IV. Internationalization of Domestic Development
2. Stages of Internationalizing the Domestic Development
2.1 Stage 1: China’s Opening-up Policy
2.1 Stage 1: China’s Opening-up Policy
Deng Xiaoping introduced a new platform at the Third Plenum of the Eleventh Central Committee in December 1978. This platform consisted of 1) decentralization and gradual marketization of the domestic economy; and 2) foreign economic policies that welcomed foreign investment and promoted exports of light industrial manufactured goods. This approach received support from the natural beneficiaries of the open policy, namely light industry and agriculture, coastal provinces, provincial officials, and industrial bureaucrats. The market-oriented reform period in China also began in 1978, particularly with the Guangdong area expanding to increase its export capacity. The Chinese
government decided to implement the opening-up policy and begin economic restructuring. It started the process by reducing the barriers between its cities and the global economy, starting with four special economic zones (SEZs) along its southern coast area: Shenzhen, Zhuhai, Xiamen, and Shantou. Soon after, the central government announced 14 Coastal Open Cities (COCs), and additional selected regions of the Yangzi Delta, Pearl River Delta, and Minan Triangle in 1988 (Teather, 1999). Further extension of this policy followed Deng Xiaoping’s southern inspection trip (nanxun) in 1992: five new Technological Zones were established in 1993, with two more in 1994.
Naturally, the east coast became the foreign investors’ favored location due to the policy and its favorable investment environment and convenient position. The reform was planned in order to rectify the line and block compartmentalization and trying to establish more rational spatial division of labor based upon the market movement. It is ironic that such “zone fever” were directly linked to China’s regional disparity.
Initially, the open door policy attracted foreign investment and promoted foreign trade.24 Since the provinces and the individual enterprises now had the investment making decisions power due to decentralization, greater reliance is now placed on the market. Capital-intensive basic industries focusing on iron, steel and petrochemicals required a concentration of resources to selected urban centers which gave room for development. This type of spatial allocation has constantly appeared as another important ingredient of socialism, especially of the Leninist type. However, such spatial
24 Démurger, Sylvie. Et.al. “Geography, Economic Policy, and Regional Development in China”, CID Working Paper No.
77, Octorber, 2001.
reallocation of development strategy that favors urban areas comes at the expense of the rural area that are also already abundant with resources in terms of industrial and human capital (Li Si Ming, 1999).
The table below presents the schedule of preferential policies executed since China’s open door policy was implemented.
Table IV-2: Schedule of the preferential policies executed in China’s provinces and cities Schedule Style and Numbers of Opening Areas Geographical Location
1979 SEZs: 3 Guangdong
1980 SEZs: 1 Fujian
1984
COCs: 14
Liaong, Hebie, Tianjin, Fujian, Jiangsu, Shanghai, Zhejiang, Shandong, Guangdong, and Guangxi
Economic Technology Developing Zones (ETDZs): 10
Liaoning, Hebei, Tianjin, Jiangsu, Zhejiang, Shandong, and
Guangdong
1986 ETDZs: 2 Shanghai
1988 Opening Coastal Strip Zones (OCSZs):
SEZs: 1, and ETDZs: 1 Hainan and Shanghai
1990 The Pudong New Zones in Shanghai
(PDNZs): 1 Shanghai
1992
The Main Coastal Harbor Cities Opening Zones (MCHCOZs): 13
Tianjin, Guandong, Shandong, Jiansu, Zhejiang, Fujian, and Hainan
The Opening Cities around the Yangtze River (OCYRs): 10
Jiansu, Anhui, Jiangxi, Hunan, Hubei, and Sichuan
The Border Economic Cooperation Zones
(BECZs): 13
The Inland Provinces and Autonomous
Capital Cities (IPACCs): ETDZs 5
1993 ETDZs: 12
Anhui, Guangdong, Heilongjiang, Hubei, Liaoning, Sichuan, Fujian, Jilin, and Zhejiang
1994 ETDZs: 2 Beijing and Xingjiang
Source: Based on the China Foreign Investment Report Series by Chinese Academy of Social Sciences, as well as Wing Thye Woo (2002)
The central government launched the Coastal Development Strategy, aiming for regional division of labor in which the coastal area would concentrate on developing labor-intensive processing industries targeting the international market. Meanwhile, the inner provinces worked more as a supporting role for the development of resource-based industries. (Teather, 1999). Shirk (1996) introduces the following core components of Deng’s open policy, introduced in a series of policy initiative moves in the decade following 1978.
