Who will rule the 21st century?

[union]

Originally published in Business Week magazine on July 2, 2007. Reprinted with permission.

We’re neither economic forecasters nor political prognosticators by trade, but you don’t have to be either to see that right now the U.S. holds a robust lead in the race for hegemony. Our economy is five times as large as China’s and 15 times larger than India’s, with about one-fourth the population of either nation. That gives the U.S. a real advantage in providing education, health care, and national security—plus all the other stuff that makes a country thrive.

But “right now” doesn’t mean forever. All you need is a ruler to draw the straight-line extrapolation showing that China and India, with their faster growth rates, will eventually catch up to the U.S. in terms of pure economic size. For China, that would occur as early as 2045; for India, the date would be some 20 years later. Which is why you so often hear experts predicting that, by midcentury, the U.S. will be trailing the two new world superpowers.

We’d say: Not so fast. Straight-line calculations about the U.S., China, and India are just that. They assume all three national will enjoy smooth upward rides. No recessions, no banking breakdowns, not political crisis, no disruptive social uprisings. Unlikely? For sure! With China’s massive experiment combining communism and capitalism, India’s entrenched bureaucracy and corruption, and America’s long term entitlement obligations, it is far more probable that growth trajectories will zig and zag more than zoom. Further, straight-line calculations do not take into account relationships with other parts of the world, such as the Middle East, where changing alliances could have economic repercussions.

Given that reality, then, what general scenario would you bet on for the next 50 years? Would it be America’s 3% annual growth or China and India at 8%? We’d take the U.S. for a simple yet incontrovertible reason. Its system—the sum of all its parts—works, and when it breaks, it bounces back fast. Don’t worry; we’re not breaking into The Star-Spangled Banner. We just believe U.S. economic dominance isn’t a function of how long the nation has been leading the pack.

It’s about how America operates as a country. We’re talking, mainly, about freedom and stability. Political parties disagree, often vehemently, but the government never stops running. Generally speaking, the U.S. justice system is fair, and health care, while inconsistent in delivery, is widely available. And even though secondary education in America gets roundly knocked, we have without doubt the best system of higher education, turning out the world’s most skilled, innovative science and engineering PhDs.

America has a final competitive advantage as powerful as it is unique: its confluence of bright, hungry entrepreneurs and flush, eager investors. Yes, China and India have ambitious people who dream of building their own companies, and, increasingly, more are getting the chance. (The U.S. venture firm Kleiner Perkins Caufield & Byers just opened offices in Shanghai and Beijing.) But neither China nor India comes close to the U.S. in terms of this “killer app,” and it will take years of venture capital flowing in before the Chinese let go of a rote approach to work and truly embrace entrepreneurial innovation.

China has other challenges as well. Aside from its risky social experiment, it has an economy in which less than a quarter of its people truly participate, and its one-child policy is exacerbating the problems of an already aging population. India, meanwhile, will continue to struggle with its overwhelming number of have-nots and its aforementioned corruption. True, India is a democracy, but a democracy muddled by a profusion of divergent political parties.

Now, we’re not saying the U.S. system is perfect or its economy invulnerable. If not dealt with, entitlements like Social Security, Medicare, and Medicaid will create a budget deficit that will explode over the next 20 years. How America handles that problem via tax and spending policies will determine the strength of its growth engine. Fortunately, our stable, highly adaptable system has conquered enough major problems—from the Depression to the Cold War—in the past that there is more reason for optimism than despair.

In the end, we’d make the case that American economic leadership will be with us for most, if not all, of the century. It will by no means “rule,” as it did at the turn of the 21st century. But it will remain ahead until other nations develop a total economic and social system that works as well. There’s a lot more to the world’s economic future than a straight-line extrapolation can tell you.