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Is China Growing Freer than the West?

Note: This essay was written in response to the Silver Challenge Editorial Contest at the Free Market News website. Other authors' treatments of the same subject, as well as more information on the Editorial Challenge can be found here.

M.A. Nystrom, M.B.A.
Man on the street in (the Republic of) China
March 1, 2005

1. Introduction

As the brightest star currently on the world's economic stage, China is attracting increasing media attention and admiration. The low, single digit growth rates of mature Western economies look anemic by comparison to China's dazzling two decades of near double-digit growth. Asia's long slumbering giant is finally awake, and is aggressively taking its place at the table along side the world's industrialized economies. After decades of missteps and backward policies under communism, China has finally caught its economic stride with its market economy reforms at precisely the time that the West seems to be faltering.

Is this because China is less burdened by wasteful government regulation and intervention, which allows its economy to grow freer? I will investigate this question by first providing a short historical introduction to post-war Asia, and comparing China's experience with that of other high growth Asian nations, most notably Taiwan and Japan. Next I will ask what it means to have free economic growth, and establish concrete definitions of economic freedom. Finally, I will measure the conditions in China and in democratic nations against these definitions and conclude my argument.

2. Post War Communist China and "Free Market" Asia

For decades after the Communist Revolution in 1949 under the leadership of Mao Tse Tung, China failed to shine as an economic power. The country limited its trade primarily to the USSR and other communist nations, its economy silently imploding at a time when democratic neighbor Japan adopted a market economy and grew by leaps and bounds. China's disastrous attempt at a "Great Leap Forward" from 1958 to the early 1960s stands as a textbook example of the failures inherent in centralized government planning. The policy resulted in negative economic growth of over 20% in 1962 alone, and left 30 million dead from starvation.

Shortly after this disaster came the decade of the Cultural Revolution, another top-down, radical reform attempt initiated by Mao in 1966. Intended to purify the nation by purging 'enemies of the state,' it was a nightmare of misguided government power that disrupted education, government, and daily life for everyone in China. Under the leadership of Mao, Communist China was one of the most backward societies and economies in the world. It was only in the post-Mao period Since Deng Xiaoping's rise to power and subsequent implementation of China's "open door" policy in 1978 that China's economy began to grow in the manner that is now grabbing headlines worldwide.

China however, is merely the latest in a string of Asian nations that have experienced a rags-to-riches economic transformation. Following World War II, Japan was the first Asian economy to benefit from receptive international export markets, a large, disciplined labor force and an undervalued currency. Like China, postwar Japan started on the very low end of value-added manufacturing curve, capitalizing on its competitive advantages by producing labor-intensive goods for export markets. Like China, Japan experienced double-digit growth for nearly twenty years as it gradually worked its way up the value-added chain. This came to be known both domestically and internationally as the "Japanese Economic Miracle." Following in the footsteps of Japan came the Little Dragons: Taiwan, Hong Kong, Singapore and Korea, followed later by the rest of Southeast Asia: Thailand, Malaysia, Indonesia and now Vietnam.

These Asian nations rose from relative poverty to high standards of living by employing 'targeted growth' strategies: Governments first selected high value industries to grow, subsidized them with public monies, enacted policies to limit imports and promote exports while at the same time maintaining an undervalued currency. Pioneered by Japan and copied by her neighbors, this straightforward formula, bolstered by ample quantities of hard work makes growth look easy. But with all the government intervention involved, it can hardly be described as free market growth.

Taiwan is a perfect example of a nation employing this kind of strategy. In 1973, Taiwan's government realized that the nation needed to upgrade its primarily agricultural-based economy. The government began a targeted industrial development plan, channeling tens of millions of dollars of public money into an integrated circuit (IC) research and development program. Prior to this, Taiwan was simply a low-cost assembler of final electronics goods for larger multinational firms, possessing little domestic technical expertise of her own. The plan was controversial, with many believing that the government had no business making such investments, and others fearing that Taiwan lacked the technical skill to handle such advanced technology. The end result, however, was a resounding success. Today Taiwan is the world's leader in semiconductor foundries, with over 60% of the world's market share. Taiwan Semiconductor Manufacturing (NYSE:TSM) and United Microelectronics (NYSE:UMC), the world's two largest semiconductor foundries, are the direct result of this government-sponsored plan.

TSM pioneered a completely new IC business model in 1987 - the "fabless" IC firm. Freed from the burden, expense and excessive risk of building their own semiconductor foundries - something that can cost billions to build and maintain - hundreds of fabless design firms sprang up in the US and Taiwan. This caused the entire industry to become more nimble, extremely competitive, and spawned voracious growth. But as we see, voracious growth should not be confused with free market growth.

