Will China Rule the World?

03/21/2012 09:11 am ET | Updated May 21, 2012

This fall China will have a new leader, widely expected to be Xi Jinping, the country's vice president, who recently met President Obama in Washington. Doubtless every move of a Xi regime would be closely watched: Will China carry on buying the United States' government debt? Will it commit to action on climate change? Should we all followed the Chinese economic model?

Today such questions are often coupled to the assumption that China is the world's emerging economic superpower, due in good measure to its rapid embrace of technology. According to the Economist magazine and the International Monetary Fund, China will overtake the U.S. as the largest economy in the world within the next decade.

This outlook overstates China's potential for continued economic growth, however. Our research on national economies throughout world history shows that long-term economic growth, while indeed based on technological innovation, only sustains itself in the presence of democratic political institutions that provide people with incentives to innovate. China may continue to grow in the near term, but the limited rights it affords its citizens places major restrictions on the country's longer-term possibilities for prosperity.

For that matter, this is hardly the first time observers have been swept up in the growth potential of a communist state. Journalist Lincoln Steffens, sent by the U.S. to study the Bolsheviks in Russia, came away awed. "Soviet Russia," as Steffens wrote in 1931, "was a revolutionary government with an evolutionary plan ... They had set up a dictatorship, supported by a small, trained minority, to make and maintain for a few generations a scientific rearrangement of economic forces which would result in economic democracy first and political democracy last."

The promise of economic democracy preceding political democracy should sound familiar to today's observers of China -- as should Steffens' later adage about the Soviet Union: "I've seen the future and it works."

Right up until the early 1980s, many Westerners still thought the Soviet Union was working. In one sense it did, for a time. The Bolsheviks took over the highly inefficient agricultural economy that existed under the Tsarist regime, and used the power of the state to move people and resources into industry. This spurred rapid growth for a few decades: The Soviet Union grew at an annual rate of about 6 percent between 1928 and 1960. Such growth even fooled the country's own rulers, leading Nikita Khrushchev, in his famous United Nations speech of 1956, to warn Western leaders, "we will bury you." As late as 1977, several textbooks argued that Soviet-style economies were superior to capitalist ones. Nobel Prize winner Paul Samuelson's introductory economics textbook predicted in its 1961 edition that the Soviet national income would overtake that of the United States by 1997. In the 1980 edition there was little change in the analysis, though the overtaking was delayed to 2012.

But by the 1970s, the Soviets had produced almost all the growth that could be derived from moving people from agriculture into industry, and the state's policies could not produce growth in any other way. Further technological innovation, apart from some advances in military and aerospace technology, could not occur by fiat. To create innovation more broadly, people need incentives such as the right to their own labor, to business profits, and to patents. But the Soviet leadership could not create effective incentives because the society was under a repressive communist dictatorship. It experimented with bonuses and other incentive schemes, and meted out harsh punishments, imprisoning millions for not working hard. But to no avail.

The real story of the Chinese economic turnaround is more similar to the Soviet one than many observers today recognize. Like the Soviets, the Chinese Communist Party under Deng Xiaoping, starting in 1978, took over an inefficient agricultural economy, stemming from Mao's Great Leap Forward and the Cultural Revolution. The Chinese leaders have also used state power to move people and resources into industry, again hugely improving economic growth.

The parallel is not exact: China has more potential than the Soviet Union in a few ways. Chinese growth has not come simply by government fiat, but also because, starting with Deng's government, China has made changes allowing people -- from farmers to industrial leaders -- more incentives and autonomy to start using their land, capital, and talents. China can also export goods globally, unlike the Soviet Union during the Cold War; these larger markets may allow for more growth. China's growth may also be higher because it had even more technological catching up to do than the Soviets.

Still, while China has implemented policies that seem radical compared to the ones it maintained in the mid-1970s, Chinese growth, like Soviet growth, has occurred under authoritarian political institutions. The country still lacks an independent judiciary and an independent media. Entrepreneurs have been jailed for dubious reasons -- not coincidentally when they went against businesses with stronger political backing. Many key economic decisions are still made by party elites who can change the CEOs of its largest companies on a whim.

There will be limits on how much innovation such a system can generate, even if China keeps growing this decade. For all its changes, China still has what we term "extractive" political institutions, those that direct resources away from the people and toward the state and a small number of its elites. History is littered with states that have had some democratic or "inclusive" features, but remained essentially extractive: from ancient Rome to early-modern Venice to many authoritarian nations within the last century, these states have ultimately failed to deliver sustained growth.

By their nature, extractive states are against the kind of innovation that leads to widespread prosperity: this kind of change threatens the hold on political and economic power that elites in such states fight to maintain. And fight they will: contra Steffens and others who have argued that some economic modernization leads to political reform, history shows this is not an inevitable pattern.

Watching Xi and China's other senior leaders is important. However, the biggest questions about China's future growth do not involve its next economic investments, but rather, its political essence. Unless China fundamentally reforms its political institutions, a change that seems unlikely in the short term, a trajectory of economic growth followed by relative decline is more likely than a trajectory of long-term increasing prosperity. And when that happens, the Economist magazine and the IMF, following in the footsteps of Samuelson's textbook, will have to revise their figures.

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