What Explains China’s Rise? — Part 2

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.[1]

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’s Success

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.

Random Draw

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.

Venezuela

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.)

Shipping Container

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.

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.

Culture

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.

Answer

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.

NOTES:

[1] 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.

 

9 thoughts on “What Explains China’s Rise? — Part 2

  1. Atanu-da,

    Interesting write-up. I request you to also dwell on where China will go in the future. It dominates other countries using coercive means. It’s internal projects don’t seem to be sustainable. That said, they know the problems and might have a solution. I would love to know ur thoughts.

    Thanks
    ShivKumar

    Like

    1. @ShivKumar:

      I can’t conjecture on where China will go. I wish I had that crystal ball. You write, “It dominates other countries using coercive means.” That’s par for the course, isn’t it? Have you ever known any entity (countries included) that don’t use coercion to dominate others if they can?

      Another worry that people seem to have is that China’s model is “not sustainable”. It’s a bogus worry. Nothing lasts forever. That something is not sustainable is not an argument against it. The fact is that China has succeeded enormously where other countries have failed miserably. That’s to be celebrated.

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  2. Certainly, the fact that a smart and non dogmatic (practical) Deng came to the helm after Mao is luck. There is no question about that. So the fact that they got a wise leader who stayed at the helm was luck.

    But I think the luck factor somewhat ends there. The rest of it seems engineered to me —

    (1) The fact that they were able to attract the best companies to build their supply chain from China, make themselves a global manufacturing center, and cause both their people and their state to benefit from the spoils is credit to their execution and iterative, continuous improvement capabilities and their hard work ethic. The quality of their products has generally improved over time. They have been competent and ingenious (and even unethical) enough to copy core systems and technology and then gain leverage by either threatening the original innovators who they learned from with suitable financial terms, and in many cases, evicting them.

    (2) In this digital age beyond physical product manufacturing, they have followed a similar pattern. They intentionally strategized on identifying the latest cutting edge digital innovations and online product services / systems that work elsewhere (e.g. Facebook, Google. Amazon). They copy these systems very closely (e.g. Tencent, Weibo, Baidu, Alibaba). They block their citizenry from accessing the global brands, discover what works and grows and how, and then allow Chinese companies to compete within China and re-create an often identical service/product for the market. The state controls these companies and invests in them too, with an eventual plan of perhaps competing in global markets with the first movers. The wealth accrues to Chinese founders and employees and the state, and the money is forced to be reinvested in China or in projects that directly benefit China. The citizenry seem to like this authoritarian state and take immense pride in their state’s global dominance.

    (3) The single party authoritarian system has meant they can more easily invest in really long term projects and craft a visionary budget suitably, they can more easily make people swallow bitter pills and endure inconveniences for a while, hoping the rewards gained as a result will eventually make a majority see their brutal actions as justifiable. They can keep the media away from the worst atrocities, so we don’t know the scale and impact of these and neither do all their citizens. But the basic intent of the government has been data and results driven forward progress and reducing corruption and brutally suppressing dissent and complaints. With impressive results, they can afford to continue to do this without major revolt. May be they will ease into democracy as an already very rich country where the slow and noisy process won’t affect them as fundamentally since the difficult work is done in quick time!

    (4) I think it is also valid to say that there is a racial dominance angle at play. There is an obvious intent to exclude others from living in their country and sharing in the wealth and opportunities, with the benefits that their own citizens gain abroad. Foreigners in China are not allowed to buy land or property if they don’t live in the property as a primary residence themselves. Many other countries don’t have such asymmetric restrictions.

    I know this term has often been used by evolutionary psychologists labeled as anti-semitic: “Group Evolutionary Strategy”. The academic who has pushed for it runs a web site that pushes back against multi-cultural diversity and discusses white identity, white interests, and the culture of the West. I this of this term when characterizing Chinese success — the group here being the Chinese Han population. Thanks.

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    1. $5 trillion of the Chinese economy comes from state-owned business, which share their technology with the People’s Liberation Army.. “The fusion of commercial business with military is significant. The technology that is developed in the civil world transfers to the military world – it’s a direct pipeline. Not only is there a transfer, there is also systemic theft of U.S. technology that facilitates even faster development of emerging technology.”

