China and the Export-Oriented Economic Growth Strategy
Macroeconomics emerged as a separate discipline in the first half of the 20th century. In addition to Keynesian cross-era masterpiece “General Theory”, which laid the theoretical framework of macroeconomic analysis, there is another important prerequisite: The great achievements obtained of economic statistics since 20th century.
One Method of calculation of the Gross Domestic Product is from a country’s total final demand for goods and services in a given period to measure the value of GDP.
Western macroeconomics generally believed that the total demand means the economy’s aggregate demand for goods and services. Economist Joseph E.Stiglits wrote in “Economics” that, the aggregate demand in the economy is the produced goods and services in the economy for all needs. (Joseph E.S, 2006)
In other words, calculating GDP by expenditure approach, four categories expenditure in actual economic life are added: including consumer spending, investment spending, government purchases of goods and services and net exports of goods and services.
Consumer spending means that local residents purchase of final goods and services, which constitute the most important part of the total demand of a country. The household consumption of consumer is further divided into durable goods (such as color televisions, refrigerators, air conditioners,etc.), noon-durable consumer goods (such as food, fuel,clothing,etc.) and services (such as haircuts, medical care, education,etc.).
Investment expenditures including the purchases of new spending on capital goods, it’s fixed asset investment and business inventories to increase the expenditure. In which, investment in fixed assets consists of two parts, business fixed investment and residential investment.
Government Purchases of goods and services
Government purchases of products and services, including the government of current products and services, foreign production of goods and services purchased. For example, spending on national defense, infrastructure expenditures like building bridges and roads. It also includes transfer payments: social insurance, medical care, unemployment relief and welfare spending and the salaries of government workers.
Net exports of goods and services
Net exports of goods and services means the difference between exports minus imports.
2.1.2 Theory of Economic Growth
The Theory of Economic growth is the important issue of the whole economics research. From the classical economic growth theory to modern theory, forming a relatively complete regular pattern and empirical studies of economic growth factors.
Classical economic growth theory attempted to grasp all the essence of social economic growth process at any point of time. The economists such as Adam Smith, Ricardo, Mall Muse and Mill are the representatives in this field.
The modern economic growth theory is based on the classical theory of economic growth, focus on the use of fewer dimensions and precise definition of economic variables on one aspect of economic growth. Establishing a formal model, like Harhold-DORMA economic growth model, Neoclassical growth model, New Keynesian growth theory, Techonological progress theory,etc.
Of all the theoretical studies about the sources of economic growth, the economic growth theory can be roughly divided into the neoclassical growth theory and the structuralist theory. Since Abulamo Katowice (1956),Solow (1957) and Denison (1962) and other pioneering research about the theories of economic growth, neoclassical theory has made considerable progress in measuring the growth factors. R.M.Solow (1957) pointed out in the one article that economic growth is the total growth process under the assumption of competitive equilibrium.
Also,R.M.Solow argued in 1987 that the Harrod-Domar model seemed unsound. If the condition for steady growth is that the savings rate equal the product of the growth rate of employment and a technologically-determined capital-output ratio, then a recipe for doubling the rate of growth in a labor surplus economy was simply to double the savings rate, perhaps through the public budget.
The structuralist theory is based on the significance of the structure variables in economic growth, making the neoclassical growth equation as a starting point, introducing the structural factors to explain the process of economic growth. Represented by Chenery, the structuralist theory point out that the economic growth is a non-equilibrium growth process.
Abhijit V. Banerjee and Esther Duflo¼ˆ2004¼‰showed extensive evidence that although Growth theory traditionally assumed the existence of an aggregate production function, the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return.
There is another theory named “New Growth theory”, Joseph Cortright (2001) explain that New Growth Theory is a view of the economy that incorporates two important points. First, it views technological progress as a product of economic activity. Previous theories treated technology as a given, or a product of non-market forces. New Growth Theory is often called“endogenous” growth theory, because it internalizes technology into a model of how markets function. Second, New Growth Theory holds that unlike physical objects, knowledge and technology are characterized by increasing returns, and these increasing returns drive the process of growth.
