest in the World Factbook, Table 13 below presents a cross-country table of the most recent inter-sectoral shares of GDP. Table 5.13: Cross Country Sectoral Shares of GDP (%) Country China Taiwan Hong Kong South Korea Japan India Indonesia Brazil Chile South Africa Nigeria Russia Australia New Zealand USA Canada Mexico Switzerland EU-25 Source: World Factbook 2005

Primary 13.8 1.7 0.1 3.2 1.3 23.6 14.6 10.1 6.3 3.6 36.3 4.9 3.4 4.6 0.9 2.3 4.0 1.5 2.2

Secondary 52.9 30.9 11.3 40.4 24.7 28.4 45.0 38.6 38.2 31.2 30.5 33.9 28.2 27.4 19.7 26.4 27.2 34.0 28.3

Tertiary 33.3 67.4 88.6 56.3 74.1 48.0 40.4 51.3 55.5 65.2 33.3 61.2 68.4 68.0 79.4 71.3 68.9 64.5 69.4

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China, India, and USA are the three most populous countries of the world. Switzerland is a very small country in Western Europe. Canada and Australia are the two rich economies with relatively smaller population bases and each endowed with vast natural resources. Japan and South Korea are China’s neighbors. China and India have recently been engaged in economic cooperation and the visit of the Chinese Prime Minister to India in 2004 has been an occasion for much reference to the historic Silk Road of trade between the two large neighboring economies. India has a relative advantage in her share of banking and insurance industries in her service sector (Table 7). Based on intersectoral shares of GDP, the primary sector at 1.7 percent, the secondary sector at 30.9 percent and the tertiary sector at 88.6 percent, Taiwan offers a paradigm of a mature industrialized economy. The issue of inter-sectoral imbalance of the Chinese economy following her successful Industrial Revolution is of concern. Taiwan has strong economic and historic ties with China and its strong, well-structured money and financial markets can be easily expanded to provide financial services for the Mainland. Hong Kong, now an autonomous administrative unit of China, has historically been a global financial market, and must continue to be a resource base for China, with its service sector share at 88.6 percent of GDP. Foreign banks and financial institutions have much to offer. Indeed, following China’s admission to the WTO, foreign investments in China’s financial market have increased, as noted earlier. Collaboration between HSBC and Shanghai Bank, and Citigroup and the Shanghai-Pudong Development Bank initiated the process. In the summer of 2005, Bank of America made substantive investment in China Construction Bank, it has acquired a 9 percent share of CCB, with a provision to increase their holdings to nearly 20 percent at any time in the next five years. HSBC and ING both have approximately a 20 percent stake in Bank of Beijing. Several other American banks inclusive of Wells Fargo have acquired stakes in Chinese financial institutions. Will the withdrawal of China’s bid to take over UNOCAL have an impact on the efforts of American financial institutions to expand their investments in China? Will they face a cold welcome to buy into


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Chinese financial institutions? Will European banks and insurance companies be preferred or financial institutions from Japan and South Korea be more welcome? Table 5.14: Rank Based on GDP (US$ billions) 2004 Rank 2003 Rank GDP USA I 1 11,668 Japan 2 2 4,623 Germany 3 3 2,714 UK 4 4 2,141 France 5 5 2,003 Italy 6 6 1,672 China 7 7 1,649 Spain 8 9 99 1 Canada 9 8 980 India 10 12 692 Korea 11 11 680 Mexico 12 10 676 Austria 13 13 63 1 Brazil 14 15 605 Russia 15 16 582 Netherlands 16 14 577 Switzerland 17 17 359 Belgium 18 18 350 Sweden 19 19 346 Turkey 20 21 302 Source: The World Bank. 2004 Note: Taiwan is not included in the World Bank statistics. Using an end-2004 exchange rate of US$ 1 = 3 1.9 Taiwan dollars, Taiwan’s GDP would be equal to about US$320 billion, which would make Taiwan the world’s 20thbiggest economy.

A progressive cooperation between China and the USA in their mutual business engagements in the financial sector will add to economic gains of both the economies. Based on GDP in 2004, the USA is the largest economy and China is the seventh largest. Both have retained their relative ranking from 2003 as shown in the Table 14 above. In addition, China’s holdings of US bonds to the tune of US$ 700 billion warrant continued and constructive economic cooperation between the two economies. Indeed, China’s sustained economic growth at a very high rate will be facilitated by a much greater participation of US financial institutions in China.

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7. Exchange Rate: the Chinese Yuan as a Floating Currency As of July 21, 2005, the PBOC stated that “to guarantee stable, orderly market operations and maintain the basic stability of the yuan exchange rate at a reasonable, balanced level,” the Chinese yuan would no longer be linked to the US dollar. Since 1997, the yuan was pegged to the US dollar at 8.28 yuan for one dollar and has been there until July 21, 2005. PBOC officials allowed a variation of the rate by a very small margin of one hundredth of one percent. With the delinking of the yuan from the dollar, a basket of currencies consisting of the dollar, the euro, the yen, and the won would determine the value of the yuan. China’s trade with the United States, European Union, Japan, and South Korea became the issue. However, no specific weight of each currency in the basket has been made public. The PBOC added that currencies of Singapore, United Kingdom, Malaysia, Russia, Australia, Thailand, and Canada, with whom China has good shares of trade, would also relate to the basket. Expectedly, PBOC made the decision to delink at its own time and voted to make the transition as smooth as possible, making the float of the yuan strictly limited to a range within a 0.3 percent band around the official parity rate. The PBOC has also authorized large corporations to participate in China’s inter-bank foreign exchange market, a privilege hitherto restricted only to financial businesses. Excepting the Indonesian rupiah, all other currencies have appreciated vis-a-vis the US dollar over the past one year period (Table 15). A similar patter is noted when US dollar exchange rate for several other currencies for August 22, 2005 is compared with the rates of August 22, 2004. The gain of the Indonesian rupiah is the most notable nominal increase, followed by the Japanese yen, Swiss franc, euro, and the British pound. Research remains to be done to determine if American action should have been taken to depreciate the US dollar, keeping the yuan at its previous rate. This policy would have applied to most other currencies whose exchange rates have gone up relative to the dollar. The revaluation of the Chinese yuan alone can hardly explain the global exchange rate phenomenon vis-a-vis a weaker US dollar. According to one estimate, the dollar needed to be depreciated by as


21 1

much as 25% from 1985-1986 to reduce the trade deficit from 2.6% to 1% of GDP in 1989. The 2004 trade deficit of 5.8% of GDP would warrant a much larger depreciation of the US dollar. We have stated earlier that the post-WWII regime of stability of the international money and financial market in the non-Soviet economies with the US dollar at its fixed gold value as the anchor currency is no longer in operation. The International Monetary Fund (IMF), of course, could add much input to the debate. Table 5.15: US$ to Foreign Currency Exchange Rates Currency Australian dollar Brazilian real British pound sterling Canadian dollar Chilean peso Chinese yuan (renminbi) Euro Indian rupee Indonesian rupiah Japanese yen Korean won Malaysian ringgit Mexican peso Russian rouble Singapore dollar South African rand Swiss franc Taiwan dollar Source: Oanda

8/22/2005 1.3306 2.4481 0.5569 1.2104 543.00 8.0947 0.8221 43.4750 9,966.10 110.3900 1,020.80 3.7613 10.7550 28.5900 1.6705 6.5255 1.2737 32.1680

8/22/2004 1.3820 2.9660 0.5502 1.3005 634.76 8.2867 0.81 17 46.3700 9,24 1.10 109.2700 1,154.90 3.8010 11.3520 29.2200 1.7084 6.6051 1.2507 34.0410

Year Change -0.05 14 -0.5179 +0.0067 -0.0901 -9 1.76 -0.1920 +0.0104 -2.895 +725.00 +1.12 -134.10 -0.0397 -0.5970 -0.6300 -0.0379 -0.0796 +0.0230 -1.8730

Will the revaluation of the Chinese yuan, and consequent depreciation of the US dollar, lead to a narrowing of the adverse trade gap of the USA? Since WWII, American consumers have developed an imperial or unilateral approach to buying all that the rest of the world can produce and offer for export, unconcerned about the adverse economic consequences of the country’s prolonged negative current account balance. I have argued against the textbook version of the neoclassical theory of international trade, pointing out that when the euro appreciated, the US trade balance with the euro regime continued to be adverse (Dutta

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2005) and surprisingly increased 14% in 2004 from the previous year. Thus, the recent experience pointedly suggests that the mind-set of the American consumers will not be changed by exchange rate fluctuations. Overall, the US current account balance deficit has actually increased to US$ 665.94 billion in 2004 from a deficit of US$ 385.7 billion in 2001 (IMF World Economic Outlook and EconStats). The same is likely to be the situation with China. Laura Tyson, the dean of the London Business School, states that in 2004, China made foreign direct investments of US$ 2 billion in USA compared to the US$ 60 billion invested by American companies in China (BusinessWeek, August 15,2005). Given the spending mindset of many American consumers, we should invite more Chinese FDI to correct the trade imbalance rather than let our trading partners accumulate more of our government bonds and add to their already huge portfolios of investments in the US economy. The Chinese bid for UNOCAL would have been a positive step from this perspective. I venture to argue that the situation would not change even if the yuan was depreciated by a much larger margin. A return to the debate with focus on the coordinated management of the US monetary and fiscal policy will be in order.

CHAPTER 6 THE FOREIGN SECTOR OF THE CHINESE ECONOMY

1. Trade Relations and Economic Cooperation Following the economic reform agenda of the 1970s, China has to her credit a unique record of internationalization and industrialization, including trade relations and economic cooperation with most countries of the world.

Exports, f.0.b. Imports, c.i.f.

438,371 412,836

Share ofworld exports Share of world imports

5.8% 5.3%

Table 6.1B: China’s Trade by Commodity Group, 2003 (%) Exports 5.1 4.1 90.7

Agricultural products Mining products Manufactures Source: World Trade Organization (WTO)

Imports 7.4 12.7 79.5

We begin with China’s trading status in 2003 Tables 1A and 1B. Be it noted that in the pre-reform regime, China had insignificant trade with capitalist market economies. By 2003, China’s merchandise trade became quite substantive, with 5.8 percent of world exports and 5.3 percent of world imports. The respective volumes reached US$ 438 billion for exports and US$ 413 billion for imports and China enjoyed a surplus of US$25 billion in her trade accounts. A breakdown of China’s trade by commodity groups for the year still points to China’s emphasis

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on the manufacturing sector, with 90.7% share of exports and 79.5% share of imports (see Chapter 4). In Table 1C we examine the progressive trend in China’s trade pattern. China’s total trade, exports plus imports, at US$474.3 billion in ,2000 increased to US$ 509.8 billion in 2001, an annual increase of 7.5 percent. Total trade, which continues to grow, is an index of an economy’s internationalization and openness of the economy. All evidence indicates that China is very much an open economy. Table 6.1C: China’s Total Foreign Trade, Exports and Imports (US$ millions) 2000 Region Asia Africa Europe Latin America North America Oceania Others Total

Exports 132,308.23 5,042.01 45,481.56 7,185.21 55,273.51 3,910.22 1.81 249,202.55

Yoof total 53.09 2.02 18.25 2.88 22.18 1.57 0.00 100.00

Imports 141,341.88 5,555.07 40,784.08 5,4 10.28 26,119.59 5,877.35 5.48 225,093.73

% of total

62.79 2.47 18.12 2.40 11.60 2.61 0.00 100.00

2001 Region Exports % of total Asia 140,956.58 52.96 Africa 6,006.57 2.26 Europe 49,239.42 18.50 Latin America 8,236.74 3.09 North America 57,640.93 21.66 Oceania 4,074.40 1.53 Others 0 0.00 Total 266,154.64 100.00 Source: China Statistical Yearbook 2002

Imports 147,182.51 4,792.95 48,401.60 6,702.15 30,241.25 6,292.88

YOof total 60.42 1.97 19.87 2.75 12.41 2.58

0.15

0.00

243,613.49

100.00

Table 1C also tells us that China’s trade relations cover all continents, with shares of trade with Asia, Europe and North America being dominant. Table 2 below lists all of China’s trading partners by continents lending support to China’s global economic presence.

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Table 6.2: China’s Economic Presence and Trading Partners Asia Afghanistan Bahrain Bangladesh Bhutan Brunei Myanmar Cambodia Cyprus Korea Rep. Hong Kong, China India Africa Algeria Angola Benin Botswana Burundi Cameroon Canary Islands Cape Verde Central Africa Ceuta Chad Comoros Congo (B) Djibouti

Egypt Europe Belgium Denmark United Kingdom Germany France Ireland Italy Luxembourg Netherlands Greece Portugal Spain Austria

Indonesia Iran Iraq Israel Japan Jordan Kuwait

Laos Lebanon Macao, China Malaysia

Equatorial Guinea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Cote d’lvoir Kenya Liberia Libya Madagascar Malawi Mali Mauritania

Albania Andorra Bulgaria Czech Slovakia Finland Gibraltar Hungary Iceland Malta Monaco Norway Poland

Maldives Mongolia Nepal Oman Pakistan Palestine Philippines Qatar Republic of Korea Saudi Arabia Singapore

Sri Lanka Syria Thailand Turkey United Arab Emirates Arab Republic of Yemen Vietnam Taiwan, China

Mauritius Western Sahara Morocco Sudan Mozambique Tanzania Namibia Togo Niger Tunisia Nigeria Uganda Reunion Burkina Faso Rwanda Congo (J) Sao Tome & Principle Zambia Senegal Zimbabwe Seychelles Lesotho Sierra Leone Melilla Somalia Swaziland South Africa Eritrea

Romania Sweden Liechtenstein San Marino Switzerland Yugoslavia Slovenia Croatia Macedonia Bosnia and Herzegovina Estonia Latvia Lithuania

Georgia Armenia Azerbaijan Belorussia Kazakhstan Kirghizia Moldavia Russia Tadzhikistan Turkmenistan Ukraine Uzbekistan

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216 Latin America Antigua and Barbuda Argentina Barbados Aruba Bahamas Belize Bolivia Brazil Cayman Islands Chile Colombia

Costa Rica Cuba Curacao Republic of Dominica Ecuador French Guyana Granada Guadeloupe Islands Guatemala Guyana Haiti

Honduras Jamaica Martinique Mexico Montserrat Nicaragua Panama Paraguay Peru Puerto Rico Saba

North America Canada

United States

Greenland

Oceania Australia New Caledonia (Fr) Society Is. Cook Islands Vanuatu Solomon Is. Fiji New Zealand Tonga Gambier Is. Norfolk Islands Tuamotu Is. Nauru Papua New Guinea Samoa Source: China’s Statistical Yearbook 2002

Saint Lucia Saint Martin Is. Saint Vincent & Grenadines El Salvador Surinam Trinidad and Tobago Uruguay Venezuela Virgin Is.(E) St.Kitts-Nevis

