The shape of globalization: China’s remarkable role

2 December 2011
ITC News

Ten years ago, China joined the World Trade Organization (WTO). Its membership and integration into the world economy had a huge – and hugely underestimated – positive impact on global prosperity. Consumers gained from less expensive imports and, more broadly, increased global competition drove huge welfare gains, which continue to grow.

It is a success story of the WTO, and something both the WTO and China can be extremely proud of. This fact needs to be stressed and repeated, particularly at a time when multilateral trade negotiations are not moving as swiftly as all of us would like. Much of the credit goes to Long Yongtu, China’s vice-minister of Foreign Trade and Economic Cooperation and one of the main architects of this great achievement.

It is also the story of globalization – the new economic order – to a large extent initiated in China with the change in policies under Deng Xiaoping after 1977. One of his guiding concepts was to ‘seek truth from facts.’ China’s new policies not only changed the course of its history; the signal from China triggered a global turnabout in the perception of the private sector across the developing world and, ultimately, in economic policy.

ERT, the European Round Table of Industrialists, analysed this transformation in three consecutive reports, the first dating from the early 1990s. This work revealed a global wave of autonomous opening of markets, deregulation, modernization and globalization of rules and regulations related to business. This was very much driven by competition on rules.

As a result of these changes, more local and foreign-invested private resources were mobilized and, even more important, investment became more efficient. In other words, the incremental capital output ratio of the economies opening up improved significantly. This drive from business had – and continues to have – an impact on widespread prosperity; since 1980, more people were lifted out of poverty, able to establish themselves at a level of modest prosperity, and even able to move up further, than in any other period of history.

Meanwhile, the success is also reflected in global GDP statistics. Since 2000, the average growth of developing economies accelerated to a rate three times that of advanced economies. With a less heavy hand of the state, investment efficiency further improved from 2000 up to the start of the financial crisis in 2008; in fact, it nearly doubled. On the other hand, investment efficiency was reduced by one third in advanced economies over the same period. Another factor of change began to accelerate as well. By 2010, a remarkable 29% of foreign direct investment originated from emerging economies, as opposed to 2%–4% in the 1980s, according to the UN World Investment Report 2011.

Leaders in advanced economies have to learn to listen more carefully. Indebted European countries urgently need foreign direct investment as a non-debt-creating financial flow. Advanced economies need advice regarding the conditions under which more FDI from emerging economies will flow to them. Therefore, the discussion on conditions for investment has reversed; this advice is now increasingly required from our Chinese partners.