2.1.3 Theory of Comparative Advantage
In Ricardo’s 1817 book, “On the principles of Political Economy and Taxation”, David Ricardo used the example of Portugal and England’s trading of wine and cloth to illustrate the benefits of specialization and trade. His writing served as the basis for the prinicple of comparative advantage, under which total output will be increased if people and nations engage in those activities for which their advantages over others are the largest or their disadvantages are the smallest.
Ricardo’s comparative advantage theory has become the important cornerstone of the theory of international trade. The subsequent theory of Heckscher-Ohlin factor endowment theory is more in-depth argument of comparative advantage. This theory suggests that the incidence of international trade is based on different basis of factor endowments.
One country always needs to focus on exporting the products which are producted by its relatively low lost, while importing the products which are produced with its relatively expensive cost. Thus resulting in increase their economic well-being under the same condition of total resources and access to the best interests of trading.
Comparative theory and factor endowment theory are the basic theory of export-oriented strategy. However, there is an important condition implict in the theory: the countries need to adopt free trade policies. This is very difficult to achieve in reality, particularly in developing countries, in order to achieve the goal of indusrialization, they won’t satisfied the static benefits of trade, while the developed countries will not give up their comparative disadvantage industries due to the serious unemployment problem.
Therefore, from a historical point of view, the eras of higher level of free trade, export trade mechanism worked better to promote economic growth and vice versa.
2.2 Literature Review
2.2.1 Export-oriented Economic Growth Strategy
22.214.171.124 Historical Overview
China formally abolished the financial subsidies to foreign trade enterprises in 1991. In 1992, China has basically abolished planned economy, import measures began to have a substantial reform, custom tariff and non tariff levels are beginning to significantly decline. In 1994, official RMB exchange rate and adjusted market exchange rate formed a market-based, single,managed floating exchange rate system. Also foreign trade rights are opened to private sector in 1999.
After joining the WTO in 2001, the intensity of export incentives increased in the short term. Take export tax rebates for example, since 2001, this figure is increasing 1000 billion yuan per year. On the other hand, during this period, China started to focus on improving the proportion of high-tech products in exports, enhance the technology and added value.
During this financial crisis, China’s foreign trade situation was subjected to unprecedented suffering. Firstly, Take first nine months of 2009 alone, 8-month export growth rate lower than year-ago levels. Secondly, international trade friction intensified. In 2009, China suffered 116 trade investigation. Thirdly, our country has reserved of 2.4 trillion U.S dollars and becoming the world’s largest exporter. With most countries haven’t yet to emerge from the crisis, the demand for Chinese products will not release soon.Trade protectionism will exist for quite some time.
126.96.36.199 Strategy Performance
After the reform, China adopted the export-oriented strategy, which helps China got rapid development at the early stage of opening up to the world economy. Strategy performance are mainly in the following areas:
Trade expanding with status strengthened
In 1978, China’s exports is only 16.76 billion yuan, 298.56 billion yuan in 1990. This figure increased to 1.2 trillion yuan in 2009. Corresponding to this, China’s trade rankings and trade status has been increasing, Import and export volume ranking third in the world. The status of the World’s large trading nation has been identified.
The trade structure improving
China’s processing trade has always been the main form of our foreign trade. But the trend of exports of manufactured goods is more and more obvious, and in 1995 it became the first category over the exports of textile products, which indicates that China exports from labor-intensive to capital and technology-intensive.
In another aspect, high-tech products trade situation,to certain extent, could reflected the level of a country’s scientific and technology development and competitiveness.
The rapid development of foreign enterprises
After years of development, China has achieved remarkable results in the utilization of foreign capital, especially foreign direct investment. In 2008, FDI inflows reached 108.321 billion, which is No.1 all over the world.
