Nobel Prize-winning economist Michael Spence discusses the development of strategic competition and the benefits it can bring
Bio: Michael Spence is a Canadian-American economist who was the co-recipient of the 2001 Nobel Prize in Economics. He is now a professor of economics and business at the Stern School of Business at New York University and a professor of management at the Stanford Graduate School of Business.
The relationship between China and the United States in particular is becoming increasingly strained, and signs of a potential decoupling are now ubiquitous. The competition between the two countries, both economic and strategic, has escalated in recent years and taken on greater technological characteristics than ever before.
Nobel Prize-winning economist Michael Spence, believes that if the US and China fight a zero-sum battle for long-term technological dominance, they will both fail, impeding technological progress and economic growth everywhere. They are far better off striving to reach or remain at the frontier of innovation, without preventing others from challenging them.
Q. How do you view globalization and the relationship between China and the West in the global economic system?
A. I believe we are in a transition away from globalization, the end point of which we don’t know. Both China and the West are aiming to have something more complex, a balance between strategic cooperation and strategic competition, meaning the world will become more fragmented as countries create barriers, such as dual-use technologies, which have military implications, and place increased emphasis on national security issues. A lot of governments and businesses are also talking about diversification now, which means creating a different way of organizing global supply chains than is currently the case. Both China and Western governments understand that the cost of isolation is extremely high and that an economy can’t perform anywhere near its full potential if it’s isolated from the global economy and global technology systems. There is the risk that the world will break up into groups in something like a new Cold War, but I think that’s unlikely because of the economic consequences.
Q. How would you define strategic competition in terms of the US-China relationship and how does it differ from standard economic competition?
A. Strategic competition in the modern world has a technological theme. China is now a first-class technological power, and this fundamentally changes the global economy. Strategic competition now consists of competition to be at the frontier of technology and governments, China in particular, is now focusing on this. The Made in China 2025 documents are a good example.
Until recently, the United States was the premier technological power together with Europe, South Korea and Japan. China now has also reached this point through both its extraordinary growth and its investments in people, science and technology. Although each have their own advantages, I think on balance we’re in a situation where the United States and China are competing to be at the technological frontier, which is not necessarily a bad thing.
In terms of the overall global effect of a strategic competition between China and the United States, the focus is more on technological breakthroughs rather than retaining intellectual property, partially because the part of the global system that develops new technologies doesn’t have a lot of seriously proprietary stuff, so it’s quite open to exchanges and leaks. Europe is also aiming to play a more important role in the future, and other countries will also benefit as they develop. This will benefit the world in general, provided the US and China don’t attempt to block the flow of technology.
Q. To what extent do leaders both in China and the West view economic competition as a “zero-sum” game? And what would be your view?
A. My view is it’s not a zero-sum game, and I think that leaders in all countries understand that too. The exception is with technology related to defense and national security. National security is significant, but developing technology and not sharing it wouldn’t be an effective way to operate. Additionally, it would be close to impossible for the West to hold China back in terms of technological development. Defense-related policies which limit global dispersion are standard government practice across time and nothing unusual or new, so governments should try to keep such policies at a minimum. Sensible leaders regardless of nationality understand that being dynamic is key to advancing in technology, and although opposing beliefs are now rife, the mutual benefits of cooperation will win out.
Q. Do you think there is any prospect of an international organization being able to agree on rules and data management that would be accepted by all major global players?
A. I think it would be highly desirable to have a global institution specializing in digital security, but national priorities will have to dominate. There are already agreements with respect to nuclear, biological and chemical weapons and this needs to be extended to cyber weapons. It’s especially important as our societies are digitalizing rapidly and as such, these weapons are becoming increasingly destructive.
Q. China’s common prosperity policy is targeted at a more equal distribution of wealth and influence within the country, a topic also widely discussed within the US. To what extent can the US learn from China in this area?
A. China has produced an enormously impressive model of growth which was in important respects inclusive, and as a result there are tens of millions of new middle-class consumers in China today. China has illustrated something that the West should pay attention to, if not everybody is benefiting all the time, it’s okay because somebody always gets rich first. In America, people are less comfortable with the resulting economic, political and social polarization which makes good governance very difficult.
I think the main focus should be on two things. Firstly, what Americans call equality of opportunity, that’s the core. You want the next generation, whatever their abilities and preferences, to have roughly the same opportunity as the last.
Secondly, they need to strengthen critical services. Education, health and various social security systems should be delivered to the entire population at a high quality. In America, we now have a government that takes this issue seriously, but if you try to implement such a policy with redistribution, you’re only utilizing the demand side. Such a focus will obviously result in barriers on the supply side. So the main lesson the US can learn from China is that despite good intentions, achieving the right kind of equality will be undermined by blockages on the supply side of the economy.
Q. The Belt and Road Initiative (BRI) has now been underway for several years. How would you assess the initiative’s progress? Where has it succeeded and where has it faced difficulties?
A. The BRI is important and it’s a very large initiative with a huge global reach, particularly westward into Eurasia. However, when you’re negotiating with countries whose negotiating capacity is less than yours, unfair deals will occur. Some arrangements as part of the BRI have happened this way, but I believe this is part of a global learning curve. I think China’s intentions generally are to promote growth and development in parts of the world that are far behind. China will become both a friend and an influential player in this process, which is perfectly legitimate. The United States and the West may start investing more heavily in some of these countries as well, or develop an entirely separate supply chain.
Q. What areas of common ground are there that China and the West can build upon?
A. There is an enormous amount of common ground. The obvious topic which requires a united world effort is climate change and sustainability. The world needs technology to flow without barriers because to deal with a big challenge like the climate, we need to minimize handicaps. If we don’t, the result will be duplicate efforts and slow progress in developing green technology. The inclusiveness agenda is another area of common interest. China talks about common prosperity and the West has a significant problem with rising income inequality and declining wealth. Thirdly, regulating new technology to maximize benefits and minimize the risks from data security, privacy and cybersecurity is very important. In these new technological fields, there’s a lot of space for experimentation and learning from peers.
Q. If you look at it from the perspective of 10 years from now, what will the long-term effects of the pandemic be?
A. In the short run, it will slow down the Chinese economy. It has also created a greater desire for a new policy as the COVID-zero approach eventually starts to hurt in terms of the economy. Already China has lifted some of its blockages both to the domestic economy and the international economy. However, supply chain congestion won’t go away anytime soon because it’s not entirely related to the pandemic.
Q. You have previously said that the world is experiencing four major structural transformations: the multidimensional digital revolution; the push for clean energy and environmental sustainability; major breakthroughs in biomedical science and biology; and the rise of Asia. How successful has international collaboration/competition been in advancing these areas and how could it be improved?
A. I stand by that, but in addition I would add two more factors. I have recently been studying aging populations and debt levels. Currently 75% of the world’s population will soon be living in societies in which the ratio of working people is dangerously low. Debt levels are also at historic highs which makes a society far more prone to shocks such as COVID-19. These two issues will require a lot of policy makers’ attention and creative thinking. Right now, we have an explosion of entrepreneurism, which policymakers would be wise to draw on as a source of creative solutions.
President Biden and Xi Jinping have said they are committed to jointly addressing global issues such as climate change and sustainability, and the consensus of policymakers is that this cooperation is critical. Biomedicals is also an area in which there is a huge amount of cooperation.
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