China moves up in the world

China moves up in the world

What makes for high growth? Developing countries, not to mention most economists, have been trying to figure this out for decades. The Asian growth model—of low-wage, low-skill, export-oriented manufacturing—seemed to work for some time, until economists rightly pointed out that unless these economies moved to high skill and innovation, they would stagnate.

That’s the concern now preoccupying China, the one economy that managed to execute this model for 25 years. That’s why it’s now shifting away from this model. Over the last week, Chinese manufacturers such as Foxconn and Honda have decided to hike wages. Whether it’s voluntary or not, these moves enjoy Beijing’s blessings.

But if the world’s factory stops being so, won’t investors, who came to China to run away from the high-wage West, flee? The Chinese government intends to help the economy complete its transition to a high-skilled one that attracts even more capital.

The China Daily this week reported a government plan to attract more overseas talent through various incentives. “The national plan, a blueprint for creating a highly skilled national workforce over the next decade, aims to transform the country from being ‘labor-rich to talent-intensive’," wrote the newspaper, de facto controlled by the Communist Party. China already has many expatriates working: 480,000 were hired last year.

And this is merely China’s latest step in this direction. Beijing takes higher education seriously. The government disbursed Rs10,000 crore to the top 11 universities in 2004. Beijing also pays attention to smaller campuses, ensuring that the faculty, who aren’t tenured for life, perform consistently. The number of college graduates has quadrupled in a decade.

In China’s attempt to move up the value chain, it’s betting that “talents" are preferable to “capital or technology", as the China Daily wrote. Some economists have noted since the 1980s that long-term growth is as much a function of the human knowledge an economy fosters within, as capital or labour.

Only time will tell whether a centralized state can manage such a fundamental shift, but Beijing at least deserves credit for realizing there’s more to growth—more organic elements —than cheap labour and capital. Other developing countries should take note.

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