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.

Global Viewpoint

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.

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.

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.

But this potential will come to an end as well unless China radically transforms its institutions. This requires not only obvious steps such as introducing an independent judiciary, independent media, and more secure property rights for businesses, but truly inclusive political institutions. This necessitates a fundamental political opening so that political power is more equally distributed and can underpin economic institutions. This, in turn, will create a level playing field and encourage and fully reward all sorts of innovation – especially the disruptive kind.

The threat for the US is exactly the flip side of the opportunity for China. US inclusive institutions are in decline, and the danger that the US could follow other societies in history – such as the Venetian Republic in the 13th century – that have seen their inclusive institutions dismantled and their economic success undermined is a real one.

US society has been undergoing profound changes over the last four decades. The huge rise in economic inequality, brought to the headlines partly by the Occupy Wall Street movement, is both an important aspect of these changes and also a warning sign. The problem is that economic inequality often comes bundled with political inequality. Those with great wealth and easy access to the politicians will inevitably try to increase their political power at the expense of the rest of society. This sort of hijacking of politics is a surefire way of undermining inclusive political institutions, and is already under way in the US.

There is also a vicious circle here: Economic inequality is increasing political inequality, and those increasing their political power will use this to tilt the playing field further and gain a greater economic advantage. This will not only take the form of getting more tax breaks and government subsidies for their businesses, but also by blocking more innovative rivals and, directly or indirectly, undermining the opportunities that the rest of society has for acquiring skills, taking risks, and innovating.

Ultimately, however, the reason to believe that it will be the US, not China, leading the world in innovation and technology for many, many more decades is the resilience of US inclusive institutions. We have been here before, and we have rebounded. Things were much worse during the Gilded Age both in terms of economic inequality and in terms of how totally and unscrupulously the wealthy elite, the so-called robber barons, had come to dominate politics.

Yet the robber barons did not prevail. The US political system was also able to tackle the problem of Southern segregation and black disenfranchisement, which, if anything, looked even more insurmountable. All of this was made possible because Americans stood up and fought for political equality, and the US political system was open enough to allow them to do so. We are optimistic that this time it will not be different.

Daron Acemoglu and James A. Robinson are the co-authors of “Why Nations Fail: The Origins of Power, Prosperity, and Poverty.”

© 2012 Global Viewpoint Network/Tribune Media Services. Hosted online by The Christian Science Monitor.