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School of Economics, Renmin University of China

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1 School of Economics, Renmin University of China
Pursuing keeping the Balance between the Industrial Policy and the Market Mechanism: China’s experiences YU Tongshen School of Economics, Renmin University of China Oct, 2010 Addis Ababa, Ethiopia

2 The Industrial Policy plan of a nation, sometimes shortened IP, “denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio”. These interventionist measures comprise "policies that stimulate specific activities and promote structural change"

3 The roles or functions of IP are as follows:
One of the measures to tackle the Market failure and help to allocate the resources more efficiently To protect the infant industries of LDCs To iron flat the economic cycle To help the LDCs to catch up by exploiting the advantages of late comers

4 Two examples of application of Industrial Policies in China’s economic development:
One is an example in agriculture sector, and another is in foreign trade and manufacturing sector.

5 Application the IP, Example 1:
Household responsibility system and price reform in agriculture products take the agriculture as the first priority and reform at the beginning of the China’s reform and opening-up The IP essentially is no more than to select a sector as the priority in order to promote the development of the sector.

6 And China had taken the agriculture as the sector most urgently needed to be developed at the outset of the reform, because the agriculture is the foundation of the economy. There was very good reason that China’s reform and opening up started with agricultural sector.

7 What was the economic situation of China’s economy before the reform?
China used to be a subsistence economy in which production is mainly for personal consumption and the standard of living yields no more than the basic necessities of life.

By the late 1970s (before the reform), the Chinese economic system was characterised by public ownership of industry, collectivised agriculture, centralised planning of resources allocation, the use of administrative prices, a centralised and passive banking system, state monopoly over foreign trade and commerce, and a strictly regulated system of labour employment and welfare provision.

9 Poverty and Human Development in China before the Reform
Country and Country Group GNP per Person (dollars) Annual Population Growth Rate (percentage) Adult Literacy(percentage) Net Primary School Enrollment (percentage) Life Expectancy at Birth (years) 1979 1976 1975 or 1977 1950a China 260 1.9 66b 93b [36] 64 Sri Lanca 230 1.7 85 62 [55] 66 India 190 2.1 36 [38] 52 Indonesia 370 2.3 [35] 53 Low-income countries 210 39 56 [37] 51 Middle-income countries 1420 2.4 72 71 [48] 61 Industrial countries 9440 0.7 99 94 67 74 Source: World Bank Development Report, 1981, p.101 aMost 1950 data are estemated. b1979

10 After the late of 1970s, significant and remarkable reform and opening up waves took place in the territory of China. Since the setup of reform and opening up, China has gradually entered into an era of marketization and integration into the world market. And the process seems is no more than a process of industrialization and urbanization, as the other developing countries do. But for China, the process seems to have one more meaning: it was a process from a centrally-planned economy to a market economy and from subsistence agricultural economy to an industrialized economy

11 The 1978-79 agricultural reform in Anhui under Wan Li.
First, spontaneously, the emergence of team and household responsibility systems in the poorest regions. Then, under the auspices of the provincial authorities, these systems were put into experiments in several counties – covering 15% of all the brigades in the province within three months.

12 In , the systems were progressively applied by the central leadership nationwide. By the year of 1979, 75% of all the brigades in the country adopted some forms of team responsibility system. The application of the household responsibility system was more controversial, and met with more resistance by local authorities, but, by the early 1983, 95% of all the brigades in the country adopted the system. The new system gave more incentives to encourage peasants to produce more agricultural products.

13 The concrete policy measures adopted by the government also include:
increase procurement prices for grain, cotton and some other key agricultural produces. In subsequent practice, the agricultural price index increased by 20% in 1979 and 7% in 1980 tax exemptions for rural communes and brigades in the meantime. gradually ended the food subsidiary system to the urban citizens, and finally abolish it.

14 The reform in agricultural sectors achieved great achievements
The reform in agricultural sectors achieved great achievements. In five years (from 1979 to 1984), the output in agriculture sector doubled. The progress made in agriculture laid a solid foundation for the further development in other industrial sectors.

15 Application of IP, Example 2:
Manufacturing industries and special economic zones The pre-reform nexus of foreign trade and economic development can be characterised as proceeding along a path of import substitution. Foreign trade focused on importing foreign technology (and key industrial inputs that China was unable to produce), with exports being driven by the need to serve such imports The principle of comparative advantage – indeed, the notion of taking part in the international division of labour – did not play a role in this nexus.

16 The trade regime had the advantage of making possible (via concentrated uses of foreign exchange earnings) the development of prioritised industries – but only at the cost of sacrificing possible gains from trade as predicted by the principle of comparative advantage.

17 In order to take the comparative advantages of the economy, in China’s case, it’s rich labour forces, China’s government decided to take part in the international division of labour. Since the late 1970s, China’s government adopted an export-oriented policy to encourage the development of labour-intensive manufacturing sectors and lift the overall productivity of the economy. Concrete measures to promote the development of the export industries include:

18 reforms in exchange rate, the pricing regime and quantitative restrictions in order to make the export-oriented sectors becoming more competitive. Until 1994, the evolution of the exchange rate was a process of gradual devaluation of the RMB (official rate) towards the market rates. The convergence of the official exchange rate to the market rate was achieved through a dual-track approach.

19 Tariffs and import quotas, which had been used very often as the policy tools to protect the domestic industries under the import substitution policy, have gradually withered along with the process of progressive liberalisation and the commitment to WTO entry.

