In a recent edition of NPR’s On Point, host Tom Ashbrook trumpeted, “China’s economy is barreling ahead. Europe’s in crisis. The U.S. in a muddle. Across the world, free market economies are being challenged by state capitalism.”
Is there a real conflict between the free market and state capitalism today, or is it all a false dichotomy? Have commentators misread what’s really going on?
First, I question the assumption that “state capitalism” is what has driven China’s economic development. Since 1978, Beijing has increased the economic freedom of the Chinese people and allowed internal markets to develop. Economic reforms in cities like Shanghai were inspired by radically free Hong Kong. This increased freedom unleashed the people’s pent-up economic potential, kickstarting decades of progress— proof again that free markets work. Far from challenging our model, China is adopting it.
However, it is doing so incrementally, and it still has a long way to go. Its GDP per capita (PPP) is ranked 99th by the IMF, just ahead of Ukraine, behind Namibia and well below the world average. A citizen of El Salvador is, on average, richer than a Chinese person. How have we come to compare ourselves with such a poor country, and even envy it?
For one, we are impressed by the fact that China’s economy has become the world’s second largest by purchasing power parity, a statistic that sounds significant but really isn’t. With a population over three times that of the US, if China’s people were as rich as Americans their economy would be more than three times as large. As it stands, China’s people are less than a seventh as wealthy as Americans, keeping them in second place. When they become a third as wealthy as us, the cumulative effect will make China’s economy larger than ours, while its people will still be three times as poor.
The other thing we admire about China is its rate of growth, which certainly is impressive. However, the current rate of growth says nothing about ultimate attainment. The US once logged high growth rates— we were the China of the late nineteenth and early twentieth centuries. If we have slowed down, it is because we have achieved full development. The question is how far China’s growth will take it: will it keep going until it becomes rich, or will it stall out in middle-income territory?
With its current economic model, in fact, China cannot go much further. It could probably expand in manufacturing for another decade or so, absorbing more migrants from the countryside to the cities. Wages for factory workers will rise, and internal markets will expand. But China wants to be more than the workshop to the world; it wants to compete internationally in sectors with higher profit margins and greater prestige.
Beijing knows that when Americans buy a product made in China, only a small percentage of the sale price goes to the Chinese production chain. A recent article in the Washington Post explains: “Much of Apple’s iPhone… is made in China. But if a high-end version costs $750, China is lucky to hold on to $25. For a pair of Nikes, it’s four pennies on the dollar.”
Beijing wants to capture more of that revenue by fostering homegrown brands that both design and manufacture products within China for sale abroad, a program the government calls its “going-out strategy.” However, the state will find that it can’t force this to happen. It must unleash the energies of the people, and they will accomplish it themselves. To do that, Beijing must increase civil liberties, especially freedom of expression, and promote independent thinking rather than conformity.
Instead, Beijing’s approach is to intervene directly in the economy: subsidizing emerging sectors like green energy, counseling Chinese companies to develop brands with international appeal, and forcing the creation of “indigenous” technologies to replace imported foreign technologies. These efforts have failed to produce results. For instance, only 4% of cell phone users in China use the government-sanctioned indigenous technology, while 96% continue to use Western-designed cellular technology. Sooner or later, China will have to face up to the fact that there is no substitute for free and creative individuals competing for private gain.
China’s ruling Communist Party fears that increased freedom will bring about social turbulence and challenges to the government’s authority. Part of its concern is for self-preservation, but it also has the more benevolent goal of smoothing out economic ups and downs. The state’s stewardship made possible a quick rebound from the global recession, but it is also restricting prospects for the nation’s future advancement. Without the downsides of freedom, you cannot enjoy the upsides, either.
Those who believe that China is presenting an alternative economic model are missing the real story. China’s ascent is not the rise of “state capitalism,” but the gradual expansion of the free market under the stewardship of an authoritarian government. Freedom is what has given China everything it has gained so far, while the lack of total freedom is preventing China from achieving more. Put another way, state capitalism is holding China back, while the free market is trying to pull it forward. This will change as the Chinese people experience more of what is available in the outside world, and demand more freedom. It may come as a disappointment to some who were hoping for a new and better model, but China will inevitably become more like us as it advances economically. It, too, will be a free, market-based society, and we will have to look elsewhere for a competing model of economic development.