World-System of the Hierarchy of China and Hong Kong - Essay Example

TOPIC: The effects of internal and external changes in the world-system on the hierarchy of China and Hong Kong since the 1980s The effects of internal and external changes in the world-system on the hierarchy of China and Hong Kong since the 1980s Introduction Over the past century, China and Hong Kong (HK) have developed in distinctly different ways, both politically and economically. In 1949, China established a communist nation, separating itself from the world economy for over 30 years. Meanwhile, under British administration HK has turned from a fishing village into a cosmopolitan city-state since the Opium War of 1842. This study will describe changes in the core-periphery relationship between Hong Kong and China since the 1980s, an era in which China adopted its "open door policy" and HK reverted to rule under China. This study will apply world-system perspectives to examine the relationship between the two. First, a theoretical framework for the concept of the world system has been constructed using current literature. Second, the political and economic history of China and HK has been examined. Finally, the development of China and HK since the 1980s will be compared. World Systems World-systems theory is a set of nested and overlapping interaction networks which focuses on understanding the development of multicultural territory labour division across core and periphery regions (Chase-duun, 1993, 1995; Wallerstein 1974, 2000). Wallerstein (1974) defines the world-system as a multicultural territorial division of labour, and defines two types: core and periphery. These are defined by the nature of their industries: core regions are characterized by capital-intensive, well-developed tertiary industries and periphery regions by labour-intensive primary and secondary industries. The specific claims of world-system theory can be separated into system structure and system dynamics. System structure defines the characteristics and relationships of the system components, with reference to core, periphery and semi-peripheral regions1. System dynamics concerns the processes of the upward or downward mobility within the structure (Shannon, 1996). China (pre-1980s) When Mao Zedong established the People's Republic of China in 1949, the government's priority was the forcible redistribution of property (Kenneth, 1992). Marrin (1993) and other critics describe the first few decades after the creation of the Republic as being full of chaos, famine and class struggles. The Korean War induced the United States and United Nations to enforce a series of embargo punishments on China. Furthermore, the Soviet Union withdrew loans and technicians in 1960 due to a downturn in their relationship. The Great Leap Forward and the Cultural Revolution (1958-1976) not only paralyzed internal production and economic activities, but also separated China from the world-system economy (Marrin, 1993). Because China rigidly controlled international investments and trade, Hong Kong became the only port where China could buy foreign currency and items that were not obtainable locally (Miners, 1991). Hong Kong (pre-1980s) Hong Kong became a British colony at the end of the Opium War in 1842. Although its governor was appointed by Britain, colonial government did not promote any ideology to enhance its political legitimacy. Hong Kong has often been described as a free society (So & Kwitko, 1990). Colonial government adopted a "positive non-intervention" policy towards the economy while maintaining a competitive business environment to attract foreign investment, and pursued export-led industrialization in the early 1950s (Haddon-Cave, 1995). After China's political upheaval in1949, an influx of over sixty thousand refugees to HK (Hambro, 1955) brought substantial capital and labour resources, which were used to set up manufacturing factories. The embargoes imposed on Chinese trade in the 1950s helped subsidize the HK economy, with HK acting as a buffer zone between western countries and the Chinese market. China and HK (1980s onwards) After further political struggle in China, Deng Xiao-ping assumed power in 1979 and introduced a series of open door policies to invite foreign investment2 (Kenneth, 1992). This allowed China to use foreign capital to reconnect with the capitalist world system. In 1984, Deng declared that China would resume sovereignty of HK from July 1997 onwards. A prosperous HK would substantially contribute to China's economic growth (Miners, 1991). After 1997, the relationship between China and HK became economically closer, creating a more intimate interdependence, particularly as HK investors had priority to benefit from the undeveloped market in China. On December 11, 2001, China officially became a member of the World Trade Organization (WTO), allowing China to benefit from export markets, increased foreign investment, import competition, and the arrival of new