Academic, policy and business communities are debating whether globalization has a positive effect on economic growth and poverty alleviation in developing countries. Is it a certainty that developing countries always benefit from becoming integrated into the global economy?
Economic integration between developed and developing countries brings with it capital flows between the two worlds as well as increased trade flows, which leads to increased economic activity and subsequent economic growth. History has, however, shown that this development also can bring with it negative effects to developing countries, such as boom and bust cycles, which is far from beneficial in bringing people out of poverty.
So what is China’s experience with globalization? Since the early 1980s when China started to open up to the outside world after three decades of self-imposed economic isolation, the country’s GDP has been growing by an average of 10% per year and hundreds of millions of Chinese have been pulled out of poverty. Only recently, due to the sheer size of the Chinese economy, have the growth numbers slightly come down, still to a respectable 6.5 – 7% per year. It is therefore safe to say that China is, globally, one of the main beneficiaries of international economic integration.
China has by and large avoided the pitfalls of boom and bust cycles over the last 50 years of development by applying well-thought-through developmental and industrial policies. I have personally followed the evolution of these policies during my years of work for Handelsbanken in China. One very important overall policy which has served China well, and is still doing so, is the implementation of strict capital controls and a currency which is not freely convertible. In the 1980s and -90s, direct foreign investments were restricted, and foreign companies were forced into partnerships with Chinese companies when investing in manufacturing in China. These restrictions have gradually been relaxed and foreign companies can now own 100% of their Chinese subsidiaries in most business sectors. Over the years, other impediments to foreign-owned businesses in China have included compulsory technology transfers in return for market access, and local content rules, which required all market actors in China, both foreign and local, to source input materials and components locally to qualify to sell in China.
China’s accession to the World Trade Organization on December 11, 2001 must be regarded as a watershed event in respect to the deregulation of the Chinese market. When China joined the WTO, many more industrial sectors suddenly became available to foreign companies, and in addition, import duties in many product categories were reduced.
Given that China has benefitted from decades of globalization, it is no wonder that President Xi Jinping, during the G20 meeting in Hangzhou in 2016 and more recently during the World Economic Forum in Davos in January 2017, assumed the role of a champion of globalization. But in the light of China’s decades old implementation of restrictive market access policies, a managed currency regime and government-sponsored industrial policies, is China really a credible champion of globalization?
I think we should give China the benefit of the doubt and accept China as a positive force in the continued global trade integration. As the Chinese economy matures, we can expect continued deregulation of the economy, and a willingness by Chinese businesses and politicians to adopt international industry standards as well as fair and transparent procurement policies. China is, after all, one of the biggest stake holders in ensuring open global markets which are free from protectionism.
Handelsbanken Hong Kong Branch