Endogenous roots of growth

China’s experience shows economic development is not merely a matter of institutions or accumulating capital, but a process in which knowledge and market allocation spur entrepreneurial activity

Many economists believe that economic theories developed in the West and based on Western practices are not applicable to China’s development. This is not the case for Joel Mokyr, who won the Nobel Prize in Economics last year. The conceptual vocabulary of Mokyr’s theory on the cultural roots of modern economic growth — choice-based social learning, persuasion, the prestige of useful knowledge and horizontal transmission — offers a coherent and surprisingly productive lens for interpreting a sequence of well-known breakthrough moments in China’s reform and opening-up since 1978.

China’s experience confirms that modernization is not merely a matter of capital accumulation or institutional reforms, but also involves changes in the social acceptance of knowledge, markets, entrepreneurship, foreign experience and innovation. At the same time, China enriches Mokyr’s framework by showing that people who change accepted ideas can operate within controlled spaces for debate and experimentation, through selective adaptation and policy learning, rather than through full liberal institutional convergence.

Mokyr’s framework highlights the importance of persuasion, social learning and the changing legitimacy of ideas in moments of major transformation. In the late 1970s, the debate over the criterion of truth became an important turning point in China’s intellectual and policy environment. After the end of the “cultural revolution” (1966-76), the “Two Whatevers” doctrine constrained the reassessment of past policies and limited the space for practical reform.

Against this background, Deng Xiaoping’s call to “seek truth from facts” helped restore the principle that theory should be tested by practice. This was not a rejection of China’s ideological tradition, but a reaffirmation of one of its core methodological principles. By placing practice at the center of policy judgment, the debate encouraged ideological emancipation, opened space for policy experimentation and helped prepare the ground for reform and opening-up.

Mokyr attaches enormous importance to the social prestige of useful knowledge. The restoration of the national college entrance exam in 1977 represented a radical revaluation of human capital. It re-established examination-based meritocracy, effectively declaring that “codified knowledge” and cognitive skills were more socially valuable than proletarian origin.

In Mokyr’s framework, modernization is driven not only by endogenous development but also by the “horizontal transmission” of foreign ideas. China’s decision in 1980 to establish special economic zones illustrates this process. The reference model was the East Asian export-processing paradigm: the concept that a developing economy could boost industrialization by importing components, adding labor-intensive value and exporting finished goods under foreign brand names.

Chinese leaders placed the SEZs in limited areas and presented them as experimental zones for policy innovation and opening-up. The SEZs thus functioned as institutional environments where a new concept could demonstrate its fitness before spreading to the national economy.

The 1980s reform debates in China drew partly on the reform tradition, including the theoretical work of Oskar Lange and Włodzimierz Brus and the practical experience of Eastern European reforms. The dual-track planning and pricing system — perhaps the most distinctive indigenous innovation of the 1980s — exemplifies Mokyr’s insight that foreign ideas are modified by their institutional environment. The Chinese reform retained the Lange-Brus emphasis on calculated prices and enterprise autonomy but grafted it onto an existing planning apparatus. This was not the market socialism originally envisaged by Lange, but a conceptually and institutionally modified version that proved more robust in the Chinese environment.

The 14th National Congress of the Communist Party of China held in 1992 formally endorsed the “socialist market economy” as the target model. This decision represents a striking example of Mokyr’s idea of persuasion. Rather than questioning the principles of the Marxist political economy, reformers reinterpreted the canon. They argued that a market economy was merely a neutral instrument for resource allocation, compatible with socialism because it served the ultimate goal of developing productive forces.

The result was a peculiar but stable cultural equilibrium: markets were accepted as efficient, but the belief in State ownership as the “pillar” of the economy was retained. This bundling of market beliefs with statist values would shape the Chinese economic system for decades.

China’s accession to the World Trade Organization in 2001 marked a major step in its integration into the multilateral trading system. It required China to deepen its understanding of WTO agreements and practices, and to review and improve relevant domestic laws and regulations in line with its commitments. This process encouraged greater transparency, predictability and rules-based governance, while giving Chinese enterprises broader access to global markets.

Companies such as Huawei, Alibaba, Tencent and Xiaomi learned from global telecom, e-commerce, platform and consumer-electronics business models, including but not limited to Ericsson, eBay, Facebook and Apple. This was horizontal transmission of knowledge at the corporate level, driven by the observation that foreign models had proved successful in global markets.

Yet each company indigenized the foreign reference model. Alibaba’s Taobao introduced an escrow payment (Alipay) and reputation systems. Tencent’s WeChat transformed the messaging app model into a “super-app” integrating payments, government services and social commerce. These were not mere copies but “indigenized business models” that combined foreign technological templates with deep knowledge of local demand and institutional voids.

Following twenty years of rapid development since the 1992 decision to establish a socialist market economy, Chinese policymakers recognized the practical need to update that foundational concept. At the Third Plenary Session of the 18th CPC Central Committee in 2013, a critical semantic and policy shift occurred: the market’s role was elevated from a “basic” to a “decisive” role in the allocation of resources. At the same time, the decision affirmed the State’s role in macro-regulation and public ownership of the commanding heights, thereby defining the boundary between market and State rather than simply expanding the market. This was not an ideological rupture, but a classic case of choice-based social learning. By observing the outcomes of two decades of reform, decision-makers evaluated what institutional arrangements yielded the most growth, choosing to recalibrate the 1992 formula to better suit the economy’s newly acquired complexity and scale.

The “triple helix” model of university-industry-government relations represents another foreign model adapted to Chinese conditions. In the standard Western formulation the government plays a facilitating rather than directive role. The Chinese adaptation, consolidated after 2015 under the strategy of “innovation-driven development”, modifies the variant by assigning the State an explicit role in setting strategic directions, funding basic research and coordinating industrial consortia.

Mokyr’s framework suggests two interpretations. On the one hand, this is a rational adaptation. The State-dominant variant was judged more effective in an environment characterized by a venture capital system less suited to long-horizon, capital-intensive frontier technologies and intense geopolitical competition. On the other hand, the Chinese triple helix bundles the foreign model with a persistent collectivist belief that the State must remain the dominant allocator of strategic resources.

The ongoing learning process continued with the decision of the Third Plenum of the 20th CPC Central Committee in 2024 to initiate a law specifically promoting the private economy. This legislative move serves as a clear acknowledgment of the private sector’s indispensable role in driving China’s innovation ecosystem. Furthermore, it reflects a learned recognition that sustaining this innovative vitality requires systematically improving the business environment in which private companies operate. By choosing to codify support for private enterprise into law, the State is effectively adapting its institutional framework based on empirical evidence, demonstrating that a dynamic, well-supported private sector is a necessary condition for achieving the country’s long-term strategic economic goals.

Mokyr’s framework provides a compelling interpretive lens for China’s economic modernization. The Chinese case confirms his central insight: economic growth is not merely a matter of institutions or capital accumulation, but of achieving a shift in mindset in which useful knowledge, market allocation and entrepreneurial activity gain legitimacy.

The deeper implication is that development has no single path. China’s transformation demonstrates how a country can remain open to external knowledge while preserving its own institutional logic and policy autonomy. This is where the dialogue between Mokyr’s theory and China’s experience becomes meaningful: it helps move the discussion of modernization beyond imitation and convergence, toward a richer understanding of learning, adaptation and self-directed development.

The author is a communications researcher at the China-CEE Institute (Budapest) and a professor at Pazmany Peter Catholic University in Budapest, Hungary.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.