Re-examining the China Economic Miracle

How did China’s economy really get to there it is now?

* China like Britain, US, Germany and Japan have successfully used selective protectionism to develop their companies and economy.

Ethiopia and other African countries are getting some success copying China’s development model

* Despite claims of impending financial crisis. China’s rise over 40 years has been from an economy filled with people as poor as the poorest Africans to people mostly at the level of Eastern Europe and Portugal on per capita income. China model of development is better than the failed advice of the World Bank and other Western institutions.

China and US have economic competition with technology startups and leading edge technology.

China has strengths in its economic competition and is focusing on growth in Asia and Africa and prioritizing trade growth with Europe. The US still has many strengths which should be the focus of growth.

Less Restrictive trade is done after a Protectionist phase

A NY Times article makes the case that China has used smart protectionism to allow its economy and companies to grow.

They argues that the following the economic plans of Alexander Hamilton used protectionism to develop industries.

Unified in 1871, Germany was scrambling to catch up with industrialized Britain. To do so, it borrowed from recipes of national development proposed by Hamilton soon after the Americans broke free of their British overlords. In his “Report on the Subject of Manufactures,” submitted to Congress in 1791, Hamilton used the potent term “infant” industries to argue for economic protectionism. Hamilton’s father was Scottish. Born in the West Indies, then a British colony, Hamilton was keenly aware of how the British practiced protectionism: preventing colonies from competing while selling their own goods around the world. In his view, infant nations needed room to maneuver before they could compete with established industrial powers. The United States embraced many of Hamilton’s recommendations; the beneficiaries were, first, the textile and iron industries and then steel.

It was Hamilton’s formula, rather than free trade, that made the United States the world’s fastest-growing economy in the 19th century and into the 1920s. And that formula was embraced by other nations coming late to international economic competition. Hamilton’s most influential student was a German economist named Friedrich List, who lived in the United States from 1825 until the 1830s and wrote a book titled “Outlines of American Political Economy.” On his return to Germany, List attacked the free-market gospel preached by Britain as sheer opportunism. In his view, the British could afford to kick away the ladder of protectionism they had climbed to the summit of global industry and manufacture. He was all for free trade, but only after young industries had been nurtured in a protective environment. Applying List’s lessons, Germany moved with spectacular speed from an agrarian to an industrial economy.

Britain successfully used protectionism first.
The US followed.
Germany followed the US.
Japan followed Germany.
China followed Japan.

They all used protectionism and subsidies to help and enable the growth of strong industries and companies.

They allowed competition between companies within the nation.

There was flexibility, competition and adaptability in the central planning.

China has a model that has clearly been successful, which should be studied more and emulated by other developing countries where possible

Seth D. Kaplan Indicates the Chinese model can help developing countries in formulating their own economic strategies.

Before his death in 2012, Meles Zenawi, Ethiopia’s leader for 21 years, often expressed his desire for his country to emulate China’s economic strategy. He marked the limits of the free market, consistently praised the Chinese Communist Party’s economic stewardship, and sought China’s assistance in building up Ethiopia’s infrastructure and manufacturing base. His successor, Hailemariam Desalegn, has been even more enthusiastic about trying to create a developmental state modeled on East Asia. As one Ethiopian bureaucrat was quoted in a recent Guardian article, “We are 20 years behind China and we’re trying to do what they did to get where they are.”

Ethiopia is not alone. States as disparate as Ethiopia, Rwanda, Kazakhstan, and Bolivia seek to replicate China’s economic transformation.

China’s development model is too often misinterpreted or oversimplified. For many Western analysts, the so-called Beijing Consensus has come to denote a non-democratic challenge to liberal capitalism, constituting, as Minxin Pei explains, a combination of “authoritarian rule with pro-market economic policies.”3 This misunderstanding is not confined to the West. For many leaders in the developing world, such as the late Hugo Chávez, the China model has come to represent strong leadership, a centralized government, and an interventionist state.

These caricatures miss many of the important lessons China’s rise has for the developing world. And having an alternative model to the Western one is important, given the latter’s failure in many countries. Despite decades of aid and advice, too few developing countries have been able to transform their economies on anything approaching the scale achieved by China—which often followed a very different playbook from that promoted by Western development experts.

Despite its achievements under Mao Zedong in unifying the country and substantially enhancing the education and health of the population, the three-decade-old Communist regime had a weak economic record, especially compared to its neighbors. In the aftermath of the Cultural Revolution, China suffered from chronic food shortages, huge inefficiencies, gross misallocation of investment capital, and technological backwardness.

NOTE – having a high level of education and literacy is a critical starting point. Japan had high literacy before the Meiji reformation. Your society cannot catch up in development fore there is a high level of education and literacy.

Ten lessons from China
1) Start with small farmers and rural areas.

