Matt Ridley: China's growth comes not from dirigisme, but from low-level freedoms

I know very little about what was discussed inside the Third Plenum of the 18th Central Committee of the Chinese Communist party. The meeting was held in secret — although one of the subjects discussed was said to be greater government transparency. About all we know is that “unprecedented” economic and social reforms were 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 Britain.

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 Bo Xilai 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 Xilai.

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 democracy.

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 disappointed.

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 figured that out in their plenum, good for them.

Matt Ridley, a member of the British House of Lords, an acclaimed author who blogs at www.rationaloptimist.com.