Secret sauce of China's economic miracle

It's widely believed that due to the opening of the economy to the private sector, China's real per capita GDP rose from $404 in 1979 to $11,560 in 2022 in constant 2015 U.S. dollars-according to World Bank data. Coincidently, during the same period, India also opened its economy. But India's real per capita GDP rose from $373 in 1979 to just $2,085 in 2022-insignificant to China's progress. Such a reality raises the question-- what is the secret sauce behind China's grand success? Has this fact made famous economists wrong in understanding the growth beyond the exhaustion of reserves of cheap labour? Has it also been making research fellows of think tanks and op-ed authors bewildered in linking China's economic progress with port automation, artificial intelligence (AI) applications, high-speed mobile broadband, 5G base station counts, progress in science, technology, engineering, and math (STEM) education, the transformation of subsistence farmers into semi-skilled industrial workers and other conventional visible indicators?
Yes, China's success in automating ports that can empty a container ship in 45 minutes rather than the 48 hours or more required in many other ports of the world matters. Similarly, China's progress in automating mines where no worker goes underground, controlling factories by AI, and doing sorting and packaging jobs in warehouses by robots adds to China's productive performance. But is that all? If less developed countries like Bangladesh use their labour and natural resource proceeds to recruit foreign suppliers, including Chinese ones, to have a similar level of progress in their ports, transport and energy systems, factories, warehouses, and many other areas in making their nations smart, will citizens of those countries experience similar level of income growth? If every country in the world keeps doing the same, will all of them reach high-income status? Is it the secret sauce of development that the World Bank financed growth commission could not figure out?
There may be an argument that we have missed the issues of education, STEM graduates, R&D financing, publications, patents, and subsidies. Yes, China has made significant progress in those areas. For example, China's R&D spending has increased from around $20 billion in 2002 to over $400 billion in 2022. China has occupied top positions in publications, patents, and STEM graduate production. Besides, China's subsidy in semiconductors, electric vehicles, and many other critical industries has already triggered trade frictions.
To demystify the success, we need to go back to the basics of economic value creation. As we know, we derive economic value from (i) natural resources, (ii) labour, (iii) knowledge, and (iv) ideas. For example, Saudi Arabia and many other natural resource-rich countries have become prosperous due to the export of their natural resource stock. Similarly, Bangladesh has attained economic progress through the export of low-cost labor force. On the other hand, India has attained a certain level of economic progress by exporting information technology and knowledge-based services.
But the success of Germany, Japan, and Taiwan in reaching high-income status has been due to the production and commercialisation of ideas in the form of product and process features. For example, over the last more than 125 years, Germany has been creating economic value by producing and commercialising a flow of ideas, enriching Karl Benz's internal combustion-based automobile idea. On the other hand, Japan's success has been rooted in ideas for sustained incremental advancement and reinvention of all kinds of products and processes to make them, starting from Shimano's bicycle gears to Sony's image sensors. Similarly, the secret sauce of Taiwan's growth has been due to its success in creating continued economic value from advancing semiconductor devices and processes to make them through the systematic production of ideas.
Like Bangladesh, India and Indonesia, China also started economic value creation in the industrial economy through labour. Due to the opening of the economy, multinational corporations (MNCs) got into a race of taking advantage of China's low-cost, disciplined labour force to manufacture their products. Consequentially, MNCs contributed to the wage and GDP growth of China. To meet the growing labour demand of MNCs, a great migration from country to city took place. But it started to slow down as China's workforce started slowly shrinking. Due to this reality, economists like Paul Krugman projected the end of China's progression, resulting in getting caught in growth trap. Surprisingly, China kept growing, giving the indication that it may keep growing, reaching high-income status.
But what is the secret sauce of such prolonged sustained growth empowering an economically poor country to reach high-income status? Unlike Bangladesh, Indonesia, or India, China did not become content with a linear income growth model out of labour-based manufacturing and knowledge-centric service export. Instead, China focused on exponential economic growth potential through ideas. Hence, instead of being happy with the tremendous success of supplying labour in manufacturing automobiles for American, European, and Japanese companies, China focused on how to add and export value out of automobile ideas. Hence, upon finding no headway with matured internal combustion engine-based domestic firms, China concentrated on electric vehicles (EVs). But instead of assembling EVs by importing components or manufacturing them locally, China took serious steps to develop the capacity of advancing critical EV components like the battery pack through locally produced ideas. Such a change in approach has led to China's success of CATL in creating the market for China's ideas in the global EV market, making America's Tesla an importer of China's ideas.
Like in EV, China has also been making progress in producing a flow of ideas and creating their market in other sectors. As a result, the cost of creating economic value in China has not been increasing in proportionate to wage growth. Consequentially, despite the wage growth and exhaustion of labour stock, the competitiveness of China's industrial economy has not been slowing down. Hence, industrial jobs did not keep migrating as economists predicted. Instead, the success has been in China's graduation of adding value to EV batteries, 5G base stations, or port automation through domestic production of knowledge and ideas, creating high-income jobs for their graduates, and strengthening economies of scale, scope, and externality effects of the ecosystem or cluster.
But China's massive investment in R&D, accelerating the production of publications and patents, has yet to show proportionate result. Hence, China has been pumping staggering amount of subsidies to prime the pump for starting the chain reaction for deriving economic value from the flow of intellectual assets. Despite some success, so far, results are not highly encouraging. For example, in comparison to Japan's $25,000 and Taiwan's $4 million to seed the semiconductor industry, China's more than $100 billion public fund has yet to show a competitive edge. Similarly, ownership of 2.3 million of the world's 3 million 5G base stations is waiting for demand for low latency applications, like autonomous vehicles. Similarly, China's success in producing more engineers than the rest of the world combined is waiting for demand for engaging them to produce and commercialise ideas at profit.
Like Nobel Laureate Paul Krugman claiming that the "tigers'" miracle growth about to end by referring to the exhaustion of their reserves of cheap labour, many of us have been bewildered to understand the underlying force of the exceptional rise of China and likely continuity. Yes, China started the journey with the commercialisation of low-cost labor, and so did many other countries. But unlike India or Bangladesh, China succeeded to graduate to creating economic value out of a domestic flow of knowledge and ideas. Hence, the number of 5G base stations, AI density in the delivery of goods and services, EV proliferation, or STEM graduate numbers do not tell the story. Unlike China, Bangladesh, India, and many other less developed countries have been busy to keep exploiting labour, resulting in getting caught in a growth and debt trap. In retrospect, Paul Krugman and many other economists perceived that China would face the same fate. Hence, they advised the USA and other Western countries to flock to China to exploit China's labour and natural resources and get China caught in debt and growth trap. Unfortunately, many pundits failed to understand the potential of tapping into economic value creation out of knowledge and ideas--making products better and cheaper simultaneously, which appears to be the secret sauce of China's economic miracle.

M. Rokonuzzaman, Ph.D is academic, and researcher on technology, innovation, and policy. Zaman.rokon.bd@gmail.com