Artificial Intelligence: China’s Next Steps to Avoiding the Middle-Income Trap

Artificial intelligence (AI) has entered the common parlance of those in the technology industry and those on the outside looking in all the same. Many developed countries are investing millions of dollars to expand industries and recruit talent that will help them have a competitive edge in the rapidly growing industry. China is one of these countries. However, at the same time, China is currently at risk of falling into the middle-income trap, a phenomenon of a country’s growth “plateauing” after rapid growth and stagnating after reaching middle-income levels when these economies are not competitive enough with more advanced economies in “high-skill innovations” or “low-income, low wage economies in the export of manufactured goods.” The solution to avoiding the middle-income trap is finding new markets to maintain a competitive position in the world economy. China’s efforts to dominate globally in cutting-edge technologies, including in the development of AI and 5G, will help it avoid the middle-income trap.

China and the Middle Income Trap

On average, China has been able to double the size of its economy every eight years since 1979 and, for the most part, has been able to “avoid major economic disruptions”. Economists have attributed the successes of the Chinese economy to three factors: China’s accession to the World Trade Organization (WTO), large-scale investments, and rapid productivity growth. China gained accession to the WTO in 2001 after 15 years of negotiations. The landmark event led to an increase in Chinese exports, as membership gave China better access to foreign markets and vice versa. China’s exports to these foreign markets have largely consisted of “labor-intensive manufactured goods” made possible by China’s “abundance of inexpensive labor.” In the 1990s, China adopted the zou chu qu (走出去) strategy, or “going out.” Chinese companies began to invest in foreign companies in Africa, Latin America, the Middle East, and Central Asia, further bolstering its economic growth and spreading its influence globally. China’s productivity has expanded due to the migration of rural workers from agriculture to urban manufacturing, fueling its economy while employing an estimated 288 million individuals. Even during the 2008 global economic slowdown, when 20 million migrant workers returned to rural areas after losing their jobs and growth was stalling, the Chinese government implemented a $568 billion economic stimulus package that funded infrastructure and loosened fiscal policies to encourage bank lending. This boost countered the effects of the decrease in demand for Chinese products and kept China’s growth on track, facilitating its growth to become the second-largest economy in the world.

However, the problem is with the trends of China’s progress, and how China should continue advancing its economy and its position on the global value chain. As China continues to implement economic policies that improve the economy’s efficiency, its productivity has converged with major developed countries. The IMF projects that China’s annual GDP growth will fall from 6.3% to 5.5% between now and 2024, signaling that China’s rapid economic growth could come to a grinding halt unless the country modernizes its economy, becomes a major center for technology and innovation, and climbs the global value chain. 

Challenges for China in Becoming a Major Innovating Power

Standing in the way of innovation is China’s copycat culture, or shanzhai (山寨), or “mountain fortress,” referring to the circulation of these goods that the government has failed to control; it is considered a skill to be able to replicate foreign gadgets and software for the Chinese market. While this culture is enormously prevalent amongst former factory workers, especially from Shenzhen, who begin creating products they used to manufacture at lower prices, many large Chinese tech companies are also often seen as a nearly-duplicated version of Western counterparts: Baidu is the “Google of China,” Alibaba is the “eBay of China,” and Xiaomi is the “Apple of China.” In 2009, a Chinese company selling a Blackberry duplicate called “Blockberry” marketed its product with an ad falsely claiming that the device was endorsed by President Obama himself. 

In addition, China’s copycat culture is exacerbated by China’s role as a source of low-cost manufacturing for global technology companies. While manufacturing may be a marquee feature of the Chinese economy, it is becoming a point of weakness for the country. China’s Producer Price Index is declining, meaning that Chinese manufacturers are losing their pricing power. China is also experiencing a manufacturing exodus of companies moving their production out of China and into Southeast Asian countries, led by Vietnam to spread out their risk and seek lower costs, especially in light of the COVID-19 pandemic, tariffs imposed in the US-China trade war, and the threat of disruptions in imports.

We can use the S-curve of innovation to think about manufacturing in the landscape of China’s economy.  The S-curve shows the growth trajectory of a company, a market, or even an entire economy, highlighting how growth ebbs and flows, driving waves of innovation. When an economy adopts a new source of income, the market profits more and more from that product. Over this time, the economy grows and expands. However, after this growth, revenue begins to plateau and the economy becomes at risk of stagnation. In China’s case, this stagnation would lead to it slipping into the middle-income trap.  The innovation mapped by the S-curve is not entirely equivalent to the true innovation that contrasts with copycat culture, but it does show the decay of manufacturing as a main source of revenue for China and the need for a transition to a new kind of true innovation. At this point, the country needs to develop a new growth model that can sustainably expand its economy and foster innovation. Becoming a center of innovation will allow it to go up another s-curve of growth.

