China in Transition

Can the Chinese Economy Leapfrog?

Chi Hung KWAN
Consulting Fellow, RIETI

China has been experiencing a period of high growth since its shift to an open-door policy in the 1970s. In addition to its traditional labor-intensive products, it has become internationally competitive even in some IT products. By exploiting IT and other new technologies, China may skip the usual long process of industrialization and enter the ranks of developed nations in a short span of time. While this leapfrog scenario has become the majority view of China's outlook in Japan, most economists in China are a lot less optimistic.

In retrospect, China has already failed twice in attempts to leapfrog. The first episode was the Great Leap Forward in the 1950s under the leadership of Chairman Mao Tse-tung. The goals at the time were to overtake the United Kingdom in 10 years and achieve an economic level superior to the United States of America in 20 years. These goals, however, were far from realized. The undertaking turned out to be a disaster that wasted huge amounts of time and took the lives of millions.

The second attempt was the Great Leap Outward undertaken by the administration of Hua Guofeng in the 1970s, before the resurgence of Deng Xiaoping. The idea was to import the latest technologies from abroad and advance industrialization in one fell swoop. In the end, however, the Chinese could not effectively use the equipment they had imported and as a result wasted a great deal of foreign currency. There has never been an economic law saying the more high-tech, the better. Profitable industries in China are not necessarily the high-tech ones. Instead, most of them are low-tech. To make money in China, whether you are a local business or a foreign affiliate, you naturally require good management. The more important question, however, is whether you will be able to exploit China's current strengths, dictated by its comparative advantage.

A great many Japanese have the wrong impression that China's strength lies in its high-tech industries. But the truth is that the sectors requiring labor-intensive methods of production are still the strongest. While Japan maintains a comparative advantage in high-tech industries, it is the labor-intensive industries where China can flex its muscles. Thanks to the existence of a huge pool of surplus labor in rural areas, China will be able to maintain its competitiveness without significantly raising wages even with continuing high growth.

But this is not to dismiss the possibility of China leapfrogging in certain areas. China is such a big country that if it concentrates its resources in a specific area it may produce impressive results. For example, China is seen as being ahead of Japan in rocket development. Further, many foreign affiliates bring cutting-edge technologies and facilities to China so as to take advantage of the country's policy of swapping market for technology.

Yet, any evaluation of investment efficiency must also consider the opportunity cost of what kind of economic effect can be expected when the same amount of capital is invested in alternative areas. Unfortunately, perhaps because trained engineers outnumber trained economists among the Chinese leadership, efficiency is neglected and projects pursuing high-tech for its own sake are seen everywhere.

In the so-called "New Economy," the most important assets are not the most-advanced technologies and facilities themselves, but rather human resources who have acquired the knowledge to develop and use them. For China to catch-up with developed nations, there is no shortcut but to improve the quality of the country's human resources as a whole.

In addition to raising the level of education of its 1.3 billion people, China must also enhance its capacity for technological development and its ability to absorb technologies from abroad. Since the educational level of the country as a whole cannot be significantly improved in a short time, the economy can only develop by moving forward one step at a time. If we look at China's past experiences and the constraints it now faces, it becomes clear that leapfrogging is out of the question.

April 12, 2002

April 12, 2002