Mainland Risks a Return to Central‐​Planning Mindset

This article appeared in the South China Morning Post on January 28, 2008.

For 30 years, China has been makingprogress in transforming from aplanned economy to a market economy.Most prices are now set by demandand supply, China is theworld's third-largest trading nationand private property is constitutionallyrecognised. Nevertheless, importantremnants of central planningand control remain, which impedeBeijing's proclaimed goal of "peoplecentreddevelopment".

The biggest weakness in the 11thFive-Year Programme (2006-10), nolonger called a "plan", is the lack ofany well-defined path towards institutionaldevelopment that wouldallow farmers to acquire full ownershiprights in their land, which is nowcollectively owned. Without genuineprivate-property rights, farmers haveno right to sell their land and less incentiveto invest in the capital necessaryto increase agricultural productivity.Meanwhile, local party officialshave become rich by selling land-userights to developers, and there hasbeen a serious rise in social unrest.

Farmers, the heroes of the CommunistParty, are treated as secondclasscitizens. In addition to the lackof private-ownership rights, whichwould allow farmers to use theirproperty as collateral and would addtremendous wealth to the countryside,there are serious restrictions onthe farmers' rights to migrate.

Unless they can obtain an urbanhukou (household registration permit),farmers and their families willbe denied critical social services ifthey move to the more prosperouscities to work. With more than 700million people still in the countryside,Beijing cannot afford to have aninefficient labour market by undulyrestricting labour mobility.

Even where private ownership isallowed, in the case of housing, thoserights will remain tenuous as long asit is relatively easy for local officials toinvoke the power of eminent domainto seize private property and thenbenefit personally when it is developed.The 2007 Property Law is supposedto improve that situation, butimplementation could be slow.

China's robust economic growthhas yielded many benefits, and thestandard of living, as measured byreal per capita income, has increasedmore than fivefold since 1978. The11th Five-Year Programme calls foranother doubling by 2010 but, unlikeearlier five-year plans, that goal is notmandatory. More emphasis is beingplaced on social development objectivesand balanced growth. The newbuzzword is "scientific development",which suggests planningrather than market liberalism.

If Beijing has learned anythingfrom its reform experiment, it shouldbe that bottom-up, spontaneousmarket-based measures are morelikely to generate human happinessand prosperity than top-down centralplanning. The major problemson the mainland stem from weak institutions,not from the lack of "scientificdevelopment". As Peter Bauer, apioneering development economist,liked to point out, the process of developmentis too complex to warrantits own general theory.

But Bauer did recognise, as doChina's leaders now, that economicgrowth and development are notnecessarily the same. What matters,said Bauer, is to increase the range ofchoices open to people – an objectivebest accomplished by limited government,strong private propertyrights and free trade. China's leaders,meanwhile, seem to think that market-based growth clashes with "people-centred development". They forgetthat the free market is simply a reflectionof the free choices of millionsof individuals who own private propertyand are subject to the rule of law.The best measure of whether developmentis "people centred" is theextent of economic freedom – andChina still has a long journey to becomea market-liberal economy.

If the Chinese are to be "mastersof their own country", the goal proclaimedat the 17th National Congress,legal institutions must be put inplace more quickly to better safeguardpeople and their property.