Why is China Ahead? Look at the Economic Thought, Not Only the Numbers!

Hussein Askary, The Belt and Road Institute in Sweden

In its relatively short and amazing journey from poverty to prosperity, China made rapid progress in many aspects in the past three decades. However, something happened after the last global financial crisis in 2008 that made China leapfrog from a high-quantity, cheap labor, export-oriented economy into a high-quality, advanced labor, industrial economy but which preserved its position as the world’s largest exporter of goods and technologies.

I argue that this shift was not a mere mechanical reaction to objective outside realities, but a subjective change in the mind of the leadership of China, exemplified by the thought of President Xi Jinping, who assumed the leadership position of both the Communist Party of China (CPC) and the government in 2012-2013.

Let’s look first at the achievements of China in the past decades:

–  As part of China’s industrialization process a massive internal migration from rural (-40%) to urban areas (+40%) has taken place. The major challenge, however, is how to strike a balance between the rapid growth in the urban areas and the backwardness of the rural ones.

– The economy has shifted away from a majority employed in the primary sector (agriculture) towards a majority employed in the secondary sector (manufacturing) and tertiary sector (services sector). At the same time, the efficiency in production of food and the output have increased by means of high technology.

– China has built the largest integrated infrastructure system with the most advanced railway and high-speed railway networks in the world, and temporal distance inside China has been significantly shortened making it easier to travel and transport goods across the country. This has also allowed the emergence of an efficient industrial supply-chain withing the country.

– China adopted a targeted strategy of poverty alleviation and has lifted 770 million people out of extreme poverty by the end of 2020.

– The Engel coefficient that measures the share of disposable income that people need to be spent on food have decreased for urban as well as rural population and is just 50% of what it was in 1978.

– The disposable income per capita have increased almost by 100 times from 343 yuan in 1978 to 32 189 yuan in 2020. The gap in disposable income per capita between people in urban area (43 834 yuan) and people in rural area (17 131 yuan) is still wide and of concern.

– The ratio between the per capita disposable income of urban and rural residents has been declining steadily for 13 consecutive years since 2008, with the ratio standing at 2.56:1 in 2020.

– China has made strong headways in preventing and controlling pollution, attaining major achievements in its drive to keep the skies blue, the waters clear, and the land pollution-free.

– China has dramatically reduced the world’s poverty-stricken population and gained a new experience of modernization for humanity, while its all-round opening up has promoted win-win cooperation.

– China’s experience offers a new option for those countries and peoples who are looking for both rapid growth and independence, and its success provides them with considerable opportunities for development.

– By the end of 2020, China ranked first globally in terms of trade in goods and foreign exchange reserves and ranked second in terms of its trade in services and consumer market. China was also the largest recipient of foreign direct investment. It is the largest trading partner of more than 50 countries and regions, and one of the top three partners of over 120 countries in total.

Hard work not enough!

While hard work has been a main factor in achieving moderate prosperity, technological and scientific advancements have been decisive. Chinese leaders, especially President Xi have been aware of the importance of making China self-reliant in many important technological and scientific sectors while keeping an open door for international cooperation.

In a discussion of the role of science as a driver for the development of any nation, President Xi stated in a speech delivered to the Fifth Plenary Session of the 18th CPC Central Committee on October 29, 2015: “Innovative development focuses on the drivers of growth. Our ability to innovate is inadequate. Our science and technology are not fully developed and are unable to create momentum to support economic and social development. This is the Achilles heel for such a big economy as China.” In addition, given a hostile international environment, China had to overcome attempts by certain Western powers to limit its access to critical industrial technologies. Therefore, it became imperative to speed up the investment in technological and scientific innovation.

High-quality development

The shift from a low-quality mass production for export to high-quality industrial production was pushed strongly by Xi in the same session. “The 13th Five-Year plan period (2016-2020) provides an important window of opportunity for transforming the economic growth model”, Xi said. He added emphatically: “If we fail to achieve this, and instead implement stimulus policy for short-term economic growth, we will continue to jeopardize future growth.”

Explaining what he means by this in more detail, he stated: “In general, the industrial capacity of our country is huge, but it is partly compromised by ineffective supply. China is a big producer and exporter, but most of our products and technology are low-end while few are hi-tech, high quality, and high added value.”

Later, President Xi in a speech titled “A Deeper Understanding of the New Development Concepts,” which he delivered on January 18, 2016, at a study session of the implementation of the Fifth Plenary Session of the 18th CPC Central Committee described the challenge of the imbalance created by moving from a quantity-based to quality-based development. He said: “Coordinated development is the unity of balanced development and imbalanced development. The process from balance to imbalance and then to rebalance is the basic law of development. Balance is relative while imbalance is absolute. Emphasizing coordinated development is not pursuing equalitarianism but giving more importance to equal opportunities and balanced resource allocation.” Xi continued: “Coordinated development is the unity of weakness and potential in development. China is in a stage of transition from a middle-income country to a high-income country. According to international experience, this is a stage of concentrated conflicts of interest, in which imbalanced development and various weaknesses are inevitable. To pursue coordinated development, we should identify and improve our weaknesses, so as to tap development potential and sustain growth momentum.”

