Lessons from the Shanghai FTZ
- By John Ross
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E-mail China.org.cn, July 12, 2014
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An enterprise representative shows the business registration he just received at the service lobby of Shanghai Free Trade Zone (FTZ) in Shanghai, east China, Oct. 14, 2013. [Xinhua/Xu Wanglin] |
The FTZ has therefore tried out a series of measures to allow companies more ease in operation, and creating wider opportunities for foreign investment, but without radical and untested breaks in China's overall approach.
The explicit role of the FTZ as a testing ground is shown by the People's Bank of China internally holding discussions of measures used in it, to ascertain which work, and which don't or require modification, as a prelude to considering which measures should be rolled out across China.
Far from being conservative, or purely pragmatic, China's approach to testing economic policy is deeply grounded theoretically. Using the Shanghai FTZ to illustrate this wider approach in turn allows a clearer understanding of policies in the FTZ.
Whether in the economy, or anywhere else, the effect of any change, its cause and effect, is sometimes presented solely as a picture of one billiard ball hitting another, with the first determining the course of the second. This model is false. In reality, the consequences for the second ball are determined not only by the effect of the first ball but by any slope of the table, the smoothness of the table, the spin on the ball, the quality of the felt, and a multitude of other factors. From a theoretical point of view, there is an infinity of factors affecting the ball and it is the totality of these which determines its precise movement.
The same principle applies in an economy and has a directly practical consequences -- as an economy is far more complex than a billiard table and has numerous forces operating in it. The reason why, for example, in developed markets index share funds, which average large numbers of shares, outperform individual stock picking is because share indexes summarize the maximum amount of information available in the market about forces operating in it, whereas the information available to an individual investor picking shares is too limited. To understand the precise consequences of any economic developments numerous factors must be taken into account.
Apply this principle to China's economy, and the framework guiding "crossing the river by feeling for stones" becomes evident. Not all economic forces are of equal strength or importance. Some are so powerful, and therefore clear, that answers can be derived purely from economic theory. Economists have known since Adam Smith that the most powerful force in developing production is division of labor, including what is now known as "globalization." Modern economic statistics confirms this more than 200 years after Smith analyzed it. Consequently, the attempt to contain a self-enclosed economy by China, prior to its economic reforms of 1978, a policy copied from the USSR, was bound to fail. The decision on "opening up" China's economy in 1978 could be taken entirely from the point of view of the most fundamental economic forces -- as was done.
But how to "open" up China's economy most successfully depended on more secondary factors -- the competitiveness of particular industries, the exchange rate, the situation in different geographical regions etc. The relative weight of these, which were vital for predicting the success or failure of any policy, cannot be determined by pure economic theory but only by testing in practice -- "feeling for stones."
Within that framework the role of the Shanghai FTZ is clear. The precise factors which must be judged in economic development change with time. In 1978, when China launched its economic reforms, it was a low income country forced primarily to rely on low wages for economic advantage. But now China is, by World Bank criteria, a "high middle income" economy. Only 30 percent of the world's population lives in countries with a higher per capita GDP than China, while 50 percent lives in countries with lower per capita GDPs. Therefore, China cannot rely on low wages as its primary competitive advantage. Furthermore, China's working age population is no longer expanding.
In these new conditions China's economic development increasingly depends on its investment level -- 57 percent of growth in an advanced economy is accounted for by capital investment, and how efficiently that investment is used. The role of the Shanghai FTZ is precisely management innovation and improving investment efficiency -- not in the sense of technological innovation, but of which regulatory and financial frameworks improves efficiency.
Those who imagined the FTZ was China abandoning its tested approach for methods which have failed elsewhere simply misunderstood the policy. The Shanghai FTZ is one of the stones China has successfully felt beneath its feet.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/johnross.htm
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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