Bermuda

Kiribati Micronesia Commonwealth Marshall Islands Republic of Palau

In Asia, China trades with 41 partners inclusive of the small Himalayan nations, Nepal and Bhutan, even when each has only marginal shares of trade. In the Middle East, China trades with both Israel and Palestine, unconstrained by the regional conflicts. In Africa, China has as many as 58 partners, large and small, albeit total share of China’s African trade continues to remain insignificant. In Europe, China’s trade with 51 partners includes all 25 EU countries and Russia, as well as smaller economies such as Azerbaijan, Turkmenistan, Uzbekistan, Bosnia-Herzegovina, and Kazakhstan. The recent oil deal with Kazakhstan underscores China’s trading contact with the economies of this region. In Latin America, China has established trade relations with 43 economies inclusive of Mexico, Cuba and St. Kitts-Nevis, and Puerto Rico. The recently reported trade deal with Cuba over zinc meets China’s need for specific resources. Canada, United States, Greenland, and Bermuda are the four partners China trades with in North America. In Oceania, China has 19 trading partners, inclusive of Australia and


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New Zealand plus several island economies including Fiji and Vanuatu. China values and promotes trade with the island economies in the South Pacific. Indeed, China has established trade relations with most countries including the oil rich ones in the Middle East and in Southeast Asia, as well as resource rich ones in Africa, Latin Africa, and the South Pacific. China’s positive current account balances and growing foreign exchange reserves help facilitate trade with these countries. China can and should make investments for the exploration of resources in these resource-rich economies but must not commit the mistake of engaging in what has been discredited as the imperial model. The World Trade Organization continues to strugglc with the protest movements of African and South American farmers growing cotton, cocoa, bananas, and coffee. These economies want to be industrialized by way of processing their raw products at home. Industrialization of these pre-industrialized economies which will add to the wealth of the entire world must be the goal. On the other hand, China’s trade with the rich economies of Europe, North America and Asia, plus the newly industrializing Asian economies, provides a large market for China’s exports. These export revenues help China pay for her imports of machines and instruments from these countries (see Chapter 1). China’s trade with South Asia is increasing, particularly with India. In Africa, China conducts a large portion of trade with South Africa. The picture in Europe is similar with the UK, Germany, France, Italy, the Netherlands, and Russia being the dominant partners. In the western hemisphere, the USA is China’s leading trading partner and Canada, Brazil, and Mexico follow. China maintains an active trade account with Cuba; the export-import total of US$ 3 1 million in 2000 moved up to US$ 44 million in 2001. China’s trade share with Oceanic and Pacific Islands is respectable and the majority of trade is with Australia and New Zealand. Table 3 and Figure 1 below present time series data of China’s foreign trade, exports as well as imports, for 1978-2002. The trade account has a positive balance for the period except for one year, 1993, when China experienced a deficit of US$ 1.37 billion. For two other years, 1985 and 1986, the balance has been positive albeit with smaller margins. Figure 1 points out that in 1993, exports and imports were

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Table 6.3: China’s Trade, 1978-2002 (constant 1995 US$ billions) Year Exports 1978 38.47 1979 47.11 1980 50.87 1981 59.33 1982 60.41 1983 60.01 1984 68.53 1985 69.93 1986 70.42 1987 76.09 1988 8 1.89 1989 83.94 1990 88.30 1991 99.84 1992 111.03 126.14 1993 157.89 1994 167.97 1995 166.79 1996 205.03 1997 219.71 1998 253.03 1999 330.37 2000 362.16 200 1 2002 468.69 Source: World Development Indicators 2003

Imports 22.05 29.02 29.29 32.25 28.99 32.51 42.20 62.51 61.01 55.98 68.49 70.47 59.15 69.91 91.03 127.51 141.34 151.88 153.62 170.7 176.00 215.77 268.62 297.58 379.49

Balance 16.42 18.10 21.58 27.08 3 1.42

27.50 26.33 7.42 9.42 20.12 13.40 13.47 29.15 29.94 20.00 -1.37 16.55 16.09 13.17 34.33 43.71 37.26 61.75 64.58 89.20

nearly balanced, and that since 1996, the current account balance has experienced a substantive positive trend. In Table 4, a presentation is made to demonstrate percentage growth of China’s foreign trade and economic cooperation from 1997-2001. The total value of imports and exports has increased by 56.77 percent over this five year period. The number of projects for the utilization of foreign capital in signed agreements and contracts has gone up by 23.66 percent. The total amount of foreign capital to be utilized in signed agreements and contracts rose by 17.88 percent, but the total amount of foreign capital actually used fell by 22.88 percent. The trade conducted by registered foreign-funded enterprises also declined by 14.16 percent. Economic cooperation with foreign countries and territories went up two

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counts, 44.90 percent for contracted value and 44.80 percent for value of business fulfilled. Figure 6.1 China's Trade, 1978-2002

I -+Expolts

-+-Imports

Balance

I

500

.--0

400

z E 300

tft v)

3 v)

!$

200

c

m

c

e

8

100

6 a $

0

-100

Year


Table 6.4: China's Foreign Trade & Economic Cooperation (US$ 100 millions) Item Total Value of Imports and Exports Number of Projects for Utilization of Foreign Capital in the Signed Agreements & Contracts Total Amount of Foreign Capital to Be Utilized in the Signed Agreements & Contracts Total Amount of Foreign Capital Actually Used Registered Foreign-funded Enterprises Economic Cooperation with Foreign Countries & Territories Contracted Value Value of Business Fulfilled Source: China Statistical Yearbook 2002. calculated

1997 3251.6

2001 5097.6

%change 56.77

21 138

26140

23.66

610.58 644.08 235681

719.76 496.72 202306

17.88 -22.88 -14.16

113.56 83.83

164.55 121.39

44.90 44.80

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2. China’s Top 10 Trading Partners, Trade Destinations and Commodities in Trade: Export-Import-led Growth Model

Based on total volumes of trade, exports plus imports, China’s top ten trading partners in 1999 in order of their rank were: Japan, USA, EU, Hong Kong, ASEAN, South Korea, Taiwan, Australia, Russia, and Canada. In 2004, the same ten countries remained China’s top ten trading partners, but the ranking underwent a change: EU, USA, Japan, Hong Kong, ASEAN, South Korea, Taiwan, Russia, Australia, and Canada (Table 5). Table 6.5: China’s Top 10 Trade Partners (US$ billions) Rank 1

10

Rank 1

10

Partner EU USA Japan Hong Kong ASEAN South Korea Taiwan Russia Australia Canada

2004 Total 142.0 137.0 136.0 88.6 84.6 72.6 63.5 17.1 16.3 12.7

Partner Japan USA EU Hong Kong ASEAN South Korea Taiwan Australia Russia Canada

1999 Total 66.2 61.5 55.7 43.8 27.1 25.0 23.5 6.3 5.7 4.7

Exports 84.6 99.7 58.4 79.1 33.6 21.8 10.5 7.0 7.0 6.6

Imports 57.5 36.8 77.4 9.5 51.0 50.7 52.9 10.1 9.3 6.1

Exports 32.4 42.0 30.2 36.9 12.2

Imports 33.8 19.5 25.5 6.9 14.9 17.2 19.5 3.6 4.2 2.3

7.8 4.0 2.7 1.5 2.4’

% Change in Total Trade by partner 155.13 122.00 105.18 102.26 212.23 190.29 170.11 200.25 157.98 170.23

~

~~

Source: www.chinaembassy.org, Beijing Review Vol. 43, No. 14, percent change is calculated.

22 1


In 1999, Japan was China’s top trading partner with US$ 66.2 billion in total trade. Trade increased 105% by 2004; however, its ranking slid to third place. The EU earned the top position last year with US$ 142.1 billion in total trade, an increase of 155% from 1999. Taking US-China trade into consideration, it is to be emphasized that the paradigm of the export-import led growth model is working to mutual benefit of both the trading partners (see Chapter 1). Any suggestion that China is growing by one-way exportation of goods to the US is an incomplete story. Table 6A further underscores this point by presenting the top 5 trading partners of selected countries. The EU exports to USA, Switzerland, China, Japan, and Poland and imports from USA, China, Japan, Switzerland, and Russia. For Japan, top five partners for exports are USA, EU-15, China, South Korea, and Taiwan, while for imports are China, USA, EU-15, South Korea, and Indonesia. For South Korea, top five export partners include China, USA, EU-15, Japan, and Hong Kong while import partners are Japan, USA, China, EU-15, and Saudi Arabia. USA’s top five export partners are Canada, EU-15, Mexico, Japan, and China, while her top five import partners are EU-15, Canada, China, Mexico, and Japan. China has been a leading trading partner of EU, Japan, South Korea, and USA for all trade, both imports and exports. This two-way trade for each trading country, especially for the major ones, is the core of the free trade regime for the world as a whole, and the World Trade Organization (WTO) is the world body to uphold the regime. Table 6.6A: Top 5 Trading Partners of Select Economies Rank Exports Imports Japan Exports Imports South Korea Exports Imports EU

USA

1 2 3 USA Switzerland China China USA Japan EU-15 USA China China USA EU-15 China USA EU-15 Japan USA China

Exports Canada EU-15 Imports EU-15 Canada Source: World Trade Organization, April 2005

Mexico China

4 5 Japan Poland Switzerland Russia South Korea Taiwan South Korea Indonesia Japan Hong Kong EU-15 Saudi Arabia Japan Mexico

China Japan

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Based on data from 2003, Table 6B presents a comparative picture of China’s trade destinations and trading partners. In 2003, USA took 21.1% of China’s exports, followed by Hong Kong (17.4%), EU-15 (16.5%), Japan (13.6%), and South Korea (4.6%). Imports to China came from Japan (18.0%), EU-15 (12.8%), Taipei (12.0%), South Korea (10.4%), and USA (8.2%). The USA has reversed positions for its trade with China; it is the top recipient of Chinese exports, but last in this group to export to China. To maintain its competitive advantage, the USA is challenged to produce quality-and-cost competitive products with the country’s comparative advantage in technology and high-tech induced productivity. Table 6.6B: Ranking by Shares of China’s Exports and Imports, 2003 Rank 1 2 3 4 5

Exports United States HongKong EU-15 Japan SouthKorea

YO 21.1 17.4 16.5 13.6 4.6

Rank 1 2 3 4 5

Imports Japan EU-15 Taiwan SouthKorea USA

% 18.0 12.8 12.0 10.4 8.2

Source: World Trade Organization (WTO)

In what follows in Tables 7A and 7B, we review China’s exports and imports by commodity groups and percentage increases of each group in 2003 over 1980. The increases of China’s exports in all twelve commodity groups are quite impressive, ranging from 265% in fuels and mining products to 5568% in automotive products. Percentage increases in exports of machinery and transport equipment and office and telecom equipment are notable high, with a mind boggling 173340% increase for the latter. In Table 7B, the imports of commodity groups generally show similar percentage increases over the same two years. Growth is not as high in automotive products and office and telecom equipment imports as it was in exports, but the figures are still phenomenal. In particular, fuels and mining products are growing rapidly. Office and telecom equipment imports, though lower, still have the strongest growth rates of the twelve commodity groups.


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Table 6.7A: China’s Merchandise Exports by Commodity (current US$ millions) Indicator 1980 1990 2000 4384 10060 16384 Agricultural products 13559 7868 3129 Food 12435 6559 4956 Fuels and mining products 7855 5119 Fuels 44312 219859 8712 Manufactures 4391 1282 237 Iron and steel 3752 12097 1133 Chemicals 82600 10833 843 Machinery and transport equipment 1581 258 63 Automotive products 43498 3126 68 Office and telecom equipment 16135 7219 2540 Textiles Clothing 1625 9669 36071 Source: World Trade Organization Note: percentage increase calculated from change from 1980-2003

2003 %increase 22158 405 515 19242 265 18093 11114 4457 396999 1931 4813 1628 19580 22174 187773 5568 3571 117939 173340 959 26901 52061 3104

Table 6.7B: China’s Merchandise Imports by Commodity (current US$ millions) Indicator 1980 1990 2000 Agricultural products 6476 7855 19544 Food 3206 4619 9043 Fuels and mining products 1034 2822 33939 Fuels 1259 20637 Manufactures 12204 42385 169883 Iron and steel 2221 2852 9689 Chemicals 2854 6683 30212 Machinery and transport equipment 5246 21513 91931 Automotive products 731 1796 3798 Office and telecom equipment 546 4058 44427 Textiles 1100 5292 12832 Clothing 47 48 1192 Source: World Trade Organization Note: percentage increase calculated from change from 1980-2003

2003 %increase 30482 371 14970 367 52419 4970 29189 328571 2592 22034 892 48975 1616 192826 3576 12778 1648 96258 17530 14217 1192 1422 2926

A comparison of imports and exports by commodity group tells us a few points. For the two commodity groups, percentage increases of office and telecom equipments and machinery and transport equipment for the time period, exports far exceed imports. For the group, chemicals, percentage increases in exports and imports balance out. For the group fuel and mining products, the percentage increase of import far exceeds that of exports. For textiles, the percentage increase in export is

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less than that of imports and for clothing percentage increase of exports is far higher than that of imports. For other categories, percentage increases in exports are generally higher with smaller margins than that of imports. Based on customs statistics in 2000 and 2001, China’s main imports in terms of value consist of soybean, iron ore, crude oil, polyethylene, paper and paperboard, rolled steel, automatic data processing machines, aircraft, automotive parts, and mechanical and electrical products. With the expansion of the economy, the Chinese middle class has grown. They have developed an insatiable demand for luxury consumption goods and fashion products produced overseas. This is indeed an objective of foreign investors to create markets for consumption goods following their investment and industrialization of China. For the same period China’s major exports consist of cotton products, textile products including apparel and garments, leather shoes, furniture, sound recording apparatus, plastic goods, toys, aquatic and seawater products, and coal. In addition, Chinese exports include some specialized products: ships, fireworks, cashmere, gingko nuts, crude oil, static converters, and medical and pharmaceutical products.

3. China and United States Trade China and USA has long been engaged in extensive trade. Table 8 gives the data for China’s trade with the United States for the period between 1994 and 2004 regarding exports, imports, and total trade. For US exports to China, changes in annual percentage increases for 2000-2004 have been growing. For 1994-1998, the rates of annual percentage increase fluctuate widely from 1.7 to 26.9, and only in 1999 is there a negative change of 8%. For US imports from China, annual percentage changes have increased for the period, varying between 1.6% in 2001 and 29.0% in 2004. Total volume, exports plus imports, has increased from US$ 50.7 billion in 1994 to US$ 245.2 billion in 2004, showing a uniformly positive trend, with the exception of 2001, when growth was limited to 3.8%. The China-US trade balance has been consistently in deficit for the United States, growing from US$ 32.1 billion in 1994 to US$ 175.8 billion in 2004.

