China Catch-Up and Two Freedoms

China is expected to produce more than Japan this year, thereby becoming the world’s second largest economy after the US.   Chinese annual output is only $5 trillion compared to American $15 trillion and per person income is only a fraction of the US, but it is clear that China is catching up.

We’re witnesses to a gigantic experiment in political economy. Here is an authoritarian government that apparently recognizes the superiority of free markets, private property and individual enterprise in organizing an economy. It has lifted the shackles off industry and commerce, to an extent, so as to benefit from these powerful forces. Thus China is growing at phenomenal rates.

But freedom of expression and political dissent remains suppressed even as economic freedom expands. In the ever-resonant words of Milton Friedman, “Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised.”

The Chinese experience demonstrates that while economic freedom is as Friedman says necessary, it is not by itself sufficient to bring about political freedom—-not for several decades, anyway. Beijing’s bureaucrats have so far used one type of freedom to achieve their economic ends while brutally tamping down on the other.

China’s growth is exceptionally fast because other countries developed the products and technologies China now copies. This a common trajectory in history. Pioneering economies create the knowledge and knowhow that latecomers exploit to achieve rapid growth. America initially grew fast using British industrial technology and Japan grew using American technology.

Assuming that China continues to achieve the huge gains to be made by imitating countries that industrialized earlier, it will eventually get to the technological frontier, as has been pointed out.  Once at the frontier, growth slows down and requires innovation. China’s current political system, if it remains in place, will discourage innovation and therefore the economy will stall. But the “if” is the big question.

Economic liberty and the growth it generates will no doubt profoundly change China.  People will be more affluent and knowledgeable about other countries—Chinese tourists are already finding their way across the globe. There will be a greater area of activity free of political control. Still, there is no guarantee that China will evolve into a freer society overall.

What does all this mean for Americans? It is easy to be annoyed at cheap and shoddy copycat products pouring out of China. The Brits in their time were very annoyed at upstart Yankee copycats and tried to protect their own knowhow from imitators. It didn’t work then and it will certainly not work now. The only realistic course of action is to keep markets open and not try to block Chinese catch-up.

Aside from that, there really isn’t  much Americans can do to encourage political freedom in China— except to provide a good example by limiting their own government.

About Chidem Kurdas 58 Articles

Chidem Kurdas is a financial journalist, analyst and writer.

Throughout her career she has held numerous positions, including: Research Analyst at Thomson Reuters, New York Bureau Chief at HedgeWorld, News Editor at Infovest21, Senior Associate Editor at Medical Economics Publications at The Thomson Corporation. She is currently Editor at Opalesque Futures Intelligence.

She holds a PhD in Economics from New School University.

Visit: Mutual Fund Smarts

1 Comment on China Catch-Up and Two Freedoms

  1. america's $15 trillion output? must be enron accounting to get those numbers. $15 trillion is in the rear view mirror, won't get anywhere near that. if we had a $15 trillion economy, why are we borrowing $2 trillion a year (soon to be $3 triilion,holy s***)

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