With the release of economic data from China showing that the rate of growth of its gross domestic product decreased to 7.3 percent when compared to last year’s fourth quarter number, it is a good time to reflect on the basic direction of China’s reforms over the last 38 years.

The Chinese economic reform, literally called Gaigekaifang, refers to the process of economic changes called “Socialism with Chinese characteristics.” The process was started in 1978 by reformist Deng Xiaoping after Chairman Mao Zedong died in the summer of 1976.

It was introduced and carried out in two stages. The first stage, between the late 1970s and early 1980s, included the acts of de-collectivization of agriculture, the opening of the country to foreign investment, and permission for entrepreneurs to start businesses. The second stage involved the establishment of special economic zones and the reduction of tariffs, trade barriers and regulations. Government further reformed the economy through participation in the WTO (the World Trade Organization).

Especially important was the development of the Special Economic Zones (SEZ). These played an important role in the integration of China into the global economy, according to the World Bank.

Starting in 1980, Deng created a series of special economic zones for foreign investment that were relatively free of government regulations and interventions that would have hindered economic growth. SEZ went through several phases, ones that Deng expected and planned for. In 1980, the first four SEZs were established near Hong Kong (Shenzhen), Macau (Zhuhai) and Taiwan (Shantou and Xiamen).

Their strategic locations attracted “overseas” Chinese capital. By 1984, the SEZ model was shown to be successful and could be expanded to other coastal areas. Thus, 14 coastal port cities, from Dalian to Beihai, were selected. As described by a World Development Report, special economic zones became clustered; China gradually established its port infrastructure in order to support China’s export-oriented strategy.

Gradually, these regions became the drivers of growth for China’s economy. This growth carried other parts of China forward.

Foreign investment flowed into China not only due to SEZ policy, but also due to the bias toward reducing tariffs and trade barriers. Foreign investment played an important role in helping to greatly improve quality, knowledge and standards.

During the reform period, the government reduced tariffs and other trade barriers, with an average tariff rate falling from 56 to 15 percent. By 2001, less than 40 percent of imports were subject to tariffs and only 9 percent of imports were subject to licensing and import quotas.

By 2005, China’s average tariff on industrial products was 8.9 percent. For Argentina, Brazil, India and Indonesia, the respective percentage figures were 30.9, 27.0, 32.4, and 36.9 percent.

When China joined the WTO in 2001, it signed an agreement more strict than other developing countries. Even with this, trade has increased at a very quick rate from around 10 percent of GDP to 64 percent of GDP since the signing. From a trade perspective, China is now considered by many to be one of the most open large countries.

Although China has experienced skyrocketing development during the past years after the economic reform, some argue that this export-oriented strategy will lead to distortion of the economy. To protect the U.S. in the 2000s, the Bush administration pursued protectionist policies such as tariffs and quotas to limit the import of Chinese goods. At the same time, China’s trade policy, which has allowed producers to avoid paying the Value Added Tax (VAT) for exports since 2002, has kept the imports coming.

China has taken advantage of foreign investment since reforms began in earnest in 1978. The introduction of foreign investment has made up for disadvantages China had regarding a lack of skilled labor and a shortage of domestic capital for investment purposes.

Now the question will be: will India try to follow China’s model? Or will it create its own way?

John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development.

Yujia Luo, Hoffmire’s colleague at Progress Through Business, did the research for this article.

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