foreign-backed competitors. In addition, China's market access commitments will provide the opportunity for access to a broad range of goods and services. East Asian economies may also benefit significantly from China's membership (Tables 5 & 8). HK is now the undisputed gateway to China, which is HK's largest trading partner (Findley, 1993). Under the framework of the WTO, HK and China signed the Closer Economic Partnership Arrangement (CEPA) in 20033(TDC 2003), which became a stepping stone for multinational investors to enter China's market. CEPA also provides an opportunity for mainland enterprises to raise funds via the HK stock market. Nearly 332 listed mainland enterprises raised more than US$139 billion in HK in 20054. During this year the HK stock exchange ranked the highest among all Asian regions and fourth globally in terms of capital raised. Links between China and Hong Kong China and Hong Kong evolved politically and economically in distinctly different ways. However, there are three links between China and HK which are important factors in the development of both. Changes in Industrial Structure5 In recent years, most of the secondary industry in HK has moved to mainland China, to take advantage of cheaper labour and materials. Accordingly, secondary industry now makes less of a contribution to the Gross Domestic Product (GDP) of HK, while tertiary industry makes a greater contribution. HK has obviously benefited greatly from China's rapid economic growth since the 1980s. In 2004, 90% of GDP came from tertiary industry (+21.7% since 1980) and only 9.9% (-21% since 1980) from secondary industry (Table 1). This indicates that the hierarchy of HK is shifting from a semi-periphery to a core economy system. In China, the GDP contribution from primary industry has gradually decreased, while the share from secondary and tertiary industries has increased (Table 2). The growth rate of tertiary industry is more rapid than that of secondary industry. The GDP growth rate of tertiary industry (+10.5% since 1980) is greater than secondary industry (+4.4% since 1980). This indicates that China is shifting from a periphery to a semi-periphery country. Influx of Foreign Direct Investment (FDI) Developing countries usually suffer from lack of capital. This problem is solved by the influx of FDI. The flow of foreign-owned capital has a positive effect on a country's economic growth in many different ways, including at the individual level. For example, people with low income are usually unable to save or accumulate capital, and FDI affects these people because wages rise, allowing such accumulation. (Rostow 1960) Before the 1980s, China's overseas investments were rigidly controlled, with HK the largest partner in a one-way investment in China. When China began to permit FDI in 1979, 86% of FDI in the first five years came from HK (Table 3). In the past twenty years, 75% of total FDI has been invested in secondary industries (Table 4), with HK being the investor for nearly half of these projects (Table 5). HK is regarded as one of the most important business hubs and financial centres in the world. When China resumed exercising sovereignty in HK, there was a rapid influx of mainland companies listed on the HK stock market. These influenced only overall market value, but also the volume of equity turnover (Table 6). This two-way investment strengthened the relationship between China and HK, and helped incorporate China into the world economy. The China-HK relationship is shifting from exploitative to mutually beneficial under the dynamic world-system. Balance of Exchange within Core-Peripheral Components World-system theorists regard the economic relationship between the core and the periphery as fundamentally exploitative. Peripheral countries never earn enough from their exports to cover the cost of their imports from core countries (Frank 1984; Amin 1976). According to the above argument, export deficit should be found in the periphery country. However in China, national export deficit was only recorded between 1986 and 1990. Export deficit was found in Foreign Invested Enterprises (FIE), but the gap between import and export by FIE was gradually closed in 2000-2004 (Table 7). Furthermore, China recorded export surplus with some core countries and export deficit with semi-peripheral countries (Table 8). These data do not support the described theory, and instead imply that instead of core countries exploiting peripheral countries, in some way the relationship may be reversed in this case. Conclusion The 1980s was an important decade for both China and Hong Kong. The changes in industrial structure in China and HK indicate upward mobility of the hierarchy of both countries in the world-system. After reunification, mutual investment and trade between China and HK occurred much more frequently. The noted changes in industrial structure challenge the world-system theory that economic relationships between core and periphery