Figure 1. The S-Curve of Innovation. Chart. IdeaGenius. April 8, 2017. Accessed December 16, 2019. http://ideagenius.com/the-s-curve-pattern-of-innovation-a-full-analysis/.

In China’s case, the majority of its manufacturing has been low-tech and labor-intensive, restricting the growth of its economy in competition with countries that have moved up the value chain with high-caliber research and development such as Japan, South Korea, Singapore, and Taiwan. China now needs to seize the innovation window that precedes a new epoch of growth. The country is already advocating for “indigenous” innovation in the form of the Made in China 2025 initiative, a new economic policy that aims to make China more self-sufficient by manufacturing more high-end goods and cultivating the tech industry to put China on the cutting edge of technological innovation and commercialization. China aims to dominate innovation in industries such as next-gen vehicles, electronics, and robotics by owning more intellectual property, gaining self-sufficiency in both production and consumption, and making business in foreign markets a larger component of the country’s income. 

China’s Artificial Intelligence Plan

At the core of all these industries is artificial intelligence, a branch of computer science that aims to build “smart” machines capable of emulating the way humans perform tasks, reason, and behave. As an economy that would be greatly affected by and could benefit from industrial innovations, China has already invested heavily in AI research that will help it innovate. On July 20, 2017, the Chinese government released a plan specifically created to put China on a path of becoming a global AI superpower, titled A Next Generation Artificial Intelligence Development Plan, or AIDP.

The opening of the AIDP sets the tone for the way China sees artificial intelligence: AI is a “major strategic opportunity” for China to “seize” in order to “accelerate the construction of an innovative nation and global power in science and technology.” The country sees the development of AI not just as an industry to bolster but as a matter of “national competitiveness” and “national security.” 

The recurring theme in the AIDP could best be described as a combination of breadth and depth: driving both all-encompassing innovation and becoming the best globally at that innovation. The economic focus of the AIDP comes from one of its guiding principles, market dominance, which is key to China’s ascent up the global value chain. The document looks to the “world’s major developed countries” as a standard for investing resources in expanding and advancing the artificial intelligence field, framing the industry as a field of “international competition.” Bringing a technology industry into this light furthers the idea that this is not just a matter of economics or even national identity alone, but it is an important piece of China’s fight to stay relevant in the global economic sphere and to continue growing its economy. While discussing how AI will be applied in social governance, such as in healthcare and education, the plan states that China is “currently in the decisive stage of comprehensively constructing a moderately prosperous society”—a middle-income economy. The document establishes AI as a “new engine for economic development” and a source of “new kinetic energy” for its economy through  “triggering significant changes in economic structure” and “profound changes in human modes of production, lifestyle, and thinking.”  To pivot and put a new economic focus on a technology industry, China needs to change the way the technology industry functions in society on a social level. The AIDP points to a new economic paradigm shaped by the development of AI in a wide variety of industries.

This idea of market dominance also builds on the principles behind the Made in China 2025 initiative. The problem that the initiative aims to solve is dependence on foreign innovation. Enabling market dominance involves creating an ecosystem that is open to change and a catalyst for innovation. The AIDP not only sets the government’s sights on investing financial resources into existing AI research and development in the industry, but it also seeks to set long-term goals for accelerating the development of AI in the market. The plan lays out concrete goals for setting the country on a “strategic path for the healthy and sustainable development of AI.” Although one could argue that the fact that the plan does not specify the distribution of investments across products or fields of research, it is this flexibility and open-endedness in the plan that will foster innovation. The government seeks not to restrict the development of the artificial intelligence industry and AI research by giving it a concrete goal in what kinds of products it should have, but to expand the reach of AI by giving it a target value. Measuring the success of the plan by market value rather than by the number of products released or companies invested in gives researchers in companies and in academia virtually free rein to push the envelope of the field, which is what will make China truly innovative.

At the base of the long-term ecosystem, China plans to build “an open and cooperative AI technology innovation system.”  It seeks to expand AI through industry training and by bolstering academic research in AI, especially when it comes to basic research in topics such as  “foundational theories” and “basic theory systems.” Although the scientific theories and principles behind AI may seem conceptual and only relevant academically, these breakthroughs in basic theoretical research make China’s “talent team” even more valuable. Much of China’s talent is outsourced with a  large number of undergraduates seeking to gain exposure to Western education and more modern technologies abroad. While outsourcing has allowed China to see significant growth in the technology space, it puts the country at a disadvantage for innovation since China cannot continue to merely be on the receiving end of knowledge. It has to become a source of ground-breaking research in fields such as “big data intelligence theory” and “swarm intelligence theory,” which drives the overall progress of artificial intelligence research. 

