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Strategies for Upgrading the Competitiveness of the Emerging Power

Dec 14,2015

By Long Guoqiang

Research Report Vol.17 No.6, 2015

I. Introduction

Over the past three decades, China has implemented the basic national policy of opening-up. It took the right and proper measures, gave full play to its comparative advantages, and firmly utilized great opportunities brought by economic globalization. As a result, China is one of the countries that gain much in economic globalization. In global trade system, China, previously a closed country with small-sized economy and trade featuring producing primary products, has expanded its trade scale with labor-intensive products competing in the international market. Up to now, China is the largest trader of goods and the second largest trader of service in the world. In the global investment system, China was the world’s largest recipient of foreign direct investment and the third largest investor overseas in 2014. Besides, it becomes increasingly important in the global monetary system. Starting from October 2016, China’s currency, Renminbi (RMB), will be included in the Special Drawing Rights (SDR) basket of the International Monetary Fund.

The basic purpose of opening to the outside world is to make overall plans covering both situations at home and abroad, make full use of domestic and international markets and resources, so as to serve China’s development. Three key factors are considered when formulating the strategy of opening-up. First, the opening-up policy should meet the requirements of the overall strategy for national development. The second factor is concerned with the opportunities and challenges in the international environment. The third one lies in a nation’s foreign economic relations, especially its comparative advantage. This is what the author calls the ternary model of opening-up strategy.

A catching-up economy has to go through different stages of development from pre-industrial to post-industrial stage. And during the process, its competitive advantages in the global division of labor will experience radical changes. In the early stage of industrialization, a country’s resource endowment greatly influences its position in the international division of labor. With further development, however, acquired factors, compared with competitive advantages, become more significant, like human resources, technology, industrial base, infrastructure, system, enterprise competitiveness, the implementation of government strategy and policy etc., among which the last one plays an important role. As a country enters other stages of development, the previous proper development strategies may cease to be effective or even have negative effects, should the country fails to adjust its strategies flexibly. Therefore, it is necessary to adjust the opening-up strategy with the times, guided by theories of dynamic comparative advantages.

At present, the Chinese economy has entered the New Normal, where the goal and impetus of economic development are changing and the new development strategy guided by “Five Development Concepts”(innovated, coordinated, green, open, sharing) raises new requirements for opening up so that the medium-high rate of economic growth can be achieved and industries can become medium-high end. China’s opening up is facing three circumstances concurrently. First, the world economy is recovering after the financial crisis. Second, global economic governance is being reformed and new economic trade rules are being formulated. Third, China’s foreign economic relations, especially its comparative advantages, are being changed. As the changing international trade environment brings new opportunities and challenges, the connotation of strategic opportunity period has changed. Based on the ternary model, China needs to make big adjustments to its opening-up strategy during the new period. The paper will provide in-depth analysis of the external conditions and internal factors impacting China’s future opening-up strategy. It will also discuss and propose new strategies.

II. New Requirements for the Opening-Up Strategy Set by the New Normal

A proper opening-up strategy is vital for a country to gain benefits and avoid risks in the process of globalization. Opening up to the outside world can exertmultiple positive effects on economic growth, which hinges on the number, quality and efficiency of allocating production factors. In the modern market economy, production factors include not only traditional labor, capital and land, but also technology, information, management, and system, etc. Opening up to the outside world can exercise both positive and negative impacts on a country’s economic growth. The first positive impact is increasing the number of production factors, such as introducing capital, technology, management, and resources in need. The second positive impact is improving the quality of production factors, like introducing talent, improving management and technology, etc. The third positive impact is increasing the efficiency of allocating production factors, like introducing resources and production factors in need, removing the disadvantages in production; or changing the proportion of production factors by transferring labor from agricultural sectors with low efficiency to efficient industrial and service sectors, so that labor productivity will increase exponentially (i.e. Kuznets Effect); or raising the efficiency of resource allocation through international division of labor and competition. There are also negative impacts. First, production factors may be reduced, such as brain drain and capital outflow, and the capital outflow caused by trade deficit. Besides, the quality of production factors is likely to be lowered, like the outflow of high-caliber personnel. Moreover, the efficiency of resource allocation may be affected, such as adverse trade terms, and deteriorating industrial structure induced by international competition, etc. Fourth, ill management leads to economic risks, which may interrupt the process of industrialization. In the era of economic globalization, therefore, China will lag behind and be vulnerable to attacks if it closes doors. In addition, improper opening-up strategies could hurt the economy before offering benefits.

After the Second World War, with different theories of foreign economic relations, economies adopted different development strategies and obtained different results. Latin American countries adopted the strategy of import substitution, highly protecting the domestic market to win market share for internationally-incompetent industries at home. In history, both the United States and Germany have adopted the strategy of protecting home infant industries during certain periods, having achieved good results. However, if there is too much protection or protection for too long, domestic industries will lose dynamism to strengthen international competitiveness. Latin American countries underwent rapid industrialization in the early stage of import substitution. But since the 1970s, most of them experienced financial currency crisis, social unrest and “middle-income trap”. At the same time, economies in East Asia like Japan, Singapore, South Korea, China’s Taiwan, and Hong Kong have taken the “export-oriented” strategy, which has improved their international competitiveness, prevented them from “middle-income trap”, and succeeded in catching up with other advanced countries.

Subject to China’s national development strategy, the opening-up strategy must comply with and serve the former. Over the past 30 years, the most important objective and task of the development strategy is to rapidly advance industrialization. Hollis Chenery’s two-gap model suggests the lack of capital and foreign exchange must be addressed in order to promote industrialization. Since reform and opening-up, China has learned from other nations and implemented the export-oriented and import-substitution strategies. Specifically, it carries out the export-oriented strategy in labor-intensive industries with comparative advantages, and the strategy of import substitution in capital and technology-intensive industries without comparative advantages. China has grasped opportunities brought by transferring labor-intensive export processing industry overseas, and taken processing trade policies. By introducing foreign investment and encouraging exports, China has developed labor-intensive processing export industries highly competitive in the international market, which has successfully solved the shortage of foreign exchange that impedes industrialization, and vigorously promoted the industrialization of China.

China has entered the New Normal, a new stage for China’s economic development. Compared with the past, there are three fundamental changes. First, the economic growth rate has changed from high-speed to medium-high speed. Second, the economic structure has been upgraded to the medium-high end. Third, the driving force for economic development has been transformed from the number of production factors to innovation and the resulting optimized structure.

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