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China may continue to grow

in the near term, but this is

growth under extractive insti-

tutions—mostly relying on

politically connected business-

es, and technological transfer

and catch-up.

Who Will Rule the World?

DARON ACEMOGLU AND JAMES A. ROBINSON are the co-authors of Why

Nations Fail: The Origins of Power, Prosperity, and Poverty.

cambridge, mass.—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 mil-

itary 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 cen-

tury, 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 eco-

nomic 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 extrac-

tive institutions—mostly relying on politically connected businesses, and technolog-

ical transfer and catch-up. The next stage of economic growth, generating genuine

innovation, will be much more difficult unless its political institutions change to cre-

ate an environment that rewards the challenging of established interests, technolo-

gies, 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 agricul-

tural 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 sim-

ply by government fiat, but also because it has reformed its economic institutions,

providing incentives to farmers and some firms (though having government connec-

tions 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 which necessitate a fundamental political open-

ing so that political power is more equally distributed and can underpin economic

institutions that will create a level playing field and encourage and fully reward all

sorts of innovation—and 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.

The 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 warn-

ing 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

US inclusive institutions are in

decline, and the danger that

the US could follow other soci-

eties in history—such as the

Venetian Republic in the 13th

century—that have seen their

inclusive institutions disman-

tled and their economic success

undermined is a real one.

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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 opportu-

nities 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, lead-

ing 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 eco-

nomic 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 seg-

regation and black disenfranchisement, which if anything looked even more insur-

mountable. 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.

�

Economic inequality is increas-

ing political inequality, and

those increasing their political

power will use this to tilt the

playing field further and gain a

greater economic advantage.

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