China's Entry into the WTO: ICT Sectors, Innovation, Growth and Distribution

During the debate about PRC's entry into the WTO, it was assumed by the proponents of joining the WTO that the export-led growth will continue and under WTO regime it will also lead to the modernization of the economy along the lines of the other newly industrialized economies(NIEs) of Asia. If examined rigorously, such an assumption can be seen to entail the goal of creating further technological capabilities. In particular, China seems to be firmly committed to the creation of a largely self-sustaining innovation system as part of a knowledge-based economy of the future . Such innovation systems, called positive feedback loop innovation systems or POLIS have been created by advanced countries, and NIEs such as South Korea and Taiwan are proceeding to create these as well. Can China do the same? And will China's entry into the WTO help or hinder such efforts? Using an economy wide model it is found thatThe entry into WTO can create an opportunity for technological learning and new technology imports. The challenge is to learn quickly and develop domestic capability before costs become too high. Thus, subsidizing domestic ICT firms can become an even more attractive strategic trade and technology policy. However, developing an interactive sustainable innovation system with virtuous positive feedbacks will require strategic complementarity between capital expenditures such as R&D and human resources.Therefore, upgrading education and training and developing ICT infrastructure quickly become urgent policy objectives. Also, precompetitive support of innovation needs to be separated from the actual development and marketing. In this area, clear guidelines and incentives for both the state and non-state enterprises will be necessary. A well-defined competition policy is a sine qua non for this purpose. In the Chinese case, openness can lead to increased competition under a rules-based trading regime. The challenge will be to build competitive world class ICT firms in such an environment. Even as competitive policies are pursued along with further structural reforms in China, the fact that such policies are to be pursued in an environment of incomplete information and other market imperfections mean that excess capacity, and consequently, unemployment may persist for sometime. Therefore, the role for appropriate macroeconomic policies to pursue the goal of reducing excess capacity without creating inflationary pressures need to be considered carefully.