Wednesday 18 September 2013 8:35 pm

Against the Grain: Why cutting-edge China could leapfrog the West in the service economy

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IN THE whole of the twentieth century, only a few countries managed to transform themselves and join the club of rich economies. Japan is the most prominent example. The key question for the first half of the twenty-first century, however, is whether China will manage to do the same. It is a difficult and elusive feat, and the number of failures – of countries who nearly made it, but then fell back – is as great as the successes.

It is only a few decades ago that there were serious doubts about Japan’s capacity to break through. The country was stereotyped as producing cheap, shoddy manufactured products, and at best managing to copy goods made in the West in an inferior way.

Last week, I was in Hangzhou, a Chinese city of millions of people which most people have never heard of. There was prolific evidence of poor copying in the many slogans translated into English that adorned massive development sites, billboards and shops. The graphic phrases were somehow not quite right. The undoubted winner was a clothes shop which proudly styled itself “Fashion F*** All”.

I had been invited to speak at a conference celebrating the launch of the Alibaba Complex Systems Research Center. “Alibaba?”, I hear many ask. It is a Chinese internet company, which does both business-to-business and business-to-consumer transactions. When Facebook was floated, that social network was valued at $104bn. There is now terrific excitement and speculation about the public offering of Twitter at a possible $10bn to $15bn. Alibaba is in the final stages of negotiations over its own initial public offering (IPO). The current estimate is that it will be valued at $70bn.

Japan rose to economic prominence by making complex and sophisticated products at least as well as, and often better than, the West. Now, the Western economies are dominated by the services sector. The key point about Alibaba is that this obscure giant is not just in the services sector, but in the fastest growing, most cutting-edge part of the whole sector. In a city which most people in the West could not place on a map, a company unknown to many is planning a public offering which will make it worth nearly as much as Facebook. The company, in terms of revenue, is already easily the number one in e-commerce in the world, and the IPO will give it the appropriate capital value.

Retaining the top spot in any business based on the internet is far from easy. As recently as 2008, MySpace – a precursor of Facebook – was the world’s most visited website and, until 2009, the most popular site in America, pulling in 70m unique US users a month. And all of a sudden it died (though attempts have since been made to revive it). Alibaba may find challenges in replicating in the US and Europe its stupendous success in East Asia, if Western consumers take time to trust what is – for them – a relatively unknown offering. But even so, the company shows that China is able to leapfrog the process of development and compete effectively in the leading sectors of the world economy.

Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World.

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