How China’s unique value system underpins its prosperity and innovation

A new book by MIT professor Yasheng Huang suggests China’s political economy has long operated under a mix of autonomy and control
The nation’s development strategy has largely reached its limits and Beijing must now harness its innovative potential to spur its ‘animal spirits’ while pursuing greater liberalisation

Prof Zhang JunandTomas Casas-Klett

Published: 5:30pm, 12 Mar 2024

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As China grapples with enormous challenges – including an imploding property sector, unfavourable demographics and slowing growth – doubts about the future of the world’s largest growth engine are intensifying. Add to that China’s geopolitical rise, together with deepening tensions with the United States, and the need to understand China’s political economy is becoming more urgent than ever.

A recent book by MIT’s Yasheng Huang – The Rise and Fall of the EAST: How Exams, Autocracy, Stability, and Technology Brought China Success, and Why They Might Lead to Its Decline – can help. Huang unpacks the “East” heuristic from the historical record to arrive at a clear conclusion: China must make radical changes if it is going to realise its full development potential. Huang argues that the seeds of China’s decline were planted with the implementation of the stifling keju civil service exam system.

Before the keju system was introduced, China was producing some of history’s most transformative inventions such as gunpowder, the compass and paper. Huang’s empirical research suggests Chinese creativity peaked between 220 and 581, during the rather chaotic Han-Sui interregnum. “The first wave of technological stagnation in China,” Huang observes, “coincides with the end of China’s political fragmentation.”

The book does seem to overstate some aspects of the historical record to offer a “cleaner” narrative than might be warranted. A data set of prime ministerial resignations forms the basis of Huang’s conclusion that, with the introduction of keju, checks and balances between emperors and their bureaucrats disappeared in favour of a “symbiotic relationship”.

The result is an almost linear narrative of decline. But that is difficult to square with the Qing dynasty’s “industrious revolution”, during which China’s population more than doubled and its share of global gross domestic product reached one-third.

Huang can also be extremely perceptive such as when he challenges David Landes’ judgment that the state kills technological progress. Huang argues that “China’s early lead in technology was derived critically – and possibly exclusively – from the role of the state.” Quoting the Nobel laureate economist Douglass North, he writes: “If you want to realise the potential of modern technology, you cannot do it with the state, but you cannot do without [the state], either.”

People stand next to a model of a quantum computer at the Zhongguancun National Independent Innovation Demonstration Zone exhibition centre, in Beijing on May 26, 2023. Photo: Xinhua

But what kind of state? In Huang’s view, autocracy “has deep roots in China because of its near-immaculate design, absence of civil society, and deep-seated values and norms”. But China’s tendency toward “unitary rule”, he writes, is fundamentally cultural, with the “causal direction” of autocracy running “from culture to politics, not the other way around”.

Similarly, many modern Chinese scholars blame China’s waning fortunes in the 19th and 20th centuries on conservative Confucian ideology, which lacked any spirit of discovery or impetus for risk-taking. Huang suggests that in times when Buddhists and Daoists represented a larger share of prominent historical figures, relative to Confucians, novel ideas were more likely to flourish.

But there are reasons to believe China’s state structures and policy preferences are not just cultural in origin, but also – or perhaps rather – the result of deliberate institutional arrangements. In any case, a narrow focus on China’s top-down structures can obscure the bottom-up nature of many aspects of Chinese political and economic life.

A worker processes circuit boards at a private enterprise’s “smart workshop” in Zhangzhou, Fujian province, on June 19, 2023. Photo: Xinhua

Huang notes that China’s political economy is also characterised by autonomy. China has benefited from state management in the form of deliberate, top-down policies but private initiatives that are bottom-up and chaotic have also proved vital to its development. Understanding the balance between control and autonomy is essential to any assessment of the challenges China faces.

The Rise and Fall of the EAST also considers why China has so far managed to avoid what he calls “Tullock’s curse” – the instability or conflict caused by the bad and misaligned incentives that define autocratic successions. But it might have benefited from a deeper analysis of another phenomenon explored by the economist Gordon Tullock: rent-seeking.

Any country’s economic – and human – development trajectory is determined largely by whether elites use their power to create or extract value. One might dismiss the “robber barons” as amoral but the Rockefellers, Vanderbilts, Carnegies and others played a pivotal role in making the US the world’s most prosperous country. Likewise, tech monopolies created by Bill Gates and Mark Zuckerberg continue to exemplify American innovation.

Unfortunately, Huang’s account lacks a nuanced assessment of the relationship between rent-seeking and value creation. He might have noted that China’s “elite quality” is much higher than that of other countries with the same per capita GDP. Instead, it is comparable to European Union countries with triple China’s per capita GDP.

Sustainable value creation underpinned China’s double-digit growth rates for decades. Nonetheless, as Huang makes clear, the development strategy that propelled China’s rise over the past few decades has largely reached its limits. China must harness its innovative potential and high-quality elites to spur its “animal spirits” and strengthen its institutions, all while pursuing greater liberalisation.

Whatever comes next will be based on China’s unique traditional value system, which, as Huang emphasises, has underpinned prosperity and innovation in the past. And it will reflect the grit – not rigidity – that lies at the core of China’s political economy.

Zhang Jun, dean of the School of Economics at Fudan University, is director of the China Center for Economic Studies, a Shanghai-based think tank

Tomas Casas-Klett is a visiting professor at Fudan University. Copyright: Project Syndicate