Can China Become Innovative?

Without innovation, China’s economy risks a painful slowdown.
Can China Become Innovative?
A man thinks while surfing the internet in Beijing on June 15, 2009. Whether China can develop the institutions to allow innovation will determine its economic future, says economist Ma Guangyuan. Frederic J. Brown/AFP/Getty Images
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The following is an abridged version of remarks made by economist Ma Guangyuan to Chinese television and later reproduced widely online. 

Phoenix Television invited me to give a lecture for the “Century Forum” program titled “Everyone, Start a Business and Be Innovative!” I set the tone of my lecture by posing the question, “Will China become innovative?” Any doubt in such a major strategy regarding China’s economic future can easily garner support or be seen as grandstanding. Although I am asking the question, “Can China become innovative?” I do have hope, and am posing the question with good intentions.

Professor Tyler Cowen of George Mason University stated in his book “Average Is Over: Powering America Beyond the Age of the Great Stagnationthat the U.S. economy entered a stage of stagnation in the mid-1970s. He said there are two reasons for stagnation: low-hanging fruit and the United States reaching a historical technological plateau. He thinks technological innovations, including electricity, automobiles, trains, airplanes, typewriters, cameras, and medical equipment were all accomplished before 1940. Since then, other than computers and the Internet, not much was invented.

This is actually also a description of China’s economy.

China’s economy is stalling as it has lost all traditional motive forces. In my own words, the six-horse wagons—manufacturing, the demographic dividend, investment, real estate, export, and consumption—are exhausted and unsustainable. In the absence of innovation, China’s economy is facing the risk of falling off a cliff.

Without any doubt, technological innovation is the only remaining hope. However, implementing innovation is not as easy as it sounds. With the economy in decline, what are the chances of enterprises investing in innovation?

In the mid-1990s, Simon Kuznets raised the concept of modern economic growth. Kuznets states that Europe’s economic growth before the Industrial Revolution was lower than 0.1 percent. At that rate, it would take 700 years for material wealth to double!

Actually, in the 100 years after the start of the industrial revolution, the average annual economic growth surged to 1 percent or more, taking 70 years to double material wealth.

The economic surge in Europe was triggered by Britain’s Industrial Revolution. Many people have been asking why Britain rather than another country? Technically speaking, Europe, including Britain, was far behind ancient China in terms of advanced science and technology.

Douglass North, in his book “The Rise of the Western World,” attributes the rise of the West to the Western system. According to North, the rise of the Western world is the result of its development of an efficient system that established ownership of property and guided individuals’ economic efforts toward social activity. According to this logic, the British Industrial Revolution owes its success to this system.

Before the start of the Industrial Revolution, Britain had already established a modern system of finance, property rights, and patent rights.