Impacts of the AIDP

The Chinese government is also working with the private sector to develop and integrate AI technology into the daily lives of Chinese citizens. One example is the City Brain project developed by Alibaba to alleviate traffic in Hangzhou. The project uses machine learning algorithms to observe traffic patterns and coordinates road signals around the city to prevent traffic jams. A larger-scale project that has raised concerns about the use of advanced technology in governance is the developing social credit system, which uses advanced facial recognition to track citizens’ activities and daily habits to give them a score measuring whether or not he or she is a “good citizen.” Their social credit score determines many aspects of a citizen’s daily life, including whether or not they can travel, apply for government jobs, or take out loans. Many people have concerns over how this could give the Chinese government another tool to silence political dissenters, and how the personal data of millions of citizens would be handled. However, the direction of artificial intelligence development in relation to these solutions shows how, in the practical implementation of the goals set out by the AIDP, the government has mixed broad investments into AI research and specific developments that help the government address social issues. The two exist in tandem, but one does not discourage the other. The development of these complex machine learning systems requires research and development that enables these scalable systems to be implemented, fostering research not only in powerful companies but also in academia. Both give China an edge in terms of the acceleration of artificial intelligence research and practical application. Analysis by the Allen Institute of Artificial Intelligence in 2019 concluded that China has already surpassed the US in publishing AI research papers since 2005; in 2018, it published 27, 321 AI papers as opposed to 23, 965 published in the US. China’s share of the top 10% of AI papers based on citations by other papers is also rising sharply. Just as China prospered because of its growing significance on the world stage, the shift from foreign dependence to being a source of innovation and high-demand talent in AI for foreign powers will put China alongside the most developed countries in the world, as it distinguishes it from other countries powered by manufacturing that is being sucked into the middle-income trap. 

 The interdisciplinary nature of the investments into AI made by Chinese companies links back to the concept of “AI + X” in the AIDP, which is prevalent not only in China but in the artificial intelligence sector worldwide. The three largest companies leading the artificial intelligence sector in China, Baidu, Alibaba, and Tencent, have invested in AI research in dozens of industries and 53% of China’s 190 major AI companies. The concept of “AI + X” integrates AI into disciplines and industries such as manufacturing, sociology, law, and psychology. The AIDP specifically pushes for the application of AI in manufacturing and agriculture, both major parts of China’s economy. China is using AI to shift its entire society towards a more creative and innovative outlook on productivity, which is exactly what it needs to bring it out of stagnation. Increasing the caliber of innovation coming from China will move the country up the global value chain and make its expertise one of its competitive markets, thus expanding its sources of revenue and allowing the country to avoid the middle-income trap.

Two Systems of Governance

Clearly, many societal and social implications may arise from the introduction of the solutions that the AIDP proposes, especially those that will directly affect the day-to-day lives of all Chinese citizens. In the US, if these solutions were proposed by the federal government, many, and likely the majority, of people would be incredibly concerned by the data privacy and surveillance repercussions, as governmental data collection is seen as an infringement of civil liberties and a threat to freedom of speech. This pivot in China’s economic plan also has major implications for the workforce, as the millions who rely on manufacturing jobs will be displaced by automation. However, the Chinese system of governance sees solutions like the social credit system or wider use of facial recognition as a tool for creating incentive schemes to encourage good behavior among citizens or to enforce the law. While the government’s rationale is that law-abiding citizens have nothing to fear about data collection, the country’s view on data privacy is constantly evolving, as the government begins to implement laws on personal data collection and privacy. 

Is the AIDP a Moonshot?

Given all this, it is clear that many of the plan’s goals are incredibly ambitious, and many of the guidelines set by the plan seem quite abstract. A government can set yearly goals for climbing the global value chain or becoming an innovative center, but that does not mean that innovation actually takes place. However, the AIDP does not represent a moonshot of the Chinese government because the plan acknowledges the challenges. The plan clearly lays out the “uncertainties” that come with AI research, including the industrial shift that will come with moving the economy away from its major driving source. The plan predicts a “transformation of employment structures” and, with another competitive front on the global stage, “international relations and norms.” The fact that the plan recognizes the challenges ahead shows that it has taken the first steps to address these challenges and ensuring they do not come in the way of economic progress. It also shows that the AIDP is not purely idealistic, but that it is a measured plan that the government intends to carry out. Even if the plan does not seek to implement a specific course of action, it lays out the tangible financial goals for the AI industry in China and seeks to solve specific societal issues the country recognizes it is facing with new technology. The plan aims to scale the AI “core industry” to 400 billion RMB by 2025 and 1 trillion RMB by 2030. These goals lay the groundwork for the practical incentives and penalties that the government will set, building on the vision the AIDP spells out. Furthermore, China has already proved to the world that it can make concrete changes in large-scale innovation and applications of these emerging technologies: in November 2019, China launched the world’s largest 5G network, and 5G plans are now offered by three state-run telecom operators in 50 cities, including Beijing, Shanghai, Guangzhou and Shenzhen. The scale of its network is only giving the country more leverage and dominance over the continued development of 5G. The same can be done, and is already being done, with the development of AI in China. Artificial intelligence is indeed the new platform on which China’s economy will grow.