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Table 6.8: US Trade with China, 1994-2004 (US$ billions) 1994 1995 1996 1997 1998 1999 2000 2001 2002

2003

2004

USExports 9.3 11.8 12.0 12.8 14.3 13.1 16.3 19.2 22.1 28.4 34.7 %change 5.7 26.9 1.7 6.7 10.9 -8.0 24.4 18.3 14.6 28.5 22.2 USImports 41.4 48.5 54.4 65.8 75.1 87.8 108.0 109.0 133.5 163.3 210.5 %change 22.8 17.1 12.2 21.0 14.1 16.9 22.6 1.6 22.0 22.3 29.0 Total 50.7 60.3 66.4 78.6 89.4 101.0 124.0 129.0 155.6 191.7 245.2 %change 19.3 18.9 10.1 18.4 13.7 12.9 22.8 3.8 21.0 23.2 27.9 US Balance -32.1 -36.7 -42.4 -53.0 -60.8 -74.7 -91.7 -89.8 -111.4 -134.9 -175.8 Source: US International Trade Commission, US Department of Commerce Note: PRC exports reported on a FOB basis; imports on a CIF basis

In Tables 9A and 9B, we discuss top exports and imports from China to the US by commodity groups for the years 2003 and 2004. US exports to China, i.e., China’s imports from USA, are presented in Table 9A and show that the year over year percentage change for eight out of the ten top commodity groups has positive rates of increase. Only for two commodity groups, oil seeds & oleaginous fruits (-17.6%) and air & spacecraft (-20.4%), have rates of increase declined. The largest percent increase was in China’s imports of cotton from the USA, which rose from US$ 769.3 million in 2003 to US$ 1,431.4 million in 2004, a hefty annual increase of 86.1 percent. Table 9B refers to US imports from China, or China’s exports to USA, for 2003 and 2004. Annual percentage changes, year over year, are uniformly positive varying between 7.7% for toys & games and 64.0% for iron & steel. Table 6.9A: Top US Exports to China (US$ millions) Commodity Description Power generation equipment Electrical machinery & equipment Oil seeds & oleaginous fruits Optics & medical equipment Air & spacecraft Inorganic & organic chemicals

2003 4639.6 4782.6

2004 6224.3 6061.7

%change 34.2 26.7

2877.4 2371.0 -17.6 1594.0 2079.3 30.4 245 1.2 1950.5 -20.4 1105.3 1900.1 32.3 Plastics & articles thereof 1247.5 1792.6 43.7 Cotton 769.3 1431.4 86.1 Iron & Steel 1213.9 1330.6 9.6 Pulp and paperboard 600.6 753.9 25.5 Sources: US International Trade Commission, US Department of Commerce

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Table 6.9B: Top US Imports from China (US$ millions) Commodity Description Power generation equipment Electrical machinery & equipment Toys & games Furniture Footwear & parts thereof Apparel Iron & steel Leather & travel goods Plastics & articles thereof Optics & medical equipment

2003 31039.8 30043.1 17399.9 13670.4 11144.8 9156.8 3855.5 5440.6 4779.9 3386.9

2004 45417.3 4 1709.0 18741.2 16749.4 12014.1 11314.0 6322.1 6209.5 5821.1 3.965.9

YOchange 46.3 38.8 7.7 22.5 7.8 23.6 64.0 14.1 21.8 17.1

Sources: US International Trade Commission, US Department of Commerce

The two-way trade pattern should be noted even for top ten commodity groups in China-US trade. China is one of the fastest growing export markets for the US. Since 1990, annual exports have increased seven-fold. US investment in China (see Chapter 4) have been growing and much of China’s exports to USA are manufactured products of those US corporations doing business in China. We have argued earlier that US consumers benefit from the low-cost exports from China as evidenced by the low rate of inflation America has enjoyed for the past several years. Reportedly, the recent corporate income tax payments for 2004 helped to reduce projected US budget deficit; this is no doubt a direct result of allowing corporations to maximize their profit income by establishing a presence in China and repatriating that profit to their home offices. We have argued earlier that comparative low wage rates have been a key source of motivation for US investments in China. However, other mature industrialized countries with investments in China for the same reasons have become competitors. The US must regain competitive advantage in their domestic productivity with a focus on high-tech machines and equipments to accommodate the consequences from the structural changes we have discussed earlier (see Chapter 4). US exports are calculated on a free along side (FAS) basis and imports are measured on a cost, insurance, and freight (CIF) basis. Following Lawrence Lau and K.C. Fung (2004), if all exports and

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imports were adjusted on a common basis, free-on-board (FOB), US exports would be adjusted upward by 1 percent and imports would be adjusted downward by 10 percent. Table 10 shows the US-China trade flows and deficits based on actual Department of Commerce (DOC) figures and adjusted figures from Nicholas Lardy (1994). The annual trade data from the DOC, exports, imports, and deficits, for 1999-2003, when compared with adjusted figures, show that DOC figures for exports are lower while those for imports are higher. It follows that the adjusted trade deficit figures are much less. However, the trend of deficit for the US in Sino-American trade remains a fact and cooperative efforts between the two to correct them can and must be in order. Table 6.10:Adjusted US Trade Flows and Deficit with China, 1999-2003 (US$ billions) Department of Commerce Figures Adjusted Figures Exports Imports Trade Deficit Imports Trade Deficit Year Exports 18.1 73.6 55.5 1999 13.1 81.8 68.7 2000 16.3 100.1 21.9 90.7 68.8 83.8 25.3 83 2001 19.2 102.3 93.1 68.5 21.9 2002 22.1 116.4 125.2 103.1 88.5 2003 28.4 152.4 124 34.1 143.9 109.8 Source: Nicholas Lardy,China in the World Economy, 1994 Institute for international, Economics, with updated information from Nicholas Lardy (Institute for nternational Economics)1999-2004. Note: imports are based on US Customs service general customs value--the actual cost of the goods, excluding import duties,freight,insurance, and other charges.

As of February 10, 2005, the US Department of Commerce reports that the US trade deficit with China in 2004 reached US$ 666.2 billion, a 21.7% increase over 2003. For the year, China’s exports to US at US$ 1.764 trillion were 54% more than the US$ 1.146 trillion China imports from America. The real trade deficit in goods and services as a percentage US GDP rose to new high of 5.8% in the fourth quarter of GDP. In 2004, the US suffered a US$ 37 billion trade deficit in advanced technology products (ATPs), an increase of 38% year over year. We have argued that the US manufacturing industry can and must regain its productivity and that the debate cannot be limited to simply to low wage rates in China. In 2004, the US trade deficit with China at

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30.6% was higher than that with Japan at 13.9% and the Pacific Rim at 22.6%. Let us refer to the two recent trade disputes, one for textiles and another for oil. For textiles, China’s importation of cotton from U S increased by 86.1%, to US$ 1,431 million in 2004 from US$ 769.3 million in 2003. As of August 2005, negotiations between US-China trade representatives are in progress. Following the Uruguay Round Agreement on Textiles and Clothing, an international agreement to remove quotas on textile trade effective January 1,2005, the U S imposed “safeguards” for the domestic textile industry. American textile producers are threatened by high sudden increases of imports of garments and textile products manufactured in China. Importation of shirts, pants, socks, and other apparel grew by 97% in the first six months of 2005. The conflict of interest between the US special interest groups, cotton farmers benefiting from the Chinese cotton imports, and the textile industry hurting from Chinese textile exports to America, remains to be resolved, and it has become a political debate. The EU is dealing with the same situation, where the two interest groups are retail businessmen who make profits by selling imported Chinese textiles and the textile industry who can barely compete with the textile imports from China. The office of the EU Trade Representative will have to negotiate for a resolution of the conflict of interest between the two groups. In each case, the market, not quotas, should determine the trade patterns. Will the World Trade Organization have a role in mediating and discussions between China and the EU or China and the US? Table 11 below provides specific data for US textile and apparel trade with China for 1989-2004, in two specified categories, (a) cotton including yarn and woven fabric thereof, and (b) apparel articles and accessories. Annual exports and imports in US$ billions as well as the trade balance (exports minus imports) accompanying annual percentage changes are reported. A review of the pattern for the time period does not reveal a crisis. However, in twelve out of sixteen years, the US has a negative percentage change in the trade balance in cotton including woven fabric thereof, and for apparel articles and accessories, three years are on


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record. However, the removal of the international quota system as of January 1, 2005, as stated above, has created a critical situation. Table 6.1 1: US Textile and Apparel Trade with China, 1989-2004 (US$ billions) 1989 1990 1991 1992 1993 1994 1995 1996 HS 52 - COTTON, INCLUDING YARN AND WOVEN FABRIC THEREOF 326.6 200.2 5.5 650.0 833.6 729.7 Exports 260.4 280.9 % change .. 7.9 16.3 -38.7 -97.2 11670.0 28.2 -12.5 Imports 130.9 152.2 175.3 173.6 193.6 154.2 142.4 114.3 % change .. 16.3 15.2 -1.0 11.5 -20.3 -7.7 -19.8 Balance 129.5 128.7 151.3 26.5 -188.0 495.8 691.2 615.4 % change -0.6 17.6 -82.5 -808.5 -363.7 39.4 -11.0 HS 61/62 - APPAREL ARTICLES AND ACCESSORIES Exports 2.8 4.5 2.6 3.5 7.9 7.1 8.7 7.3 % change .. 58.7 -41.6 34.1 125.6 -9.9 21.7 -16.0 Imports 2,657.2 3,197.1 3,434.8 4,475.0 5,296.8 5,085.6 4,653.1 5,025.5 % change .. 20.3 7.4 30.3 18.4 -4.0 -8.5 8.0 Balance -2,654.4 -3,192.6 -3,432.2 -4,471.5 -5,288.9 -5,078.4 -4,644.4 -5,018.2 % change .. 20.3 7.5 30.3 18.3 -4.0 -8.6 8.1

1997 1998 1999 2000 2001 2002 2003 HS 52 - COTTON, INCLUDING YARN AND WOVEN FABRIC THEREOF Exports 22.8 53.4 577.5 124.6 51.2 153.4 769.4 -81.7 134.2 -4.1 199.6 401.6 %change -20.9 -78.4 Imports 158.9 120.7 196.8 185.1 152.4 183.3 182.3 %change 39.0 -24.0 63.0 -5.9 -17.7 20.3 -0.5 Balance 418.6 3.9 -174.0 -131.8 -101.2 -29.9 587.0 %change -32.0 -24.3 -23.2 -99.1 -4579.9 -70.4 -2061.5

2004 1,431.4 86.1 170.5 -6.5 1,260.9 114.8

HS 61/62 - APPAREL ARTICLES AND ACCESSORIES Exports 7.9 5.9 6.8 5.3 31.4 19.4 11.7 22.5 % change 8.0 -24.9 15.0 -21.9 490.7 -38.4 -39.7 92. Imports 5,998.0 5,670.7 5,774.8 6,201.7 6,429.7 7,098.1 8,688.0 10,720.9 % change 19.4 -5.5 1.8 7.4 3.7 10.4 22.4 23.4 Balance -5,990.1 -5,664.8 -5,768.0 -6,196.4 -6,398.3 -7,078.8 -8,676.3 -10,698.4 % change 19.4 -5.4 1.8 7.4 3.3 10.6 22.6 23.3 Source: Tradestats Express

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The oil trade relates to a larger global supply situation. According to one estimate (Time, August 29, 2005), by 2025, the amount of US oil consumption is estimated to increase by 32 percent while that of China is projected to grow by 119 percent. Since November 2001, world oil production has increased by 8.3 percent while global demand for oil has gone up by 8.6 percent. The US has consumed more than its fair share of oil for decades; its oil purchases in 2003 exceeded that of China, Japan, and Germany, combined. China has voluntarily withdrawn her bid to take over UNOCAL, an American oil corporation with extensive oil bases in the Asia. One way to solve the problem will be to intensify efforts to explore alternative sources of energy, inclusive of hydro, solar, and wind power. Let us take note of the fact that both China and the US have promoted energy efficient automobiles, particularly hybrid vehicles. Progressive fiscal incentives must be in place. In light of the fast growing automobile market in China, authorities should be more concerned about appropriate policy measures. In addition to the two issues above, intellectual property rights must be considered for a thorough evaluation. China has been exposed to serious criticisms for violations of intellectual property rights relative to several commodities and services they trade in. Given the comparative data on research personnel and research papers published in professional journals (see Chapter 1) and resource allocations for education, research, and related subjects (see Chapter 4), China’s recent competitive gains in the production of various high-tech products such as automotive parts, apparel, wristwatches, electronics, music CDs, and DVDs of movies and television shows, have been attributed to China’s violations of patent and copyright laws of original products manufactured by the lawful owners of the patents and copyrights. China’s patent and copyright regulations must be transparent and justiciable. Prolongation of the debate will be harmful to progressive economic dialogue between China and her trading partners, especially the US. China must address the challenge and satisfy the critics.


23 1

4. China’s Trade Account and the Value of Foreign Trade by FFEs 1999-2001 A review of China’s foreign trade account cannot be concluded without a reference to the role of Foreign Funded Enterprises (FFEs). We have discussed at length the motivation of FFEs to promote exports and earn export revenues in convertible currencies facilitating the repatriation of profits earned on their Chinese investments to their respective home offices.

Table 6.12: Value of Import and Export Goods of FFEs in China, 19992001 (US$ billions) 1999 Total 174.51 88.62 Exports Imports 85.88 Balance 2.74 Source: China’s Statistical Yearbook 2002

2000 236.71 119.44 117.27 2.17

2001 259.12 133.24 125.86 7.38

Table 12 presents the relevant data for 1999-2001 in US$ billions. Evidently, China maintains data for this subcategory of foreign trade. We have also discussed that corporate profits in the foreign corporations have reportedly gone up and have a positive impact on their respective national budgets. The total trade, exports, and imports of FFEs have been increasing and the balance in 2002 over 1999 is significantly positive. The increases in their imports explain the additions to their respective investments in China. The China market has been lucrative for FFEs.


CHAPTER 7 CHINA’S INDUSTRIAL REVOLUTION AND BEYOND

In this concluding chapter, we discuss selected topics of concern for China’s post-Industrial Revolution regime. First, we examine if China is yet a mature industrialized economy. We then discuss: (a) China’s interregional economic gaps, (b) China’s income distribution and Gini index, (c) a comparison of four economies, the two most populous, India and China, and the two richest, USA and Japan, for health, transportation, and technology, (d) China’s village level industries, (e) China’s education, science, and technology, (f) China and the USA, (g) remarks on issues relative to China’s super-power paradigm, walls against foreign businesses, China’s national income statistics, state of corruption, and bad loans and banking crisis, and (h) China and the rest of the world.

