HEADLINE Commentary: 40 years of reform and opening-up policy changes China, world

HEADLINE

Commentary: 40 years of reform and opening-up policy changes China, world

By François Godement | People's Daily app

08:15, April 26, 2018

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Editor's note:Over the last 40 years, China has seen some major economic improvements that have astounded economists. Now, experts are looking back at how decades of reform and opening up have molded the county into the world’s second largest economy and how it will approach the future.

In 1980, the International Monetary Fund (IMF) estimated China's per capita GDP at 260 yuan (roughly $150). By 2017, the IMF estimated the figure to be 63,925 Yuan (roughly $9,000), showing a 60-fold increase in US dollars and a 253-fold increase in yuan.

"Collapse of China" theory has collapsed

Years ago, economists forecast that China would suffer from a slowing economy and referred to it as the Collapse of China. However, the "collapse of China" theory has collapsed since China has continued to grow despite assumptions from economists.

Because an economy's large scale improves the odds for its stability, imbalances that were thought to be dangerous to China's economy – essentially, a large and growing amount of debt, and future liabilities such as pensions – are now seen to be a less of a danger. The world’s second largest economy, just like the world's first largest economy, can live with imbalances that would sink smaller economies.

The debate about the success or failure of China's economic policies is essentially over. What survives from this debate are side effects of China's hypergrowth such as environment and climate issues, income inequality and hidden debt. These are major concerns in China.

Opening-up policy, a prime mover in the modernization of China's economy

Internationally, the debate has shifted to new issues concerning the consequences of China's success for relations with its partners. The controversies about China's foreign trade and investments, and more broadly about globalization, are good examples of the questions being asked. From 1978 onwards, China's  opening-up policy allowed foreign capital to invest in China, and this became a prime mover in the modernization of China's economy.

From 2001 and China's admission to the World Trade Organization (WTO), the country benefitted from free trade under the preferential conditions it was given to its developing economy. During this time, China’s per capita GDP had just passed the $1,000 mark. Chinese policy-makers still remember the large trade concessions that were made in order to enter the WTO, which included a major opening of China’s agricultural and consumer goods sectors with much lower customs tariffs.

There might be a popular perception in China that anything that looks like renegotiating any aspect of the WTO deal is unfair. However, if one player wins at a game of cards, is that a reason to change the rules of the game? The reality is that major changes have happened, and the international economy is focusing on investments and services rather than goods. The advancement of information technology now concerns every aspect of normal life. These areas hardly fit into China’s original WTO agreement.

Furthermore, China's economy has completely changed after four decades of reform and nearly two decades of integration to free trade. China's domestic economy does not have much financial need for foreign capital, and only needs foreign investments in the technology areas where it is still developing. The policies to "indigenize technologies," which have been criticized abroad and denied by China, may reflect this diminished need. Recent announcements of China continuing to open its financial and industrial sectors reflect international requests rather than China's needs. China is once again pursuing a policy of self-strengthening. After a decade or two of this policy, China will determine if this action was more effective than the free flow of technology and ideas.

China is becoming a major player in key technologies of the future

For the time being, China is becoming a major player in key technologies of the future, including 5G mobile networks, e-commerce, social media, robots and the Internet of Things.

The country will create new winners – and losers – in established industries and will shape those landscapes forever with their new developments. Some would say a dynamic flow, not the existing stock, is what matters most.

There is also the perception that China is still a developing economy and must catch up to other nations. Yet many international competitors see the writing on the wall: China is strong and will become stronger in areas that hardly existed in 2001.

China's main partners in the global economy are therefore torn between two options: either ask China to adopt many of the rules that govern advanced market economies, including state subsidies, public goods, fair competition, intellectual property, and big data and its uses. Or abandon some of the open and liberal rules that have pushed China's extraordinary globalization in the last few decades and compete with China on a much tougher basis for industry and high-tech policies, limits to the opening of information, service and financial sectors, reciprocity on tariffs, closure to Chinese investments that rely on state aid or could lead to the transfer of critical technologies.

This might increasingly shape China's choices on the path of reform and opening up. Immediate national interest lie in promoting more national champions in continuing to draw the benefits from preferential treatment as a developing economy and avoiding too many concessions in areas that were not included in the 2001 deal. However, national interest might diminish the risks of the US' proposed 'trade war'. Talking about 'war' when discussing trade conflicts is misleading. In any case, China, as the world's largest exporter of goods, is expected to take losses in any trade conflict that may occur. China's rising foreign investments – in information technology, e-commerce, social medial, public infrastructure, and financial services – will have major effects on existing and future rules and norms.

China is likely to interpret its shift to provider and rule maker in world market 

China is likely to interpret its shift to provider and rule maker in the world market as a sign of increasing strength. Today, China's strength is denied by no one. As China continues on the path of reform and opening up, it should not miss the reality that increased participation in the global economy requires an increased willingness for compromise and adaptation of economic structures. Win-win also implies give and take.

(François Godement, a nonresident senior fellow in the Asia Program at the Carnegie Endowment for International Peace, is also director of the Asia and China program of the European Council on Foreign Relations and a senior policy fellow at ECFR.)

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