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China’s growth comes not from dirigisme, but from low-level freedoms

I know very little about what is being discussed
inside the Third Plenum of the 18th Central Committee of the
Chinese Communist party, which started at the weekend. The meeting
is being held in secret — although one of the subjects to be
discussed is said to be greater government transparency. About all
we know is that “unprecedented” economic and social reforms are
being discussed, including such things as rural property rights.
But, to judge by a new wave of Mao worship, persecution of
dissidents and reinforced censorship, political reform is less
likely than economic.

In other words, the Chinese Communist Party is trying to
continue pulling off the trick that has served it ever since Deng
Xiaoping defeated the Gang of Four: more economic freedom combined
with less political freedom. The people can choose any good or
service they want — except their government. In many ways it has
worked extremely well. In 1978 Maoism had left the country horribly
poor: more than half the people of China tried to live on less than
a dollar a day. Over the next nine years per capita income doubled,
then doubled again over the nine years after that.

Many a left-leaning Western politician has been heard to muse
about how much better we would grow if only we directed the market
economy with the single-mindedness of the Chinese Communist Party.
In the same way many a right-leaning Western politician has long
admired the Singapore of Lee Kwan Yew on the same grounds. See,
they mutter, a paternalistic government is best at generating
economic prosperity.

Yet this is precisely the wrong lesson to draw from China (and
Singapore). It’s not because it’s unfree at the top that China is
growing fast, but because, at least in some respects, it is very
free at the bottom. The extraordinary fact is that — economically —
the average Chinese person is more free from government
interference than the average Westerner. As Niall Ferguson has documented, general government total
expenditure is twice as high in the United States and Europe as it
is in China as a per cent of GDP. China ranks higher than America
on the ethics of politicians. It takes far less time and trouble to
build a house or a nuclear power station in China than it does in

So long as you don’t cross the Communist Party, China is
laissez-faire on a scale that would make Hayek blush. That’s what
happens when you liberalise a totalitarian regime: if the party was
previously taking all the decisions, then once it steps back
there’s very little else in the way of state bureaucracy.

Over here, there are many other levels of regulation, subsidy
and cost to entangle a small business. One of the few freedoms that
Westerners have more of is the — precious — freedom to criticise
the governing party.

Of course, this is not to deny that there’s a great deal of
crony favouritism in China. It is clear from scandals such as the
affair that knowing the right officials gets you the best
deals, and that much of the country’s financial sector is state
controlled. But then look at the way in which British business
cosies up to Brussels and Whitehall. Besides, in China finance
feeds off the prosperity rather than vice versa. It was in
agriculture, a sector unshackled by Deng when he suddenly allowed
peasants to make profits, that economic growth began, and it was in
the special economic zones, where tax was low, trade free and
profit were allowed, that the manufacturing revolution took off.
Finance is the fruit of that labour.

Hong Kong teaches the same lesson. Being run by Britain meant
having almost no political freedom to choose your government. But
being run by a Scottish free-market economist, Sir John Cowperthwaite, who was financial secretary
of Hong Kong from 1961 to 1971, meant having a great deal of
economic freedom to trade and profit without government
interference: no tariffs, no subsidies, low taxes and a very simple
and speedy bureaucracy. Cowperthwaite, incidentally, fought hard to
try this experiment in the teeth of LSE-inspired orders from
Whitehall to adopt central planning and social safety nets.

Indeed, you can say the same about Britain in its heyday. In the
19th century Britons were astonishingly free economically, but the
debates over parliamentary reform show that they were very far from
free to choose their own ministers, let alone their monarchs. Just
as in modern China, the best they could hope for was that a small
set of freeholders could choose between grandees in an oligopoly:
Earl Grey or the Duke of Wellington were if anything slightly less
born to rule than the party princelings Xi Jinping and Bo

In other places and times, too, it is clear that the economic
freedom allowed to traders in city states, from Athens to Florence
to Amsterdam to Singapore, has always been the best way to enrich
the poor. This can happen witout much political freedom, let alone

Free-market economists are wont to point out that economic
freedom is in one sense more tolerant than political freedom. If
you like apples and I like oranges, then economic freedom means I
can have one and you can have the other, and we are both happy.
Political freedom means that we take a vote on whether we all
should have apples or all should have oranges, and the loser is

All too often this tyranny of the majority is neglected in the
arguments for having a “policy” or strategy about something.
Obviously it is not possible to let only those people who want to
pay for nuclear deterrence have it, but in between apples and
nuclear deterrence there are many intermediate products that could
be matters of local or individual choice rather than democratic
tyranny: public service broadcasting, fracking, genetically
modified crops and so forth.

Here in the West we are going in the opposite direction to Xi’s
China: ever more political freedom and ever less economic freedom.
Economic decisions — I’ll buy apples instead of oranges —
increasingly become political ones: the policy is oranges.

Political freedom eventually tends to undermine economic freedom
in other ways, as is plainly evident in the furring of the
bureaucratic arteries of the West. As the economist Mancur Olson pointed out, democracy is open to
influence by special interests and these quickly capture the
political process, influencing legislation to erect barriers to
entry against competitors, to direct subsidies to themselves and to
help officials maximise the budgets of their agencies — what
economists call rent-seeking. That was roughly what destroyed
Chinese prosperity before, under the Ming empire — an economically
dirigiste regime that Europe increasingly resembles.

Don’t get me wrong. I am in favour of political freedom, for us
as well as for the Chinese. The real reason — and it is a very
important one — is to stop your rulers using violence against you,
not because it leads to economic growth. The trick is how to get
that benefit and not incur the rent-seeking costs. If they can
figure that out in their plenum, good for them.

By Matt Ridley | Tagged:  rational-optimist  the-times