Concentrated state policies on ensuring that peasant farmers had the resources, knowledge, and incentives necessary to maximize output. The state remained firmly in control of prices (increasing them to encourage extra effort), the distribution system, and the supply of fertilizer. Over time, improvements to extension services, better infrastructure, investments in agricultural research, and large-scale education and training programs paid huge dividends.5 Only after the agricultural sector strengthened did Chinese officials introduce more widespread market liberalization reforms in the 1990s and 2000s.

One of the chief beneficiaries of these developments was rural industry, one of the most underappreciated elements of the Chinese economic miracle. Benefitting from the land, labor, loans, and technical assistance that local governmental sponsors provided, township and village enterprises (TVE) became the most dynamic part of the Chinese economy in the 1980s and 1990s. Their share of GDP climbed from less than 6 percent in 1978 to 26 percent by 1996.

2) Invest heavily in knowledge infrastructure. China has invested heavily in education and innovation, producing the well-educated workforce and highly skilled specialists that have motored its economy forward.

3) Prioritize cohesion over participation. Although China is often criticized for being authoritarian, many of its leaders feel more accountable to its people than those in many developing countries that hold regular elections. The primary explanation for this apparent paradox is the country’s high degree of social cohesion and strong sense of nationhood, which result from its ethnic homogeneity (China is 90 percent Han) and its long history as a unified state.

Despite the lack of elections, Chinese leaders have been concerned with performance. Just as General Electric managers are concerned with performance.

4) Build a competent government committed to inclusive development.
* administrative function competence. Government is able to execute.
* The state has worked to ensure that all its citizens are able to participate and gain from economic growth; this is rarer in the developing world than is usually recognized.
* China’s government has been consistently committed to promoting development, adopting aggressive policies to attract investment, promote growth, boost exports, and develop technology and human resources.

5) Invest heavily in infrastructure.

6) Experiment with new policies first, then implement reforms gradually. Lots of trial and error and A-B testing.

7) Focus on reworking incentives and removing obstacles to growth.

China eschewed the “big bang” approach to reform under which all prices and markets are freed simultaneously, as happened for example in Poland in 1990. Instead it focused on “big issues” such as “incentives, mobility, price flexibility, competition, and openness.

8) Use financial markets to promote development and stability.

9) Use government policy to boost economic competitiveness.

Just as Japan, Korea, Taiwan, Germany, and to some extent even the United States once did, China’s government prioritized certain sectors and companies deemed likely to become globally competitive. It then ensured their access to cheap capital and land, technology, human resources, and regulatory assistance—advantages over their peers elsewhere. It has also used regulation to keep foreigners at bay (such as in restricted industries) or to diminish their influence. Yet it has also used Special Economic Zones (SEZs) to promote foreign investment at certain times, in certain places, and in certain sectors, giving them a larger share in its economy than many of its neighbors do. Protectionism has thus been selectively strategic.

10) Promote self-reliance.

China vs US startups

China is now has a world class startup and venture capital industry.

China’s current situation.

China has been a growth story for 40 years. There is a general sense of optimism and belief that modernization is beneficial. There is much less debate in China about the risks of automation or self-driving cars, and  the Chinese government is funding robots to modernize factories rather than trying to protect manufacturing jobs.

China market has become larger than the US and Europe in many areas. to 1.4 billion people (vs. 320 million in the U.S.), including about 660 million smartphone users (vs. 220 million in the U.S.), with widespread talent (China graduates twice as many students per year as the U.S. – 8 million, vs. 4 million – and eight times more STEM students).

* China has several advantages, most of which the U.S. can’t copy

* China isn’t interested in competing for the U.S. market (yet)

Chinese startups don’t care about the U.S. market. The opportunity in China is large enough and the competition harsh enough to require all of a team’s efforts to win.

Beyond domestic borders, battles are taking place in emerging markets where the similarity with China is an asset for expansion. The digital civilization of the West (which includes North America, Western Europe, Australia and New Zealand and sometimes places like Singapore, Hong Kong and a few others) rarely collides directly with the Chinese one.

“It is not a clash of civilizations, but rather an organizing along civilization lines, reminiscent of when Spain and Portugal split the world in half in the 16th century,”  Hans Tung of GGV Capital told me.

The fight for domination takes place in South-East Asia, India, Africa, and Latin America.

Chinese investors and buyers have become a force in the U.S. and often pay more than their U.S. counterparts. How can they afford it? Because they can help unlock an additional market and often benefit from the high P/E ratios of domestic stock exchanges. This means an acquisition can improve their stock price by much more than they paid for it. You can call it “stock exchange arbitrage.” It is also one reason some Chinese companies de-list from U.S. exchanges to re-list at home.

* The U.S. *is* interested in the Chinese market, but it’s having trouble getting in

The notable US successes in China and Asia are Apple and Yahoo.

US companies have to fund a China team and then nearly fully delegate management and decisions to the local team. The local team can leverage the brand but have the adaptability to modify to fit the China market. This will not guarantee success but it will give them a chance to succeed.

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