Solving the Mystery of Europe’s Rise In October 2024, the Royal Swedish Academy of Sciences in Stockholm announced that the Nobel Prize in Economics was awarded to three economists who studied why some countries are rich while others remain poor. Daron Acemoglu, Simon Johnson, and James A. Robinson were honored for showing “the importance of institutions to a country’s prosperity.” Their research demonstrated that freer and more open societies are more likely to thrive. In 2002, when I began teaching international business at Old Dominion University’s doctoral program, I came across one of their working papers titled “The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth.” China’s economy has grown substantially, and a large middle class has emerged, yet democracy is nowhere to be found. Their research aimed to investigate how Europe rose rapidly between 1500 and 1850, creating the capitalist system we know today. Europe at that time had many countries, but only a few experienced significant economic success. The key question they sought to answer was: Why did only some nations rise? They began by reconstructing historical data, including statistics from over 2,200 European cities, such as GDP and urbanization rates. Through econometric analysis, they identified two crucial factors that determined which countries thrived during this period. The first was trade, specifically Atlantic trade routes to the Americas. The second was the initial political and economic institutions in a country. In particular, they found that more open and less absolutist monarchs, who allowed non-royal classes to benefit from trade, enabled economic growth.  In Britain and the Netherlands, both had Atlantic trade routes and relatively open monarchies, which facilitated their rise. Meanwhile, Portugal and Spain, despite engaging in Atlantic trade earlier, had absolutist monarchs who restricted trade benefits to the royal class, leading to their eventual decline. Italy, though blessed with relatively benevolent rulers, lacked access to Atlantic ports and therefore did not participate in transatlantic trade, preventing its rise. The three Nobel laureates explained that trade with the Americas was crucial because it allowed nations to acquire colonial resources and use forced labor for profit. Though trade with the Americas accounted for only 4 percent of these nations’ GDP, it was enough to empower the emerging bourgeoisie, who in turn challenged royal authority, demanded the rule of law, and pushed for the protection of private property rights. This led to the institutional reforms that laid the foundation for modern capitalism. The laureates emphasized the crucial role of the bourgeoisie in institutional change. Political economists like Barrington Moore have often regarded the bourgeoisie as a middle class, caught between the aristocracy above and the proletariat below. The aristocracy had privileges and often exploited the bourgeoisie, while the proletariat, having nothing to lose but their chains, were inclined toward revolution. Revolutions often resulted in the execution of monarchs and the dismantling of productive institutions. However, because the bourgeoisie had property and wealth, they tended to favor reform over revolution, advocating for fair rules rather than chaos. They used their economic power to push for laws that even the monarchs had to obey, thereby creating the legal framework for capitalism. The Challenge of the Chinese Model I was deeply impressed by their research, as I was reflecting on China’s path of reform at the time. Under Mao Zedong’s rule, China’s economy collapsed. After Mao’s death, the Chinese Communist Party (CCP) began reform and opening up. The CCP allowed non-party individuals to do business and prosper, akin to the more open monarchs in Britain and the Netherlands. The CCP also exploited China’s “low human rights” advantage, similar to the use of forced labor by British and Dutch colonists. Furthermore, China’s Belt and Road Initiative and expansion into Africa resemble colonial policies. Just as Britain and the Netherlands rose through trade with the Americas, China’s rise also depends on global trade. In the late 1990s, China eagerly sought to join the World Trade Organization (WTO), but faced resistance because it was not a market economy. Developed nations, eager for profits and hopeful for China’s future, supported its WTO entry. U.S. President Bill Clinton, for instance, famously said that China’s economic growth would create a middle class, which would then demand democracy, as history had shown. Over 20 years later, China’s economy has grown substantially, and a large middle class has emerged, yet democracy is nowhere to be found. Why hasn’t China’s middle class pushed for democracy as Europe’s did centuries ago? The answer lies in the CCP’s mastery of how to maintain one-party rule indefinitely: through control. The CCP controls all resources in China. Chinese citizens (note that I do not refer to them as “citizens” in the democratic sense) need the CCP’s approval for everything, from birth to education, housing, employment, and even business operations. Their wealth and property can be confiscated by the CCP at any time. In this environment, no one is truly independent of the CCP, and thus they cannot use their wealth to challenge the Party’s authority. On this issue, experts and politicians worldwide, including myself, have been mistaken. Now, applying the Nobel laureates’ research on Europe’s rise to China, we can see that under Deng Xiaoping (ruled from 1979-1989), Jiang Zemin (ruled 1989-2002), and Hu Jintao (ruled 2002-2012), the CCP was relatively tolerant of non-party individuals making money. However, under Xi Jinping (ruling since 2012), as China has accumulated wealth and economic urgency has decreased, private entrepreneurs who have become wealthier than CCP officials are now viewed with suspicion. The CCP cadres are increasingly upset that business people under their control have more wealth than they.  