1. China’s Economic Structure as of 2004 To evaluate China’s economic structure as of 2004, we analyze two sets of statistics, (a) sectoral shares of GDP and (b) sectoral shares of employment (see Chapter 5). A fbrther review is in order. Based on inter-sectoral shares of GDP and employment, the structure of the mature industrialized economies has an obvious pattern. As the primary sector’s shares of GDP and employment decline over time, the secondary sector’s respective shares increase, and the tertiary sector’s shares become dominant. In pre-industrialized, agriculture-dominant economies, agriculture is king, contributing to large shares of both GDP and employment. With industrialization, the basket of goods and services becomes larger, and those two shares of the primary sector decline. The sector’s total output continues growing as employment share declines because increases in productivity enables fewer farmers to produce much more output. With progress in industrialization, the 233

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secondary sector’s shares of both GDP and employment increase. The economy’s income level moves up, and the demand for products from the tertiary sector inclusive of education, health care, money and financial market services, transportation, telecommunication, tourism, recreation, performing arts, music, and films, grow. Eventually, the tertiary sector’s shares of GDP and employment become dominant. Given this analytic framework, China is yet to be ranked as a mature industrialized economy. Tables 1A and 1B provide specific factual evidence. For China, the latest figures for her sectoral shares of GDP are 13.8% for the primary sector, 52.9% for the secondary sector, and 33.3% for the tertiary sector. Even though the primary sector has the smallest share of GDP, it occupies almost half of labor; the secondary sector has one-fifth of employment, the tertiary sector, one-third. We have discussed earlier the issue of China’s inter-sectoral imbalance (see Chapters 4 and 5). Table 7.1A: Sectoral Shares of GDP (%) China EU USA Japan Korea Taiwan India Thailand Malaysia Philippines UK Germany Canada Australia New Zealand Brazil South Africa Russia Emt Mexico Chile Source: World Factbook 2005

Primary 13.8 2.2 0.9 1.3 3.2 1.7 23.6 9.0 7.2 14.8 1.o 1.o 2.3 3.4 4.6 10.1 3.6 4.9 17.2 4.0 6.3

Secondary 52.9 28.3 19.7 24.7 40.4 30.9 28.4 44.3 33.6 31.9 26.3 31.0 26.4 28.2 27.4 38.6 31.2 33.9 33.0 27.2 38.2

Tertiary 33.3 69.4 79.4 74.1 56.3 67.4 48.0 46.7 59.1 53.2 72.7 68.0 71.3 68.4 68.0 51.3 65.2 61.2

49.8 68.9 55.5

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Table 7.1B: Labor Employment by Sector (%) Primary Secondary Tertiary 49.0 22.0 29.0 China 4.5 27.4 66.9 EU* 0.7 22.7 76.7 USA 5.0 25.0 70.0 Japan 8.0 19.0 73.0 Korea 8.0 35.0 57.0 Taiwan 60.0 17.0 23.0 India 49.0 14.0 37.0 Thailand Malaysia 14.5 36.0 49.5 36.0 16.0 48.0 Philippines 1.5 19.1 79.5 UK 2.8 33.4 63.8 Germany 3.0 20.0 77.0 Canada 3.6 26.4 70.0 Australia 10.0 25.0 65.0 New Zealand Brazil 20.0 14.0 66.0 30.0 25.0 45.0 South Africa 12.3 22.7 65.0 Russia Emt 32.0 17.0 51.0 Mexico 18.0 24.0 58.0 Chile 13.6 23.4 63.0 Source: World Factbook 2005 Note: EU percentages do not sum to 100 because government employment is not included.

Table 7.2A: China and Nine Mature Industrialized Economies: InterSectoral Shares of GDP (%) Primary Secondary Tertiary China 13.8 52.9 33.3 MIE9 average 2.4 27.1 70.9 Note: Computation based on data from Table 7.1A. The MIE9 Average is the average of Nine Mature Industrialized economies: the EU, USA, Japan, Taiwan, UK, Germany, Canada, Australia, and New Zealand.

Table 7.2B: China and Nine Mature Industrialized Economies: InterSectoral Shares of Employment (%) PrinX3l-y Secondary Tertiary China 49.0 22.0 29.0 MIE9 average 4.3 26.0 69.8 Note: Computation based on Data in Table 7.1B. The MIE9 Average is the average of Nine Mature Industrialized economies: the EU, USA, Japan, Taiwan, UK, Germany, Canada, Australia, and New Zealand.

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Data for sectoral shares of GDP for EU, USA, Japan, Taiwan, UK, Germany, Canada, Australia, and New Zealand we present above. The average shares of these nine mature industrialized economies are: primary sector 2.4%, secondary sector 27.1%, and tertiary sector 70.9% (Table 2A). Table 2B follows by presenting inter-sectoral employment shares. Comparing the two sets of data, we can see that Korea, Malaysia, South Africa, Mexico, Chile, and Russia are approaching the profile of a mature industrialized economy, Korea leading.

2. China’s Interregional Economic Gaps China’s 1.3 billion people live in 34 administrative units in a geographical area of 9,598 thousand square lulometers. There are 23 provinces: Anhui, Fujian, Gansu, Guangdong, Guizhou, Hainan, Hebei, Heilongjiang, Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Qinghai, Shaanxi, Shandong, Shanxi, Sichuan, Yunnan, Zhejiang, and Taiwan. The relationship between Taiwan and the Mainland is subject to the interpretation of the “One China” policy accepted by both the United States of America and the People’s Republic of China. There are 4 municipalities, Beijing, Chongqing, Tianjin, and Shanghai, each is directly under the governance of central authorities in Beijing and each has the same political, economic, and jurisdictional rights as a province. Then there are 5 autonomous units, Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang. In addition, China also has 2 Special Administrative Regions ( S A R ) , Hong Kong and Macao. Shanghai, with over 8 million people, is the largest city in China. Indeed, China has 666 cities, 11 with populations over 2 million, 23 with populations between 1 and 2 million, and 46 cities with populations between 500,000 and 1 million. The rest have relatively smaller population bases. We have discussed earlier the interregional gaps in the process of industrialization and hence in levels of income in China. Much of what has happened over the past twenty five years has been in the eastern region. The central and western regions continue to lag behind (see Chapter 4). China, with its population currently at 1.3 billion, makes up roughly 20 percent of the world population, and is the world’s most populous economy. The annual rate of growth of population is 1 percent and is

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expected to slow down. The UN Population Division projects the population will peak at 1.45 billion in 2025. The US Census Bureau estimates that even with her industrialization at an accelerated rate, only about 25 percent of the labor force work in industry and commerce, while some 60 percent of the population continues to work in agriculture and forestry (see Chapter 1). The remaining 15 percent work in (a) construction and mining, (b) social services, and (c) other areas, with about 5 percent in each of the three fields. Table 3 relates regional labor productivity to the national average. Beijing municipality tops the list, its labor being 120.07% more productive. Shanghai, Jiangsu, Chongqing, Guangdong, and Zhejiang all record positive scores. Shaanxi, Fujian, Shandong, Liaoning, and Henan, with negative percentages of the national average varying between 4.83% and 19.89%, constitute the next group. It is instructive to note that the remaining administrative units record much poorer percentages, and no data is given for Tibet. Taiwan, and the two SARs, Hong Kong and Macao, are not included in the discussion. Figure 1 is a more focused graphic presentation of the state of regional labor productivity compared to the national average of 53.8. It is obvious that only six units demonstrate positive magnitudes, while all others with negative scores at varying rates must wait for proper policy actions. There is ample room to add to the labor productivity in the majority of China’s administrative units. Sustainability of China’s industrialization and growth of GDP at a high rate has been an issue for much debate. China’s economic planners may elect to adopt a westward economic movement, with necessary and sufficient macroeconomic policy parameters defined by well specified monetary and fiscal policies in light of China’s immense growth potential (see Chapter 4). The USA began in the east on the Atlantic shore and progressively expanded westward to the Pacific. It has been argued that given the map of the world, China begins in the east on the Pacific, but cannot reach out to an ocean on the west. However, the land mass is huge and much remains to be explored in central and western China. In Table 4, we continue to examine the issue of interregional economic gaps in China in the context of each region’s share of total foreign trade, exports, and imports, as percentages of China’s national

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Table 7.3: National and Regional Labor Productivity, 2001 National Labor Productivity (10,000 padperson)

53.8

Administrative Unit Beijing Shanghai Jiangsu Chongqing Guangdong Zhejiang

Region East East East Central East East

Overall Labor Productivity (%) 120.07 69.14 41.26 32.90 9.85 3.16

Shaanxi Fujian Shandong Liaoning Henan

Central East East East Central

-4.83 -7.62 -1 1.34 -17.66 -19.89

Tianjin Hebei Guangxi Yunnan Hunan Anhui Heilongjiang Xinjiang Jilin Hainan Shanxi

East East Central Central Central East East West East Central Central

-20.82 -23.61 -23.61 -37.17 -39.59 -40.71 -44.24 -44.24 -48.88 -49.26 -50.74

-5 1.49 Sichuan Central -53.53 Guizhou Central -53.90 East Jiangxi -60.97 Inner Mongolia Central -61.71 Ningxia Central -64.31 West Gansu -74.54 Hubei Central -78.62 Qinghai West Tibet West Source: Based on data &om China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Figure 7.1 Regional Labor ProductivityCompared to National Average 150%

100%

50% c

a

E

n

0%

-50%

-100%

Administrative Unit

Source: Based on data !?om China Statistical Yearbook 2002

trade in these three components. Nine administrative units in the east have the major share of all trade. For total trade, the percentages vary between 3.34% and 38.07%; exports vary between 2.43% and 40.81%, while imports range between 4.30%and 35.16%. Guangdong dominates in all measures of trade; Shanghai and Jiangsu come second and third, respectively. Shandong, Fujian, Tianjin, Liaoning, Zhejiang, and Beijing follow next in that order. Each of the rest of the administrative units has less than a 1% share of all measures of trade, and Tibet records a negligible percentage of China's foreign trade. The point one can make is straightforward. There is more room for China to add to her total foreign trade to sustain the present high rate of growth of GDP for a much longer time. In Table 5A, for each region we compare total employment in each sectoral with the sectoral totals at the national level. We also compare total regional employment with the national total. The total employment profile reflects the population base of each region. For the secondary, or manufacturing, sector, Henan, Shandong, Sichuan, Guangdong, Jiangsu ,

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Table 7.4: Regional Trade as Share of National Total, 2001 National Total (10,000 US$)

Total 25909796

Exports 13323506

Imports 12586290

Administrative Unit Guangdong Shanghai Jiangsu Shandong Fujian Tianjin Liaoning Zhejiang Beijing

Region East East East East East East East East East

% 38.07 14.20 13.20 6.28 5.80 5.54 4.71 4.58 3.34

%

%

40.81 11.98 12.49 6.93 6.22 5.33 4.73 5.33 2.43

35.16 16.56 13.94 5.58 5.36 5.75 4.69 3.79 4.30

Hebei Jilin Hubei Anhui Hainan Sichuan Henan Hunan

East East Central East Central Central Central Central

0.70 0.58 0.5 1 0.38 0.31 0.26 0.23 0.22

0.86 0.32 0.38 0.32 0.23 0.18 0.24 0.16

0.53 0.85 0.65 0.45 0.40 0.34 0.22 0.28

Guangxi Heilongjiang Shaanxi Chongqing Jiangxi Shanxi

Central East Central Central East Central

0.18 0.17 0.14 0.12 0.11 0.10

0.18 0.19 0.08 0.07 0.08 0.12

0.17 0.15 0.20 0.18 0.13 0.09

0.08 Yunnan Central 0.08 0.08 0.04 Inner Mongolia Central 0.07 0.10 0.03 Xinjiang West 0.04 0.04 0.03 Gansu West 0.03 0.04 0.01 Ningxia Central 0.03 0.04 0.02 Guizhou Central 0.02 0.03 0.02 Qinghai West 0.01 0.00 0.00 Tibet West 0.00 0.00 Source: Based on data from China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

24 1


Table 7.5A: Regional Employment as a Percentage of Sectoral and National Total, 2001 AdministrativeUnit National Total (10,000 persons)

Total 73025.0

Primary 50.00%

Secondary 22.30%

Tertiary 27.70%

AdministrativeUnit Henan Shandong Sichuan Guangdong

Region Central East Central East

YO 7.55 6.40 6.05 5.43

YO 9.54 6.69 7.11 4.34

YO

YO

6.12 6.86 3.97 6.65

5.13 5.49 5.80 6.40

Jiangsu Hunan Anhui Hebei Zhejiang Guangxi Hubei Yunnan

East Central East East East Central Central Central

4.88 4.71 4.64 4.63 3.80 3.48 3.36 3.18

4.04 5.70 5.45 4.59 2.71 4.31 3.25 4.68

6.58 3.05 3.39 5.28 5.48 1.58 2.72 1.28

5.04 4.26 4.19 4.18 4.39 3.53 4.07 2.00

Guizhou Jiangxi Liaoning Shaanxi Fujian Heilongjiang Chongqing

Central East East Central East East Central

2.83 2.65 2.51 2.44 2.30 2.23 2.22

3.76 2.73 1.87 2.72 2.11 2.21 2.43

1.19 1.70 2.83 1.83 2.58 2.08 1.53

2.48 3.26 3.41 2.44 2.41 2.39 2.41

Shanxi Gansu Jilin Inner Mongolia

Central West East Central

1.93 1.63 1.45 1.39

1.81 1.93 1.47 1.50

2.13 0.98 1.21 0.99

2.00 1.59 1.61 1.51

Shanghai East 0.95 0.24 1.77 1.57 Xinjiang West 0.94 1.06 0.57 1.01 Beijing East 0.86 0.19 1.29 1.72 Tianjin East 0.56 0.23 0.99 0.82 Hainan Central 0.47 0.56 0.20 0.50 Ningxia Central 0.38 0.43 0.3 1 0.35 Qinghai West 0.33 0.40 0.19 0.32 Tibet West 0.17 0.25 0.05 0.13 Source: Based on data fiom China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Table 7.5B: Regional Employment in State Owned Units as a Percentage of National Total, 200 1 National Total (10,000 persons)

7409

Administrative Unit Shandong Henan Hebei Guangdong Hubei Jiangsu Liaoning

Region East Central East East Central East East

7.01 6.04 5.44 5.29 5.12 5.09 5.03

Heilongjiang Sichuan Hunan Shanxi Shaanxi Anhui Beijing Jilin Jiangxi

East Central Central Central Central East East East East

4.98 4.73 4.27 3.61 3.48 3.41 3.18 3.1 1 3.00

Guangxi Yunnan Xinjiang Inner Mongolia Zhejiang Shanghai Gansu Fujian Guizhou

Central Central West Central East East West East Central

2.95 2.80 2.67 2.51 2.40 2.21 2.14 2.14 2.01

%

Central 1.82 Chongqing Tianjin East 1.39 Central 0.84 Hainan Ningxia Central 0.65 West 0.49 Qinghai Tibet West 0.20 Source: Based on data from China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Table 7.5C:Regional Employment in Private Enterprises and Self Employed Individuals as a Percentage of National Total, 2001 National Total (10,000 persons)

