The Evolution Of China's Economic Openness And Its Effect On Growth

Economic openness with respect to trade in goods and services, foreign direct investment and financial openness had a positive marginal effect on growth during the reform period in China. And with the entry of WTO, openness will become more and more important in the future. As a main form of institutional change, openness cannot enable economists to keep their strong interests until Li (1998) established his indicator system, which measured the effects of openness from trade, investment to finance and could compute the overall index of openness finally. However, there are some flaws in Li's indicator system, such as the choice of indicators and the measurement of indicators'weights. Furthermore, the debates on the relationship between openness and growth separated into three aspects: effects of trade liberalization, foreign direct investment and financial openness on growth, respectively. It was very scarce that researchers focused such relationship from the view of taking openness as institutional change. In this paper eight indicators, which belong to three main aspects, trade, finance and investment, are introduced in order to construct the indicator system and gain the overall indices that reflect China's economic openness more comprehensively and precisely than former studies, including Li's. Through employing Principal Component Analysis to acquire weights of each indicators, the overall indices measured in this paper displays the evolution of China's economic openness from 1980 to 2002 based on existing data other than subjective judgments. Such measurement makes possible introducing economic openness to growth model as an institution variable in transition economies. So the author tests the relationship among GDP, material capital, labor and human capital, openness and technological process based on the Cointegration and VECM techniques. More importantly, the debate regarding to the mechanics of effects of openness on growth has been done in the framework of endogenous growth theory.