Lessons to Be Learned from the Shanghai FTZ

But the most successful “opening up” of China’s economy depends on more secondary factors, such as competitiveness among particular industries, the exchange rate, and the situation in different geographical regions. The relative importance of these factors, which were vital to predicting the success or failure of any policy, cannot be determined by pure economic theory but only by testing through practice – “feeling the stones.”

Within that framework the role of the Shanghai FTZ is clear. It must be remembered that the specific factors of economic development which must be judged change with time. In 1978, when China launched its economic reforms, it was a low-income country forced primarily to rely on low wages for economic advantage. But now China is, by World Bank criteria, an “upper middle-income” economy. Only 30 percent of the world’s population lives in countries with a higher per capita GDP than China, and 50 percent live in countries with a lower per capita GDP. China, therefore, cannot rely on cheap labor as its primary competitive advantage. Furthermore, China’s working age population is no longer expanding.

Amid these new conditions, China’s economic development increasingly depends on its investment level. Capital investment, and how efficiently that investment is used, accounts for 57 percent of growth in an advanced economy. The role of the Shanghai FTZ is precisely that of management innovation and improving investment efficiency – not in the sense of technological innovation, but in which regulatory and financial frameworks improve efficiency.

Those who imagined the FTZ signified China’s abandonment of its tested approach and adoption of methods that failed elsewhere were simply misguided. The Shanghai FTZ is one of the stones that China feels solidly beneath its feet.

JOHN ROSS is a senior research fellow at Chongyang Institute for Financial Studies, Renmin University of China. From 2000 to 2008 he was director of economic and business policy in the administration of Mayor of London Ken Livingstone. He previously served as adviser to several major international mining, finance and equipment manufacturing companies.