7474.1

Administrative Unit Zhejiang Jiangsu Guangdong Hebei Shandong Liaoning Anhui

Region East East East East East East East

% 8.35 7.92 7.76 7.58 6.56 6.25 5.59

Hubei Heilongjiang Shaanxi Henan Sichuan Hunan Shanghai

Central East Central Central Central Central East

4.18 4.00 3.99 3.79 3.67 3.28 3.01

Inner Mongolia Jiangxi Guangxi Fujian Yunnan

Central East Central East Central

2.88 2.61 2.45 2.30 2.01

Chongqing Jilin Shanxi Xinjiang Guizhou Gansu

Central East Central West Central West

1.94 1.87 1.44 1.24 1.15 1.09

Tianjin East 0.97 Beijing East 0.61 Hainan Central 0.58 Qinghai West 0.44 Ningxia Central 0.36 Tibet West 0.11 Source: Based on data from China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Table 7.5D: Regional Scientific and Technical Personnel as a Percentage of National Total, 200 1 National Total (10,000 persons)

3053.3

Administrative Unit Shandong Henan Guangdong Jiangsu Hebei Sichuan

Region East Central East East East Central

% 7.51 6.21 6.18 5.48 5.20 5.17

Liaoning Beijing Hunan Heilongjiang Hubei Zhejiang Anhui Shaanxi Jilin Guangxi

East East Central East Central East East Central East Central

4.71 4.25 4.05 3.75 3.75 3.59 3.42 3.25 3.06 3.03

Shanxi Yunnan Jiangxi Fujian Shanghai Inner Mongolia Xinjiang

Central Central East East East Central West

2.97 2.88 2.79 2.77 2.57 2.31 2.23

Chongqing Guizhou Gansu Tianjin

Central Central West East

1.96 1.92 1.71 1.62

0.58 Ningxia Central Hainan Central 0.53 Qinghai West 0.44 0.13 Tibet West Source: Based on data from China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Table 7.6A: Regional Average Wage in State-owned Units as a Percentage of National Average, 200 1 National Average (yuan) Administrative Unit

11178

YO

Shanghai Tibet Beijing Zhejiang Guangdong

Region East West East East East

196.47 179.92 176.92 174.58 150.11

Tianjin Qinghai Fujian Jiangsu

East West East East

135.18 125.50 119.10 115.56

Ningxia Shandong Yunnan Sichuan Liaoning Gansu Xinjiang

Central East Central Central East West West

99.41 99.01 97.33 96.47 94.91 93.42 90.76

Chongqing Hunan Shaanxi Guizhou Guangxi Hebei Hubei Jilin

Central Central Central Central Central East Central East

89.77 89.38 84.45 83.27 82.39 8 1.76 81.71 80.90

79.84 East 78.16 Central 77.10 Central 76.70 Central 76.05 East Anhui 74.66 East Jiangxi Hainan Central 72.48 Source: Based on data from China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping. Heilongjiang Inner Mongolia Shanxi Henan

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Table 7.6B: Regional Average Wage in Urban Collective-owned Units as a Percentage of National Average, 200 1 National Average (yuan)

6867

Administrative Unit Shanghai Zhejiang Beijing

Region East East East

199.40 177.78 161.10

Fujian Guangdong Tianjin Xinjiang Jiangsu YUnnan Ningxia Hunan

East East East West East Central Central Central

132.49 131.64 121.52 119.37 109.84 104.89 104.35 100.15

Gansu Chongqing Sichuan Guangxi Liaoning Tibet Shandong Guizhou Hainan

West Central Central Central East West East Central Central

97.98 96.32 95.75 93.02 92.53 90.81 90.80 90.55 90.39

Qinghai Jilin Hebei Henan Hubei Inner Mongolia

West East East Central Central Central

88.85 83.95 83.68 83.38 82.67 80.46

%

77.08 Central Shaanxi 74.98 East Jiangxi 74.36 East Anhui 7 1.75 Central Shanxi Heilongjiang East 7 1.60 Source: Based on data fkom China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Table 7.6C: Regional Average Wage in Other Ownership Units as a Percentage of National Average, 200 1 National Average (yuan)

12140

Administrative Unit Shanghai Beijing

Region East East

% 191.74 169.64

Guangdong Tianjin Zhejiang Tibet Heilongjiang

East East East West East

135.02 121.37 111.27 108.11 102.88

Jiangsu Xinjiang Liaoning Hainan Fujian

East West East Central East

97.12 95.50 92.73 91.36 90.84

YUnnFUl

Guangxi Jilin

Central Central East

85.72 83.66 81.84

Shaanxi Chongqing Hunan Gansu Qinghai Guizhou Shandong Hebei Sichuan

Central Central Central West West Central East East Central

79.28 78.28 77.27 74.47 72.83 72.74 71.93 71.48 71.25

Ningxia Central 69.72 Shanxi Central 68.79 Jiangxi East 68.77 Anhui East 66.93 Hubei Central 66.19 Henan Central 64.98 Inner Mongolia Central 62.43 Source: Based on data fiom China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Table 7.7A: Regional Transportation as Percentage of National Total, 200 1 Administrative Unit National Total (km)

Total 4747252

Highway 1074092

Railway 180399

Rural Roads 3492761

%

YO

Administrative Unit Jiangsu Hunan Shandong Guangdong Sichuan Henan

Region East Central East East Central Central

% 6.68 6.28 6.12 5.58 5.18 5.08

5.70 5.81 4.75 6.44 5.33 4.58

% 2.66 1.81 5.81 4.29 2.79 2.30

7.19 6.66 6.56 5.38 5.26 5.37

Hubei Yunnan Hebei

Central Central East

4.84 4.65 4.06

3.81 4.79 3.45

3.07 2.59 0.93

5.25 4.71 4.41

Xinjiang Anhui Heilongjiang Shaanxi Jiangxi Inner Mongolia Zhejiang Guangxi

West East East Central East Central East Central

3.75 3.62 3.53 3.53 3.47 3.37 3.33 3.23

2.98 3.10 3.26 3.01 3.68 4.00 3.59 3.89

3.80 1.16 8.85 4.57 3.65 3.24 2.13 2.22

3.98 3.90 3.34 3.63 3.40 3.19 3.32 3.09

Gansu Shanxi Liaoning Jilin Fujian Guizhou

West Central East East East Central

2.93 2.78 2.73 2.50 2.26 2.05

2.53 2.19 2.95 2.08 2.90 2.57

3.07 3.21 2.37 4.64 0.67 3.56

3.04 2.94 2.68 2.52 2.15 1.81

Chongqing Beijing Shanghai Tibet

Central East East West

1.91 1.72 1.39 1.29

2.06 4.09 2.19 1.51

1.70 10.94 8.16 0.00

1.87 0.51 0.79 1.28

0.00 0.58 Hainan Central 0.66 1.04 0.68 2.81 0.51 Tianjin East 0.64 Qinghai West 0.50 0.81 1.62 0.35 Ningxia Central 0.40 0.54 1.38 0.31 Source: Based on data from China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Table 7.7B: Regional Telecommunication Capacity as a Percentage of National Total, 200 1 Administrative Unit National Total

Long Distance Mobile Phone Optical Cable Length 7035769 21926.3 399082

Administrative Unit Region

YO

%

%

Guangdong Shandong Jiangsu

East East East

11.97 6.15 5.81

12.73 5.91 7.54

5.30 3.30 2.81

Zhejiang Sichuan Liaoning Shanghai Fujian

East Central East East East

4.85 4.76 4.62 4.37 4.22

8.20 5.26 4.20 5.07 4.36

2.93 4.77 2.53 0.59 3.77

Henan Hunan Jiangxi Hubei Anhui Guangxi

Central Central East Central East Central

3.94 3.92 3.70 3.52 3.40 3.24

3.69 3.12 2.02 3.37 2.41 2.02

5.29 4.12 2.84 3.63 3.45 4.49

Hebei Beijing Yunnan Jilin Heilongjiang Chongqing Shanxi Xinjiang Shaanxi

East East Central East East Central Central West Central

2.89 2.80 2.77 2.75 2.61 2.42 2.26 2.11 2.02

3.79 3.70 2.61 2.16 2.56 2.18 1.82 1.33 2.72

2.50 0.87 4.17 3.17 6.66 2.13 3.69 3.57 3.08

Inner Mongolia Guizhou Gansu Tianjin

Central Central West East

1.64 1.61 1.47 1.16

1.82 1.39 1.31 1.31

4.32 3.43 3.87 0.42

Hainan Central 0.78 0.57 0.08 Tibet West 0.75 0.10 1.70 Ningxia Central 0.60 0.35 0.98 Qinghai West 0.58 0.40 2.05 Source: Based on data from China Statistical Yearbook 2002 Note: The regional grouping above is independently done and may not correspond to any official regional grouping.

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Hunan, Anhui, Hebei, Zhejiang, Guangxi, Hubei, and Yunnan each has regional shares of employment greater than 3%. The four municipalities, Beijing, Tianjin, Shanghai, and Chongqing, rank relatively low on this comparison because of their respective population sizes. The table demonstrates that in many of the regions, there is room for moving industrialization and employment opportunities westward. We continue our analysis of employment in terms of ownership of units, state owned (Table 5B) and private enterprises and the self employed (Table 5C). Based on the pattern of employment in the coastal east, there is more employment in the private market sector, whereas state owned units continue to offer more job opportunities in the larger central area. The far west seems to present a dismal picture of employment. One ventures to comment that China’s socialist market economy has yet to realize the full potential of economic growth. Indeed, China can continue to sustain its growth. In Table 5D, we examine the issue in the context of regional scientific and technical personnel as a percentage of national total. There is a major concentration in 16 units in central and east China, mostly in the east. The human stock of capital of China must be augmented and China’s westward movement can be successful only with availability of scientific and technical personnel in the central and remote areas. The average regional wage rate compared to the national average wage rate is yet another way to analyze the sustainability of China’s growth at a high rate. Our analyses relate to three types of ownership of units: state-owned (Table 6A), urban collective-owned (Table 6B), and other types of ownership (Table 6C). Tibet is an exception. For both state-owned and urban collective-owned units the regional wage rate in Shanghai, Beijing, Zhejiang, Guangdong, Fujian, Tianjin, Xinjiang, Jiangsu, Yunnan, Ningxia, Hunan, and Qinghai are all above the national average. However, in the vast majority of regions, the regional wage rate has been below the national average. In general, the pattern remains relatively the same for all other types of ownership (Table 6C), Heilongjiang being an exception. Comparatively low wage rates in these regions must induce domestic as well as foreign investors to make investments there and help industrialization of the regions. Additionally, necessary infrastructure will have to be built and fiscal inducements will

China’s Industrial Revolution and.Beyond

25 1

be in order. China will produce much, much more, adding to the economic welfare of the people of China and of the world at large. In Tables 7A and 7B, we return to the provision for infrastructure which must be built to facilitate the movement of China’s economic growth westward. Table 7A presents necessary data for regional transportation of highway, railway, rural roads, and total, while Table 7B covers regional telecommunication capacity as a percentage of national total, including long distance, mobile phone, and optical cable length. As expected, the pattern of concentration in selected administrative units in east and center is notable. For seventeen regions in Table 7A, percentages of the national total vary between 3.23% and 6.68% while for the remaining units they vary between 0.40% and 2.93% of the national total of highway, railway, and rural roads. For the individual components of highway, railway, and rural roads, the pattern is as we anticipate. In Table 7B for telecommunications in long distance, mobile phone, and optical cable length, the major recipients of FDI and consequent industrialization in the east and central have been beneficiaries. They have built and maintained extensive telecommunication networks. The regions yet to have competitive shares of national averages in the three categories of telecommunications noted in Table 7B must be provided with the necessary infrastructure. Yet to be explored provinces in central and western China must be at once a challenge and resource base for China. To sustain her annual rate of growth at 9 percent, China must have necessary macroeconomic policy incentives with well specified monetary and fiscal guidelines to induce investment into those regions where relative wage rate remains competitive. The emphasis on human capital and infrastructure, in the context of our discussion above, must receive priority in China’s national planning or the interregional income gap will certainly remain a problem. Ever since China adopted the economic reform agenda in the 1970s, Chinese economic planners have certainly followed proactive policies. As China implements the 9* five-year plan, the national authorities in Beijing, in cooperation with the provincial governments, are expected to adapt their planning toward bridging the interregional economic gaps.

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3. China’s Income Distribution and the Gini Coefficient Index Much has been written about China’s income distribution, both interregional and inter-income groups. The economic planners in China have noted the fact of an interregional income distribution gap and their efforts to induce investments to the remote regions in the central and western provinces of China by macroeconomic policy incentives must be appreciated. We have also argued that in the US, the richest and the most industrialized economy of the world, unequal interregional income distribution remains a problem. The difference between the family median income levels in the top five richest states of the US and that of the lowest five remains painfully conspicuous. In 2002, the enormous gap between the family median income levels in Manhattan Borough in New York City (US$ 90,000) and Loup County in the Appalachia (US$ 6,600) has been reported. China also has a great deal more to do, as most of her economic growth has been limited to coastal regions and has benefited a limited segment of China’s 1.2 billion population. Hence, critics suggest that China’s Industrial Revolution has resulted in a situation where China is rich but the Chinese are poor. A review of the estimates of cross country Gini coefficients follows (Table 8). China ranks 44* with 10 percent of the people below the poverty line while USA ranks 45thwith 12 percent of the people below the poverty line. EU, Japan, South Korea, India, UK, Germany, Canada, Australia, Russia, and Egypt all enjoy higher rankings. In terms of the percentage of population under the poverty line, Korea, Taiwan, and Malaysia, score above the US. Both Russia and India, each with as high as 25 percent of their populations below the poverty line, are sure to miss credit for their respective rankings by the Gini index. Thailand and Malaysia outperform China and USA because they have a smaller percentage of their respective populations below the poverty line. However, other countries have poorer records by this benchmark of the poverty line. The distinguished Chinese economist, Liu Guoguang, formerly with the Chinese Academy of Social Sciences in Beijing, in a personal communication in 2004, advised me that a study based on the Gini Coefficient index of China he did in collaboration with Li Jingwen, and

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published in Chinese, lent strong empirical support to China’s competitive ranking vis-a-vis USA. Table 7.8: The Gini Index of Income Distribution China EU USA Japan Korea Taiwan India Thailand Malaysia Philippines UK Germany Canada Australia New Zealand Brazil South Africa Russia Egypt Mexico Chile Source: World Factbook 2005

Gini Index 44.0 31.2 45.0 24.9 35.8 37.8 51.1 49.2 46.6 36.8

Population below poverty line (“A) 10 12 4 1 25 10 8 40 17

30.0

31.5 35.2 60.7 59.3 39.9 34.4 53.1 57.1

22 50 25 17 40 21

4. Comparison of China, India, Japan, and US: Health, Transportation, and Technology

Following what we have called the now fashionable format, Tables 9A, 9B, and 9C below limit the cross country comparison to four countries, the two richest, USA and Japan, and the two most populous, China and India. For the number of hospital beds per 1,000 people in the country, we have complete data only for 1970 and 1980, with Japan ahead of USA, China, and India. The USA, with 7.9 and 6 beds per 1,000 people in

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1970 and 1980, respectively, ranks second, and China, with 1.54 beds in 1970 and 2.23 in 1980, ranks third. India, with 0.60 beds in 1970 and 0.77 in 1980, is outranked by the three others. Let us note that over the decade, Japan, China and India have improved their facilities while the USA has come down to 6 beds in 1980 from 7.9 in 1970 (Table 9A). If we had data for India in 2000, we would expect the same ranking to hold. Table 7.9A: Health Measures China India Hospital beds (per 1,000 people) 1960 0.46 0.60 1970 1.54 1980 2.23 0.77 1990 2.58 2000 2.52 Mortality rate, infant (per 1,000 live births) 1960 150 146 1970 85 127 1980 49 113 1990 38 84 2000 32 68 Source: World Development Indicators 2003

Japan

United States

9.0 12.5 13.7

9.2 7.9 6.0

16.0

4.9

16.5

3.6

30.4 13.1 7.5 4.6 3.2

26.0 20.0 12.6 9.4 6.9

In terms of infant mortality rates per 1,000 live births, all countries have made substantial improvements since 1960. Japan has made the greatest achievement, with only 3.2 mortalities in 2000, down from 30.4 in 1960. The USA follows with 6.9 mortalities in 2000 from 26 in 1960. Next, China had 32 mortalities per 1,000 in 2000, down from 150 in 1960, when she had the highest mortality rate. In 1960, India had an infant mortality rate of 146. In 2000, India had the highest mortality rate among the four, with 68 mortalities per 1,000 live births. For technology and communication (Table 9B), we have taken five indices for 2000 and 2003. Based on expenditure on technology as percentage of the country’s GDP, China outscores the three others, moving upward from 4.10% in 2000 to 5.28% in 2003. So does India, albeit with much small margin as she moves from 3.62% in 2000 to 3.74% in 2003. For USA and Japan the two richest economies, each has a decline, USA fiom 9.55% in 2000 to 8.78% in 2003, and Japan from

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8.45% in 2000 to 7.38% in 2003. China has become a technology-rich economy with a heavy emphasis on technology, which has enabled her to catch up and compete with USA and Japan (see Chapter 4). India has to do more to be effectively competitive in the global market.

