China's STEM Lead a Red Herring

China's STEM Lead a Red Herring

By Mark A. DeWeaver

Back in 1961, the front cover of a popular history of science included the memorable pitch "Any Russian schoolboy could understand this book. Can you?" This bit of publishing hype reflected a growing hysteria about Soviet achievements in math and science education. The US, it seemed, was falling dangerously far behind in the race to produce new scientists and engineers. American students would have to start devoting a lot more time to their algebra and physics homework or the free world would be in big trouble.

Today, similar fears are being voiced about the relatively low number of American college students majoring in science, technology, engineering, and mathematics (the so-called "STEM" fields). This time China, with three times as many STEM graduates as the US, is said to be winning the education race. If this trend continues, many imagine that Chinese domination of the global economy will be a foregone conclusion.

In fact, economic dominance is not a prize that automatically gets handed to the country with the smartest schoolboys or the most STEM majors. As the Soviet experience made clear, the size of a country's population of technical experts is relatively unimportant. What really matters is the character of the economic system in which they work. In the absence of incentives to use resources efficiently, technological expertise is unlikely to be put to good use.

Consider China's world-beating overcapacity in heavy industry, thousands of empty units of upscale residential space, and numerous redundant airports, roads, and bridges. This wasted investment employed legions of STEM graduates. They may have been well qualified but they were working on projects that should never have been built in the first place.

The worsening inefficiency of the Chinese economy is not due to any lack of engineering talent. The real issue is the quality of economic decision-making in the state sector. Private-sector investors are in most cases not to blame for China's excess capacity and unnecessary infrastructure. These problems are rather the result of competition among lower-level officials concerned more with boosting local economic growth than with cost-benefit analysis.

In today's China, GDP growth rates have replaced the output targets of the command economy as the main indicator used in officials' performance evaluations. But the incentives to "game the system" remain as strong as ever. During the 1958 Great Leap Forward, officials sometimes met their steel quotas by melting down pots and pans. For their successors, the shortest path to promotion is often to build a bridge to nowhere.

A command-economy style obsession with hitting targets can also be seen in Beijing's National Medium- and Long-Term Plan for the Development of Science and Technology (2006-2020). By 2020, the Plan calls for R&D expenditure to increase to 2.5% of GDP (from 1.3% in 2006 ). Reliance on foreign technology, estimated at 60% in 2006, must fall to 30%. China must rank fifth worldwide in terms of number of patent filings.

Here again, the incentive system favors quantity over quality. Throwing money at R&D is no guarantee that any real breakthroughs will be made. Reliance on foreign intellectual property holders can be reduced by "reinventing" or "co-inventing" their technologies. And an increase in patent filings can always be achieved by coming up with minor variations on old designs or filing "garbage patents" on existing production processes.

Claims that China's large numbers of STEM graduates will eventually translate into Chinese economic dominance implicitly assume a world in which decision makers can be counted on to make socially optimal choices. Incentives then become unimportant. The key challenges are engineering problems and success depends mainly on having the right experts and technological resources.

In the real world, of course, it is essential to get the incentives right. These include incentives to innovate, incentives to invest, and even incentives to major in STEM fields.

Unfortunately, China has gotten all three of these wrong. Innovation is discouraged because "gaming the system" is generally easier than "building a better mousetrap." Overinvestment is incentivized because officials depend on investment projects to improve their promotion prospects. This in turn creates jobs for engineers, thereby encouraging more than the optimal number of students to take up engineering.

China's supposed education advantage over the US, like that of the former Soviet Union, is a red herring. The real advantage belongs not to the country where STEM majors are the most numerous but to the one where they will be able to make the greatest contribution after they graduate.

Dr. Mark A. DeWeaver manages the emerging markets fund Quantrarian Asia Hedge and is the author of Animal Spirits with Chinese Characteristics: Booms and Busts in the World's Emerging Economic Giant.