188.8.131.52 The challenges
Many scholars questioned the trade facilite the economic growth. They thought that Export strategy is not a sufficient condition for growth ,nor the necessary condition. Also it does not necessary benefical to economic growth. These ideas are agreed by a large number of development economists. Based on the disadvantage position of developing countries in international division of labor, they argued that whether this role will have a positive impact and influence depends on the specific conditions and transmission mechanism.
After considering the constraints of international market demand, Cline(1982) pointed out the issue whether the East Asian growth model could be generalized. Research founds the situation that export-oriented growth strategies in all developing countries to become industialized countries is not sustainable.
David dawe(1996) focus on the influence of instability of exports for the investment and economic growth. Research has shown that the early 70s to mid 80s, the vast majority of countries, export instability and investment positively correlated, but negatively correlated with economic growth.
Thomas Paley(2002) pointed out that over last 20,30 years, followed by export-growth model as the optimal growth strategy, East Asian is ultimately led to a failure. And this strategy is even harmful to the growth prospects of developing countries.
By examining the impact of the 90’s chinese technology and market factors to East Asian, Sanjaya Lalland Manuel Albaladejo (2004) believed that the competitive advantage of china’s export is low value-added products, these products occupy a large market share. Japan was the main target market of China. There is a time lag between China and East Asia in the development of high-tech export products. China always plays as the engine of growth in the bilateral import and export trade of neighboring countries. But all these is changing as the position of china in industrial chain changing.
Chow (1987) using Granger causality test on the 7 countries to do the inspection and found that only three countries have causal relationship between exports and growth. These differences sparked the thinking of the validity of testing methods used and the reliability of conclusions.
For export-oriented strategy, many domestic scholars use the empirical analysis on the economic growth effect of exports, the results are not consistent.
Luo Yan ¼ˆ2004¼‰believes that China Eastern area has formed a good export-oriented Economy, while the Midwest has not yet formed. China’s eastern, central and western regions’ exports had significant promoting effect to economic growth. The different growth mechanism of eastern and western regions is an important cause of imbalance economic development. In return, the economic levels restrict the international trade.
Ding Xiaosong (2005) evidenced that the exports is a key element of economic growth. Also the economic growth has strengthened the export growth. There is a two-way relationship exists between them.
Gao Bo(2006) using econometric models conducted empirical analysis and concluded that there is cointegration relationship of the distribution of chinese economy and china’s total exports, general trade exports, processing trade and other trade exports. Under at least 99% confidence level, China’s export trade, general trade exports, processing trade and other trade exports have significantly promote effect. The research results are: Every one percentage point increase of the total average export trade, the china’s economic grow 0.6282 percent. Every one percentage point increase of general export, the china’s economic grow 0.6383 percent. Every one percentage point increase of processing trade export, china’s economic grow 0.6315 percent. Every one percentage point increase of other trade exports, china’s economic grow 0.5358 percent.
Chen ChuangXin (2007) pointed out that foreign trade development promote the changes in the flows of domestic factors of production. Factors of production more and more flow into the competitive industries. So that the competitive industries expand production scale, thus export-oriented development strategy promote the industrial structure adjustment and optimization.
Shen Kunrong and Li Jian confirmed based on the data analysis since the reform and opening up that the national foreign tade had a positive impact on improving the structure and institutional reform.
However, more scholars analysed the inadequacies of export-oriented strategy. Through large amount of experience from different perspectives verified explain that china’s export-oriented strategy has no significant role in promoting the economic growth.
Yang ChunLin (2003) thought that, dependent on large exports to drive its economic development will increase the external dependence of their economies, thus losing the economic development initiative.
Wei Hao and Zhang Erzheng (2004) pointed out that countries and regions all over the world, in order to develop the economy, universally implement the policies to encourage exports.This open reality of convergence of national policies, leading to the failure of policy, the so-called “fallacy of composition.”
Zhang Hong(2005) believed that extensive export growth exacerbated the conflicts between the country’s economic development and resource, environmental pressure.
Hou tie shan(2005) pointed out that as the reasons like the high costs and high prices. Export-oriented model does not necessarily bring about high productivity.
