World's next technology leader will be US, not China – if America can shape up
Innovation drives income growth and determines global military and diplomatic leadership. China lacks the kind of inclusive political institutions like those in the US that promote innovation. But inequality and money's influence on political power threaten American innovation.
Voices of both those convinced that China will eclipse the United States as a global economic and military power and those who are confident of continued US leadership are getting louder. Much of this debate focuses on the size of the Chinese economy relative to the US economy or issues of military might.Skip to next paragraph
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But what matters for global leadership is innovation, which is not only the key driver of per capita income growth but also ultimately the main determinant of military and diplomatic leadership. It was the US that proved after Pearl Harbor how a prosperous economy can rapidly increase its military power and preparedness when push comes to shove.
So the right question to ask is not who will be the military leader of the next century, but who will be the technological leader. The answer must be: most probably the US – but only if it can clean up its act.
The odds favor the US not only because it is technologically more advanced and innovative than China at the moment, with an income per capita more than six times that of China. They do so also because innovation ultimately depends on a country’s institutions.
Inclusive political institutions distribute political power equally in society and constrain how that power can be exercised. They tend to underpin inclusive economic institutions, which encourage innovation and investment and provide a level playing field so that the talents of a broad cross-section of society can be best deployed.
Despite all of the challenges that they are facing, US institutions are broadly inclusive, and thus more conducive to innovation. Despite all of the resources that China is pouring into science and technology at the moment, its political institutions are extractive, and as such, unless overhauled and revolutionized soon, they will be an impediment to innovation.
China may continue to grow in the near term, but this is growth under extractive institutions – mostly relying on politically connected businesses and technological transfer and catch-up. The next stage of economic growth – generating genuine innovation – will be much more difficult unless China's political institutions change to create an environment that rewards the challenging of established interests, technologies, firms, and authority.
We have a historical precedent for this type of growth and how it runs out of steam: the Soviet Union. After the Bolsheviks took over the highly inefficient agricultural economy from the Tsarist regime and started to use the power of the state to move people and resources into industry, the Soviet Union grew at then-unparalleled rates, achieving an average annual growth rate of over 6 percent between 1928 and 1960.
Though there was much enthusiasm about Soviet growth – as there is now about China’s growth machine – it couldn’t and didn’t last. By the 1970s, the Soviets had produced almost all the growth that could be derived from moving people from agriculture into industry, and despite various incentives and bonuses, and even harsh punishments for failure, they could not generate innovation. The Soviet economy stagnated and then totally collapsed.
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China has more potential than the Soviet Union. Its growth has not come simply by government fiat, but also because it has reformed its economic institutions, providing incentives to farmers and some firms (though having government connections still helps enormously, and challenging powerful firms can land you in jail or worse). China also had more technological catching up to do than the Soviet Union.