News | Digital Transformation - China A Planned Economy and a Culture of Experimentation

Trial-and-error is crucial to China’s burgeoning digital economy



Timo Daum,

[Translate to en:] Shenzhen: The Maker Movement
Shenzhen: The Maker Movement, WIRED (Screenshot from YouTube)

After a period of economic ascent, many developing countries land in the middle-income trap: they get stuck acting as cheap labour to mass-produce commodities for the global market.

China was regarded as the “factory of the world” for a long time. Companies like Foxconn, which produces iPhones for Apple, among other things, were notorious for their poor working conditions. Historian Rebecca Karl notes that Foxconn’s slogan “China rooted, global footprint” encapsulates not only its own strategy, but China’s as well: “Roots in China are premised on the political capacity of the state to field a docile workforce, or rather, to render its workforce quiescent; the global footprint is achieved by partnering with some of the largest manufacturers in the world to seize and maintain market hegemony over microelectronic processing and sourcing.”

Timo Daum is an author and social theorist whose research focuses on digital capitalism.

Translated for Gegensatz Translation Collective by Joseph Keady and Marty Hiatt

Yet the Chinese leadership is trying to adjust. One expression of that effort is the government’s goal, first announced in 2004, of creating a “harmonious society” (héxié shèhuì), which represents an attempt to avoid the middle-income trap in the economic development of newly industrializing countries. China expert Tobias ten Brink writes that, “In order to attenuate the effects of capitalist modernization, China’s central government has been pushing for a comprehensive restructuring of the economy”. Its export-oriented accumulation model based on low wages will gradually be replaced by a new one. Chinese workers have experienced enormous pay increases and the country has built up its domestic market: according to the National Bureau of Statistics of China, wages have tripled since 2012.

For several years, the leadership of the world’s most populous country has been steering toward a digital service economy, in which information and communication technologies play a leading role. Huang Qunhui, a Senior Research Fellow at the Institute of Industrial Economics for the Chinese Academy of Social Sciences, emphasizes that “China’s industrialization will be one led by informatization, i.e., it will be a new form of industrialization that is thoroughly blended with informatization”. In its effort to turn China into a modern “network economy”, Yu Hong claims, “the state declared communications … would be its next pillar industry”.

The same is true of Chinese economic policy after the COVID-19 pandemic: the plan that is in effect for 2021 to 2025 aims for an altered development model known as “internal circulation”, the most important aspects of which are an intensified orientation toward domestic markets, encouragement of private consumption, and ongoing expansion of digital service industries.

A Planned Economy in the Twenty-First Century

China’s policies of reform and opening up since the late 1970s have brought it a market economy and private property. New companies were founded and capitalism with Chinese characteristics was established. Nonetheless, the role of both the state and state-run businesses is still dominant, particularly in key industries. The digital sector is an important exception: its economy is ruled by powerful private digital corporations (see article 2).

Contrary to the credo that the market economy has won, China’s economic boom is not the product of market reforms alone. State regulations have also frequently played a decisive role. Unlike in the West, the state has a strategic plan for infrastructural and technological development, which political scientist Tobias ten Brink believes is still an “integral part of Chinese capitalism”. Economists Philipp Staab and Florian Butollo also emphasize the “intensive role of the state” in China, which they believe far exceeds the Pentagon’s technological commitment to Silicon Valley: they see that as a crucial advantage of the Chinese model over the US original.

Constant improvement, seeking customer feedback, and quick responses to technological advances, market developments, and customer desires are vital to digital economic success.

In early March 2021, the National People’s Congress passed its fourteenth five-year plan since the state was founded, setting out the direction for the country. China expert Gerhard Stahl is convinced that China wanted to “refine five-year planning into a modern tool for political management”.

However, at no level is decision-making in any way limited to the cliché of a rigid apparatus with a single ruler at the top. In that regard, Asia expert Parag Khanna describes a technocratic government “built around expert analysis and long-term planning rather than short-term populist whims or private interests”. The old men (women are rare within the upper echelons of leadership) have to prove themselves for 40 years before they can be considered for high-level responsibilities.