Wang Bo Ren(2006) argued that the export-oriented industrialization model need some prerequisites: some of the domestic industrial sector has already high level of technology and production management experience, also the adequate management personnel and skilled workforce. Thus the vast domestic market and products has certain competitiveness.
Kong Xiang Min(2007) thought that, from Japan and other Southeast Asian countries development process, we can see that the implementation of export-oriented economic development strategy has certain age and stage.
Chai LiFang (2007) argued that the export-oriented trade model which is winning by amount is deteriorate the market supply and demand situation of china,causing the tense supply circumstance of china’s energy and raw materials. Meanwhile, the increasing of prices of raw materials of international market make china becoming the ATM for international seller.
Wu Jinglian (2007) said that, During the strong and continued growth of china’s economic after the opening up policy, Export-oriented policies contributed a lot. However, as some export-oriented policy of Southeast Asian countries and regions to support economic growth tell us, with the economic development , this kind of policies whose main content is national protection and the currencies undervalued need to be adjusted in time. Otherwise, it will become increasingly prominent negative effect.
Yu Lixin (1989) using 1978-1986 data in the study shows that the situation of China’s foreign trade growth rate with an inverse relationship with the volume of trade. While Peng Fuwei found the pull of net exports run opposite trend to the national economy.
Yang Quanfa and Shu Yuan(1998) extended the Balassa and Feder model, said that since the opening up, China’s export of primary products and economic growth was positively correlated, but the growth of manufactured exports negatively correlated with economic growth. The main reason is the growth of manufactured goods still remain in the extensive growth, while extensive export is not he main reason for economic growth.
Liu Xiaopeng (2001) started from the relationship between GDP growth rate with the foreign trade, revealing the imports has a strong role in promoting economic growth while exports and economic growth has a weak correlation.
Xu Helian (2002) and other scholars have studied the relations between china’s foreign trade and growth. They thought that dependence on foreign trade better response the relations between opening up and growth. China’s growth is mainly dependent on the increase in factors inputs, relatively open trade has not a significant role of economic growth.
Lin Yifu, Li Yongjun estimated the contribution of foreign trade to China’s economic growth. The results show that the 1990s,every 10% of export growth, basically can contribute GDP growth 1%.
Shen Chengxiang (1999) found that there is cause and effect relationship between China’s exports and output, but no long-term stability equilibrium relations between the two. Song Shaohua and Song Hanming also reached a similar conclusion.
Sun Yanlin(2000) analysed and obtained that ,there is no statistical significance relationship between economic growth and export. Even in the 50% level is still not significant, thus the export-oriented economic growth strategy does not have universality. There are scholars indicate that exports play a role in the short term, while long term does not work. Like Zhao Lin and others with the data of Year 1978-1999, analysis found that China’s export growth is only short-term effect on economic growth, and long-term effect is not obvious.
Yang Yinhai and Fengpei estimated the strength development potential of export-oriented model. For a country, the export-oriented model can only last about 20 years, then there will be decreased effect and not a big role in promoting economic development.
Shi Zhiling and Hao guoying (2007) through the analysis of the data that the formation of export-oriented strategy made the malformation of the industrial structure and causing imbalance. East Asia’s export-oriented strategy and take-off cannot bring long-term growth of our economy and its own shortcomings cannot be ignored.
Lili and Du Lin (2007) using 1983-2003 annual data and quarterly data in 1952 respectively. By cointegration and Granger causality test and other methods, conducting dual variables and multivariate empirical analysis of the impact of exports on economic growth. The results showed that, despite China’s export trade and economic growth have feedback between them, but the export-oriented model does not guide the economic development as “long-term drive”.
Wang Lihong (2007) analysed the terms of trade index of China since 1985, the result showed that the 1997 Asian Financial crisis is a major blow on export-oriented strategy. It is actually a declaration of export-oriented strategy to down state. Despite the improved terms of trade after WTO accession, the increase is not big enough. In this environment, China should adopt a “stimulating domestic demand”, kind of self-growth strategy.
