Lessons from China.

• Author: Binning, Tom
• Position: THE ECONOMIST

I RECENTLY TAUGHT BUSINESS STRATEGY and analytics to Chinese entrepreneurs and middle managers in Chengdu, China. On a subway ride I passed three stops--High-Tech Zone, Financial City and Incubation Park. While I did not explore these hubs in depth, it appears many Colorado high-tech manufacturing jobs that left the state a decade ago are now located in Chengdu's High-Tech Zone.

During the last 30 years China's vulnerable agrarian economy, with about 20 percent of the world's population, moved through the stage of a "developing economy" to a prosperous nation with a middle class of approximately 300 million people. Some expect the middle class will grow to 500 million by 2030. In the coming decades China is likely to surpass the U.S. as the largest national economy and will, as a result, exert strong economic influence throughout Asia, Eurasia and Africa.

There are three primary factors setting in motion China's transformation. First, the Communist Party changed its attitude toward free markets in the 1980s. Second, to fight inflation, improve quality, and support geopolitical "allies" that embraced free markets and/or democracy, the U.S. opened our markets to more imports. At the time, the U.S., with about 5 percent of the world's population, represented about one-third of the global economy; today the U.S. represents just over one-fifth of the global economy.

The third factor is seldom discussed in the U.S. because it challenges our ethos of freedom through democracy and markets. It's that nasty P-word--Planning. Many Americans still equate planning with mandates and quotas. That doctrine died with the collapse of the Soviet Union and with the emergence of modern China. A second type of negative planning, which is actually more prevalent in the U.S. and Europe than China, centers on constraining the market. A Chinese economist described it as building the cage in which a bird (i.e., the market) can fly at will.

From what I saw, China's success relates to two other types of planning--indicative planning and infrastructure development. Under indicative planning, governments signal a clear vision for the economy and provide incentives through subsidies and taxes to nudge the market in the indicated direction. Large-scale infrastructure development requires strong visionary politicians and business...