Imagine how much wealthier China would be without the totalitarian government getting in the way.
China has an economy that isn’t quite a command economy and isn’t quite a market economy. It also isn’t a mixed economy, or at least it isn’t what people normally mean by that term, i.e., a mostly market economy with heavy regulation and a welfare state. Many of China’s largest firms are state-owned, and even nonstate firms commonly have Communist Party minders within them to make sure they don’t run afoul of the regime. The line between the private sector and public sector is often nonexistent, and Xi Jinping has been cracking down on successful business sectors lest they become too powerful in society and challenge his authority.
China’s economy has nonetheless grown at a rapid rate in the past few decades, and it is now the world’s second-largest. So how was there such rapid growth?
Given the basic sketch of the nature of the Chinese economy, there are two ways to answer that question.
- Well, the Chinese government is authoritarian, and what they do on human rights is abhorrent, but you’ve got to hand it to them; they were able to get strong economic growth for a long time; or
- The only good thing those commies ever did was allow some market forces in the economy, and imagine how much wealthier China would be without the totalitarian government getting in the way.
A recent essay by James Dorn of the Cato Institute makes a strong case for No. 2.
Dorn stresses the order in which events occurred. First, the Chinese economy under Mao was state-planned, autarkic, and poor. Then, the Chinese government began to allow some forms of private organization internally. China also permitted more firms to engage in foreign trade. It was only after those processes were well under way that China began to be integrated into world markets, and that integration remains in many respects incomplete.
One of the first examples of private organizations after the Cultural Revolution was “the household production responsibility system,” which is the name Deng Xiaoping gave in 1982 to a system that had arisen bottom-up in farming communities. “Some farmers began to contract with local authorities to gain rights to lease land from the collective and sell produce in private markets once official quotas were met,” Dorn writes. “As the informal contracting system gained popularity, it was eventually sanctioned by officials.”
As that system succeeded, farmers then began to form town-and-village enterprises (TVEs). “In 1978, at the beginning of the reform movement, there were no legally registered private TVEs, but by 1985, there were 10 million,” Dorn writes. The government did not anticipate the roaring success of TVEs, but permitted them under Deng’s attitude that ideology was secondary to results.
The nonstate sector had developed enough in Chinese society that there was a dual-track price system in the ’80s, where market prices existed alongside planned prices. It wasn’t until 1987 that the CCP officially approved of private enterprises, but that was belatedly ratifying what had already taken place.
Nonstate enterprises won out over time, and the dual-track price system increasingly became a market-price system in many sectors. “By 1999, 95 percent of retail commodity prices, 83 percent of agricultural commodity prices, and 86 percent of producer goods prices were set by the market, not the plan,” Dorn writes. Industrial production flipped from being 80-20 state-run in 1978 to being 80-20 private-run in 2016.
Simultaneous with these internal market reforms came opening to the outside world. This was well before China joined the WTO in 2001. The status quo under Mao was that the government prohibited nearly all trading with foreigners. With the creation of the first special economic zones (SEZs) in 1980, the government gradually began to allow firms to engage in foreign trade. SEZs succeeded, and the government created more of them.
“As trading rights were extended, the number of domestic firms engaged in foreign trade increased from 12 in 1978 to more than 5,000 a decade later,” Dorn writes. That number grew to 35,000 by 2001, all on its own, before China joined the WTO. Joining the WTO then slashed tariffs, which accelerated the increase in foreign trade.
This paragraph on the supposed success of China’s industrial policy is worth quoting in full:
It was China’s opening to the outside world—not protectionism and industrial policy—that propelled economic development. As Lardy noted in China’s 40 Years of Reform and Development: 1978–2018 (pp. 335–36), it was only in 2003 that China formally established the State‐Owned Assets Supervision and Administration Commission (SASAC) and tasked it with overseeing about 200 of China’s largest firms and turning them into “national champions.” In 2006, SASAC identified a number of “strategic and pillar industries” in the manufacturing sector and hoped industrial policy would spur their growth. However, success was limited: the SOE share of manufacturing output and investment fell, while that of private firms continued to increase. Thus, Lardy concluded that, although “the state has sought a more direct role in promoting economic development, it almost certainly should be judged a failure.”
Two of the biggest things that hold back China today are the lack of an independent judiciary and prohibitions on the free exchange of ideas, Dorn writes. Businesses want the assurance of an impartial court system to resolve disputes. Not being able to share information freely harms innovation and probably contributes to the Chinese practices of espionage to get ahead. Removing those shackles would require the CCP to give up more power than it is comfortable with doing.
“China became an economic powerhouse by opening its markets, recognizing the nonstate sector, and allowing individuals to lift themselves out of poverty. Attempts at industrial policy under the SASAC failed,” Dorn writes. “The lesson for China is to continue on the path of marketization and liberalization, not to revert to destructive state control and repression.”
If China wants to ignore that lesson and persist on its return to state-run economic planning, the U.S. shouldn’t get in the way. And hopefully someday the communist regime will fall, and Chinese people will be able to prosper as much as they could if only they lived under the rule of law with property rights and free markets.