China regards itself as a socialist country. Key industries and all land are still state-owned property. Since 1992, the programme of the Communist Party of China (CPC) has asserted that “China is in the primary stage of socialism and will remain so for a long time to come.” The CPC thinks in very long cycles: the present stage on the path toward socialism is expected to last a full century. Yet it is not only the centralized power structure in Beijing that is empowered to make plans. China’s provinces and local administrations also play an important role in the country’s innovation dynamics, according to Yukong Huang, the World Bank’s former country director for China.

In her assessment of the success of telecommunications corporation Huawei, Elizabeth C. Economy, an outstanding Chinese economic policy analyst, also emphasizes the importance of planning institutions and approaches, noting that China’s playbook includes “long-term planning, deep engagement with the country’s dynamic entrepreneurs, significant targeted investments in R&D, protecting the Chinese market from foreign competition, and acquiring international talent and technology”.

“Experiment First, Regulate Second”

If such a strong tradition of planning persists in China, why hasn’t it suffered the same fate as the Soviet Union, which famously perished under its planned economy?

A large part of it is surely due to China’s culture of experimentation, which serves to counterbalance central planning. In addition, China has a long tradition of experimentation and reform to draw on. Modern Chinese history includes a wealth of social and economic experiments, although the Cultural Revolution and the Great Leap Forward under Mao Zedong are both examples of failed policies that ended in catastrophe.

The attempts at pragmatic liberalization under Deng Xiaoping likewise used trial-and-error. The enormous special economic zones that arose amid Deng’s policies of reform and opening up were and still are also distinctly experimental spaces in which socio-political experiments have taken place on a large scale.

The competitive environment also includes state institutions, which researcher Hyekyung Cho describes as a “national competition state”. Provinces, administrative bodies, and cities compete with one another and even officials and government agencies are in competition.

This culture of exploration is an essential part of the digital economy: constant improvement, seeking customer feedback, and quick responses to technological advances, market developments, and customer desires are vital to digital economic success. That goes for China’s Pearl River Delta, with its “capital” in Shenzhen, just as it does for the American original in California.

Start-ups and maker culture are highly respected in today’s China and receive ample state funding. Yuan Yang, China tech correspondent for the Financial Times, encapsulates that spirit in her aphorism “experiment first, regulate second”.

China has probably escaped the middle-income trap, as wages rise along with private consumption in the domestic market.

The Chinese digital start-ups that have grown into massive corporations in a few years have been through rapid learning processes, participating in “China’s complex, fast-changing, and often ambiguous business environment”.

Regulatory conditions often change overnight and major differences between urban and rural areas create additional challenges for companies.

Anthropologist Silvia Lindtner describes China as a “prototype nation” dedicated to continually creating technological and social prototypes as rapidly produced templates that are subject to ad hoc reviews when they succeed. By 2015, the government had taken note of the maker scene in Shenzhen and Chinese prime minister Li Kequiang visited a maker space.

The “maker approach,” in Lindtner’s words, was ideally suited to cultivating and supporting a posture of personal entrepreneurship that could turn innovative thinking into a genuine mass phenomenon. That same year, minister of science and technology Wan Gang explained that “[w]e encourage … mass entrepreneurship in society so that resources are better distributed. … It’s the opportunity of the majority, rather than just the privilege of the few, to realize a life-long dream”. According to Lindtner, prototyping is no longer viewed only as a method for innovating in tech startups, but also as “a promising way to intervene in entrenched structures of inequality, exploitation, and injustice”.

China: An Experimental Space in a Planned Economy

China’s rapid digital industrialization is characterized by intensive economic planning that goes far beyond economic incentivizing and infrastructure policy. Far-reaching, long-term state planning has played and continues to play a significant role in the country’s development — something akin to a perpetual Marshall Plan.

Together with a lively culture of experimentation at every level (particularly in the digital sphere), a highly dynamic development is taking hold and benefiting the population at large: China has probably escaped the middle-income trap, as wages rise along with private consumption in the domestic market.

In China, seemingly contradictory elements are coming together — state-directed policy driving an agenda of digital-industrial modernization, on the one hand, and a dynamic private-capitalist digital sector on the other — under the banner of Deng Xiaoping’s credo of incremental experimentation, or trial and error at every level.