Centros Públicos. Red de centros

Several aspects of this process are illustrated in Figure 1-5, which depicts the volume of imports, exports, FDI inflows and foreign currency reserve from 1978 to 2003. China has emerged as the fourth largest trading nation, with a total trade volume of US$ 851 billion in 2003. China has also become one of the most popular investment destinations in the world. Since 2002, it has become the largest recipient of FDI in the world. China has

33 For surveys of the classic static arguments and several dynamic arguments for free trade see e.g. Helpman and Krugman (1985) or Grossman and Helpman (1991). For empirical studies on the effect of openness on economic performance see e.g. Sachs and Warner (1995) and Edwards (1993).

attracted FDI inflows of over US$ 500 billion. Since 1994, China has consecutively run surpluses in both current and capital accounts, which led to a surge of foreign currency reserve, the amount of which reached US$ 448 billion³⁴ at the end of 2003 – the second largest in the world only behind Japan.

Figure 1-5 Increasing openness of the Chinese economy during the reform period

0 50 100 150 200 250 300 350 400 450 500

1978 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Amount (US$ billion)

Exports Imports FDI inflows Foreign currency reserve

Source: Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

According to the WTO, China has become the fourth largest merchandise exporter of the world, only behind the United States, Germany and Japan. Merchandise exports contributed significantly to China’s economic growth in the 1980s and 1990s (Yu, 1998).

China rapidly strengthened its export competitiveness³⁵ in global markets: the share of China’s exports in the total volume of the world increased from one percent in 1985 to over six percent in 2000 (UNCTAD, 2002). The structure of China’s exports also substantially changed: in 1985, exports of primary products and resource-based manufactures represented 49 percent of all exports; in 2000 their percentage receded to 12 percent and that of non-resource-based manufactures jumped to 87 percent. The percentage of high-technology products in China’s exports jumped from 3 percent in 1985 to 22 percent in 2000. However, the level and trend of export pattern during the reform period can be explained by relative comparative advantages and the effect of exchange rate was

34 The amount of foreign currency reserve as to the end of 2003 was announced to be US$ 403 billion by Chinese government. However, this figure would be US$ 448 billion if taking account of the amount of US$ 45 billion that was injected into the state-owned banking sector.

35 Export competitiveness has many aspects, the most obvious implying higher exports, but it also means diversifying the export basket, sustaining higher rate of export growth, and upgrading the high-value-added content of export activity.

significant in the 1990s (Yue and Hua, 2002). Behind the export boom in the 1990s was the role of inward FDI.³⁶ In 1988, foreign affiliates accounted for less than 9 percent of exports; in 2003, their percentage jumped up to 54.8 percent. Multinational Corporations (MNCs) played a leading role in the particularly remarkable export dynamism in high-technology industries. The percentage of exports by foreign affiliates in high-technology industries rose from 59 percent in 1996 to 81 percent in 2000. Throughout much of the 1990s, China accounted for almost half of FDI inflows to developing countries and was the second largest recipient of FDI inflows in the world, after the United States. It was generally anticipated that the WTO entry would further increase China’s FDI inflows. Indeed, in the first year after its WTO entry, China surpassed the United States to become the world’s biggest recipient of FDI with over US$ 52 billion in FDI inflows in 2002. FDI inflows to China further increased to US$ 55 billion in 2003.³⁷

Most studies on economic openness draw attention to trade policies. Theoretical growth literature has given more attention to the relationship between trade policies and growth rather than to the relationship between trade volumes and growth (Yanikkaya, 2003).

Researchers have used a number of factors such as trade flows, trade restrictions, or price distortions to measures trade openness. Sachs and Warner (1995), for instance, provided a widely used indicator, based on the classification of the trade regime of a country. However, there is still no agreement on the best measure of openness on a cross-country basis.³⁸ In order to provide an internationally comparative yardstick of the openness of the Chinese economy, we developed a simplified method³⁹ to measure inward and outward economic openness on a cross-country basis. To have a more comprehensive understanding, we measured economic openness with respect to both trade and FDI. The method is applied to the largest 50 economies in the world (in terms of GDP) in 2001, to illustrate the comparative degree of economic openness (Table 1-6). A preliminary assessment of the level of economic openness of most East Asian economies, a number of transition economies with relatively large economic size, and other large-scale developing and developed economies could be made on the basis of this openness index. This assessment generally supports the positioning of the East Asia countries and the EEFSU transition economies in the scheme of Figure 1-2.

36 See Zhang and Song (2000), Zhang and Felmingham (2001) and Liu et al. (2001) for discussions.

37 Data in this paragraph is according to UNCTAD (2002).

38 See e.g. Krishna (1992), Pritchett (1996), Rodrigues and Rodrik (1999) and Yanikkaya (2003) for the discussions of different measurement approaches.

39 The averages of the four relevant indexes (FDI outflows, exports, FDI inflows, imports) of the largest 50 economies in the world in terms of GDP of the 2000 are used as benchmarks.

Table 1-6 Degrees of openness of the largest 50 economies in 2001 14 Netherlands 59.73 13.48 2.27 65.06 12.76 2.80 2.53 15 Australia** 22.75 1.09 0.40 22.85 2.99 0.74 0.57 16 Russia 24.15 0.80 0.38 36.81 0.82 0.55 0.47 17 Argentina 10.16 1.19 0.26 11.42 -0.07 0.12 0.19 18 Switzerland 41.13 3.59 0.91 45.47 7.00 1.65 1.28 19 Belgium 81.09 38.41 5.37 84.42 43.83 8.03 6.70 42 Philippines 47.43 1.37 0.73 49.27 -0.22 0.53 0.63 43 Puerto Rico 100.44 0.00 1.22 80.76 0.00 0.92 1.07

Average 41.09 4.38 1.00 43.83 3.10 1.00 1.00

Source: World Bank and United Nations Conference on Trade and Development (UNCTAD).

Note: 1) * Share of GDP. 2) ** Data for 2000.

The degrees of economic openness of the largest 15 economies (in terms of exports and

FDI inflows) in 2001 are illustrated in Figure 1-6. In the same figure, the dynamics of the openness of the Chinese economy is also depicted, demonstrating the fast growing openness of the Chinese economy from 1980 to 2003. Since 1995, the relative significance of inward FDI decreased despite the fact that the total volume of FDI inflows increased from US$ 37.5 billion in 1995 to US$ 53.5 billion in 2003. The ratio of exports to GDP increased steadily for more than 20 years and climbed to 32.5 percent in 2003.

Figure 1-6 Degrees of openness of the largest 15 economies* in 2001 and the Chinese path of openness

0 10 20 30 40 50

0 1 2 3 4 5 6

FDI inflows (percent of GDP)

Exports (percent of GDP)

Source: World Bank and MOFTEC.

Note: * Not including the Netherlands (exports = 65.1% of GDP; FDI inflows = 13.5% of GDP).

1.3.2 China’s Economic Internationalisation: Another Chapter to the ‘East Asian