China's industrial policy has mostly been a flop

Not the juggernaut that people thought

Photo by Zachary Kadolph on Unsplash

By now, the popular myth of Chinese inevitability and invincibility that reached its zenith in 2020 has been decisively punctured, thanks to the failure of the Zero Covid policy and the subsequent massive spread of Covid. China’s leaders spent three years trumpeting the idea that their system was superior because of their ability to control the virus; this turned out to be a rhetorical blunder, since it raised expectations to impossible heights and set Covid up as a litmus test of greatness that China couldn’t possibly pass.

Beyond the Covid-related headlines, however, the Chinese party-state and Chinese business (if the two can be said to be separate entities) have suffered a string of less-heralded setbacks and frustrations. Many of these failures relate to industrial policy, an area where lots of people — including many professional China analysts — assumed the country would shine. Over the last eight years, we’ve heard a lot about China’s determination to seize the technological lead from the U.S. and its developed allies. But despite unprecedented commitments of money and manpower, this just hasn’t happened.

China’s industrial policy isn’t like Japan’s or Korea’s

In my experience, Americans tend to think that China is a country whose economic model relies heavily on government promotion of strategic industries, especially in manufacturing. Part of this is probably just because people tend to mentally lump China in with its East Asian neighbors — Japan, Korea, etc. — who were known for industrial policy during their periods of rapid catch-up growth. And part of it is because certain left-leaning commentators have tried very hard to paint China’s rapid economic growth since 1979 as a victory for central planning, rather than the triumph of market liberalization that it was portrayed as in the 90s.

But in fact, China’s attempts to promote specific industries are relatively recent — in the 80s, 90s, and early 00s, China did very little of this. Barry Naughton, probably the premier Western scholar of Chinese industrial policy, explains this in his short book The Rise of China's Industrial Policy, 1978 to 2020, which you can read online for free here. He discusses how from 1978 through 2005, China essentially just focused on liberalizing their economy — if the government targeted specific industries, this was done at the local and provincial level, as in the U.S. In other words, the leftist story that China’s economic growth was a victory for central planning just doesn’t make any sense for that period.