20 Average tariff rates (sources: press reports):
Before Dec-92 Dec-92 Dec-93 Jan-94 1995 Apr-96 Oct-97 2001 2002 Jan-03 2005 (WTO commitment) Rate after reduction 43.10% 39.90% 36.40% 35.90% 35.30% 23.00% 17.00% 15.30% 12.00% 11.00% 10.00%

21 Above all, to solicit the FDI and foster the benign investment climate, China’s government established a variety of special economic zones and Development Zones. Special Economic Zones (SEZs) are areas designated by the Chinese government as having first priority for economic development through the use of foreign investments.

22 The earliest four SEZs are Shenzhen, , Zhuhai, Shantou and Xiamen (Amoy) Special Economic Zones set up in 1980. Coastal Open Cities-COCs There were 14 COCs in China. China's government decided in April 1984 to further open up to the foreign investments, so 14 coastal cities had been selected due to their strategic location. Export-oriented processing zones, sometimes are called Economic Trading Development Zones, have been set up within the COCs.

23 These ETDZs have greater economic autonomy and discretion with respect to solicitation of foreign investments. Export-oriented processing zones in China have become a bridge connecting domestic and overseas markets.

24 Sustained rapid expansion in foreign trade and in manufacturing industries is a phenomenal development in China over the reform era, and judging from export-GDP ratio alone, China could be said to be more ‘open’ than most other big countries in the world, including Japan and the US. In contrast to the pre-reform era, foreign trade has become crucially important in determining China’s path of overall economic development.

25 Leading to Strong Buildup of FX Reserves (Millions)
*The figure of 2006 is that of June of the year and currently the figure for 2010 is about US $2.4 trillion.

26 The Working Logic of DZs
The story of the birth of the Bangladesh garment industry illustrates the principles involved in attracting foreign investment, and how valuable the participation of foreign capital in the process of economic development in developing countries. It also indicates the reasons we shall establish various zones.

27 First of all, the foreign investment in this case played a role of knowledge transmission, simply because the knowledge leaks (spill over). That is also the main reason we need the reform and opening up policy. The knowledge include: technologies of production advanced management way to do business some skills and some know-how

28 Secondly, the knowledge matches
If capitals ( knowledge ) can freely move to wherever they want, they will tend to move to the place where they can match with lots of other capitals ( knowledge). . Knowledge leaks, but only to the location where it is well prepared, that is, where there is much qualified human capital, where there is sound infrastructures, where there is much existing knowledge, where there is sound regulations, legal systems, healthy environment etc., because the return to new knowledge depends on how much there already is.

29 1. under the rigid, underdeveloped system, little foreign investment could be lured to get into the country. 2. to maximize the productivity of the foreign capital, the host country usually has to provide the corresponding required capital to match the foreign investment. 3. The sound infrastructure, in particular, required great amount of investment. But at that time, China only had limited resources to meet the requirements. The only choice for China is to put the limited resources into selected area in order to build up required investment climate. That is to set up the special economic zones.

30 Based on the principle of being practical and realistic, the Chinese government decided to adopt a gradualist policy in attracting foreign investments with emphases on those areas, where there are more advantages to attract foreign investment. In the August 1980, Chinese government designated Shenzhen, Shekou, Shantou and Xiamen as the pilot reform areas, called the special economic zones (SEZs).

31 In April 1984, to further open up to the foreign investments, so 14 coastal cities had been selected due to their strategic location as the Coastal Open Cities (COCs). In February 1985, China's government designated 51 cities and counties in the Pearl River Delta, Yangtze River Delta and Minnan Delta as Coastal Economic Open Areas (CEOAs) In the April of 1990, the Chinese government made a strategic decision to open and establish the Shanghai Pudong New District as a new Economic and Technological Development Zone.

32 In 1988, the first high-tech development zone was established in Beijing (Zhongguancun High-tech Development Zone). After that, in 1992, 51 HTDZz have been approved by State Council. Altogether, there are 52 HTDZs in China. By the end of 2000, an all round, multiple level, new opening-up framework but with some priorities has been set up.

33 Therefore, the aim of all zones is to provide preferential policies to certain areas with tax holidays, customs duties exemptions, preferential tax rates, and lower corporate taxes as special incentives to encourage foreign investment. On the other hand, the purpose of these zones is to bring new technology, management & marketing know-how, the development of a skilled labor force and foreign exchange to developing countries.

34 The Achievements of China's Development Zones and Experiences and lessons from the practice
First of all, the development zones have attracted great amount of FDI to invest in the zones. There is research work indicating that the status of the Economic and Technological Development Zone (ETDZ) are important determinants in the decision of investment.

35 Almost half of all foreign investment in China now has been invested in the economic zones. The industrial production in all economic zones has grown faster than the rest of China. Secondly, The DZs have become the strong booster of foreign trade. Thirdly, the economic development zones in China have become the main source of the economic growth. Fourthly, the development of various DZs put spurs on the local economic development.

36 Experiences the institutional arrangements are more important than the physical capital or technology itself. 2. It's very critical for a development zone to build up a favorable small climate for the foreign investment. 3. development zone should keep in mind that import know-how along with the assembly line

37 Lessons 1. The development gap between coastal area and western area has been widened 2. How to develop the innovation capacities of China's enterprises in the development zones remains a serious problem. 3. In the process of establishment of various DZs, too much resources has been put into them. To some extent, the market-oriented reform has been negatively influenced. 4. At the time, there still is something to do to conform the practice of establishment of the DZs to the provisions of WTO

38 Thank you for your attention!



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