Fact Box

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Exchange motivator


Over the past four decades, China has made remarkable economic achievements that the whole world has marveled at. The key to its economic success is that China adopted the policy of reform and opening-up.

Former leader Deng Xiaoping pointed out in 1978 that it was impossible for China to build a country with its doors closed. In recent years, President Xi Jinping has repeatedly stressed on different occasions that "opening-up drives progress whereas self-isolation only leads to backwardness".These statements on the importance of continued opening-up to the world are one of the pillars of China's economic success.

China's rapid development over the past 40 years is represented by the growth of per capita income, and there is only one factor that could enable growth in per capita income--the increase in labor productivity, or increase in output per unit of time.

The increase in labor productivity has been driven by technological progress, the division of labor, specialization and exchange. Exchange is very important, and requires a series of rules or institutional safeguards.

So, what determines the division of labor, specialization and exchange? British economist Adam Smith argued in The Wealth of Nations that it is determined by the size of the market. The larger the market, the more factors of production are involved in the division of labor and specialization, and as the division of labor becomes more complex, the more everyone can exchange and the greater gains they can achieve by leveraging their respective advantages, whether comparative advantages or absolute advantages. Later generations named this theory that economic growth depends on expansion of the market as Smith's theorem.

China's practice in opening-up has made a strong case for the long-term growth theory. China's achievements through opening itself up are inseparable from its efforts to participate in the international division of labor and rule making. Policies to attract foreign investment, set up special economic zones, promote export-oriented industries, and encourage businesses to develop overseas have all helped to expand the size of the market and generated growing gains from trade based on the international division of labor. Of course, this process has been accompanied by technological progress.

Long-term growth theory has long been considered as a Western theory. In fact, these ideas are consistent with some of the thinking presented by the ancient Chinese, showing a deep-rooted influence of the traditional Chinese wisdom on China's practice of opening-up today. Adam Smith wrote The Wealth of Nations in the 18th century. However, Chinese historian Sima Qian wrote an article Huozhi Liezhuan (On Goods and Prosperity) as a part of Shiji (Records of the Grand Historian) more than 2,000 years ago. The term huozhi is what we call growth today. In the article, Sima Qian specifically talked about how to realize huozhi, or growth, by "exchanging what I have more of for what I have less of".The book Huainanzi written by Liu An, who lived around the same time as Sima Qian, also talked about how to realize natural economic growth by "exchanging what I have for what I have not and what I am good at producing for what I am not good at producing". This shows that the basic logic in the theory of international trade was known to our ancestors more than 2,000 years ago. The ideas to a large extent embody the essence of international trade theory as we know it today. I call this Chinese theory the Huainanzi-Sima Qian Theorem.

Adam Smith and British political economist David Ricardo argued mainly about the idea of "exchanging what I am good at producing for what I am not good at producing", but did not touch on "exchanging what I have more of for what I have less of".Building on Smith's and Ricardo's theories, Swedish economist Eli Heckscher and his student Bertil Olin emphasized the concept of natural endowment, elaborating on the question of "less and more" and the question of "have and have not". Division of labor and gains from trade, as one of the two logical bases of long-term growth theory, thus can find an equivalent reference in traditional Chinese culture. It shows the cognitive isomorphic side of the Eastern and Western cultures and the continuous theorizing process of Chinese wisdom.

Of course, it is noticeable that participation in the division of labor and exchange necessitates proper rules. Therefore, reform and opening-up go hand in hand. Reform plays a very important role here. China has joined the World Trade Organization, signed the Regional Comprehensive Economic Partnership Agreement, completed negotiation on the China-EU Comprehensive Agreement on Investment, and applied to join the Comprehensive and Progressive Trans-Pacific Partnership. What China has been doing is to join a system of rules in which people can secure rights, develop stable expectations and reduce transaction costs, thus enabling huge and potential trade gains.

This is the logic behind China's opening-up to the outside world. Opening-up is an important fulcrum of China's modernization process, through which China has gained greatly from trade.

The author is a member of the Chinese Academy of Social Sciences (CASS), director and a senior fellow of the Institute of World Economics and Politics at CASS. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn