What Can We Learn From It?
Arvind Panagariya As much as by luck as by design, China stumbled onto an export and foreign investment strategy that has proved remarkably successful, helping the economy move quickly to a market-based system. experience serve as a model for other countries? But can the Chinese
After three decades of inward-oriented trade and foreign investment policies, in 1979, China switched course and launched an "open-door" policy. During the 15 years that have elapsed since then, the country has
persistently, albeit gradually, liberalized its trade and foreign investment regime. This has been accompanied by a spectacular growth in GDP and During 1980-90, GDP grew annually at an impressive rate of Over the same period, exports grew at an annual rate of 11
foreign trade. 9.5 percent.
percent--more than twice as fast as world trade--and imports 9.8 percent. More recently, in 1992 and 1993, GDP has shown annual growth rates exceeding 13 percent. The annual growth in exports and imports during these two years
has been 13 percent and 27 percent, respectively. What are the key trade and foreign investment policies that have led to this dramatic growth in China's foreign trade and GDP? And what lessons
can we derive from China's experience for other economies in transition? (see box)? In the following, we examine the nature of reforms and why they
worked well or poorly in particular cases. Though this study focuses on external economic policies, it is important to remember that the promotion of non-state enterprises has closely complemented China's outward-oriented
- 2 strategy. These enterprises, owned collectively by local authorities in
urban areas, townships or villages, enjoy a high degree of autonomy in their operations. Consequently, they have been most successful in taking advantage of the outward-oriented strategy. Promoting an "export culture" On the external front, three factors combined to give rise to China's success: adoption of an aggressive pro-export strategy by central
authorities, active participation of local authorities and the presence of Hong Kong and Taiwanese investors looking for a source of cheap labor. With
the beginning of the open-door policy, the central authorities began sending clear signals in favor of an export-oriented trade regime. A variety of
instruments were employed to promote what may be called an "export culture": geographical targeting, sectoral targeting, a liberal foreign investment regime, and liberal provision of export financing. Geographical targeting. China set up the so-called Special Economic Zones (SEZs) and Open Cities within which economic activities--
manufacturing, banking, exporting and importing, and foreign investment-took place in a more liberal environment than is available in the rest of the economy. These zones helped to serve as focal points for investment from both domestic and foreign sources and to allow China to develop links with the world market, brought in part, by Hong Kong and Taiwanese entrepreneurs. Originally there were only a handful of such zones, all in Guangdong and Fujian provinces. Over time, many features of SEZs were extended to other cities. Two features of SEZs distinguish them from the rest of the country. First, the SEZs enjoy considerable administrative autonomy in the
- 3 areas of investment, pricing, taxation, housing, and labor and land
management policies. require virtually no
Most foreign investments can be approved locally and central clearance. Second, the SEZs offer many The
economic incentives to investors not available in the inland provinces.
corporate income tax, normally 33 percent for foreign funded enterprises and 55 percent for state owned enterprises, is 15 percent for all enterprises in the SEZs. All imported inputs used in exports or sold within the Zones are In addition, tax holidays
free of import duty and other...