Achieving Inclusive Growth in China Through Vertical Specialization

Wei Wang

• Publisher: Chandos Publishing
• Year: 2016
• Print ISBN: 9780081006276
• eBook ISBN: 9780081006283
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Vertical Specialization and Inclusive Growth in China discusses the two interrelated developments that have transformed the Chinese economy in recent years. First, the global community has increased calls to foster inclusive economic growth, with China embracing this trend. Second, the explosive growth in China's trade resulting from international vertical specialization production and trade networks which has complicated the notion of inclusive growth in the Chinese context.This book assesses these two trends quantitatively, giving evidence of the link between vertical specialization and inclusive growth, and then decomposing the inclusive growth effects of vertically specialized trade into six components: GDP growth, export growth, FDI, environment, employment, and innovation. It further explores the differing impact of conventional trade and processing trade on inclusive growth, providing direction for future policy. This second book by the author to consider vertical specialization stresses the importance of integration in driving inclusive growth.- Argues that inclusive growth and vertical specialization analyses must be performed together- Gives quantitative evidence for the link between vertical specialization and inclusive growth in China- Investigates the different impact of conventional trade and processing trade on transition to inclusive growth in China, using comparative analysis techniques- Offers insight on forming future policy in China to increase inclusive growth

1

Introduction

Key elements of a transformation in China

Abstract

The mode that centers on trade liberalization and seeks vertical specialization in a resource-conserving and environmentally friendly way will help promote sustainable and inclusive economic development. The goals of creating new jobs and eradicating poverty and climate change are deeply intertwined. Growth strategies that fail to tackle poverty, unemployment, innovation, climate change, and/or utilization of foreign capital will prove to be unsustainable, and vice versa. Common denominators in the success of these agendas are opening up and sustainable development. Opening up to the outside world is an essential component of reform and inclusive growth in China.

Keywords

Vertical specialization; inclusive growth; employment; income; innovation; environment; opening up; development in a scientific way

1.1 Background

In recent years, two important interrelated developments have occurred that transformed the fundamental nature of Chinese economy. The first is the global community calling for fostering economic growth in a more inclusive manner, with China embracing inclusive growth to make the markets work for all. The second is the explosive growth of China’s trade and China’s rapid emergence as an export powerhouse due to having taken advantage of the processing trade regime based on vertical specialization and slicing up the value chain. The literature for each of these two separate topics is large and growing. However, very few books quantitatively assess these two trends together.

For China, development has always been the top priority throughout the approximately 30 years of reform and opening up. Up to 2007, China’s gross domestic product (GDP) grew at an average rate of 11%, with trade surplus equaling 10% of the GDP. Since the global crisis, the trade surplus has fallen sharply into the range of 3–4% of the GDP.

Since its market-oriented economic reform in 1978, China’s income inequality situation has seemingly deteriorated (Mah, 2013). For growth to be sustainable and effective in reducing poverty, it needs to be inclusive (Kraay, 2004; Berg and Ostry, 2011). How can the micro and macro dimensions of inequality and growth be integrated to reflect both the pace and distribution of economic growth? The links between inequality and growth are many and complex. Greater inclusiveness depends on the distribution of income and employment creation dimensions. The inclusive growth approach has a longer-term perspective, because the focus is on productive employment as a means of increasing the incomes of poor and excluded groups and raising their standard of living (Ianchovichina and Lundstrom, 2009). In the domestic context, inclusive growth means a country’s economic and social development should guarantee a higher living standard for its people while not imposing serious damages on the environment. Realizing inclusive growth, resolving the social issues emerging from economic development, and laying a solid social foundation for trade promotion, foreign direct investment facilitation, and long-term economic development are all major issues. China’s macroeconomic regulation in pursuing development in a scientific way should focus on transforming economic growth patterns and adjusting economic structures. To bring about these structural changes, China must turn to a growth model driven by technological progress and higher production efficiency.