In brief, the method China follows in alleviating poverty and raising the living standards is not “taking from the rich and giving to the poor” but rather lifting the poor to higher levels through investments in infrastructure and technological innovation in the productive sector including in the poor rural areas.

Focus on science and technology: robotics as example  

Stressing the primacy of scientific and technological development over mere linear growth, on June 9, 2014, in a speech at the General Assembly of the Members of the Chinese Academy of Sciences and the Chinese Academy of Engineering, Xi stated: “Scientific and technological innovation is constantly transcending geological, organizational and technological limitations. It intensifies the competition between innovation systems and makes innovative strategic competition more important in the competition for comprehensive national strength. Scientific and technological innovations, like a fulcrum which is said to be able to lever the earth, always create miracles. We cannot afford to lag behind in this important race. We must catch up and then try to surpass others.”

In the same speech he made the contrast between being a cheap labor market and being a modern industrial nation: “The old path seems to be a dead end. Where is the new road? It lies in scientific and technological innovation, and in the accelerated transition from factordriven and investment-driven growth to innovation-driven growth.”

He took one example of what his intentions are, Robotics. “Robots are dubbed ´pearls on the crown of the manufacturing industry´. A country’s achievement in robotics research, development, manufacturing, and application is an important yardstick with which to measure its level of scientific and technological innovation and high-end manufacturing. Major robot producing companies and countries have stepped up their efforts to gain advantages in terms of technology and markets. I couldn’t help wondering: China will be the largest robot market in the world, yet can its technology and manufacturing capability sustain it through the competition? We should make better robots and seize bigger market shares.”

He concluded: “The direction of our scientific and technological development is innovation, innovation, and more innovation. We should attach great importance to breakthroughs in basic theories, step up the construction of scientific infrastructure, continue to push ahead with basic, systematic, and cutting-edge research and development, and provide more resources for independent innovation.”

The way forward

With these notions as the guiding light, China enormously increased its investment of research and development as a share of its GDP. China’s National Bureau of Statistics reported recently that R&D spending accounted for 2.4% of China’s GDP.

In 2020, China spent RMB2.4 trillion on research and development (R&D), ranking second in the world. Its R&D intensity (ratio of R&D to GDP) reached 2.4 percent. A total of 1,345,000 utility patent applications were filed with domestic agencies and 441,000 were granted. In addition, 69,000 international patent applications were submitted through the Patent Cooperation Treaty. China ranked 14th on the Global Innovation Index in 2020 and was the only middle-income economy in the top 30 on this list. To foster the national innovation capacity, China has established 533 key national labs, 350 national engineering research centers (also known as national engineering labs), 1,636 national enterprise technology centers, 212 mass entrepreneurship and innovation bases, 1,287 national technology enterprise incubators, and 2,251 makerspaces approved by the Ministry of Science and Technology.

President Xi and the CPC made at least two clear-cut breakthroughs in economic thought:

One: He argued that economic growth and progress cannot be measured merely in GDP growth, but rather through the raising of the productive powers of labor through scientific and technological development. China is moving from “growth at any price” to “quality growth”. It will continue to be the factory of the world, but for high-value products. However, it will continue to compete with others even in lower value products since it has the most efficient industrial capacity and supply chain within the country itself. Through the Belt and Road corridors, it can bring its products quickly, securely, and cheaply to any corner of the planet.

Two: The fact that innovation is the key to economic growth. However, innovation cannot be a result of mere “hard work” and through collective efforts, but that innovation is a function of the development of the culture and individual especially the aesthetical aspect. Therefore, the revival of Chinese classical culture and even on western classical culture rather than the banal popular culture is a move in the right direction. It is not a mere national romantic view of ancestral traditions and identity, but a true method of scientific and aesthetic fostering of the creative powers of the individual and society. Therefore, the restrictions on Chinese children’s computer use habits, for example, should be viewed in this light.

The dynamic character of the growth of the Chinese economy, its potential, and stability have been augmented by a population of over 1.4 billion people pursuing prosperity and a better living standard through hard and innovative work. This includes a middle-income group of over 400 million people that keeps expanding – offering a supersized market growing faster than any other place in the world.

China’s realization of “moderate prosperity in all respects” and eliminating extreme poverty in the centennial anniversary of the founding of the CPC is a fulfillment of an intermediate ultimate goal of the “rejuvenation of the nation” by 2049, the centennial anniversary of the founding of the People’s Republic of China. There are certain other stepping-stones to be reached too. The 2025 “Made in China” which is being replaced by “smart manufacturing in China” is the next one. By 2035 China intends to achieve “basic socialist modernization” when the levels of technological advancement, innovation, living standards are the highest in the world, while the national governance system is modernized. By 2049 China is planning to achieve the goal of building “a modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious and beautiful”.

Given China’s recent record, if it is not hindered by outside forces or unforeseeable cataclysmic events, these goals seem to be reachable. Also, given the correct identification of the weaknesses and strength of the Chinese economy through the though of President Xi and the leadership of the country, China will continue to be the leader of the world economy.