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How China Bungled Techno-Development

When it comes to leveraging technology to foster shared prosperity, China in recent years has offered preliminary lessons about what to avoid. An increasingly rigid political environment is offsetting the gains from innovation by introducing unnecessary inefficiencies and legal uncertainty, as well as stoking social inequality.

CAMBRIDGE – Since the mid-2000s, China has been moving away from a manufacturing-heavy, export-led growth model toward a technology-driven economy. But China’s significant technological advances have been overshadowed by its political landscape, leading to inefficiencies, legal unpredictability, and rising social inequality.

To understand the situation today, it helps to start in the mid-2000s. China’s coastal local governments were confronting the economic challenges that come with a labor-intensive, export-oriented manufacturing model. That model required significant amounts of land – a limited resource, particularly in areas with a burgeoning real-estate market. Allocating extensive land for manufacturing caused local governments to miss out on substantial revenue. Despite the availability of relatively inexpensive labor, coastal provinces like Jiangsu, Zhejiang, and Guangdong, and cities like Shanghai, lacked the resources (land, water, and electricity) needed to sustain further economic growth.

The 2008 global financial crisis compounded these issues, striking a blow to China’s main export markets. To mitigate the effects on its principal export sectors, the authorities stepped up their efforts to reduce China’s reliance on labor-intensive manufacturing. China’s focus would be on modernizing traditional sectors and cultivating new industries, especially the digital sector. By 2021, China’s digital economy had reportedly expanded to $6.72 trillion, accounting for 39.8% of its GDP.