China has the world’s most interesting and potentially most instructive economy. One in four of the world’s population live there; it has the world’s highest sustained growth rate – if official figures are to be believed – and, if it continues growing at present rates, it will soon be the world’s biggest economy. Within a generation, it will account for half the planet’s GDP. It seems destined to become the world’s dominant ‘super power’, at least economically.
Discourse about China is reminiscent of debates during the 1970s, 1980s and 1990s about the ‘Asian Tigers’ (Japan, Taiwan, Hong Kong, Singapore and South Korea). They were the world’s highest growth economies, and people of every persuasion claimed them as examples of their system outperforming alternatives. Initially, capitalists and socialists disagreed about which countries were succeeding, but the view that socialist economies were more successful, especially those with extreme forms of socialism and communism, became unsustainable after the collapse of international socialism at the end of the 1980s.
Both sides now claim China as an example of their system succeeding. Many commentators predict that the Chinese ‘bubble’ will burst. Meanwhile every observer is dazzled, and no one seems to be sure what to make of the phenomenon. Close on China’s heels is India, also rising from the ashes of a century of mass destitution at extraordinary growth rates. Maybe concerns about the sustainability of these two impressive growth rates is misplaced, given the enduring nature of spectacular growth over many decades in such so-called economic miracles as the Asian Tigers, Ireland and Mauritius.
Because of its unique significance, we wondered whether China really is a special case, and reached the surprising conclusion that, not only is there nothing conspicuously distinctive about China’s success factors, but that it is perhaps the definitive exemplar of which policies coincide with which outcomes.
China’s growth is consistent with and predicted by its economic freedom score, rather than its civil and political liberties score. It does indeed grow faster than its nominal economic freedom score predicts, but that is typical of what happens when countries move ‘in the right direction’. They often experience an ‘acceleration effect’.
Conversely, countries that are relatively free but increasingly less so, tend to contract disproportionately. Zimbabwe is an obvious example. Its economy started deteriorating before it slipped from modest levels of economic freedom during its first decade of independence to now being one of the least free economies in the world.
What we found is of considerable importance for policy makers. Firstly, China cannot be thought of as a single economy or even as a single country as far as its economy is concerned. The diversity of economic systems within China, from one province to another, is bigger than the diversity of economic systems internationally. Secondly, almost all its growth (industrialisation, investment, etc) is not only confined to provinces with high scores on the ‘marketisation index’, but to a few special zones. Thirdly, these zones have the freest economies on earth, if not the freest economies the world has ever known.
AUTHOR Leon Louw is the Executive Director of the Free Market Foundation. This article is an excerpt from the book Habits of Highly Effective Countries – Lessons for South Africa published by the FMF and may be published without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.
FMF Policy Bulletin / 29 May 2012