China and Economic Freedom

The relationship between economic freedom and prosperity is empirically verifiable. Countries that are relatively economically free — meaning free markets and private ownership of capital — do better than countries that are not economically free.

South Korea, for example, is a rich country and North Korea is a disaster zone; Chileans are better off than Venezuelans; capitalist West Germany was richer than socialist East Germany. Here’s an excerpt from the executive summary of the Economic Freedom of the World: 2019 Annual Report

Nations that are economically free out-perform non-free nations in indicators of well-being

        • Nations in the top quartile of economic freedom had an average per-capita GDP of $36,770 in 2017, compared to $6,140 for bottom quartile nations (PPP constant US$).
        • In the top quartile, the average income of the poorest 10% was $10,646, compared to $1,503 in the bottom quartile in 2017. Interestingly, the average income of the poorest 10% in the most economically free nations is two-thirds higher than the average per-capita income in the least-free nations. ¢ In the top quartile, 1.8% of the population experience extreme poverty (US$1.90 a day) compared to 27.2% in the lowest quartile.
        • Infant mortality is 6.7 per 1,000 live births in the top quartile compared to 40.5 in the bottom quartile. ¢ Life expectancy is 79.5 years in the top quartile compared to 64.4 years in the bottom quartile.

That was the basis for the claim made in a previous post on economic freedom and economic prosperity. However in a comment to that post, the challenge was to explain the prosperity of China even though China does not rank high in the economic freedom ranking of the Fraser Institute. In fact China (ranked 113) does worse than India (79), Namibia (106) or Nepal (110) in economic freedom ranking.

Continuing from the subsequent post (Have the Laws of Economics Changed), here I argue that China’s success is indeed predicated on economic freedom even though China does not have the degree of economic freedom that one would expect given its stellar rise in gross GDP (and fairly remarkable rise in per capita GDP.)

Allow me an analogy. It is a fact that luminous astronomical bodies are hot because of nuclear fusion. However, there are apparently luminous bodies (the moon and the plants) which are cold because they don’t have nuclear fusion. They reflect the energy of the sun and therefore merely appear luminous.

The development of the West — particularly the United States among the OECD countries — is testimony to the power of economic freedom. Practically all modern advances in science, engineering and technology arose there. Other nations of the rest of the world that were able to adopt the fruits of the economic freedom of the West gained. China does not have economic freedom but was smart enough to copy the advances of those who have.

Two sets of factors worked in China’s favor, broadly speaking. First was internal to China. China is an authoritarian, one-party political system. And it fortunately had a large, relatively literate population. Both were instrumental in China’s taking advantage of the second set of factors that were external to it. China was ready to provide the cheap labor that gave it a competitive advantage in labor-intensive manufacturing. The manufacturing capacity was built by Western capital and Western technology. It was open to both, which India could not have done primarily because of Nehruvian stupidity that India suffers from.

China allowed foreign investment to set up mega factories in China and insisted on technology transfer. Western corporations took advantage of cheap Chinese labor to bring down production costs. This, however, could not have happened without a world-transforming technology — again developed in the United States. That’s the  invention of the shipping container and the radical decrease shipping costs.[1]

China succeeded but so could have India but it didn’t. What’s the salient distinction between the two in this context? It’s their political systems. China is an authoritarian dictatorship while India is a “democracy.”

It is facile to blame India’s economic failures on democracy and to ring up China’s success to its authoritarian one-party political system. What we have to be careful about is the content of the two systems. The US is a democracy and is none the worse for it. India is a democracy and is a basket case. Though both are democracies there are differences in the nature of the democracies that the two have.

India’s democracy basically allows the people to choose which set of politicians will rule over them. No doubt the politicians who constitute the government are popularly elected but the people are not all that much different from being serfs of the government. The constitution of the India puts the government as the sovereign that rules over the people.

The United States’ constitution puts the people as the sovereign and the popularly elected government as the agent of the people, and constrains the government to the will of the people.

The point being that merely because the US and India are democracies conceals a lot of differences. Both cows and orcas are classified as mammals but they are remarkably different when you get down to the specifics (even after noting that some cows and all orcas have similar dress codes.)

China’s one-party authoritarian political system is not a handicap, much like India’s multiparty democratic system is a handicap. Because whether or not a dictatorship is good depends on the content of the dictators. There’s much to choose between a Idi Amin or a Chavez, and a Lee Kwan Yew or a Deng Xiaoping. For that matter, there’s much to choose between a Mao and a Deng, even though both were Chinese communists. They may belong to the same class but they operate differently.

Here it’s relevant to note that a good dictator with unrestricted power can be better than a democratically elected politician with a limited term with little constitutionally imposed constraints. The elected politician knows that his tenure is not guaranteed, and that any decision he makes that could be beneficial to the public in the long term but which would cause short-term hardship would quickly bring about his fall from power. So he (or she) decides to make the most of the time he has, enrich himself, his family and his cronies. The public good is not part of his calculus.

The good dictator doesn’t have to worry about popular opinions. He goal is to do what it takes to advance his nation — which is his property. A good dictator is like a monarch. His tenure is secure and therefore he can go about doing what needs to be done — popular opinion be damned.

Nehru was a dictator and so was his daughter until she was dispatched by her bodyguards. They had the power but lacked the intelligence and the wisdom of a Deng Xiaoping  or a Lee Kwan Yew. They were more like the North Korean Fat Boy — too full of themselves.

So that’s the story. The Chinese don’t enjoy economic freedom. But their leaders were smart enough to realize that foreign capital and imported technology could be the way out of poverty for their literate population, and they were lucky that two major revolutions — transportation and telecommunications — happened to help them become the major power.

They first learned by imitation. Economists call it “learning by doing.” They did not have to invest in the R&D that the West invested in. They merely copied the stuff. And as they learned, they became rich enough to be able to afford to make their own advances in science, engineering and technology.

India, I am sorry to note, doesn’t have enlightened leaders. What it has is popularly elected leaders — like Nehru and Gandhis and you know who. That these people would lead India to development is less than the chances that a cow will dive into the deeps to feed on fish.

NOTES:

[1] Post on the container “Happy 50th Birthday, Box.”   April 2006.

 

 



Categories: Economic Development, Economics

4 replies

  1. Are the GDP per capita numbers PPP based?

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  2. Thanks for the response, Atanu. Economic freedom was measured on 5 metrics: 1: Size of Government 2: Legal System and Property Rights 3: Sound Money 4: Freedom to Trade Internationally 5: Regulation

    Many agree that China gained because existing WTO rules do not check China’s mercantilist and protectionist practices like market-distorting subsidies and state-sponsored industrial espionage.

    Even some scholars with no allegiance to Trump have their doubts about the sufficiency of WTO rules and the capacity of the WTO as an international institution to confront the unique challenge of an economy like that of 21st-century China. Harvard Law professor and former USTR official Mark Wu has written that “the WTO is struggling to adjust to a rising China” because of “China’s distinctive economic structure.” He adds, “Overall, I contend that without major change China’s rise, should it continue, will contribute to a gradual weakening of the WTO legal order.

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