The most concise answer to the question, “What explains China’s rise?” is one word: luck. (On the left, the Chinese character for luck.) Actually luck has been a major factor in the rise of all nations that escaped the grip of poverty.
Economists, starting with the classical economists like David Ricardo and Adam Smith around the mid-18th century, have struggled with explaining the causes of the wealth of nations. All of the various causal factors they and their successors identified are relevant and the question is far from settled, as evidenced by the hundreds of papers and books published every year by serious scholars on the subject of economic development, growth and progress. But hardly anyone invokes lady luck.
Just So Stories
Is there a secret to economic development? Actually, no. Only the ignorant or the seriously deluded are convinced that they know the secret. Each country follows a unique path that cannot be duplicated. Which is not to say that there are no general principles that affect development. Just as in the case of individuals, there are general principles that push toward success: intelligence, the ability to work hard, endowments, and external factors that are beyond one’s control. But let’s be clear about this: both nature as well as nurture are luck of the draw. You are born to wealth or poverty, and so also you are born with the genes that make you hard-working or lazy or intelligent or stupid.
Can one ever definitively explain why an individual or a nation succeeded or failed? I think not. In the end, what it amounts to is so many “just so” stories. This one failed (or succeeded) because just precisely those things happened to happen, and those will never happen precisely that way.
There are scores of very intelligent Chinese and non-Chinese scholarly observers of China, each of whom have their favorite take on China. They are all like the proverbial blind men figuring out what the elephant is. No one has a privileged position and the reasonable way to understand the animal is to walk around it and integrate the various views (if blind people can be said to have views, that is.)
The complex interactions of major economic, political, cultural, technological, historical and geographical forces — all of which are almost entirely outside the control of anyone — determine if and when an economy prospers or fails. That is why I think the all-encompassing factor for the success or failure of a nation is just plain old fashioned luck.
China was one of the most impoverished nations on earth a mere 50 years ago. In 1979, no one outside of a lunatic asylum would have claimed that China would become a gigantic, successful economy by 2015. Yet, there you have it. Consider the above statistics from a presentation by Prof Zhang Weiwei at the Schiller Institute in Berlin in July 2017. In less than 40 years, China raised 700 million people out of poverty. That’s unprecedented in human history. It can claim other amazing advances — such as having the world’s largest network of high speed rail at 30,000 kms by the end of 2018 — but improving the lot of hundreds of millions of people is the most commendable and worthy of respect.
What else can it be but luck? Let’s think back to pre-1978 China. It was a desperately poor country. Chairman Mao Zedong had, through the Great Leap Forward (1958 – 1962) and the Cultural Revolution (1966 – 1976), managed to kill more of his fellow Chinese than any other person, foreign or domestic. Somewhere between 23 million and 55 million Chinese perished in the Great Leap Forward. Suffering so intense that death must have been a relief. The Cultural Revolution devoured an additional estimated three million more.
Mao Zedong and Deng Xiaoping
China’s bad luck has a name — Mao Zedong — and an ideology — communism. China’s luck changed with the death of Mao at the age of 82 in September 1976. After a brief premiership of Hua Guofeng, Deng Xiaoping (1904 – 1997) began the amazing transformation of China. He had been side-lined during the Cultural Revolution. But, as good luck would have it, Deng took over as the leader of the People’ Republic of China from 1978 to 1989.
Deng was a wise man. Beside Thailand and Malaysia, he visited Singapore in November 1978 and learned from Lee Kuan Yew. (Later LKY would say that the world leader he most admired was Deng; the admiration was mutual.) Here’s an excerpt from the wiki page on Deng:
While Deng never held office as the head of state, head of government or General Secretary (leader of the Communist Party), some called him “the architect” of a new brand of thinking that combined socialist ideology with free enterprise whose slogan was “socialism with Chinese characteristics”. Deng opened China to foreign investment and the global market, policies that are credited with developing China into one of the fastest-growing economies in the world for several generations and raising the standard of living of hundreds of millions.
