Industrial Insight

China doomed to fail? | April 1, 2012

China doomed to fail?

http://www.nytimes.com/2012/04/01/opinion/sunday/friedman-why-nations-fail.html?_r=1

Op-Ed Columnist

Why Nations Fail

By THOMAS L. FRIEDMAN
Published: March 31, 2012

Acemoglu explained in an interview that their core point is that countries thrive when they build political and economic institutions that “unleash,” empower and protect the full potential of each citizen to innovate, invest and develop. Compare how well Eastern Europe has done since the fall of communism with post-Soviet states like Georgia or Uzbekistan, or Israel versus the Arab states, or Kurdistan versus the rest of Iraq. It’s all in the institutions.

“Our analysis,” says Acemoglu, “is that China is experiencing growth under extractive institutions — under the authoritarian grip of the Communist Party, which has been able to monopolize power and mobilize resources at a scale that has allowed for a burst of economic growth starting from a very low base,” but it’s not sustainable because it doesn’t foster the degree of “creative destruction” that is so vital for innovation and higher incomes.

“Sustained economic growth requires innovation,” the authors write, “and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics.”

“Unless China makes the transition to an economy based on creative destruction, its growth will not last,” argues Acemoglu. But can you imagine a 20-year-old college dropout in China being allowed to start a company that challenges a whole sector of state-owned Chinese companies funded by state-owned banks? he asks.

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