Over-reliance on exports, not only domestic resources are exploited by foreign enterprises, and the domestic economy susceptible to the international market. Once the export frustrate while the domestic demand has not yet started, this will inevitably lead to national economic depression.
Particularly low level of exports of technology products, most of the exports are low value-added products and services. In a long run, this situation is not conductive to upgrading of the industrial level and improving the living quality of people. Furthermore, currently, European Union, United States and Japan are affected by financial crisis, the demand for products and services are also greatly reduced.
Therefore, relying on export-oriented economic growth model is not suitable for China’s sustainable economic growth.
2.2.2 Domestic-led Economic Growth Strategy
184.108.40.206 Introduction of Domestic-led strategy
Domestic Demand-led economic growth strategy is through issuing treasury bonds and other positive fiscal and monetary policy, starting the investment market; through credit and other economic levers to start the consumer market to promote economic growth.
30 years of reform and opening up, China’s sustained, rapid and stable growth has laid a solid material foundation for the expansion of domestic demand. Final consumption expenditure and capital formation comprehensively reflect the total amount of domestic demand of China.
With the deepening of China’s participation in international economy, the structure of consumer demand and investment demand structure have produced a corresponding change.
220.127.116.11 Strategy Constraints
Domestic scholars focus and direction is the reality of insufficient domestic demand in China. The study of expand domestic demand and economic growth analyse the causes of insufficient effective demand and the corresponding measures.
Yuan Enzhen(2001) believed that china’s surplus economy is relative, which is performed as the contradiction between effective supply shortage and invalid oversupply. China’s industrial structure is irrational, since very beginning, the proportion of Secondary industry in GDP remained high enough, and rapid expand under the extensive growth model. Carelessness investment and low-level redundant construction formatted large excess capacity and poor product structure.
While the development of tertiary industry is lagging behind. Supply of services, products seriously shortage, the consumer demand for services are idled. As income increased, the structure of consumption in China has changed. It is moving from survival to the developmental, enjoyable type. But the product supply and consumer policy has lagged behind the changing demand of the consumption structure.
Therefore, Yuan pointed out that the insufficient of effective demand mainly because the non-convergence of supply and demand restrict the release of potential demand. So it should be demand-oriented, adjust the industrial structure positively and optimize the supply structure, providing the products and services what the consumers want.
Chen Gonglin (1999) thought the issue of insufficient effective demand is the problem of institutional. Firstly, the state-owned enterprises which is the dominant part are still not out of the woods, the large and complete structure has not been fundamentally changed. Backward enterprise system causing the technology and product obsolescence, management system stiffness, increasing the pressure to survive.
Secondly, although the non-public economy has developed rapidly, the time is short and lack of accumulation of resources and management experience, thus lack of market competitiveness and the further development of non-public economy is still subject to many restrictions.
Finally, the delay of reform caused non-standard market transactions, the role of basical market allocation is not fully utilized. In this regard, scholar pointed out the response measures are further deepen the state-owned enterprises reform, especially the reform of property rights, followed by principles and exit the field of competition as soon as possible. To non-public economics there should be policies and institutional support,thus de-restricted the development and growth of small companies.
Mao Yushi (1999) , argued that poor credit condition is the root caused of insufficient effective demand.Credit is the foundation of market economy development and normal operation. Without credit for guarantee, transaction cannot be effective. In the process of china’s economy from a planned economy to market economy, the development of credit is not perfect, which resulting in non-standard market transaction and market disorder.
Meanwhile, market is flooded with fake and shoddy goods, reducing the consumer’s purchase desire and strengthening the lack of demand. Lack of credit has also hindered the smooth flow of funds, resulting in lack of investment demand. Therefore, poor credit will make china’s total demand shortage phenomenon long-term exists.