Mao wrecked China; Deng restored China. It wasn’t luck that Deng did what he did. Wisdom, not luck, guided his hand. The luck lies in the fact that Deng got to be the boss-man. Consider India. India’s misfortune is also plain luck — bad luck to be precise. The bad luck has a name — Nehru. He was chosen by MK Gandhi to lead India, and the clueless Nehru led India into a hole because he lacked the wisdom to choose the right policies.
The main point here is that the leaders of a nation are just random draws from a huge deck that has hardly any aces. The chances of drawing a winning hand are very slim indeed. Get a bad hand, and you can reduce a promising nation to rubble; draw one of those rare good hands, and you can transform the nation, and in case it’s a large nation, change the trajectory of the world.
Here’s a small example. Venezuela was a very fortunate nation. It has the largest known reserves of petroleum in the world (surpassing Saudi Arabia in 2010). Remember that it’s a tiny nation — just around 30 million in 2016. It has proven reserves of 300 billion barrels of oil.
That’s around 10,000 barrels per capita of reserves — or around $600,000 per capita at today’s prices. It could have been fabulously wealthy. But under the socialist policies of Hugo Chavez, it began its slide into poverty, and after Chavez’s death in 2013 his successor Nicholas Maduro has reduced the nation to rubble. Venezuelans are starving and those who can are leaving. There’s potential wealth in Venezuela but that’s unrealized and the people are suffering because Venezuela drew a lousy hand in the random draw of leaders (just like India did.)
Back to China. China got tremendously lucky in Deng. And Deng wisely chose to open up the economy to foreign investment and technology. Poor and developing nations neither have the capacity to invent technology nor are they capable of using leading edge technology. But they can adopt available relevant technologies. China got lucky there. The most critically important technology that helped China’s rise was invented just over 60 years ago.
In 1956, the intermodal shipping container was invented by an American transport entrepreneur Malcolm McNeal (1913 – 2001). That technology reduced the cost of freight dramatically. It is one of the contributing factors that allowed China to become the manufacturing center of the world. (Interestingly, China manufactures around 90 percent of all shipping containers. See this for a history of the shipping container.)
Skilled labor is a requirement for manufacturing. China’s labor force was both literate and cheap. That made it ideal for the West to move its manufacturing to China, given the low and falling cost of transportation, thanks to container technology.
Here’s the point: China was able to climb out of abject poverty because of factors external to itself. It could not have done that 100, or even 50 years ago because the technologies that came helped China grow, broadly transportation and communications technologies, were not mature. The fact that its post-1978 leaders decided to adopt the available technology is secondary.
Technology is “know how” or “how to do something.” Technology is in essence a recipe for making or doing something. That something could be as trivial as a cup of tea or as complicated as a nuclear reactor. Technology is knowledge. Knowledge can be created, shared, copied, and adopted.
Generally we understand technology to be what’s required to engineer stuff. Computers, smartphones, cars, commercial jetliners — these are some of the awesome products of technology. However, technology broadly defined, is all around us. Double-entry bookkeeping is technology, and so is the modern corporation, and the stock market. Markets, which is a human invention, is also the product of technology.
Which technology a country adopts powerfully determines its fate.
It is said that politics is downstream of culture. That is, culture determines the politics of a society. Like politics, technology too is downstream of culture. Not just that the development of technology is culturally dependent but even the adoption of technology developed elsewhere is culturally determined. It depends on the openness of a culture to outside technology.
The first thing one learns about Chinese culture is that it’s Confucian, one of the defining features of which is meritocracy: “the revolutionary idea of replacing nobility of blood with nobility of virtue.” Here are a few lines from Confucius (551–479 BCE) about government:
When Tzu kung asked about government, Confucius said: “Sufficient food, sufficient armament, and sufficient confidence of the people.” Tzu kung said, “Forced to give up one of these, which would you abandon first?” Confucius said, “I would abandon the armament.” Tzu kung said, “Forced to give up one of the remaining two, which would you abandon first?” Confucius said, “I would abandon food. There have been deaths from time immemorial, but no state can exist without the confidence of the people.” (Analects 12:7)
If a ruler sets himself right, he will be followed without his command. If he does not set himself right, even his command will not be obeyed. (Analects 13:6) [Source.]