Table 7.9B: Technology and Communication Measures China India Technology expenditure (% of GDP) 2000 4.10 3.62 2003 5.28 3.74 Daily newspapers (per 1,000 people) 2000 59.29 Internet users (per 1,000 people) 1990 2000 17.37 5.43 2003 63.25 17.49 Personal computers (per 1,000 people) 1990 0.43 0.32 2000 15.90 4.54 Mobile phones (per 1,000 people) 1990 0.02 0.00 2000 65.82 3.53 2003 214.77 24.75 Source: World Development Indicators 2003

Japan

United States

8.45

9.55

7.38

8.79

565.96

196.30

0.20 299.40 482.69

8.04 440.62

59.87 315.16

217.92 572.10

7.02 526.19 679.01

2 1.24 389.02 543.01

The next index chosen is daily newspapers per 1,000 people in the year 2000. Japan, with 565.96 newspapers per 1,000 people is far ahead of the USA with 196.30 per 1,000 people. China, with 59.29 newspapers per 1,000 people, is a distant third. No figure for India for the year 2000 is noted, but reportedly, India has a much higher figure. For internet users we have complete data for all four countries for 2000. The USA, with 440.62 users per 1,000 people is far ahead. The corresponding figures for Japan and China are 299.40 and 17.37, ranking them in that order, far behind the USA. India has a dismal figure of 5.43 internet users per 1,000. Data on personal computer users per 1,000 people in 2000 and 1990 show a positive trend for all four countries, each with higher percentage of people using them. In terms of cross-country comparison, the USA is

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M Dutta

far ahead, Japan comes second, China a distant third, and India a remote fourth. Mobile phones per 1,000 people report figures for 1990, 2000, and 2003. Each of the four countries records a progressive trend. Japan, which ranked second in 1990, moved up to the top position in 2000, and maintains its ranking in 2003. The USA, ranked first in 1990, became second in 2000 and continues to be second in 2003. China, with just 0.02 mobile phones per 1,000 people in 1990, moved up to 65.82 in 2000, then to 214.77 in 2003, further strengthened her comparative position. India remains far outranked. Table 7.9C: Transportation Measures China India Air transport, passengers carried (in millions) 1970 2.67 1980 2.57 6.60 1990 16.60 10.90 2000 61.90 17.30 2003 86.00 19.50 C02 emissions (metric tons per capita) 1960 1.17 0.28 1970 0.94 0.35 1980 1.51 0.51 1990 2.12 0.79 2000 2.21 1.05 Passenger cars (per 1,000 people) 1980 1990 1.43 2.42 2000 6.74 6.03 Pump price for super gasoline (US$ per liter) 2000 0.40 0.60 Rail lines (total route-km) 2000 58,656 62,759 Roads, total network (km) 1990 1,181,033 2,000,000 2000 1,402,698 Vehicles (per 1,000 people) 1990 4.67 4.3 1 2000 12.40 9.26 Source: World Development Indicators 2003

Japan

United States

16.30 45.10 76.20 109.00 104.00

163.00 295.00 465.00 663.00 589.00

2.47 7.08 7.88 8.67 9.34

16.16 20.59 20.36 19.29 19.85

202.60 283.32 413.10

535.70 573.28

1.06

0.47

20,165

160,000

1,114,697 1,166,340

6,243,163 6,358,665

469.49 572.40

757.70

China S Industrial Revolution and Beyond

257

Finally, Table 9C deals with transportation in seven parameters. For the number of air transport passengers carried in millions, the USA is far ahead, with Japan, China and India following in that order. The trend for all four countries from 1980-2003 have been upward, except for Japan, serving slightly fewer passengers in 2003. Adjusting for the geographic area and the size of population, Japan may have correct priority. COz emission in metric tons per capita places the USA unsurprisingly at the most challenging position; the figures are moving up: 16.16 in 1960, 20.59 in 1970, 20.36 in 1980, but then marginally declining to 19.85 in 2000. Japan has increased its emissions from 2.47 in 1960 to 9.34 in 2000. Corresponding C 0 2 emissions figures for both China and India remained relatively low from 1960 through 1990, as automobile use was relatively marginal. However, the figures for 2000 point to the fact that in each case the increase over the decade has been very pronounced, as the people in the two countries engage in more automotive transportation. The use of passenger cars per 1,000 people is notable in USA, followed by Japan, China, and India. Figures for 2003 over 1990 show a big increase for both China and India. It is no wonder C02 emissions in the two countries went up as discussed above. For pump price for super gasoline based on US$ per liter in 2000, Japan pays the highest price, followed by India, USA, and China, in that order. Given the relatively low pump price of gasoline and the vast population size, the automobile use in China is expectedly on the fast track. For total route lulometer of rail lines, the USA is far ahead followed by India, China, and Japan, in that order. India, with a total of 62,759 total route kilometers outranks China with 58,656 kilometers. However, both China and India, given their shares of population and geographic areas, must continue to develop many more route kilometers of rail lines. As we have mentioned before, Japan’s figure merits adjustment for its smaller population size and much smaller geographic area, and also take its extensive road miles for automotive transportation into consideration. The total network of roads, Japan is highly competitive and ahead of both China and India. India has a much larger network and China is

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M. Dutta

significantly behind. Of course, the USA with its network of 6 plus million kilometers enjoys a definite competitive lead. India’s figure for 2000 is not reported. Over the decade, the USA, Japan, and China report net substantive additions of road kilometers to their respective totals. Finally, we compare vehicles per 1,000 people in the four countries. In 1990, the USA with 757.70 vehicles per 1,000 people is far, far ahead of Japan, with 469.49 vehicles per 1000 people. In the same year, neither China, with 4.67 vehicles per 1,000 people, nor India, with 4.31 vehicles per 1,000 people, has a competitive share. In 2000, rates of increase in vehicle use in both China and India have been more than 100 percent, contributing to a global change in the production and consumption of vehicles. Japan has increased its figures from 469.49 in 1990 to 572.40 in 2000.

5. Village Level Industries in China’s Primary Sector The rationale for promoting the village level industries is quite straightforward: It is a way to augment the income of the rural people engaged in farming and agriculture by helping them add value to their products and thus augment their incomes (see Chapter 4). Provisions for rural transportation and banking facilities naturally must follow. Addition of internet services for the marketing of the products of the village level industries, reportedly already in progress in China, will further add to the farmers’ money income. They will be able to sell their merchandise to the global market and maximize their profits. It is to be noted that China Statistical Yearbook has recently used the category “rural industries,” instead of the primary sector, when calculating the data on sectoral employment. Is there a limit to the frontier? Can China provide enough employment this way to her 1.3 billion people? The research must continue.

6. Education: Science and Technology China’s priority for science and technology is on record and many members of China’s industrial and political leadership have advanced engineering training. The rest of the world must take note of the fact that

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China ’s Industrial Revolution and Beyond

China’s space program put an astronaut into orbit in October 2003. China is of course a nuclear power. In April 200 1, the US-China Science & Technology Agreement has been extended for a five year period, which covers cooperation in fields such as marine conservation, renewable energy, and health. Japan and the European Union also have science and technology cooperation agreements with China. Table 7.10: Comparative Figures in US$ millions for China and USA: Estimates for 2004 and 2008 China 2004

USA 2008

2004

2008

1.10 1.75 1.70 1.80 Finance & Accounting 0.80 Engineering 1.75 2.10 0.65 Life Sciences 0.59 0.73 0.83 0.76 Note: Estimated from Business Week 08/22/2005 for actual 2004 figures and 2008 projections (p. 57).

Given the comparative bases of population, currently China with 1.3 billion and the US with 290 million, China’s figures are not competitively large enough in all three fields of study (Table lo). However, China’s lead in engineering must be noted. Overall, the US lags behind. We have argued that China’s allocation of resources to the tertiary sector inclusive of health care, education, science, and technology has been quite suboptimal (see Chapters 1 and 4), more so given its population base. Can China successfully compete with the mature industrialized economies and maintain productivity gains towards sustaining her growth rate at an annual rate of 9-plus percentage?

7. China and the USA Did China exist? For some twenty two years, from 1950 through 1972, China was not recognized by the US government. However, the US State Department reports that as many as 136 meetings at the ambassadorial level between USA and China took place from 1954 to 1970. In February 1972, President Nixon led the American effort to “rediscover” China. His historic visit to China covering Shanghai,

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Beijing, and Hangzhou produced the Shanghai CommuniquC which reopened Sino-American dialogues. During the necessary preparatory period from 1973-1978, President Ford visited China in 1975. President Carter reaffirmed America’s commitment to China and normalization came in the form of the Joint CommuniquC on the Establishment of Diplomatic Relations of January 1, 1979. Three months later, on March 1, 1979, the US and China established respective embassies in Beijing and Washington DC. Let us now turn to US-China economic relations. Online reports from the US State Department state that US direct investment in China has been substantive, covering a wide range of manufacturing sectors, several large hotels, restaurant chains, and petrochemicals, the result of some 20,000 equity joint ventures, contractualjoint ventures, and wholly foreign-owned enterprises (see Chapter 4). “More than 100 US-based multinationals have projects in China, some with multiple investments. Cumulative US investment in China is valued at US$48 billion. Total two-way trade between China and the US grew from US$ 33 billion in 1992 to over US$ 230 billion in 2004. The United States is China’s second largest trading partner, and China is now the third largest trading partner of the US, following Canada and Mexico. US exports to China have been growing more rapidly than to any other market, up 28.4% in 2003 and 20% in 2004 and imports from China grew 29%, with US trade deficit with China exceeding US$ 162 billion in 2004.” Two simple policy guidelines are followed: (a) China’s smooth integration into the world economy will maximize global economic gains, and (b) the US must be able to obtain its competitive share of economic transactions, in trade as well as investment, in China’s vast economy with 1.3 billion people, an abundant source of labor at a relatively low wage rate and plentiful endowment of several raw materials. In addition, China is a potential market for consumption demand for goods and services produced in USA. Obviously on a per capita basis, China has a long way to go (Table 11). Will the rate of growth of GDP in the two economies remain as they are at the present time? Will the two economies be able to compete in productivity gains? Will a long term linear projection based on the available data base of both China and USA be reliable? Will there be

26 1

China’sIndustrial Revolution and Beyond

other economies out-competing both China and USA? We cannot answer these questions at present. Integration of the continent of Europe into one economic unit as the European Union added ten new members in 2004 to its existing membership of 15, with its competitive shares of world population, world output, and trade, remain to be explored (see Chapter 3). Table 7.1 1: China and USA, 2003 (constant 2000 US$) GDP (billions) China 1,375 United States 10,343 Source: World Development Indicators 2004

GDP per capita 1,067.35 35,566.15

The recent trade disputes between China and USA over petroleum and textiles have received much attention and understandably so. Trade disputes between the USA and Canada and the USA and EU are common occurrences and they take their cases to the World Trade Organization (WTO). Indeed, the WTO, which offers a mechanism for an orderly resolution of international trade disputes, has been a great accomplishment. The record has so far been impressive. Trade disputes are being managed instead of escalating into trade wars. The US-China trade disputes may be viewed in that global context. Of course, there is always a rationale for bilateral negotiations for the resolution of specific trade disputes between any two trading partners (see Chapter 6). It is encouraging to note that the European Union and China have been able to settle their textile dispute by negotiation. The China-US conference on textile disputes held in Beijing in August 2005 unfortunately continued to be in a deadlock. One can reasonably hope that a give and take policy will find the two parties in agreement. The other option will be to refer the dispute to the WTO. The petroleum dispute relates to long-term economic strategy while the textile trade dispute is of short-term consequence. With the industrialization of the traditional economies in Asia and in other continents, global petroleum consumption has been growing at an accelerated rate. The US continues to be the largest economy in the world and has historically been the major consumer of petroleum. Efforts by competing countries to acquire petroleum bases all over the

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world have been increasingly pronounced and the search for oil is indeed a cornerstone of US foreign policy. There is a finite supply of petroleum. As China, India, and other newly industrializing economies in all continents need to add to their petroleum bases, competition has become truly global and the intensity of the global competition is more acute than ever. We have argued that the ideal solution will be the exploration of alternative energy sources and the development of technology for more efficient petroleum use per unit of GDP of a given economy. Historically, Japan’s use of petroleum per unit of GDP has been competitively very small. Could Japan’s experience be a learning model? China may explore energy sources in the far west, particularly desert regions. The textile trade dispute should be relatively easy to resolve. Textile imports from China at its present high rate have had an adverse impact on the domestic textile industry and on cotton farmers. China can voluntarily implement export restrictions (VERs) to ease the situation, while the US may offer compensatory deals. However, the US textile industry must be technologically restructured to enable it to compete with foreign countries engaged in textile products and textile exports to the US. Given the comparative advantage of the US in technology, US textile workers must be given the proper tools to add to their productivity and thus effectively compete against low wage rates in textile exporting countries inclusive of China. In the short term, according to authoritative American sources, imports of products, textiles included, from China and other countries have made some positive economic impacts on the US economy. Consumers have more choices in products and at lower prices. The US public may grumble about imports, but it is undeniable that imports from China have made American consumers better off. The rate of inflation has remained relatively low, allowing the US economy to grow at target rates in the 1990s. Even the current war economy in the US, though facing huge budget deficits and a mounting national debt, can find comfort from the fact that the projected budget deficit for the current 2005 fiscal year has been significantly reduced. This situation is subject to substantive modification following the fiscal burden brought on by Hurricane Katrina in America’s Gulf states and our continued


