China Needs More Market — and Individualism — and Less State

China’s “new normal” is slower, but higher quality, economic growth, with a target of 7% this year. To improve the quality, Chinese Premier Li Keqiang, in his closing press conference at the National People’s Congress, called for getting “the relationship right between the government and the market,” and he laid out a program “to boost vitality of the market.”

The premier’s message is important because China’s economic imbalance reflects a more fundamental imbalance between the market and the state — or, more precisely, between the individual and the state. Yet the Chinese Communist Party’s monopoly on power and its mantra that stability comes from power, not freedom, continue to thwart fundamental reform.

Economic life has been liberated to a large extent since 1978 by allowing the non-state sector to flourish via freer markets and more secure property rights. But the bottom-up economic reform process is in sharp contrast with the top-down political system.

Increasing the range of individual choice is of utmost importance in judging economic development.

Without addressing the tension between the economic and political regimes, China cannot hope to rebalance the relationship between the individual and the state.

The Chinese people have experienced a significant rise in living standards and, no doubt, have more freedom than in the Maoist era. But there is still a large inequality of power, and significant uncertainty with respect to the law and basic human rights.

The Burden Of Taxes

China’s future will depend on resolving this tension in favor of freedom and the individual while constraining state power to the protection of persons and property. In this respect, Premier Li’s remarks during his press conference deserve careful attention.

“To boost market vitality,” he would “eliminate roadblocks and pave the way for people to tap their entrepreneurship.” Reducing the “heavy burden” of taxes and fees on small businesses would enable them “to forge ahead.”

The premier wants to reduce the costs of business by also making it easier to enter business. He recognizes that increasing opportunities for opening new businesses will increase supply, which in turn will “boost market demand” (Say’s Law of Markets). He wants young entrepreneurs to put their ideas into practice, and he wants government to “lift all restrictions so that they can put their talent to good use.”

Yet to do so means creating a free market for ideas and safeguarding intellectual property rights — goals that would jeopardize the power of the state and CCP.

Who can argue with Premier Li when he states that “a country can achieve prosperity when its people’s initiative is brought into full play?” Or when he states “there will be much vitality in economic activity when there are ample business opportunities and choices for consumers?”

He wants people to “achieve full potential in their life.” So did the famous Chinese sage Lao Tzu, who said:

“When taxes are too high, people go hungry. When the government is too intrusive, people lose their spirit. Act for the people’s benefit. Trust them; leave them alone.”

Premier Li applauded the use of the Internet for business, saying that “online and offline interaction has only boosted the vitality of the market.” Borrowing a popular expression, he noted, “On the Internet everyone stands a chance to fly if there is a favorable wind blowing from behind.”

There have been efforts to stem government corruption and to decentralize functions, making it easier to open small businesses. But even so, the roadblocks remain formidable.

Western Values

Premier Li notes that as government slims down and reforms, vested interests will fight hard to retain their privileges. He likens reform — and the balancing between government and the market — to “taking a knife to one’s own flesh.” But he maintains that the leadership is “determined to keep going until our job is done.”

“Reducing the powers held in the hands of government,” he says, “has actually helped us to tackle downward pressures on economic growth.”

This implies that the premier understands that the market is more flexible than government, and that greater reliance on the market mechanism will make it easier to rebalance the economy and achieve higher-quality growth. Yet doing so will be difficult.

He wants to “enhance institution-building” to fight corruption and rent-seeking, and he wants to move toward a legal system in which “no one is above the law.” Of course, if freedom is to be of prime importance, the law itself must be just in the sense of protecting equal rights to life, liberty, and property. But those ideals are supposedly “Western” values.

Increasing the range of individual choice is of utmost importance in judging economic development, as noted by the late Peter T. Bauer (Lord Bauer). In seeking a “new normal,” China’s leaders would be wise to learn from Western economists such as Bauer, but also from their own legacy of liberalism as evidenced by Lao Tzu and others.

Premier Li, in calling for boosting the “vitality of the market,” sends a strong signal that what China needs is more freedom and less power. Change may be coming — change that incorporates both economic and political/institutional reform.

Whether the roadblocks to rebalancing government and the market can be removed, it is good news that “development will remain the top priority,” because that priority means China needs “a peaceful international environment.”

James A. Dorn is vice president for Monetary Studies and a Senior Fellow at the Cato Institute in Washington, D.C.