-The expansion of exports, particularly of light industrial manufactured goods, by decentralizing and making more incentive-compatible foreign trade administrations. The monopoly of the central foreign trade ministry (called MOFTEC, or the Ministry of Foreign Trade and Economic Cooperation, in its current incarnation) was destroyed, and the trading authority was dispersed among various ministries and provinces, which were allowed to retain a proportion of their foreign exchange earnings.
Collective township and village enterprises located in the countryside were encouraged to export.
- The acquisitions of foreign technology, investment, and managerial and international marketing knowledge through joint ventures. To attract foreign investment, approval authority was decentralized to ministry and provincial officials.
-The creation of SEZs in the coastal provinces of Guangdong and Fujian, which were authorized to offer concessionary terms to foreign investors.
FDIs After Opening-Up
Following the economic reform and opening-up policies, China became an attractive location for Foreign Direct Investment (FDI). In the beginning stage, Chinese reformers doubts about the change and hesitant about opening up to FDI, putting restriction on it. SEZs were created for the Multinational enterprises to invest, and this particularistic treatment of enterprises and specific regions such as SEZs can be characterize the 1980s. On surface, foreign-funded enterprise and the local firms had the same legal status to sell their products in domestic market. However, the foreign capital flow into regions
with positive outlook, which indicated that the more developed regions on the eastern coast offered the best prospects.25
Despite the ninth FYP (1986-1990) calling for accelerated development in the interior provinces, it was put forth to channel FDI and foreign investments to the central and western regions, but the plan did not produce any significant impact. During 1992-1995, the eastern coastal region recorded to take up almost as much as 90% of total FDIs. The eastern coastal region such as Jiangsu, Guangdong, Fujian, Shangdong, Shanghai, Geijing and Tianjin are all included in the area. In contrast, the western region generally has a high concentration of minority populations accounted for low FDI percentage, less than 10%. The table below presents the shares of FDI inflows in GDP among provinces during the 1990s.
Table IV-3: Shares (in percentage) of FDI inflows in GDP
Provinces 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Beijing 5.623 7.521 8.924 7.295 7.991 6.466 10.905 4.45 2.721 2.177 Tianjin 5.888 10.072 13.094 16.853 16.236 13.804 12.064 6.596 1.445 2.059 Hebei 1.105 1.888 2.779 2.313 1.999 1.602 2.062 1.351 0.488 0.281 Shanxi 1.132 2.15 1.362 1.506 0.878 0.488 0.32 0.707 0.521 0.043 Inner
Mongolia 0.624 0.421 0.631 0.552 0.607 0.58 0.506 0.922 0.068 0.025 Liaoning 3.625 2.107 4.672 5.476 4.576 4.259 5.042 3.665 1.934 1.607 Jilin 1.532 1.501 2.175 2.305 2.808 3.017 2.226 2.209 0.745 0.363 Heilongjiang 0.766 0.91 1.557 2.249 1.962 2.143 1.851 1.113 0.461 0.135 Shanghai 5.748 5.821 8.084 10.424 11.29 9.809 10.809 12.046 2.443 0.865 Jiangsu 6.198 6.537 7.626 6.745 7.215 8.408 7.994 5.465 3.778 0.729 Zhejiang 2.212 1.902 2.188 2.687 3.049 2.891 3.717 3.113 0.969 0.454 Anhui 0.868 0.744 0.817 1.349 1.801 2.011 2.142 1.388 0.376 0.086 Fujinan 7.248 9.385 10.611 11.596 13.143 15.63 18.989 14.612 9.967 4.032 Jiangxi 0.939 1.433 2.079 2.325 1.651 2.002 2.379 1.659 0.961 0.216 Shandong 2.879 2.441 2.546 3.46 3.674 4.489 5.681 3.885 2.519 0.636 Henan 0.909 0.943 1.172 1.406 1.189 1.331 1.498 1.057 0.229 0.193 Hubei 1.827 1.963 2.175 2.039 1.906 2.183 2.761 2.187 1.029 0.272 Hunan 1.521 1.627 2.172 2.54 2.341 1.931 1.684 1.972 0.734 0.162 Guangdong 9.665 11.403 12.566 14.318 14.991 15.92 19.234 13.498 8.899 5.808 Guangxi 2.119 2.692 3.855 4.041 3.247 3.751 5.804 5.704 1.552 0.327
25 Alex Grannenman, Meine Peieter van Dijk, 2015, “Foreign Direct Investment in China, Factors Determining a Preference for Investing in Eastern or Western Provinces”, http://file.scirp.org/pdf/ME_2015082715270527.pdf
Hainan 6.878 0.513 13.527 14.27 16.842 24.354 23.909 15.787 13.735 7.805 Chongqin 1.273 1.337 2.497 2.567 n/a n/a n/a n/a n/a n/a Sichuan 0.902 0.761 0.861 0.62 1.228 1.28 2.86 1.57 0.381 0.311 Guizhou 0.208 0.371 0.446 0.52 0.366 0.756 1.052 0.595 0.321 0.253 Yunnan 0.542 0.686 0.672 0.835 0.364 0.676 0.575 0.717 0.256 0.036
Xizhang n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Shaanxi 1.438 1.347 1.798 4.006 2.307 2.706 2.52 2.011 0.465 0.362 Gansu 0.525 0.365 0.368 0.44 1.048 0.965 1.675 0.185 0.006 0.094 Qinghai n/a 0.159 n/a 0.101 0.045 0.083 0.15 0.17 0.043 n/a Ningxia 0.543 1.76 0.676 0.264 0.238 0.192 0.468 0.66 0.023 0.013 Xingjiang 0.116 0.17 0.161 0.195 0.582 0.556 0.618 0.604 n/a 0.003
Source: China Statistic Yearbook 1993-2001 by National Statistic Bureau
Ten years later, in 2002, the numbers had changed only slightly, with most FDI, approximately 88%, continuing to go to the coastal areas. However, the 11th(2006-1010) and 12th (2011-2015) FYPs promoted investment in western China, and a more equal distribution of FDI is hence expected.