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commitment to Iraq. The Congressional Budget Office (CBO) estimates that the tax revenue from US corporations has increased as corporate profits have gone up. Much of these increased corporate profits originate from investments by US corporations in foreign countries with relatively low wage rates. Following the American Job Creation Act of 2004, we must take note of the fiscal incentives recently introduced to bring home profits on foreign investments at very low tax rates. US investment in China must be factored into the US budget estimates. For 1992-1998, China’s share of world exports rose from 2.3 percent to 3.4 percent, and FFEs in China increased their share from 0.5 percent to 1.5 percent in all of China’s exports (see Chapter 6). US firms in China of course earned profits from their share of FFE exports. FFE firms have successfully penetrated the Chinese market, especially in the manufacturing sector of transport equipment, electronics and telecommunication equipment, food processing, electrical machinery and equipment textiles, and chemical materials and products. Did foreign firms invest in China’s textile industry? The role of foreign investors in China’s textile trade remains to be further explored. How will it impact the textile trade dispute between China and the USA? We have argued that the Industrial Revolution including the Green Revolution of the agricultural sector must continue to progressively advance technologically. The recent disappointing shuttle experiences of the US space program, certainly the result of advanced science and technology, lends critical support to this proposition. It has been true for every other sector of the US industry, automobile, steel, film, television, computer chips, and bioengineering inclusive of cloning. Foreigners developed competitively superior technology and captured significant shares of US market. The international migration of technology is a historical fact. It came from Europe to America, and now moves to Asia. Revolution is a process that knows no end and its application to an economy must accept the process. This is indeed the challenge for all mature industrialized economies, America included. This will be true for Asia’s newly industrialized economies as technology migration continues to other pre-industrialized economies. Technology is based on knowledge and knowledge is an international commodity.

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8. Selected Issues for China

8.1 Super-power Paradigm Some authors have argued that the American economic relationship with China will result in one-way traffic to US disadvantage. Chinese nationalism and cultural domination of the rest of the world has been feared by some. China will be the leading super-power, militarily as well as economically, in the twenty first century. “A communist economic juggernaut emerges to challenge the West,” writes Richard J. Newman (US News d World Report, June 20, 2005, p. 40). The real issue is an economic awareness of Asia by the West. Asia has been known more for her rich history, religion, philosophy, mysticism, and culinary arts, all made more exotic by limited trade. Europe’s quest for Indian spices must be a familiar history. Japan changed Western misconceptions and came to be recognized as a formidable mature industrialized economy. Japan’s belonging to the map of Asia became a subject of study for the West. Economic awareness of Asia beyond Japan came to be a reality in the 1980s when the trans-Pacific share of the US trade became greater than that of its share of the trans-Atlantic trade for the first time in American history (Dutta 1985). The US in the post-WWII decades dominated the world on both military and economic counts. Imperial powers that had previously sought to assume that role failed one after another. It has been argued that such a super-power paradigm has historically been proven to be unsustainable and my advocacy for the supra-national continental economic regional model has been forcefully stated (see Chapter 3).

8.2 Walls, Walls, and More Walls Against Foreign Businesses Kimberly Silver of the China Business Review (1998) critically wrote about China’s nationalism and China’s determination to limit foreign investment privileges by way of reducing fiscal incentives, cutting the value-added tax rebate for exports from 17 to 9 percent, and imposing various non-tariff barriers. Commodity specific trade restrictions


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limiting market access to foreign brands must be noted. Recent “tariff reductions for imported inputs, streamlined inspection and customs clearances, and State loans” for specific domestic industries have been noted. Reference also has been made to “new tariffs on beer, crude oil, photographic film, and video-cassette recorders (VCRs).” Trade regimes for domestic and foreign firms, as it has been pointed out by some, have been separated by policy measures. A comparative evaluation of the fiscal policy incentives offered by several mature industrialized economies inclusive of the USA, Japan, and the EU, to help specific industries in their respective economies must be in order. A sovereign nation state economy has always retained the right to develop its economic policy as it sees fit. Foreign investors have the privilege and freedom to explore profitable opportunities to trade and invest in their best interest. The market will determine the rules of the game. Will all these divert the inflow of foreign investments from China to other countries? It is feared that the land of the historic Great Wall will erect more and more walls against economic freedom, especially for foreigners. Indeed, foreign banks and institutions have made efforts to invest in China’s financial market (see Chapter 5). Let us argue that with the progress of China‘s Industrial Revolution it is time for foreign investment to move to other economies. Indeed, China is expected to join the ranks of the investors and make investments in other pre-industrialized traditional economies. The progress of industrialization in Asia’s pre-industrialized traditional economies beyond Japan in the past quarter of the century must be a learning model. From 1990 to 2004, China’s economic planners placed a unique emphasis on the manufacturing sector and industrialization was the agenda (see Chapter 4). Foreign investors understood that and provided the capital for massive investments in China to make China‘s industrialization a reality. China and foreign investors have optimized their mutual benefits. In the current post-industrialization period, China has to attend to two specific items and the economic planning will have to conform to that agenda. Firstly, the inter-sectoral imbalance calls for adjustment. China needs to build up its tertiary sector, inclusive of money and financial market, science and education, and transportation network to sustain the economy’s rapid rate of growth. Secondly,

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interregional income disparity remains a critical issue to be addressed. Indeed, it is clear that China has placed its priority on providing a solid basis both in terms of quality and quantity for her money and financial market and rightly so. China has been proactive by way of providing macroeconomic policy incentives to induce foreign and domestic investment in the interior of the country. We have noted earlier that economic news items on China have recently become dominated by reports on inflows of investments by foreign banks and financial institutions into China. The growing list of investors includes Royal Bank of Scotland, Hongkong Shanghai Banking Corporation, Allianz Bank, Bank of America, Merrill Lynch, Goldman Sachs, JP Morgan Chase, Citigroup, and Wells Fargo. Chinese banks including Bank of China, China Construction Bank, Industrial and Commercial Bank of China, and Guangdong Development Bank have been recipients of inflows of foreign funds. Foreign banks have earned stakes in the Chinese banks at varying rates. Reportedly, Royal Bank of Scotland may enter into a partnership with the Bank of China. Foreign bank investments in Chinese banks are very welcome because it adds to the availability of China’s capital funds. It also helps modernize China’s banking administration, risk management, and information technology. China also has developed plans to induce foreign investments in Western regions so that inter-regional income gaps can be narrowed. In August 2005, China’s Foreign Exchange Regulator has approved of trading in the inter-bank foreign exchange forward market by five Chinese and nine foreign banks. The nine foreign banks include Shanghai branches of HSBC Holdings PLC, Standard Chartered PLC, Citibank, Societe Generale SA, Deutsche Bank AG, Credit Suisse First Boston, ING Bank NV, Mizuho Corporate Bank, and the Guangdong branch of Bank of Montreal. Indeed, the process of liberalization is steadily in progress. Critics have warned that continued over-investment in the secondary sector of manufacturing and industrial produce might eventually contribute to inflationary pressures and financial crisis, as we know from the Asian Financial Crisis of 1997-1998. This would hurt both China’s economy and all foreign investors in China. Historically, the Great Wall provided China with a strong military defense strategy, and likewise, the


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economic “walls” against foreign investment, as suggested by critics, may save the Chinese economy from an unforeseen crisis. Proper regulation of the domestic economy is necessary to protect against the international transmission of adverse cyclical events. A country7s monetary policy must be able to insure its economy against “irrational exuberance” from possible inflows of speculative funds from abroad. Management of hedge funds has been a problem for most central banks. Let the PBOC accept its challenge and do what the central bank of China is expected to do for its economy. Recent international conferences and sporting events hosted by China lend support to China’s commitment to openness and universalism. The enthusiasm of the people and government of China in sponsoring the 2008 Olympic Games is hard to miss. Let us add to this a phenomenal increase in tourism. 8.3 China’s Statistics

Some of our fellow economists have taken a second line of attack on China. Can the Chinese statistics be accepted for what they are? Have the Chinese authorities helped inflate the data? True, official statistics of each country are open to revisions. International institutions as well as various national governments engaged in trade and investment with China must be responsible for necessary verification of data before they engage in business with China. What has recently been termed as enronism in the context of the US corporate world where several corporations have been found to have manipulated their financial statements with a goal of keeping stock prices high could not remain a secret for long. Can we really try to “fool all the people all the time?” I have used the data compiled by National Bureau of Statistics of China, the World Bank, the World Trade Organization, Asian Development Bank, the World Factbook, Eurostat, and other international institutions. Most leading scholars on China I have consulted draw upon these sources.

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8.4 Corruption Still others have written extensively about corruption in China and they seem to suggest a collapse of the Chinese economy as a result of rampant corruption. Given the rule that only a person who has not committed any sin will have a visit with the Supreme Being, there will be no candidates for the visit. Tragic is the present state of affairs in so many countries. It is difficult to compile the necessary data and rank all economies by their cost of corruption per unit of output. Based on periodic reports from the media, corruption is no less a problem in mature industrialized economies. Is there a relationship between GDP base and the magnitude of corruption? Of course, China must institute a transparent judicial system with appropriately alert and qualified attorney generals at various levels to safeguard the economy and prosperity of the socialist market economy. A quick suggestion that a multiparty pluralistic form of government replacing China’s one party communist government will be a solution is very much open to debate. Corruption in the pluralistic democratic economies continues to point to the inadequacy and inefficiency of the capitalist market economies. The list of business leaders criminally prosecuted and imprisoned in the USA, recently compiled and published by the news media, is surprisingly long. Will there be a difference in China’s socialist market economy?

8.5 Bad Loans and Banking Crisis China faces a serious banking crisis as bad loans accumulate. Banks in China made loans to certain parties based on extra-economic considerations rather than strictly evaluating the economic merits of the loan. Such situations contributed to the financial crisis in 1997-1998 in several neighboring Asian economies including South Korea and Thailand. China managed to avert the Asian Financial Crisis. The PBOC’s direct control of money supply through the banks which were state controlled might have the difference. China must correct her banking and financial market as promptly as possible. Fortunately, Chinese authorities have taken note of the problem and have been quick to act (BusinessWeek, May 9, 2005, p. 52). In late 2003, the Chinese


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financial authorities allocated US$45 billion to “prop up” Bank of China and China Construction Bank. In 2005, China Construction Bank began a relationship with Morgan Stanley and issued an initial preferential offering for US$ 5 billion in the US market. In April 2005, the Chinese government signed off for US$ 30 billion to bail out Industrial and Commercial Bank of China. China’s central bank, PBOC and the Chinese Finance Ministry have cooperated in developing relevant remedial programs. China’s banking system will expectedly achieve its potential operational capacity by 2007 “when foreigners will have unfettered access into China’s banking industry.” Let us note that for the first time in nearly a decade, the PBOC has raised its interest rate by 0.27 base points to 5.58 percent for its benchmark lending rate to contain the overheating Chinese economy. Marginal variations of the rate of interest in the recent past are noted in related statistics. No economy will ever be totally immune from occasional problems. It is true for China. The Chinese government and monetary authorities are keenly aware of it and they are ready to take proper actions. 9. China and the Rest of the World

In 2005, China and the EU celebrate 30 years of diplomatic relations and 20 years of the Trade and Cooperation Agreement between them. Negotiations are in progress for a new agreement for a more comprehensive strategic partnership between China and the EU. The EU plans to grant China fbll market access. The EU-25 will offer a market of about 30 percent of world GDP, approximately 60 percent of world trade, and a population base of 450 million. Economic cooperation between China and the EU encompassing nearly two billion people is certainly in order. Will China add euro to its currency reserve? Will China buy euro bonds to add to their holdings of over 700 million dollars in US bonds? The Euro-regime has emerged as a competitive segment of the world market and China must elect to act accordingly. The four day visit to India by China’s Premier Wen Jiabao in April 2005 has been responsible for expanded economic relations between the two economies separated by the Himalayas, each with a billion-plus

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population base. Reference has been made to the historic Silk Road between the two countries. In 2004, Sino-Indian trade reached US$ 13.6 billion, up 79 percent from the year before. It is needless to add that the total trade between the two economies of almost 2.5 billion people is far less than what it can be. How does it compare with inflation adjusted figures of the value of Sino-Indian trade on the Silk Road centuries ago? China’s exports to India increased 77 percent to US$ 5.93 billion, while China’s imports from India rose 80 percent to US$ 7.66 billion. China’s exports to India consisted mainly of industrial products and China’s imports from India covered raw materials. The Chinese imports consist of cement, cotton, rice, coal, crude steel, aluminum, copper, wheat, and oil. The potential of economic cooperation between the two economies remain to be explored, and a proposal for a China-India Free Trade Area is currently under review. China’s economic relations with Japan, South Korea, Taiwan, and member countries of the Association of South East Asian Nations (ASEAN) have been noted earlier. My recommendation for an Asian Economic Community has been well received. China is a member of the world economy and is ready to play her constructive role in the global economy (see Chapter 6). Indeed, since 1998, China, Japan, and Korea, and the five original members of the Association of South East Asian Nations (ASEAN), Singapore, Thailand, Malaysia, the Philippines, and Indonesia, have been engaged in frequent meetings toward developing monetary and fiscal policy cooperation toward promoting trade and investment amongst themselves. This 3 plus 5 model of Asian economic cooperation expanded in 2003 to include India and five new ASEAN members, Myanmar, Laos, Cambodia, Vietnam, and Brunei Darussalam.

10. Concluding Remarks

I will not venture to make any concluding remarks. The events in China are in continuous progress and what we know about China is much less than what we should know. The rest of the world will continue to marvel at the progress of China’s Industrial Revolution and Economic Presence. Revolution is a continuous process and the dynamism of China’s economic progress has to continue. Change is the only constant, as the


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saying goes. Kornai’s treatise on anti-equilibrium has a message for all students of economics (Kornai 1971). Economists, with their complex and elaborate mathematical models, have struggled to locate the global equilibrium and in general have settled for a local equilibrium. A review of simulation exercises points to the similar result. What lies ahead of China is a question that remains to be answered in the years to come.