      ===

      India’s own little experiement with ‘State Capitalism’ was quite successful too:

      India’s Missile Story: In autumn 1982, Kalam presented his findings to the defence minister at that time, R Venkataraman. If Kalam was a hard-driving visionary, so too was Venkataraman. Dismissing all talk of a “phased programme”, he ordered all programmes to be taken up simultaneously. The Integrated Guided Missile Development Programme was formally sanctioned in July 1983, and funds were pre-allocated for a 12-year period up to 1995.

      Those were heady days for the DRDO’s idealistic young scientists, buoyed by the 1971 victory over Pakistan and the “peaceful nuclear experiment” of 1974. In 1972, two young IIT graduates, VK Saraswat and Avinash Chander joined the DRDO just ten days apart. They were amongst more than a hundred young scientists who joined the DRDO’s missile complex after graduating from premier institutions like the IITs, and Jadhavpur University. Within three years, Saraswat was heading propulsion development, while Chander spearheaded the development of navigation and guidance systems.

      “Wherever we have worked without the option of import – be it on strategic missiles, nuclear weapons, atomic energy or the space programme – we have achieved self-reliance. In the super-secret world of electronic warfare, where import is not an option, we have built world-class systems. We should ourselves ban imports, and we will indigenise. Necessity is the mother of invention.”

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      1. @Tanay:

        “If Kalam was a hard-driving visionary …”

        Pardon me for rejecting an oft-repeated falsehood but Kalam was at best a shady character, if not an all-out crook.

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    2. @Namami:

      “Certainly, the fact that a smart and non dogmatic (practical) Deng came to the helm after Mao is luck. There is no question about that. So the fact that they got a wise leader who stayed at the helm was luck.”

      Thanks for your long comment. The point about luck is that it is a necessary condition, not a sufficient condition. The luck part was Deng and then everything that followed was allowed (or made possible) by Deng.

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  3. Atanu,
    I agree with most of the points made by Namami except the one regarding democracy.
    A few remarks I would make
    – China is the second imperial power soon may be the first in spite of the fact calling itself a developing nation according to the politburo terminology. It has not only occupied Tibet which was an independant country but also outnumbered Uyghurs in their territory by Han chinese.Moreover a million Uyghur people are kept in labour camps ( I don’t have written sources).Thanks to the digital revolution every single chinese is under scrutiny by mobile phone and CCTV and big data servers.
    – I reiterate China has replaced progressively the British and the French empires in Africa.
    – I am a philistine in economics ; but still I fail to understand why China is considered a capitalist country (perhaps not by you). If I am not mistaken it is the greed of the western capitalists which has made China The Factory of the world.The greedier they were the more their respective countries lost jobs.It was and is a snowball effect. You know for instance more than 90 % of the ketchup eaten in Europe comes from china with the machines established by the Italian food-processing companies.
    – It was luck China had a leader like Deng XiaoPing. Western countries are equally responsible for China’s growth. I am not undermining the hard work of the plebeian in harsh working conditions.

    The Falun Gong movement may someday lead Chinese, despite the present persecution it faces towards some form of democracy and peace with their neighbours

    Like

    1. @Karun:

      “– I am a philistine in economics ; but still I fail to understand why China is considered a capitalist country (perhaps not by you). If I am not mistaken it is the greed of the western capitalists which has made China The Factory of the world.”

      Why is China considered a capitalist country? Because China practices capitalism. That’s why. And while we are recognizing that Western capitalists are motivated by greed in what they do, can we point to any instance of any group of people who are not motivated by greed? Are socialists not motivate by greed? Or are they self-negating, other-regarding angels who sacrifice themselves for the public good?

      Let’s be clear about one thing. Without capital, the world we live in, would not be possible. And thus by extension, without capitalists, we would not have the world we have. Sure, the world is not perfect, and it will never be perfect. But the world we have is a much better world than it has ever been, and that betterment is to no small extent thanks to capitalists and capitalism.

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