Commentary

Found in China, Bust of Adam Smith

This article appeared in the Times of India on January 29, 2007.

In a 2005 poll covering 20 countries, GlobeScan found that China had the highest proportion of respondents (74%) agree that the “free market economy is the best system on which to base the future of the world.” That outcome is remarkable given that only a short time ago (prior to 1979) Beijing embraced a stateled development model.

The same poll found that US citizens have strong support for the free market (71%) while Russia, which has a long anti-capitalist history, still has rather weak support (43% favoured the market), and France, with its long attachment to socialism, has even less support with only 36% saying they favour a free market.

The significant change in attitude toward capitalism in China is further illustrated by the Chicago Council on Global Affairs’ 2006 multination survey of public opinion. Eightyseven percent of those surveyed in China thought that “globalisation, especially the increasing connections of their country’s economy with others around the world, is mostly good for their country.” That result compares with 60% in the United States and 54% in India.

It is not surprising that the Chinese people would embrace globalisation as it has opened China to the outside world, brought about rapid economic and social change, and helped lift millions out of absolute poverty. In widening the range of opportunities open to people, globalisation has put pressure on the Chinese Communist Party (CCP) to allow privatisation and marketisation—with a positive impact on civil society. People are able to own their own homes, operate their own businesses, and seek work in the private sector.

Trade liberalisation has been good for China and good for the global economy. Even though millions of Chinese workers have been dislocated, the Chicago Council survey found that 65% of those polled in China believe that “international trade is good for the job security of workers.” In contrast, only 30% of Americans surveyed thought free international trade benefited workers.

Of course, the goal of trade is not to protect jobs but to create wealth—and global wealth is much greater today than it was two or three decades ago. Trade liberalisation, the information revolution, and financial integration have combined with pro-market institutional change to make China’s—and the global economy’s—future bright.

One lesson from China’s transition from central planning to a market-oriented system is that poverty is best addressed by institutional change rather than foreign aid and government intervention. Several decades ago most of the world’s poor were concentrated in Asia, not Africa. The reverse is true today. Foreign aid has not improved the plight of the poor.

Likewise, increasing the minimum wage is not a panacea. Politicians promise a higher wage but do nothing to address the underlying causes of poverty. Rather, if the legal minimum wage is above the prevailing market wage for unskilled workers, employers will cut back on hours, reduce benefits, and switch to labour-saving methods of production.

Hong Kong has no minimum wage, yet is prosperous. China has no national minimum wage and lets the market guide local minimum wages so that they do not interfere with job growth. In Shenzhen, the minimum wage was increased last year to 810 yuan per month, but the local labour official Wu Liyong, said, “We are adapting to the market through the pay raise, rather than interfering with the market.” Many companies already pay more than the minimum, and there is a labour shortage so that market wages will be forced up by competition.

Although China has made substantial progress on its march toward the market, much remains to be done. Free markets require widespread private property rights, a transparent and just legal system, and the free flow of information. Moreover, if China is to develop worldclass capital markets, Beijing must make the yuan fully convertible and allow capital freedom. Opening the CCP to capitalists is not sufficient. The Party’s monopoly on power has to be contested at some point. Nor is it sufficient to amend the PRC Constitution to better protect private property when there is no independent judiciary to enforce contracts.

The National People’s Congress is expected to pass a new law in March to further strengthen private property rights. But the law will have no teeth unless there is also meaningful judicial reform, which appears unlikely in a one-party state.

If China’s future is to rest with the free market, there must be political as well as economic liberalisation. Ultimately, a free market cannot exist without a free people. The real challenge for Beijing will be to institute a rule of law that protects persons and property against the state. The people’s preferences will then rule rather than the Party’s.

James A. Dorn is a China specialist at the Cato Institute in Washington and coeditor of China’s Future: Constructive Partner or Emerging Threat?