The Nobel laureates argue that China’s political institutions are not open. Due to a lack of freedom, China lags behind democratic nations in innovation. While an authoritarian regime can efficiently mobilize national resources for a period of time, it is unsustainable in the long run. Nevertheless, the laureates acknowledge that China’s rapid growth presents a challenge to their theory. The Importance of International Trade to China’s Model In my view, the laureates overlook the importance of international trade to China’s model. Although China lags behind democracies in innovation, it can acquire innovations from other countries, both legally and illegally. Acquiring innovations is faster and cheaper than creating them. Additionally, China’s “low human rights” advantage and its state-driven economic model should not be underestimated. I refer to this model as “China Inc.,” where the CCP runs China like a giant corporation. The CCP is the owner and manager, with the General Secretary serving as the CEO. State-owned enterprises (SOEs) function as its strategic divisions and subsidiaries, while private businesses operate as joint ventures, in which the CCP holds a controlling stake. Foreign enterprises are essentially franchises, operating at the pleasure of the CCP. Meanwhile, the Chinese people are employees of China Inc. They cannot criticize the CEO, cannot choose where they live freely, and the Chinese money they earn is essentially internal coupons that requires CCP’s approval to convert and move overseas. The “China Inc.” model gives the CCP several advantages: agility in state-to-state affairs and national-level support for Chinese firms competing with foreign businesses. In democratic countries, the government is the referee, and companies are the players in the markets. In China Inc., the government is both the referee, the coach, and the competitor on the field. The CCP concentrates national resources to develop industries it deems important, allowing Chinese firms to outcompete foreign companies on the global stage with low-cost advantages. In international markets, no privately-owned company, no matter how large, can match the might of China Inc., which has the backing of an entire nation’s resources. As long as the world tolerates the China Inc. model, China’s low-cost products will dominate global markets, and its overcapacity will generate significant profits for China at the expense of other countries. Thus, the Chinese model can be sustained for a long time. Democratic nations must recognize the true nature of China Inc. Only then can they develop effective countermeasures. Broadly speaking, there are three strategic responses to consider. The first is to unite all nations in telling China Inc. “no” and demand that the CCP abandon its model. This would mean asking the Chinese state to stop acting as both a player and a referee and instead just be a law-abiding referee like other governments. However, it is unlikely that the CCP would willingly give up this advantage. The second option is for other nations to adopt a similar state-driven model, where governments become more actively involved in business competition. In other words, democratic nations would adopt their own versions of the China Inc. model, which would fundamentally disrupt the current global economic order. So far, no country, including the United States, has seriously considered this option. The third option is to do nothing and continue doing business with China Inc. Under this scenario, China, with its low human rights and state-driven advantages, will continue to dominate the global market. In conclusion, the China model presents a significant challenge to the traditional understanding of capitalism and global trade. The laureates’ theory holds strong for democracies, but the sustainability of China’s state-driven system requires us to rethink economic paradigms. As long as the world continues to engage with China’s unique system, we will continue to see its products and influence spread globally. Whether or not the global community will adapt to or push back against this model remains an open question. Shaomin Li is Eminent Scholar and Professor of International Business at Old Dominion University and author of The Rise of China, Inc.: How the Chinese Communist Party Transformed China into a Giant Corporation.  The post The Chinese Model’s Challenge to the 2024 Nobel Prize in Economics appeared first on The American Spectator | USA News and Politics.