Reform with Chinese Characteristics
Bureaucrats in planned socialist economies such as China have formidable powers, and tend to resist deregulation. However, economic interest should not influence policy-making. Until 1978, China insisted on maintaining rather isolated, autarkic relationship with the international system. This can be characterized by low levels of trade, scientific exchange, foreign investment, tourism, and shipping (Zweig). Shirk(1996) explains how economic reform in China’s closed economy came about, despite being controlled by a communist institution, as follows. Compared with Russia, the Chinese version of communism was more flexible because political and economic authority was more decentralized and less institutionalized than in the Soviet Union. This allowed for more room in which to break down reforms into particularistic benefits for Chinese officials, and thereby give them new vested interests in the reform. Moreover, following the 1978 opening-up, the bureaucrats and domestic actors recognized significant advantages generated by relative price and the global market. Once the walls were broken down, international economic force evoked positive domestic responses regarding China’s reform drive.
Shirk calls this Chinese-style economic reform “gradualism,” “administrative decentralization,” and
“particularistic contracting,” which were the means by which reformist politicians took advantage of
the positive responses to economic opening-up. This confirms the powerful influence of
internationalization that affected the local group. In addition, we cannot underestimate the fact the Deng utilized this geographic particularism to earn political credit from the provincial authorities who received special privileges soon after he was appointed. Soon, other inland regions and coastal regions saw the effect of such privilege from the special zones and demanded similar privileges for
themselves, or tried to gain some benefit from the open zones. This Chinese approach to reform in foreign trade administration and the encouragement of exports garnered significant success in both political and economic terms, receiving bureaucratic (especially local) support for the open policy by creating a system of selective access to foreign exchange and imports.
Negative Impact of the Open Policy: Regional Disparity
The widening coastal-interior gap and struggling poorer regions have prompted China to consider regional inequality as the main reason of its regional issues and many other crucial issues for government policy26. For example, in 1995, the per capita GDP in China’s provincial-level administration units showed that the level of economic development varied a great deal across the provinces. Shanghai, being ranked at the top of the list, had a per capita GDP of RMB 17,403, which was nearly 10 times that of Guizhou (RMB 1,796) province, with the lowest per capita GDP.27 Provinces at the top of the list, including Zhejiang, Guangdong, and Jiangsu, had per capita GDPs in excess of RMB 7,000, which was two to three times those of the poorest provinces, such as Guizhou, Gansu, Tibet, and Shaanxi. The provinces with high per capita GDP were generally in the south and the eastern coast, whereas provinces with low per capita GDP were generally in the central and western parts of the country. 28 As mentioned above, many have blamed these regional disparities and differences to Deng Xiaoping’s open policy launched in 1978.
26 Yehua Dennis Wei, 2010. “Multiscal and Multimechanism of Regional Inequality in China:Implications for regional policy”, Journal of Contemporary China, Volume 11, 2002-Issue 30, 109-124.
27 Peter T.Y. Cheung. 1998, Provincial Strategies of Economic Reform in Post-Mao China: Leadership, Politics, and Implementation, M.E. Sharpe, New York
28 Ming L.S. 1999, China’s Regional Development Issues. In: Teather D.C.B., Yee H.S., Campling J. (eds) China in Transition. Palgrave Macmillan, London