The government of China is authoritarian, single-party rule, not multi-party democracy as in the advanced industrialized nations. Democracy is a mixed blessing. And in the less developed nations, without denying the obvious merit of democracy, namely political freedom, as actually practiced it is a dismal failure. That is not a ringing endorsement of authoritarian government. What matters is the quality of the government on the ground; as an ideal or an abstraction it may be great but if the quality of the government it actually delivers leads to poverty and strife, then it needs rethinking.
Meritocracy and Authoritarianism
The Merriam-Webster defines meritocracy as “a system in which the talented are chosen and moved ahead on the basis of their achievement.” The highest level of the Chinese government is clearly a meritocracy: only those who have demonstrated superior ability find a place. The degree of competition is insane. At the level of the town or county, they elect their leaders democratically but at the top, they select the best. And then those chosen can do whatever they want without having to worry about losing some political popularity contest (which is what electoral democracy actually is.)
Can we conclude from China’s example that authoritarianism is good? Certainly not. After all, Mao was an authoritarian. So were Lenin, Stalin, and a whole lot of other dictators that slaughtered their own people by the truckloads. What matters is whether those at the controls actually know what they’re doing. Mao did not; Deng did. And so did the most celebrated authoritarian of them all — Lee Kuan Yew of Singapore. The outcome matters more than flowery rhetoric and empty ideals.
China did remarkably well. It did remarkably well compared to its past self; and compared to the other large nation, India. By no stretch of the imagination is China perfect. Hardly anyone living in the OECD countries would look enviously at the Chinese. But in most people in the low income countries would prefer to have the wealth of the average Chinese. The post-Mao leaders of China have been extraordinarily successful in making China great.
What Explains China’s Rise?
So far, I have been doing a lot of hand waving and dancing around that question. It’s really a hard question to answer satisfactorily. On the edges of a real answer will surely be the fact that China moved away from its core socialistic ideology and adopted market-friendly, private-property respecting, capitalistic ideas. Its leaders recognized that socialism does not deliver the goods. Confucian pragmatism led them to change course without too much fuss. As Deng Xiaoping put it, “It doesn’t matter if a cat is black or white, so long as it catches mice.” They do what works, and just call it socialism.
To the degree that China has succeed thus far, it is clearly because it adopted policies consistent with classical liberal ideas related to markets and property. Granted that the Chinese government may never grant political freedom to its people. But I believe people value economic and individual freedom more than political freedom.
Democracy is supposedly the last word when it comes to good governance. I think that’s not really true. Even with full political freedom, majoritarian democratic governments does not automatically guarantee any civic or economic freedom. What would you choose — having economic and civic freedom under an authoritarian government or having little economic and civic freedom under a democratic government? The fact is that dictators can, if they choose, grant all sorts of freedoms to the people, provided it does not threaten their dictatorship.
China’s rise has been studied by real experts. Fortunately for us, the result of their scholarship is available to us. In the next post, which will be the last in this set, I will provide links to some of them.
Until then, be well, do good work and keep in touch.
 I think Daniel Kahneman understand the role of luck. Read this delightful article “Nobel Prize-winning psychologist Daniel Kahneman on luck.” Quote:
One of the most amusing episodes in the book [Thinking Fast and Slow] comes when Kahneman visits a Wall Street investment firm. After analysing their reports, he calculated that the traders, who were highly prized for their ability to “read” the markets, performed no better than they would have done if they made their decisions at random. The bonuses that they received were, therefore, rewards for luck, even though they found ways of interpreting it as skill. “They were really quite angry when I told them that,” he laughs. “But the evidence is unequivocal — there is a great deal more luck than skill involved in the achievements of people getting very rich.”
The same is true when we assess the success of one company against another. He describes spending an evening at the home of one of the most famous CEOs in the world who became “really quite embittered” as he explained how his billions were largely the result of chance. Not that he thinks we will ever call bull-shit on the myth of the all-seeing CEO who deserves their eight-figure salary. “Our mind is an instrument for making sense of the world. We make sense of the world by telling causal stories — and causal stories are always going to have heroes in them. The things that could have happened and would have changed events do not come to mind.”
Success and failure of people corporations and nations are partly due to luck.