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World's next technology leader will be US, not China – if America can shape up

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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.

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