'Why Nations Fail': Will this be China's century?

MIT economist Daron Acemoglu analyzes the Chinese system and the challenges the country may face.

Monitor managing editor Marshall Ingwerson chats with 'Why Nations Fail' co-author Daron Acemoglu.

Will this be China’s century?

About as much as the last century belonged to the Soviet Union. That’s the lesson of history, according to Daron Acemoglu, an MIT economist and co-author of “Why Nations Fail” with political scientist James Robinson of Harvard. Their study of the rise and fall of economies all over the world through much of recorded history leads them to conclude that China will top out at a level of wealth per person less than half that of the US or Western Europe. China is currently on a course to reach, by the late 2020s, about a third of US per capita income and about 40 percent of US levels sometime in the 2030s. That’s the level at which it is very difficult for a “copycat” economy – one that imports its innovation from abroad – to make further progress.

A good analogy to China today is the Soviet Union in the middle of the 20th century, when it was driving its agrarian economy into the industrial age and was among the fastest growing countries in the world. It went as far as it could by adopting the well-established industrial practices of the West, then ran out of steam in the 1970s. At some point, the low-hanging fruit is gone.

“There is certainly some more growth that China can easily score based on catch-up, but at some point, it’s clear that this sort of growth cannot continue, most of it can’t continue, unless China starts innovating its own technologies in order to do things more efficiently and also start innovating new products to appeal to consumers both at home and abroad,” Dr. Acemoglu says.

What limits China’s horizon is much like what limited the Soviets in the mid-20th century. Both are what Acemoglu calls “extractive” economies run by a narrow political elite largely for their own benefit. Such economies don’t innovate because innovation means letting new winners emerge in the economy as they outcompete existing power players, some of whom get bumped. China’s economy is dominated by large state enterprises, often run by family members of senior party officials.

Acemoglu does not believe that China can become an innovative economy without opening up its politics to real competition as well. “I think the Communist Party leadership is worried about this, but is probably more sanguine [than worried] that they can do it.” Public pressure could always force political reform, but it’s not clear that discontent is very widespread. And on the other hand, the elite might become “even more rapacious” in how they squeeze the economy. If Bo Xilai had continued his rise in the party, he might have taken China down that road, suggests Acemoglu.

“I think the country has huge potential, and it has achieved so much in thirty years," he said. "It was the country that had the largest number of people under the poverty line and it has become a country that is largely dominated by a middle class.

“But that did not happen because there was some directive that China should produce more. They tried that. It didn’t work. That did not happen because the Communist Party tightened its grip or changed its view of what was the best course for the country, although that happened under Deng Xiaoping. It changed because, mostly in the 1980s, incentives in agriculture changed big time.”

Further conversations with Daron Acemoglu, co-author of “Why Nations Fail”:

Marshall Ingwerson is the Monitor's managing editor.