President Barack Obama flew to Beijing on Friday to meet with his counterpart, Xi Jinping, at the Asia Pacific Economic Cooperation summit. No doubt China’s recent flattening in growth was discussed; although growing at around 7 to 8 percent, this is a decline from the extremely rapid economic expansion of the past few years.
Such a trend seems to indicate that the model that China has used for growth in the past generation is no longer relevant. China has performed extraordinarily well in a government-spurred focus shift toward foreign direct investment and manufacturing. But diminishing marginal returns will eventually set in, and perhaps this plateau in growth is a nudging reminder of what is to come.
At the same time, purchasing power for the individual consumer has increased dramatically since Deng Xiaoping’s reforms, and China will be able to overtake the United States in GDP around 2021. These shifts signal an economy that craves consumption and renders knowledge-based services.
So how can China prepare for such a transition?
If China wants to move smoothly and continue to thrive, it will need to address its innovation deficit. David Shambaugh contends, via the Brookings Institution, that the government has been addressing this gap by simply pouring money into it, but this isn’t enough. A more fundamental change is required.
China’s main focus for reform should be its educational system, which performs admirably in test scores but fails to encourage freedom of expression and critical thinking skills. The system emphasizes rote memorization and grueling exams, which is great for instilling a sense of self-discipline, but it does not encourage risk-taking or skepticism.
The primary and secondary educational systems are designed to prepare students for an enormously important exam, gaokao, or the determinant of which college a student will enter. The specifics of the exam, which include calculus problems and memorization of passages, are not indicative of the ability to critically evaluate pressing issues or generate their solutions.
And such a trend continues in post-secondary education. Although many Chinese universities, such as Peking and Tsinghua, possess a wealth of resources and boast state-of-the-art facilities, they are prone to regulation by the Communist Party. Indeed, each department in the university has its own Party representative, and this in turn influences the agenda of the university. Faculty members have “little to no role in governance” of the university, which curtails freedom of intellectual exploration, a “precondition for innovation in universities,” according to Harvard Business Review.
China has an impressive graduation rate, but a lack of freedom of expression and critical thinking skills will not help these students create inventive companies.
Entrepreneurs succeed when they identify the gaps in demand within a society and fill these gaps by coming up with new products. Identifying these gaps requires one to question the existing order and to think of fundamentally different ways to structure this order. Students will need to be trained to think along these lines if China is to foster entrepreneurship and innovation.
In the past, China has adapted outside technologies and has used them to satisfy the demands of its economy. High-speed rail, its space program and Alibaba are emblematic of this adaptation. But for China to emerge as an undisputed leader that is more of a consumer than a producer, it can no longer follow this mode of development. If it does, it will be stuck in the “middle-income gap” instead of acting as a global economic force with universities that educate generalist leaders and pockets resembling Silicon Valley.