China's Economic Ascent: Unpacking the State's Role in Innovation and Global Power

A dispassionate analysis of China's economic model, its drivers, limitations, and its complex relationship with the West, based on a conversation with Dr. Jostein Hauge of the University of Cambridge.

The Architecture of China's Economic Miracle

China's transformation into an economic superpower is often simplified. Dr. Hauge argues that its foundation is a profound and unwavering commitment to long-term industrial policy. Unlike the short-term political cycles that can hamper policy in Western liberal democracies, China's state-led model has enabled a consistent focus on developing manufacturing and technological capabilities over decades.

This is operationalized through mechanisms like five-year plans and specific initiatives like "Made in China 2025," which set clear technological targets. A key instrument of this policy is the vast ecosystem of state-owned enterprises (SOEs)—numbering in the hundreds of thousands—which allow the state to maintain significant control over the "commanding heights" of the economy.

Beyond Top-Down Control: The Role of Fierce Internal Competition

A critical nuance often missed in Western analysis is the role of market dynamics within China's system. The state may set the overarching direction, but it frequently fosters intense competition among firms to achieve its goals. The electric vehicle (EV) sector is a prime example.

Dozens of companies, both state-backed and private, were allowed to compete. Through this process, winners like BYD emerged organically through innovation and market success, not solely through pre-selection and subsidies. This internal competition, sometimes compared to the venture capital model in Silicon Valley, is a powerful engine of innovation that operates within the state's strategic framework.

The Innovation Question: Can a Controlled System Truly Lead?

A persistent debate surrounds whether China's political model can foster true, groundbreaking innovation or if it is merely exceptional at catch-up development and incremental improvement. Dr. Hauge contends that the evidence points to continued strong innovation, citing rapid advances in semiconductor and AI chip development—areas where U.S. trade restrictions arguably accelerated China's drive for self-sufficiency.

He also pushes back on the myth that innovation in the West happens in a state-free vacuum, pointing to the foundational role of U.S. military funding (e.g., DARPA) in technologies that later commercialized into consumer products. The comparison suggests different models for innovation: one with more explicit state direction and another with more unintended spillovers from state-funded projects.

The West's "Hysteria": Geopolitical Fear vs. Economic Reality

The conversation addresses the rising tide of alarmism about China in Western media and politics. Dr. Hauge suggests that much of this is disconnected from the economic reality experienced by many outside the West. Surveys show that perceptions of China are significantly more positive across much of the Global South, where it is seen as a more equal partner in infrastructure and development projects.

The tension arises because China's rise challenges the Western-led liberal international order—not just in economic terms but also by presenting a successful alternative governance model. The discussion concludes that a more dispassionate approach is needed: one that acknowledges the benefits of China's growth (poverty reduction, green tech affordability) while maintaining the capacity for critical engagement on issues of human rights and geopolitical concerns.

Looking Ahead: The Next 5 Years

The outlook for China's economy remains robust. Dr. Hauge anticipates continued rapid development and innovation, particularly in high-tech sectors like AI and robotics. A key internal challenge will be solving the puzzle of low domestic consumption and rebalancing the economy to be more driven by internal demand alongside its export strength. However, there are no immediate signs of a fundamental slowdown in China's industrial and technological advancement.