By Dan Steinbock
(The author is the Research Director of International Business at the India, China and America Institute in Atlanta, Georgia, the United States.)

The first challenge of China's economic development was to overcome poverty. Now the nation is preparing for the second challenge - achieving prosperity.

Recently, some Western observers have expressed concern for what they call China's rising "nationalism" and "protectionism".

These perceptions may be motivated by vested interests - concerns over China's rising economy and power.

From Britain to France and the United States, the take-off of every country - industrialization, urbanization and modernization - has been driven by economics and technology. But it has also been supported politically by the building of an effective centralized national state and a growing sense of nation.

A unified sense of national purpose can greatly contribute to the catch-up efforts of underdeveloped nations against the leading industrial forerunners - from Alexander Hamilton's America to Deng Xiaoping's China.

In the case of Germany and Japan, two late industrializers, the period of take-off also gave rise to external projections of nationalist ambitions. In the 1910s and 1930s, these military adventures contributed to two world wars, the holocaust in Europe and devastating massacres in China.

Chinese people have suffered from such external ambitions in the hands of Western powers and Japan. Accordingly, China's economic development is predicated on peace and stability - not war and expansion.

In the early 1990s, China's economy was still known primarily for simple, low-tech manufactured goods, such as textiles, shoes and plastics. Today, it is moving toward more complex, high-tech goods. In the past, China was portrayed as the "world's factory", where manufacturing meant cost efficiencies. Since January 2006, President Hu Jintao has been calling for a transition to an innovation-based economy.

This transition is not a threat, but an opportunity for China and the rest of the world. Like the UK, Germany and France in the postwar era, China is accelerating catch-up efforts in order to move higher in the value-added chain.

Prosperity is based on productivity, which is rooted in innovation. Through the 1950s and 1960s, America set the standards for prosperity, productivity and innovation. Today, advanced OECD (Organization for Economic Cooperation and Development nations) dominate worldwide innovation, as measured by patent rivalry. Now China is catching up.

Ultimately, China's objective is not to provide endless labor reserves to serve foreign nations, but to lift the remaining rural regions from poverty and to raise living standards in rapidly expanding cities.

The economic ripple effect of the prosperous cities of Shanghai, Beijing, Guangzhou and Shenzhen is now energizing a new generation of urban centers - from the high-tech clusters of Dongguan and Wuhan and growth centers like Hangzhou, Tianjin, Chongqing and Qingdao, to Kunming and Nanning, the gateways to Southeast Asia.

Recently, the fastest relative growth in real estate investment has not been occurring in the first tier coastal cities, but in the second and third tier cities - from Urumqi in northwest to Chengdu in the southwest.

In comparison to the US and European cities, China's metropolises of the 21st century are huge, with populations ranging from near 8-12 million - Qingdao and Chengdu, respectively - to Chongqing, with close to 24 million people.

In the past, American consumers sustained world economy. In the future, the urban centers of China - and, over time, India - will drive global growth.

At the same time, foreign multinationals in China are facing a more demanding operating environment. This transition is neither a threat nor unique in East Asia.

In the 1980s and 1990s, China's open economy welcomed all foreign direct investment. Foreign multinationals enjoyed corporate tax rates half those imposed on local companies, while paying no duties on their capital goods imports.

It was a highly preferential environment favoring foreign multinationals, which basically traded technology for market share.

Since last January, foreign multinationals have been held to the same standards as local competitors - as exemplified by the new Enterprise Tax Income Law (setting the unified corporate tax rate at 25 percent) and the new Employment Contract Law (securing the framework for labor contracts).

Critics argue that China's growth is being undermined by higher corporate taxes, more expensive labor, land and commodity costs, currency appreciation, export-tax rebates, and so on. But the stage is neither unique nor eternal. Japan and the newly-industrialized countries of East Asia saw a similar transition only a few decades ago.

In advanced economies, rising productivity means higher wages. Why shouldn't Chinese people have the same rights to happiness and prosperity as the British, French, Germans and Japanese in the postwar period?

In the quest for growth, advanced nations seek to improve their economic standing, through greater productivity and innovation. Yet, different stages of growth feature different challenges.

Productivity improvements that are typical during the take-off - for example, building basic infrastructure facilities, improving health - are not sufficient to increase productivity at a more advanced stage, where productivity gains from these policies have already been exploited.

The US growth model is based on GDP per capita of $45,800, at purchasing power parity. It may be appropriate to many urban and post-industrial Western countries that seek to maintain their position at the top. The growth challenges of developing countries are different. Based on $5,300 per capita, China's growth model is closer to their realities of early industrialization and urbanization.

The US and Chinese models need not be seen as mutually exclusive, but complementary. Each has a function - but in a different stage of growth.

In the Cold War era, the American model played a critical role in the increasing prosperity of Western Europe and Japan. In the post-Cold War era, the Chinese model can have a substantial role in spreading growth across emerging Asia and beyond.

(China Daily August 15, 2008)