Innovation will define future of economic growth

After the Korean War (1950-1953), South Korea was one of the world's poorest countries, with an economy heavily reliant on agriculture. Fast forward to the present, and it's a global leader in technology and innovation, home to powerhouse companies like Samsung and LG. This transformation, known as the "Miracle on the Han River," is a testament to how innovation can drive economic growth.

The South Korean government played a significant role in this transformation by investing heavily in education and technology, creating a highly skilled workforce. Additionally, they established policies that encouraged the development of technology-intensive industries. This strategic focus on innovation and technology turned South Korea from a war-torn country into a high-income country with a vibrant economy, demonstrating the transformative power of innovation on an economy.

Joseph Schumpeter, a renowned economist, would likely view South Korea's economic transformation as a prime example of his theory on innovation and economic growth. Schumpeter introduced the concept of "creative destruction," which suggests that economic growth is driven by innovative activities that disrupt or destroy existing industries and create new ones. South Korea's economic development, driven by technological innovation and the emergence of new industries, aligns with Schumpeter's view that innovation is the critical driver of economic change.

Schumpeter argued that entrepreneurs and their innovations are the catalysts for economic development. In the case of South Korea, government policies and investments facilitated an environment where innovation could thrive, leading to the emergence of globally competitive companies and industries. This not only transformed the South Korean economy but also contributed to global technological advancement.

Nations that fail to innovate risk stagnating and eventually declining in the global landscape. Innovation is the driving force behind economic growth, technological advancement, and competitive edge in the international market. When a country neglects the cultivation of new ideas, technologies, and solutions, it misses out on opportunities to improve the quality of life for its citizens, enhance its infrastructure, and strengthen its economy. The absence of innovation leads to a reliance on outdated methods and technologies, making it difficult for such a nation to keep up with the rapid pace of change seen in more dynamic, forward-thinking societies.

Moreover, innovation is crucial for addressing the complex challenges of the modern world, including climate change, healthcare, and resource management. Countries that fail to innovate lack the agility and creativity needed to solve these problems effectively, leaving them vulnerable to the consequences of these global issues. This can result in diminished international influence and a reduced ability to participate in and benefit from global initiatives and collaborations. As the world becomes increasingly interconnected, the inability to contribute innovative solutions can isolate a nation, diminishing its voice and standing on the world stage.

Economically, the failure to innovate can lead to a decline in competitiveness. Industries that once thrived can become obsolete if they do not adapt to new technologies and market demands. This can lead to job losses, decreased foreign investment, and a lower standard of living. Without innovation, a nation's economic activities may become increasingly focused on low-skill, low-value industries, making it difficult to achieve or maintain high levels of prosperity. The resulting economic stagnation can lead to social and political unrest, further exacerbating the nation's challenges.

Finally, the cultural impact of failing to innovate should not be underestimated. A culture that does not value or foster innovation may become resistant to change, discouraging creativity and risk-taking among its population. This can lead to a brain drain, where the most talented and innovative individuals seek opportunities abroad, in environments where their skills are valued and can be fully utilized. The loss of these key individuals further weakens the nation's potential for growth and development, creating a vicious cycle that is difficult to break.

A notable historical example of a country that suffered due to a failure to innovate is the Qing Dynasty in China, particularly during the 19th century. The Qing Dynasty, which ruled from 1644 to 1912, initially resisted industrialization and technological advancements that were sweeping through Europe and America during the Industrial Revolution. This resistance to innovation and change, coupled with an adherence to traditional ways, left China technologically and militarily behind Western powers and Japan.

The consequences of this failure to innovate became starkly evident during the Opium Wars (1839-1842 and 1856-1860) when China was defeated by Britain, and later during conflicts with other Western powers and Japan. These defeats led to the signing of "unequal treaties" that heavily favored the foreign powers, including ceding territory and granting extraterritorial rights to foreigners. This period, often referred to as the "Century of Humiliation," highlighted the detrimental effects of the Qing Dynasty's inability to adapt to and embrace new technologies and ideas.

Innovation is poised to be the linchpin of economic growth, as posited by Philippe Aghion, Céline Antonin, and Simon Bunel in their book the power of creative destruction. Their work suggests that economic systems that embrace both market forces and appropriate regulatory oversight foster an environment where innovation flourishes. They advocate for policies that strike a delicate balance between facilitating creative destruction and mitigating its potentially disruptive social impacts. This approach aims to ensure that innovation not only catalyses growth but also promotes a more inclusive economy.

The authors argue for competition-friendly policies to stave off economic stagnation. They highlight that a competitive marketplace is critical for continuous innovation, as it challenges incumbent firms and prevents market monopolies. Such an environment spurs a continuous churn of ideas and technologies, which is indispensable for sustained economic vitality and long-term growth.

Further elaborating on their vision, they endorse a "both/and" approach to capitalism, which harmonizes the strengths of various economic systems to champion frontier innovation. This integrative model proposes leveraging entrepreneurial talent within a framework that balances wealth creation with social welfare. The role of the state is thus accentuated, tasked with fostering a supportive environment for innovation through education, infrastructure, fair competition, and social regulation.

Finally, the work by Aghion, Antonin, and Bunel suggests that reforming capitalism must be an ongoing endeavor, responsive to contemporary challenges, such as those highlighted by the COVID-19 pandemic. They underscore the need for educational and labor market reforms that align with and enhance the dynamics of creative destruction. Their stance is that a society that nurtures innovation and resilience can forge a path of growth that is not only robust and sustainable but also inclusive, ensuring that economic progress benefits a broad spectrum of society.

In conclusion, innovation is undeniably the cornerstone of future global growth, offering a transformative path through which societies can evolve, economies can thrive, and environmental sustainability can be achieved. By embracing a culture of innovation, we enable a dynamic response to the complexities of our modern world, fostering advancements that propel us towards a more prosperous, equitable, and sustainable future.

Aditya Sinha (X:adityasinha004) is Officer on Special Duty, Research, Economic Advisory Council to the Prime Minister of India. Views are personal.

• Opinion