Therefore, the scholar put forward the countermeasures which is to build low-cost credit history and a sound social credit system, but not simply to use expansionary fiscal policy and monetary policy. In the absence of sufficient credit to use fiscal policy, although they could have immediate return, it equivalent of an back to planned economy. Investment efficiency must be very low and there will be a serious waste of money. Still, in the absence of sufficient credit to use monetary policy, it will increase bank risk and increase the banks’ bad loans.
Kang Jingping (2000) thought that the unequal distribution of social wealth is the root causes of China’s macro-economic inadequate aggregate demand.
Firstly, the unequal distribution of wealth caused insufficient consumer demand. Generally the marginal consumer propensity of rich is lower than the poor. Most of the national income are in the hands of few affluent, thus the consumption is naturally difficult to increase. While widening income gap will increase the sense of crisis of poverty levels. And new economic growth point is also difficult to form. The inequality of urban and rural income will also inhibited the rural market development.
Secondly, the social inequality of wealth will lead to the lack of investment demand. Income polarization will result in weak consumer market, so that savings can not be converted into investment. The slow increase of farmers income and low purchasing power is the key to starting the rural market.
In this regard, the scholar suggested to use measures such as financial means to adjust the tax policy of income distribution, increase the income of low-income, and the marginal propensity of consumption of the whole society, thus enhancing the consumption capacity of the whole society.
For reasons of lack of consumer demand, some scholars discussed from the psychological exceptions, the consumer attitudes and other angles.
Li He and Yan Yulong (2009) believes that in order to defend the negative impact of global financial crisis on china’s economic development, china should adopt a proactive fiscal policy and a relatively accommodative monetary policy.
In fiscal policy, further consider expanding the deflict and increase investment in issuing treasury bonds, those are used to the spending of maintaining the livelihood for urban and rural social security. In addition to this, it is particularly important to increase investment in rural areas.
As for Monetary policy, we can still cut the deposit reserve rate , deposit and loan interest rates and take the open market operations and other policy instruments. Unilaterally reduce the interest rate can be considered, which will narrow the difference between deposit and lending. The central bank could further increase the liquidity of commercial banks by issuing or repurchase the bills of commercial banks.
Xu Sheng (2009) Added that the fundamental issues of expanding domestic demand in China is effectively expanding domestic consumption demand, fiscal policy should corresponding shift to structural expansion. The financial crisis triggered by subprime mortgage, whose essence is a global financial crisis. The incentive is the global imbalance of consumption structure, the structural imbalance of consumption also rooted in the world highly uneven political and economic development.
In this context, to effectively expand domestic consumption demand, fiscal policy must based on structured tax cuts, structural expansion of financial spending and investment policy for long-term stable and sustainable economic development.
How to expand domestic demand after the international financial crisis, there are some scholars provided analysis from the angles of reducing the burden on enterprises to increase effective supply, coordinating urban and rural development and stimulating rural consumption.
From the analysis above, there are several difficulties encountered in transformation. To summary, mainly by three kind of reasons: The first one is low efficiency of the consumer demand policy, which lead to powerless expansion of domestic demand. The Second reason is pressure on inflation and unemployment. And the last one is trade friction
Therefore, the study of domestic demand-led economy growth model has significance theoretical and practical importance. Not only this can provide a useful supplement for economic growth theory, but also provide strong theoretical support and practical improvement methods for the implementation of the policy of expanding domestic demand.
2.2.3 RMB Exchange Rate Problem
18.104.22.168 Historical Overview
Changes in the RMB Exchange rate regime approximately have 7 stages. Since the old currency was replaced in 1953 to 1984, most of the time, the value of RMB is overvalued. The main reason is during this period, the planned economy had absolute dominance with the guidelines of self-reliant economic development principles.Our dependence on foreign trade in 1952 was 9.4%, in subsequent years this number didn’t exceed 10% and in 1977, the figure is 8.9%. Fall-scale import and export limited by government control and the level of RMB exchange rate had little effect on the entire national economy.
During the later stage of this period, overvalued currency has resulted in considerable difficulty, but the social values still agreed that maintenan
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