LAST week, China announced that it had mastered the art of making ballpoint pens. Don’t laugh: It was a years-long effort that cost millions of dollars and required the leadership of a state-run corporate colossus. It was front-page news, widely discussed on talk shows and celebrated on social media.

And it was no one-off stunt. China hopes such government-mandated “innovation” will finally revive its economy and catapult it into the front rank of technologically advanced nations. Unfortunately, such efforts are far more likely to worsen the inefficiencies already holding its economy back.

Ballpoint pens aren’t actually new to China. Its 3,000 pen manufacturers make around 40 billion of them a year and fulfil 80 per cent of the world’s demand.

There’s just one problem: China doesn’t possess the advanced alloys and machines necessary to make a high-quality pen ball and socket. As a result, 90 per cent of China’s pen tips are imported. Pens made from Chinese components are widely acknowledged to be inferior — a point made by Premier Li Keqiang in a 2015 television appearance. “That’s the real situation facing us,” he said. “We cannot make ballpoint pens with a smooth writing function.”

For the premier and others, the problem was about more than signing a smooth autograph. For years, it’s been a popular symbol of all the perceived gaps and failings in China’s vast industrial complex, from its reputation for poor quality to its inability to transition to making higher-value products. Amid an ailing economy, these failings started receiving attention at the highest levels of the government.

In 2011, China’s Ministry of Science and Technology took the hint and launched a project called “Research and Development and Industrialisation of Key Materials for the Pen Industry.” It allocated nearly $9 million and conscripted the Taiyuan Iron & Steel Group Co., a giant state-owned stainless-steel manufacturer, known as TISCO, to lead the venture.

That was a fitting symbol in its own right. For decades, China’s policy makers have favoured inefficient but politically connected state-owned enterprises, with unfortunate results for the economy.

During the first half of 2016, more than half of China’s roughly 150,000 state enterprises recorded losses, despite accounting for nearly a quarter of the country’s industrial income. Under President Xi Jinping, the sector has been strengthened and its role in economic reform has become even more central.

And that’s where the problems really begin. Even if a private company wanted to invest in producing high-quality pen tips in China, concerns that the new technology would be stolen or hijacked would likely dissuade them. For pen manufacturers that means it’s easier, and more profitable, to keep making lower quality pens. Rather than undertake the difficult process of intellectual-property reform, the government instead issues mandates for innovation, and invests in state-owned companies that think of politics first and profits later — if at all.

TISCO is a good example. Objectively, there’s no business case for the company to undertake pen tip manufacturing. In 2015, it churned out more than 10 million tons of steel. By comparison, total annual Chinese demand for stainless steel pen cases is about 1,000 tons. In a recent TV interview, an official with the Chinese Pen Association, a booster of the project, conceded that for TISCO, “it isn’t very cost-effective”. That’s something of an understatement: The project took half a decade of painstaking R&D and may not turn a profit for years to come.

Worse, that profit will likely come at the expense of the pen industry the effort was supposed to be helping. In November, TISCO was allowed to write China’s new industry standard for pen tips. The immediate effect will be to force all other manufacturers to conform to TISCO’s technological specifications — or be labelled out of compliance, with the risk of a shutdown. Long term, TISCO’s standard will probably result in a de facto domestic monopoly on pen tips, thereby replacing the foreign monopoly that China was originally trying to break up.

That may satisfy some mercantilist policymakers, but it’s a poor model for realising China’s innovation and manufacturing potential.

A better path is to strengthen intellectual-property protections so that private enterprises can be confident that their innovations will belong to them.

Meanwhile, overhauling or shutting down money-losing state-owned companies would make the economy more productive and ensure that resources flow to competitive companies with good ideas, rather than those with political connections.

For China, that might be the most important innovation of all.

By arrangement with Bloomberg-The Washington Post

Published in Dawn January 19th, 2017