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INDEX

Adaptive Innovation, 25, 59, 124, 150 Africa, 149,214-217, Agricultural Bank of China (ABC), 183,184,186,202,203 American Job Creation Act of 2004,263 Asia Pacific Economic Cooperation (APEC), xx, 50,77,78 Asian Continental Economic Regionalization, xx, xxi, 71,72, 77,95, 100 Asian Economic Community, Cooperation, Summit, xiv, xx, 49, 50, 65, 67,69, 72, 84, 87, 101, 104,270 3 + 5 and 4 + 10 Models, xiv, 49, 50, 69, 72, 88, 97, 122,270 EU Learning Model, xx, 17,49,51, 67,68, 75, 77, 79, 84, 87, 101 Asian Development Bank (ADB), ix, 15,57,58,63,89, 109,267 Asian Financial Crisis, 4, 16, 32, 36, 57, 66, 73, 188, 266, 268 Association of South East Asian Nations (ASEAN), xxiv, xxxi, xxxii, 32,34, 35, 69,72,88, 89,98, 102-104, 111, 112, 120, 121, 124, 131, 133, 149, 153-155,220,221,270 Australia, 38,69, 78, 99, 104, 142, 149, 193, 194, 200, 207, 208, 210, 216, 217, 220,234,235 Bad Loans and Banking Crisis, xxii, 203,233,267,268 Bank of China (BOC), 183-186,202,204,266,269 Beijing, 4, 11,37,44, 143, 152, 153, 183,201,205,235-252,260,262 Bowden, R, 78 Bradsher, K, 4, 5 Brazil, 207,209,216,217,234,235,253 Breton Woods, 17, 73 Businessweek, 212,259,268 Canada,xiv, 32, 64, 78, 133, 149, 193, 194,207-210,216,217,220,221, 234-236,252,253,260,261

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282

M Dutta

Cao, H, vii, 18 Chang, PK, vii, xi, 18, 39 China and the Rest of the World, xiii, xxii, 1, 9, 32, 35, 55, 60, 69, 125, 151, 180,233,258,264,269,270 China Ministry of Commerce, 34 China Ministry of Foreign Trade and Economic Cooperation (MOFTEC), 129, 130, 137-139 China Statistical Yearbook, 34, 129-131, 133, 135-137, 139, 142-146, 149, 152, 157-159, 161-167, 169, 170, 172-179, 184, 187, 189-191, 194, 195, 206, 214,216,219,231,238-249,258 China’s Economic Presence, xii, xiii, xix, xxvii, 53, 60, 64, 71, 147, 151, 214, 215,270 China’s Foreign Trade, xxi, xxvi-xxviii, xxxii, 146, 148, 149, 182, 190, 194, 214,217-219,231,237,239 Fully Foreign Funded Enterprises (FFEs), 127-129, 142, 147, 160, 161, 171-173, 177,218,219,231 Merchandise Trade, xxvii, xxviii, 2 13,223 Trade by Commodity Group, xxvii, xxviii, 213,222,223,225,226,264 Trade Partners, xii, xiv, xxii, xxvii, xxviii, 72, 148,214-222,230,260 Trade with USA, 22 1, 227,228,260,26 1 China’s Industrial Revolution, xii, xv, xix, xxii, 1, 16, 25, 26, 44, 51, 53, 125, 130, 134, 137, 143, 146, 151, 153, 180-182,208,233,252,263,265,270 China’s Interregional Economic Gaps, xv, xxii, 233,236,237,251 Income Distribution, 44,251,252,266 Gini Coefficient, xv, xxii, xxix, 233,252,253 Westward Movement, 237,250,251 China’s Key Economic Indicators, xxiv, 60, 145 China’s Money and Financial Market, xiv, xxii, 62, 126, 139, 146, 181-183, 186, 190, 191, 193,201,203,205-208,265,266,268 China’s Expenditure on Education, Health, Technology, and Science, xxiii, xxiv, 9,48,254,255 China’s Statistics, xxii, 267 Chongqing Municipality, 152,236-250 Chow, G, viii, 18,69 Comparison: China, India, USA, Japan, xv, xxii, 192,233,253,255 Construction Bank of China (CBC), 183-186,204,208,266,269 Consumer Credit Market, xxi, 205,206 Coppel, J, 87

Zndex

283

Corruption, xxii, 54,233,268 Cuba, xiii, 14, 50,216, 217 Durand, M, 87 Dutta, M, 4, 18, 25, 29, 34, 39, 43, 48-50, 57-61, 63, 64, 66-69, 71, 74, 75, 78, 79, 82,84, 86, 124, 125, 182, 183,211,264 Economic Policy Gap, 6, 16 Macroeconomic Agenda, xix, xx, 16, 17,38,39, 75,79, 87 Macroeconomic Policy, 5,6, 16,32, 54,237,251,252,266 Employment Growth, xxiii, 6-8,27,28, 161, 162 Employment Profile, xxi, 19, 155-157, 161,239 Energy Gap, 5, 11 Electricity, Production and Sources, xiii, xxiii, 12-14, 137, 138, 157, 158, 160-162, 166, 168-170 Enronism, 54,65,267 Enterprise Responsibility System, 23,56, 123 Environmental Gap, 5, 14 Euro, xx, 46,67,74,75,86,96, 121,210,211,269 European Union (EU), xx, xxiv, xxxii, 17, 32, 34, 43, 46, 48-51, 67-69, 71, 72, 74-89, 93-104, 117, 118, 121, 131, 133, 148, 149, 153-155, 184, 207, 210, 216,220-222,228,234-236,252,253,259,261,265,269,274 Eurostat, 267 Exchange Rate, xix-xxi, 44-46,54,67,86,87,209,210,212 Euro-US Dollar, xx, 86, 87, 96,211 Yuan-US Dollar, 54,202,210-212 Family Responsibility System, 18,23, 56, 137 Fixed Assets, xxi, xxv, xxvi, xxvii, xxxii, 145, 152, 153, 171-178 Capital Construction and Innovation, xxi, xxvii, xxxii, 25, 53, 124, 171, 172, 174, 175, 177-180, 185 Foreign Banks and Financial Institutions, xxi, 180, 183, 201-203, 205, 208, 265, 266 Foreign Direct Investment (FDI), xix, xxi, xxiii, xxv, xxxi, xxxii, 15, 24-30, 32, 34, 35, 53, 57, 59, 61, 62, 65, 123, 125-131, 133-140, 145, 146, 150-153, 157, 161,212,251 Wholly Foreign Owned Enterprises, 65, 181

284

M. Dutta

Industrial and Manufacturing, xiv, xxi, 24,25, 65, 127, 133, 135, 139, 140, 146,147,160-170 Phase 3, xiv, 123, 126, 128-131, 137, 157, 163, 188 Foreign Exchange Reserves, xiii, xiv, xxiii, xxvii, xxxii, 14, 31, 44-46, 53, 178, 189-191,217,269 Forrestal, RP,43 Globalism and Regionalism, xx, 72, 96 Great Leap Forward, xxi, 129, 147 Grimes, A, 78 Growth Model, xxii, 25, 60, 147,220,221 Export-Import Led, xxii, 60,96,147,220,221 Import-Export Led, xiv, 60,147 Harding, H, 69 Holmes, F, 78 Hong Kong, xxiv, 6, 32, 34, 35, 37, 48, 57, 59, 61, 63, 68, 78, 89-93, 98, 102, 105, 107-110, 118, 119, 124, 131, 133, 142, 148, 149, 153, 160, 171-174, 185, 188, 193,203,207,208,215,220-222,236,237 Hooley, R, viii, 18 Human Capital Stock, xiii, 5 , 6, 8, 14, 17,25, 26, 38,47, 53, 123, 134, 139, 140, 146,250,251 Education, xiii, xv, xxii-xxiv, 6, 8, 9, 17,26,38,47, 53, 63,65, 139, 146, 157,258,259,265 Health Care, xiii, xv, xxii-xxiv, 8, 9, 17,26,38,47, 53,63, 65,233, 253,254,259 Science & Technology, xv, xxii, xxiii, 9, 123,233,258,259,263,265 India, xii, xiii, xv, xxii, 14, 39, 49, 69, 72, 76, 78, 84, 88, 90-92, 103, 105-108, 113, 121, 192-194,207-209,215,217,233-235,252-258,262,269,270 Industrial and Commercial Bank of China (ICBC), 183-186,202,266,269 Industrialization and Internationalization,xx, 17, 56 Insurance Industry, xiv, xxvii, 62, 63, 140, 157, 159-162, 167-170, 181, 182, 195,206-208 International Monetary Fund (IMF), 17,46,50,72,73,211,212 Issing, 0 , 4 2 , 62,64, 75,79, 82-84, 88,89

Index

285

Japan, xv, xxii, xxiv, xxxi, 32, 34, 36, 38,49, 53, 57, 61, 63, 64, 68, 69, 71, 72, 78, 80-85, 88-92, 94, 98, 101-110, 112, 114-116, 118, 119, 121, 123, 124, 131, 133, 137, 142, 148, 149, 192-194, 207-210, 215, 220-222, 228, 230, 233-236,252-259,264,265,270 Jefferson, GH, viii, 18 Jobless Growth, 54 Joint Venture Securities Companies, xxi, 204 Kazakhstan, 215,216 Klein, LR, vi, 25, 39,43,46,60 Korea, Republic of, xxiv, 32, 34, 36,49,61,63,68, 69, 72, 88, 89,98, 102, 105110, 118, 119, 123, 124, 148, 149, 153, 200, 207-210, 215, 220-222, 234236,252,253,268,270 Kornai, J, 27 1 Lardy, NR, viii, 18,227 Latin America, xiii, 14, 73, 149,214,216,217 Letiche, JM,43,79, 122 Li, J, vii, 252 Liang, Y, 18 Lin, SK, vii, 18, 39 Liu, G, vii, 252 Market Gap, 5, 14 Mature Industrialized Economies (MIEs), xv, xxviii, 6, 7, 14, 19, 24, 29, 30, 32, 35-38, 53, 55, 57, 58, 60, 62-67, 71, 94, 123, 124, 127, 141, 162, 165, 174, 192,207,208,226,233-236,259,263-265,268 Mazzucelli, C, 79 Merva, M, viii, 18,29 Mexico, 207,209,216,217,221,234-236,253,260 Monnet, J, 79 Mundell, RA, 46,75 New Zealand, 38,69,78,99, 104, 142,207,216,217,234-236,253 North America, 32,34,73, 133,214,216,217 Oanda, 21 1 Okita, S, 72

286

M. Dutta

Organization for Economic Cooperation and Development (OECD), 85, 126, 130, 145, 147 Outsourcing, 54 People’s Bank of China (PBOC), xi, xix, xxi, 5 , 16,40,41,43,44,66, 142, 182186,190,191,201,205,210,267,269 Restructuring, xix, 5 , 16,40 Perkins, D, vii, 18, 69 Pound Sterling, 210,2 1 1 Productivity Analysis, xxi, 145, 146, 162 Rate of Growth of GDP, Accelerated, Sustainable, xiii, xix, 4, 5 , 11, 16,37, 38, 61,63, 71, 124, 140,146,192,203,239,265 Average Annual, xii, xxiii, 1,4, 5 , 11,43,51, 57, 140,251,260 Real Estate Boom, xxi, 140, 142 Resource Gap, 5 , 9 Land Resource, xxiii, 11, 12, 145,237 Rostow, W, 123 Russia, xiii, 46, 78, 207,209,210,215-217,220,221,234-236,252,253 Schroeder, J, 79, 81, 82, 85 Sectoral Shares of GDP, xxiii, xxiv, xxviii, xxxi, 15, 18-23, 56, 58, 63, 88-98, 181,206,207,233-236 Service Sector Gap, 5 , 15 Intersectoral Imbalance, xiii, 15,206,208,234,265 Shanghai, xxvii, 35, 37, 63, 127, 143, 152, 153, 191, 201-203, 205, 236-250, 259 Shanghai Daily, 4 Socialist Market Economy, xv, xix-xxi, 5 , 16,24,27, 39, 51, 55, 57, 65, 66, 124, 125,157,161,163, 164,180,182,250,268 Special Economic Zones (SEZs), xxi, 125-127, 145,201 Economic and Technical Development Zones, 127, 128 Stiglitz, JE, 50, 74 Stock Exchanges, xxvii, 191-194, 196-200 Structural Change, xxi, 86, 123, 124, 165,226 South Africa, 50,207,215,217,234-236,253 Super-power Paradigm, xxii, 233,264

Index

287

Taiwan, xxiv, 32-35, 37, 57, 59, 61, 63, 64, 68, 72, 78, 89, 94, 98, 101, 102, 105-110, 118, 119, 123, 124, 133, 142, 148, 149, 153, 160, 171-174, 177, 200,207-209,211,215,220-222,234-237,252,253,270 Tantum, D, viii, 24, 59, 124, 125 Tertiary Sector, xiii, xiv, xxi, xxv, 134, 135, 137, 138, 140, 141, 143, 146, 156158, 181,206-208,233-236,241,259,265 Transport, Post & Telecommunication, xxi, xxv, 118, 119, 136, 143, 144, 147, 157-165, 167-170,222,256,257 Time Magazine, 144,230 Tsao, JTH, viii, 18 Uniformity of Industrialization, xxi, 88 United Kingdom (UK), xiv, 36, 38, 64, 67, 68, 71, 74, 80-82, 87, 94, 96-98, 100, 105-108, 117, 118, 133, 193, 194, 201, 202, 209, 210, 215, 217, 234-236, 252,253 United Nations Organization (UN), ix, 17, 50,72, 73,237 United States of America (USA), xii, xiv, xv, xx, xxii-xxiv, xxviii, xxix, 7, 9, 14, 28, 32, 36-38,40,44,47, 50, 53-55, 58,63-66, 68,71, 73, 76-78, 80-86, 88, 89,97-108, 115, 116, 121, 123, 124, 131, 133, 137, 148, 149, 153-155, 184, 185, 192-194, 200, 203, 206-212, 216, 217, 220-222, 224-230, 233-237, 252-265,266,268 United States Department of Commerce, 225-227 Unity in Diversity, xx, 49,74, 79, 87 US International Trade Commission, 225,226 US-China Trade, 221,227,228,260,261 US Census Bureau, 237 US Dollar, xx, 45,46, 54, 86, 96,202,210,211 United States State Department, 180,259,260 Village Level Industries, xxii, 56, 156, 157, 164, 180,233,258 Visco, I, 87 Walls, xv, xxii, 233,264,265,267 Wei, W, viii, 32, 60, 61 Weimer, C, viii, 18 WorldRank, ix, 1, 9, 17, 23, 37, 38, 44-47, 50, 61, 64, 72, 73, 85, 99, 101-104, 108, 181,209,267 World Factbook, 81, 82,207,234,235,253,267

288

M Dutta

World Trade Organization (WTO), 17, 53, 63-65, 67, 72-74, 83, 84, 147, 201, 204,208,213,217,221-223,228,261,267 Wu, J, 18 Yen, 210,211 Yoo, JH, 18 Yuan (RMB), xxi, 54, 150, 168, 190,201,202,205,210-212 Zhang, Y, 18 Zhang, Z, vii, 18

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