APEC in the 21st Century

6. The Implications of China’s Accession to the WTO

150 Deepak Bhattasali and Masahiro Kawai 6 The Implications of China’s Accession to the WTO Deepak Bhattasali and Masahiro Kawai Introduction The ability of China to raise per capita income by over 8 per cent a year over the last two decades places it in a very small group of countries experiencing rapid economic growth.1 Rising standards of living, including lifting nearly 250 million people out of poverty, have been made possible through a factor-accumulation-based strategy that drew on China’s immense labour resources, assisted by massive investments in physical capital and industrial infrastructure. Changes in incentives and organizations buttressed this strategy, and resulted in rising total factor productivity (TFP) averaging nearly 3 per cent per year. In the 1990s, growth had slowed, reflecting a combination of macroeconomic and external sector policies and intensified structural bottlenecks. The regional economic slowdown since the beginning of the Asian financial crisis had also an adverse effect on China. Visible urban unemployment (estimated to be about 9 per cent of the workforce), factory closures and massive excess capacities in industry, price deflation, and a real growth rate that dipped to 7.1 per cent in 1999 were some of these signs. The Implications of China’s Accession to the WTO 151 China’s desire to join the World Trade Organization (WTO), despite fears that increased competition from abroad may cause further labour market stress, stems from the belief that the net gains in economic efficiency, employment and welfare would likely be positive in the medium and long term. Its negotiating stance on specific aspects of the accession protocols has reflected its desire to backload many of the projected adverse impacts on employment and income. Underlying these positions is a temporal view of how quickly robust and selfsustaining employment creation will follow from the massive structural changes taking place in the economy. In terms of economic management, the key issue is the authorities’ ability to maintain the momentum of growth with the fiscal stimulus programme until job creation accelerates, to provide social safety nets to alleviate labour dislocations, and to foster more balanced development in the Western Provinces. This paper examines the implications of China’s accession to the WTO for its economy, from structural, sectoral, and macro perspectives, and for its major trading partners and global competitors. Four Types of Structural Transformation in China Four major types of structural transformation have been underway in the Chinese economy. Each of these has profound implications for resource allocation, the distribution of income, and the relative emphasis given currently to specific aspects of economic policy. Briefly, these are: • From a command economy to a market economy, a transformation that, de jure, started after the “opening” of China in 1978. It has been marked by the progressive deregulation of prices and resource allocation decisions. It has also been characterized by a shrinking role of the State in economic activity. The share of retail goods sold at prices fixed by the State fell from 97 per cent in 1978 to 5 per cent in 1999; the share of agricultural goods sold at fixed prices fell from 94 per cent to 23 per cent; and the share of capital and industrial goods sold at fixed prices fell from 100 per cent to 12 per cent. Further, the share of the public sector in total fixed investment fell from 82 per cent in 1980 to 53 per cent in 1999. Similarly, direct funding of investment from the 152 Deepak Bhattasali and Masahiro Kawai government budget declined from 30 per cent to 6 per cent over the same period. • From an economy based mainly on agriculture to one based largely on manufacturing and services (see Appendix Table 1 for this trend). In 1980, agriculture accounted for 30 per cent of total output. It had declined to 18 per cent by 1999. The share of the workforce in agriculture fell over the same period from 69 per cent to 50 per cent. During the 1990s when the economy as a whole created 67 million new jobs, agriculture shed 31 million jobs, or roughly 3.4 million jobs each year. By contrast, services added 104 million jobs, or nearly 11.5 million jobs per year. • From an economy with high-fertility and low-longevity, to one with a low-fertility and high-longevity demographic profile. The natural growth rate of the population slowed from 1.2 per cent...