Rarely has there been such a wide discrepancy between estimates of an economy's performance and potential as there is in China. While some economists praise China's past achievements and future prospects, others dwell on the supposed flaws in China's development model and suggest that a middle-income trap awaits. But even more remarkable than the sharp divergence in views on the Chinese economy is the fact that both sides have been able to marshal sufficient evidence to support their views. Few would dispute that China's past economic success was largely due to technological imitation enabled and facilitated by trade. Especially her 1990s and the first decade of this century were marked by direct investment with and from developed economies. But we cannot pretend that linking technological imitation to rapid economic growth is not an achievement. After all, most low-income countries are unable to do so.
In this discussion, it is jarring to suggest that China still lacks some key technologies, or that it has acquired most of what it does have thanks to the allure of its vast market. The true measure of technological success is the ability to turn new technologies into engines of profit, growth, and development. And China has done so not only by using Western technologies in their raw form, but also by rapidly upgrading and adapting them.
Currently, China is at the forefront of fields such as 5G, renewable energy, lithium batteries, and electric vehicles (EVs), and is also a world leader in artificial intelligence. As former U.S. Treasury Secretary Lawrence H. How could a country with so many world-leading products be able to produce so many world-leading products? Technology company.
According to Keyu Jin of the London School of Economics, the answer is simple. China is a truly innovative country. Western observers have a hard time recognizing this because views of China have become so politicized. But MIT's Yasheng Huang argues that China's deep-rooted traditions stifle innovation, so everything China has done has been a reuse of Western technology. He concludes that unless these traditions can be broken, economic decline is all but inevitable.
Both economists provide an entire book's worth of analytical evidence. How is this possible? One explanation is that in China's highly complex political economy, many of the factors considered incompatible with innovation are offset or offset by policies and structures that enable innovation. , it is possible that they are supplemented.
People visit the green agriculture section of the China International Supply Chain Expo in Beijing on November 30, 2023. Photo: Xinhua In China, the importance of top-down economic management, including the widespread implementation of national industrial policy and the perpetuation of large-scale agriculture, has often been discussed. State-owned enterprises (SOEs) in key sectors are fundamentally incompatible with dynamism and innovation. Critics say that central government overcontrol can lead to economic inefficiency, capital misallocation, and fiscal distortions.
However, while the central government issues uniform policies and strategic documents, local governments are also given ample scope to foster private sector innovation, especially by establishing a near-perfect business-facilitating environment. Local governments enjoy varying degrees of autonomy, but policies tailored to the local economy are widely encouraged.
Furthermore, China's leaders understand that subsidies can promote competition, rather than inhibit it. For a small number of technology companies to drive the development of emerging industries, they must overcome huge barriers to entry. In most Western countries, support from well-developed financial and capital markets has made this possible, but companies still need sufficient time to achieve scale and competitiveness. Given the high fixed costs associated with this, early subsidies can be very valuable, even essential.
In China, many local governments are willing to bear these fixed costs not only by providing subsidies but also by establishing investment funds for emerging industries. This will encourage more companies to enter the market and lead to the development of greater production capacity.
Manufacturing researcher Yang Xiaojun adjusts equipment at a research institute in Xi'an, Shaanxi province on January 17 (Photo: Xinhua News Agency)
Importantly, this capability is distributed across different geographies, and companies operate in individual, highly competitive markets rather than in a single market. In this sense, China's economic fragmentation, which critics often cite as a weakness, is a source of strength.
China's comprehensive industrial ecosystem means that firms gain competitive advantage through network externalities and economies of scale. This helps explain the rapid rise of China's EV and lithium battery sectors. This achievement is attributed by critics to Chinese industrial subsidies and by defenders to the competitive domestic market environment.
For China's critics, excessive bureaucracy, dominant state-owned enterprises, an underdeveloped financial sector and fragmented markets hinder the emergence of a highly dynamic and competitive economy. But as any long-time observer of China will tell you, the reality is not so simple. China is a vast country with a long history of unitary statehood, deep cultural traditions, and a highly complex governance structure that is both centralized and decentralized, rigid and flexible.
Top-down management coexists with and even enables local autonomy and bottom-up innovation. This “double helix” phenomenon results in radically contrasting analyzes of economic prospects.
Zhang Jun, dean of the Faculty of Economics at Fudan University, is director of the China Economic Research Center, a think tank based in Shanghai.Copyright: Project Syndicate
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