China's industrial revolution, which started 35 years ago, is perhaps one of the most important economic and geopolitical phenomena since the original Industrial Revolution 250 years ago. The reason is simple: Less than 10 percent of the world's population is fully industrialized; if China can successfully finish its industrialization, an additional 20 percent of the world's population will be entering modern times. Along the way, China is igniting new growth across Asia, Latin America, Africa and even the industrial West, thanks to the country's colossal demand for raw materials, energy, trade and capital flows. 

China's rapid growth has puzzled many people, including economists. 

How could a nation with 1.4 billion people transform itself relatively suddenly from a vastly impoverished agricultural land into a formidable industrial powerhouse when so many tiny nations have been unable to do so despite their more favorable social-economic conditions? Among the many conflicting views that have emerged to interpret China's rise, two stand out as the most popular and provocative. The first sees China's hypergrowth as a gigantic government-engineered bubble. It is not sustainable and will collapse because China has no democracy, no human rights, no freedom of speech, no rule of law, no Western-style legal system, no well-functioning markets, no private banking sector, no protection of intellectual properties, no ability to innovate (other than copying and stealing Western technologies and business secrets), nor a host of many other things that the West has possessed for centuries and have proved essential for Western prosperity and technological dominance.1 According to this view, the bubble will burst at the expense of China's people and environment.

The second view sees China's dramatic rise simply as destiny. It is returning to its historical position: China had been one of the richest nations and greatest civilizations (alongside India) from at least 200 B.C. to 1800, the dawn of the Industrial Revolution in England. (See Figure 1.) It was only a matter of time for China to reclaim its historical glory and dominate the world once again. (As Napoleon once said, "Let China sleep, for when the dragon awakes, she will shake the world."2)

But neither view is backed by serious economic analysis, instead being based either on prejudice or naïve extrapolation of human history. How could a nation with all those adverse elements for business and innovation be able to grow at a double-digit annual rate for several decades and transform itself in such a short time from an impoverished agricultural economy into a formidable manufacturing powerhouse? If culture or ancient civilization is the explanation, then why aren't Egyptian, Greek or Ottoman empires bursting onto the world stage?

This article provides a different view of China's rise, one based on fundamental economic analysis. It hopefully will lead to a better understanding of China's miracle growth but also will shed light on the failures and successes of many other nations' attempts at industrialization, including the original Industrial Revolution itself.

Admittedly, many people think China's economic miracle has come to an end. The growth of its economy has declined sharply from the double digits to 7 percent or lower. Its stock market is in turmoil, and its currency is under attack. But keep in mind that the United States experienced 15 financial crises and a four-year civil war as it rose to global prominence. It was on the verge of collapse in 1907 after taking on the mantle of the world's superpower from the United Kingdom. The U.S. also weathered the Great Depression in the 1930s and the global financial crisis in 2007. Does all of this mean it is no longer an economic star?