In the past 30 years, China’s exports have grown at an annualized rate of 19%, which is more than twice the rate of the growth of world exports (Ma et al., 2009). As a result, China’s share of world trade has surpassed that of Japan, the United States, and Germany to become the world’s largest exporter. China’s foreign trade is, to a large extent, vertically specialized. China’s exports contain a substantial amount of inputs imported mostly from the East Asian supply chain, as illustrated by Koopman et al. (2008). Conventional trade models do not consider vertically specialized trade. One way to quantify the importance of the vertical trade is to look at the share of processing exports in China’s total exports. The China Customs General Administration’s trade database exclusively records China’s foreign trade transactions of goods. Processing exports are significant to China’s foreign trade, accounting for 55% of China’s exports to the world in 2005 (Ferrantino et al., 2007). In 2008, 47% of China’s exports were classified as processing exports (ie, they use imported intermediate inputs). Processing trade by foreign-invested enterprises (FIEs) is that conducted by three types of FIEs: wholly owned FIEs; foreign-invested joint ventures; and Sino-foreign cooperative firms. Processing trade includes two main types of transactions: processing and assembling and processing with imported materials (Xu and Lu, 2009). The emergence of China has intensified international segmentation of production processes within Asia, but it has not created an autonomous engine for the region’s trade because Asia still depends on outside markets for its final exports (Gaulier et al. 2007; Liao et al., 2012). In reality, imports of intermediate goods sometimes involve trade between a parent and its subsidiaries in the same transnational corporation. This kind of relationship usually exists in the intermediate goods trade between China and developed countries (Liao et al., 2012).

1.2 Six components of the problem of inclusive growth in China

What is inclusive growth? The concept of inclusive growth was first created and advocated by Asian Development Bank (ADB) economists in 2007. It means to spread the benefits of globalization and development and to realize “balanced social and economic progress through sustainable development.” Some definitions of inclusive growth are interchangeable with definitions of pro-poor growth—defined as growth associated with poverty reduction (Grosse et al., 2008; Habito, 2009; Rauniyar and Kanbur, 2010; Ranieri et al., 2013). Ianchovichina and Gable (2012) describe inclusive growth as increasing the pace of growth and enlarging the size of the economy by increasing productive employment opportunities and providing a level playing field for investment. Inclusive growth is the most important source of continued and sustained economic growth (Anand et al., 2013a,b).

The proxy used in this book is an attempt to capture inclusive growth by accounting for six components of the problem of inclusive growth in China. To enlarge the size of the economy, generate productive employment, accelerate poverty reduction, strengthen indigenous innovation, lower environmental damage, upgrade utilization of foreign capital at the required scale, and avoid middle-income trap, China will have to achieve sustained and inclusive growth, which critically depends on “reform and opening up” policies. For this reason, questions of macroeconomic stability, employment generation, poverty and economic disparity, environmental sustainability, technological innovation, utilization of foreign capital, and inclusive growth should be more prominently refle...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• About the author
• Acknowledgments
• 1. Introduction: Key elements of a transformation in China
• 2. The evolving pattern of China’s free trade from a vertically specialized perspective during the transition to inclusive growth in China
• 3. Vertical specialization and enlarging the size of the economy: Comparing impacts of conventional trade and processing trade patterns on GDP growth in China
• 4. Vertical specialization and increasing productive employment: Comparing impacts of conventional trade and processing trade patterns on labor market in China
• 5. Vertical specialization and accelerating poverty reduction: Comparing impacts of conventional trade and processing trade patterns on income in China
• 6. Vertical specialization and lowering environmental damage: Comparing impacts of conventional trade and processing trade patterns on energy consumption in China
• 7. Vertical specialization and strengthening indigenous innovation: Comparing impacts of conventional trade and processing trade patterns on innovation in China
• 8. Vertical specialization and upgrading utilization of foreign capital: Comparing impacts of conventional trade and processing trade patterns on foreign investment in China
• 9. Concluding remarks
• References
• Index