Working toward a truly open economy
By Mei Xinyu (China Daily)
Updated: 2008-02-27 07:24

The country's decision-makers must update their ideas about establishing an open market according to the latest developments in the economy.

Since the country launched its economic reforms in the late 1970s, it has witnessed remarkable improvements in its industrial competitiveness. The penetration of Chinese exports into markets around the world has made China a target of barriers and limits imposed by many of its trading partners.

Some regions and departments in China have become so eager to attract foreign investment that they are willing to compromise local rules and interests. Many Chinese companiesespecially those private ones find obstacles to market-access and corporate financing, among other things.

Therefore, it might be more helpful to stress the idea of "establishing an open economy" instead of "opening up to the outside world" to avoid the misunderstanding that our economy should be more open to the outside world than to domestic business of all kinds of ownerships.

In an open economy, commodities, capital and labor flow freely whether these productive factors originate from outside of the country or from within it.

When a country has an open economy, its economic system is vigorous and fair, laying a solid base for sustainable development. Meanwhile, the State should be able to attract overseas resources that could place the country in a better position when it comes to international trade and economic cooperation.

Therefore, making the economy open to businesses based both at home and abroad is indispensable for economic development.

Having a big and mature market will make it easier to lure overseas investors. And having access to more foreign investment will inject fresh dynamism into the market, making it operate more smoothly.

At this point in history, there are some problems to tackle to ensure that all of the factors at play in the economy work together to ensure progress.

In some capital or technology intensive industries, or those most hospitable to natural monopolies, the government has to grant State-owned businesses the right to operate as monopoly players or at least impose relatively high barriers to market access.

The point is to guarantee that China has leverage in trade pricing on the global market and a solid position when seeking economic cooperation.

In such a situation, domestic businesses might only be permitted to enter particular industries by purchasing stakes in monopoly players instead of becoming new market players themselves.

It is necessary to impose such limits on domestic businesses to protect the national interest now that the economy is also open to foreign players.

Looked at from another perspective, the measures used to make the economy more open to foreign investors become an obstacle to establishing a uniform domestic market.

Areas that enjoy favorable treatment in trade or policies aimed at attracting foreign investors - such as special economic zones, technology development zones and industrial parks - have played a significant role in boosting economic growth in recent decades.

But the favorable treatment and special tax, land-use and industrial development policies have also been abused on occasion, distorting the local market order. It is time to check such abuse to prevent it from disrupting the smooth functioning of the economy.

More importantly, opening the economy to foreign businesses in an unblanced manner could create gaps between different industries, different regions or different social strata. Those who benefit from trade ties would develop faster than others, worsening the disparities.

If the economy is truly open, the free flow of productive elements would bring more opportunities to the inland regions and non-trade industrial sectors, narrowing the gap with the coastal regions.

In the effort to establish a truly open economy, the authorities should offer more transparent and efficient public services and improve infrastructure so that domestic and foreign businesses both find it easy to seek further development.

Taxation authorities should improve their supervision of tax payments by foreign players. They could achieve such an improvement by working more closely with other countries, regions and offshore financial centers, especially to share information.

More input should be injected into public services and the tax rate should be lowered when it comes time to heighten the country's desirability as an investment destination and big market.

Discriminative measures should be eliminated to facilitate the flow of labor into and out of the country. Proper arrangements should be made to encourage talented people to move from the eastern part of the country to the relatively less developed central and the western parts, which would definitely boost local development in both the economic and social spheres.

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce

(China Daily 02/27/2008 page8)