China needs to move to an economic model in which innovations, technology, productivity improvements become more important and that will require reforms. | MIT Technology Review
Since 1978, the Chinese economy has seen phenomenal growth. While that’s not in dispute, the reason why China has managed to grow so fast and whether it can maintain that growth is far less clear. The consensus view among China scholars is that the country has grown by relying heavily on investments, exports, and its huge low-cost labor force. That formula has worked well so far, but evidence indicates that China is getting less and less from this approach lately. The country’s export growth is decelerating quickly, and China is already investing an amount equivalent to about half of its GDP—which is probably the highest level ever among any country in peacetime.
China has just completed its once-in-a-decade leadership transition. An item that should be high on the new leadership’s agenda is changing the country’s strategy so that its growth wastes less energy, requires less investment, and is less reliant on exploiting cheap labor as a competitive advantage. We do not know the policy deliberations among the Chinese leaders; in fact we don’t know whether or not these policy discussions are taking place at the highest echelons of the Chinese government. What we do know is that a transition out of the rapid growth model of the last three decades will be fraught with technical uncertainties and political complexities. But it is critical that it happens.
The factors that drive a country to grow when its GDP per capita is $500 are totally different from the growth drivers when a country has a per capita GDP beyond $5,000. At $500—which was the case in China in 1994—you can copy the technology and production methods of other countries and drop them into your economy. Those premium features of a country’s political system, such as rule of law, intellectual property rights, labor rights, and democracy, are not that important. Indeed, they can be a hindrance, because at that low level of per capita GDP, these Western institutions inflict transaction costs rather than facilitate growth.
As a country gets richer, its growth formula changes. Innovations, technology, and productivity improvements become more important, as do domestic entrepreneurs and innovators. The problem is not that China doesn’t value science and technology. Many Chinese leaders are trained engineers, and there is no shortage of technocratic ideas and expertise in China. In the past 20 years, China has invested heavily in R&D. This year, China will likely invest 2 percent of its huge economy in R&D, a level attained by only a few fairly rich countries. But the payoff for this massive investment is not clear. Ongoing research, done together with my MIT colleague, Fiona Murray, shows that these massive technological investments have far less impact than one would expect.