In contrast to China's disastrous policies of the 60's and 70's, Taiwan's government policies were a resounding success, and Taiwan is favorably viewed as a free market economy. But this does not change the fact that Taiwan's success was not the result of free market policies. Risk was shifted from private companies in the US and Taiwan onto the taxpayers of Taiwan, who financed the expensive foundries.

3. What is Free?

Taiwan is the global rule rather than the exception. No economy grows completely free, because all economies are subject to government rules, regulations and interventions. Even the United States, believed to be one of the freest economies in the world is home to its own forms of government regulations, bureaucracy and favoritism that interfere with free market growth. To say that one economy is freer than another would therefore mean that it has less government intervention than the other, regardless of whether that intervention is has a positive or negative effect on growth. Government intervention also occurs at many levels of an economy, from very basic laws that regulate the behavior of citizens, all the way up to macroeconomic policies that govern the rules by which the economy interacts with other economies.

The U.S. constitution is the venerable standard by which individual freedom can be measured: "We hold these truths to be self-evident," it states. "That all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed."

Freedom and justice at the individual level is the foundation of a free society and a free economy. The United States, the nations of Western Europe, Japan and Taiwan all have democratic governments that "[derive] their just powers from the consent of the governed." As such, individuals' unalienable rights are guaranteed, including the right to freedom of self expression, the ability to choose the number of children in one's family, freedom to choose which religion to practice, freedom to peacefully organize, and the right to own property. Individuals are guaranteed protection from the State's powers by due process of law.

4. Is China Free?

The individual human rights that are taken for granted in democratic nations are still only a dream in China, where one party, the Communist Party of China, rules the nation without input or representation from those governed. The result is a number of draconian laws and policies that seem antiquated by modern standards. Families are limited to one child. Religion is outlawed, and individuals can be jailed or executed for practicing or teaching their beliefs. The government is extremely nervous about groups organizing, so this is outlawed. This means that labor unions are illegal. All land is still owned by the government, so "buyers" simply sign a 99-year lease for the right to use it the property on it. This right can, however, be arbitrarily retracted at any time for any reason by the government without due process of the law. It is clear that individual liberty and freedom do not yet exist in China. But the words, "9% annual growth" seem somehow to blind observers to these facts.

At the macroeconomic level, China maintains a fixed currency peg of 8.28 yuan to the dollar, undermining any ability for the currency to find its true value in a free and open marketplace. Some experts estimate the yuan is undervalued by 30 - 50% as a result. But it is this artificially undervalued currency by which all resource inputs are valued. Low local costs of production are at the root of China's current competitive advantage, but it is artificially engineered by government policies. This is the antithesis of a free market. Once again, "9% annual growth" makes people forget this plain fact.

In all fairness, China has made great progress from the days of the Great Leap Forward, and the Cultural Revolution. This is true. China has liberalized her economy and has adopted market reforms, but these are in the context of authoritarian rule. They are hopefully the first steps toward democracy and a true free market economy. But the world seems to have been blinded to the reality of China's authoritarianism by the brightness of her economic growth. China is a great place to do business precisely because the rights of individuals are denied, not protected, by their government. As Chairman Mao once said, "Political power grows from the barrel of a gun."

5. Conclusion

As we can see, neither at the micro level, nor the macro level does China exhibit the signature patterns of a free market economy. This being the case, how is it possible that we can call growth in China free? Is China's economy growing voraciously? Absolutely. Is China's economy growing freer than it was before? There is no questionthat the answer is yes.

But is China growing freer than the West?

As long as authoritarian powers maintain arbitrary control over everything from the minute details of people's lives to the exchange rate of the currency, this question does not even make sense.

Turn off the TV and think!



Send me your comments on this article. I will read them all, and post the most interesting ones.

References used in this article:

http://www.china-window.com/china_economy/china_ecomonic_growth/introduction-7.shtml

Transnational China Project Commentary:
"China Through the Eyes of a Chinese"
http://www.ruf.rice.edu/~tnchina/commentary/yang1200.html

Worker protests in China - plentiful but preempted?
http://www.taipeitimes.com/News/edit/archives/2005/02/18/2003223555

Tortured House Church Leader Testifies for the First Time
http://www.peacehall.com/news/gb/english/2005/02/200502071428.shtml

Human Rights Watch World Report 2005: China
http://www.peacehall.com/news/gb/english/2005/01/200501281353.shtml






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