regions are exploitative. Indeed, the relationship between these two regions has shifted from exploitative to mutually beneficial under the dynamic world system. (1497 words) Table 1 GDP of Hong Kong Year 1980 1985 1990 1995 2000 2004 Population (10,000 person) 514.5 550.0 575.2 627.0 671.1 691.6 Total employment (10,000 person) 248.9 262.7 274.8 300.0 337.4 355.1 % of population 65.2% 64.8% 63.2% 62.0% 61.4% 61.3% Percentage Contribution to GDP by Industrial Structure GDP (Million HKD) 143 277 599 1,116 1,315 1,291 Primary industry 0.8% 0.5% 0.2% 0.1% 0.1% 0.1% Secondary industry 30.9% 29.0% 24.4% 15.2% 13.2% 9.9% Tertiary industry 68.3% 70.5% 75.4% 84.7% 86.7% 90.0% Source: Abstract from Census and Statistics Department of HKSAR web-site http://www.censtatd.gov.hk/hong_kong_statistics/index.jsp Table 2 GDP of China Year 1980 1985 1990 1995 2000 2004 Population (10,000 person) 98,705 105,851 114,333 121,121 126,743 129,988 Total employment (10,000 person) 42,361 49,873 64,749 68,065 72,085 75,200 % of population 42.9% 47.1% 56.6% 56.2% 56.9% 57.9% Percentage Contribution to GDP by Industrial Structure GDP (100m RMB) 4,518 8,964 18,548 58,478 89,468 136,876 Primary industry 30.1% 28.4% 27.1% 20.5% 16.4% 15.2% Secondary industry 48.5% 43.1% 41.6% 48.8% 50.2% 52.9% Tertiary industry 21.4% 28.5% 31.3% 30.7% 33.4% 31.9% Source: China Labour Statistical Yearbook 2005 Table 3 FDI in China, investment from Hong Kong (1979-2004) (Unit: US$10,000) Year 1979-85 1986-90 1991-95 1996-2000 2001-04 Total Total Number of Project 6,797 22,728 229,739 104,621 145,056 508,941 Hong Kong 5,829 16,261 130,225 39,708 47,205 239,228 Share % 86% 72% 57% 38% 33% 47% Others 968 6,467 99,514 64,913 97,851 269,713 Share % 14% 18% 43% 62% 67% 53% Total Contractual Value 160.83 245.32 3554.97 2799.84 4205.12 10966.08 Hong Kong 104.48 141.80 2091.64 941.27 1367.33 4646.52 HK share % 65% 58% 59% 34% 33% 42% Total Realized Value 60.60 146.31 1141.77 2134.79 2137.55 5621.02 Hong Kong 28.03 89.01 669.13 916.80 712.77 2415.74 HK share % 46% 61% 59% 43% 33% 43% Source: Abstract from Invest in China web-site. http://www.fdi.gov.cn Table 4 Industrial Structure of FDI in China (1974-2004) (Unit: US$10,000) No. of Project Share % Contractual FDI Value Share % Total 508,941 100 10,966.09 100 Primary Industry 14,463 2.84 213.07 1.94 Secondary Industry 381,701 75 7486.31 68.27 Tertiary Industry 112,777 22.16 3266.71 29.79 Source: Abstract from Invest in China web-site. http://www.fdi.gov.cn Table 5 Top 5 invest countries / regions in China (1979-2004) (Unit: US$10,000) Country / Region Number of Project Share % Contractual FDI Value Share % Realized FDI Value Share % Total 508,941 100% 10,966.09 100% 5,621.01 100% Hong Kong 239,228 47.01% 4,646.52 42.37 2,415.74 42.98 Taiwan Province 64,188 12.61 793.35 7.23 396.05 7.05 U.S.A. 45,265 8.89 986.09 8.99 480.29 8.54 Japan 31,855 6.26 666.50 6.08 468.46 8.33 Republic of Korea 32,753 6.44 55.64 4.61 259.35 4.61 Source: Abstract from Invest in China web-site. http://www.fdi.gov.cn Table 6 Market Capitalisation and Turnover of China-related Stocks in Hong Kong (HK$mil) Main Board Turnover Year-end Market capitalization % of market Turnover % of equity turnover 1993 142,358.21 4.78% 121,328.09 11.86% 1994 104,260.65 5.00% 91,724.38 9.41% 1995 127,165.74 5.42% 63,148.28 8.52% 1996 294,861.53 8.48% 160,249.54 12.45% 1997 521,592.43 16.29% 1,341,442.09 38.19% 1998 368,498.87 13.84% 442,925.47 27.74% 1999 998,831.11 21.13% 457,606.51 25.81% 2000 1,288,691.53 26.87% 839,166.55 29.34% 2001 1,008,667.91 25.96% 742,447.03 40.77% 2002 935,655.78 26.29% 449,065.66 30.54% 2003 1,600,887.25 29.23% 995,442.34 43.92% 2004 1,864,508.88 28.13% 1,548,588.19 45.58% 2005 2,990,455.76 36.86% 1,552,976.00 43.29% Source: Abstract from the web-site of Hong Kong Exchanges and Clearing Limited. http://www.hkex.com.hk/data/chidimen/chidimen.htm Table 7 Total Imports and Exports of China by Foreign Invested Enterprises (FIE) in 1986-2004 (US$ Million) 1986-1990 1991-1995 1996-2000 2001-2004 National 4863.97 10143.98 17738.45 31365.55 Imports and Exports FIEs 497.37 3372.38 8586.35 17247.39 Share % 10% 33% 48% 55% National 2538.73 4960.28 8121.79 15130.89 Imports FIEs 327.57 3010.05 4331.98 8426.20 Share % 13% 61% 53% 56% National 2325.24 5183.70 9616.66 16234.66 Exports FIEs 169.80 1362.33 4254.37 8821.19 Share % 7% 26% 44% 54% Source: Abstract from China Labour Statistical Yearbook 2005 Table 8 China import-export balance by countries / regions in 2004 (US$ Million) Import Export Balance Total $561,229 $593,326 + $32,097 United States $44,657 $124,942 + $80,285 Hong Kong $11,797 $100,869 + $89,072 Netherlands $2,970 $185,19 + $15,549 Germany $30,356 $23,756 - $6,600 Malaysia $18,175 $8,086 - $10,089 Japan $94,327 $73,509 - $20,818 Republic of Korea $62,234 $27,812 - $34,422 Taiwan Province $64,759 $13,544 - $51,215 Source: Abstract from China Labour Statistical Yearbook 2005 References Amin, Samir. 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