Less government control helps China's economy

August 15, 2010 9:20AM

Tennessee Center for Policy Research scholar Dr. Richard Grant shows how China’s decreasing reliance on government control over the economy is benefiting the communist nation. This article originally appeared in Sunday’s Tennessean. by Dr. Richard Grant “That which gets mea­sured, gets man­aged,” is a com­mon apho­rism taught to man­agers. It cer­tainly does help in many cases to be able to gauge one’s progress toward a goal and to com­pare that to what is done. Per­ceiv­ing a link between one’s actions and the results is a pos­i­tive guide and motivator. A dark corol­lary to this apho­rism might be stated, “That which gets mea­sured, gets man­aged even when you don’t want it to be.” This often hap­pens in cor­po­ra­tions and admin­is­tra­tive bureau­cra­cies but is par­tic­u­larly glar­ing in the use of macro­eco­nomic data. Data, such as gross domes­tic prod­uct and unem­ploy­ment rates, are arbi­trary in their con­struc­tion and never bet­ter than esti­mates of amor­phous con­cepts. But their real prob­lem arises when they are politi­cized and mar­ried with the dubi­ous the­o­ries of wannabe eco­nomic planners. When politi­cians imag­ine that con­sump­tion is too low to sup­port their desired level of GDP growth, the result is “stim­u­lus” spend­ing, explod­ing bud­get deficits, arti­fi­cially low inter­est rates, and sub­si­dies for com­pa­nies and projects that waste resources. Need­ing a quick fix before an elec­tion, politi­cians and their advis­ers imag­ine that they can micro­man­age the macroeconomy. Since the col­lapse of the post-war, fixed exchange rate mon­e­tary sys­tem in the early ’70s, the Inter­na­tional Mon­e­tary Fund has tried to jus­tify its exis­tence by act­ing as the com­piler of inter­na­tional eco­nomic sta­tis­tics and dis­penser of advice. Recently the IMF sug­gested that the People’s Repub­lic of China should main­tain “the fis­cal stim­u­lus through 2010 while, on the mar­gin, reori­ent­ing fur­ther toward fis­cal mea­sures that will spur con­sump­tion.” China’s GDP growth rate has tended to be in the high sin­gle dig­its and was 11.1 per­cent in the sec­ond quar­ter of 2010. That’s not reces­sion, but appar­ently the IMF imag­ines that growth should be faster or that it might slow with­out gov­ern­ment tak­ing on more spending. The IMF wants Chi­nese pri­vate con­sump­tion to increase in order to achieve “a more bal­anced econ­omy” but never spec­i­fies exactly what a “more bal­anced” econ­omy is. If the stan­dard is the same as that exhib­ited by the Obama admin­is­tra­tion, then no level of con­sump­tion is high enough. If we don’t spend, then the gov­ern­ment will try to spend for us — or despite us. Even the big-spending Bush (II) admin­is­tra­tion wanted Chi­nese res­i­dents to spend more, but at least Pres­i­dent Bush revealed his true motive of pro­mot­ing U.S. exports. Those who mar­vel at high Chi­nese growth rates should con­sider the link between that and the high level of sav­ings and investment. China pros­pers as its econ­omy is freed rel­a­tively from gov­ern­ment con­trol and inter­fer­ence. China is still under­de­vel­oped, but its growth rate has soared as own­er­ship and decision-making have been decentralized. Chi­nese com­mu­nists could not ignore the les­son pro­vided by Hong Kong as it grew from post-war poverty to the top tier of pros­per­ity in just a few decades. As a British colony with not much of an econ­omy after the Japan­ese occu­pa­tion ended, Hong Kong escaped the atten­tion of the social­ist plan­ners that were unleashed on the United King­dom itself. Sir John Cow­perth­waite, who was the finan­cial sec­re­tary of Hong Kong from 1961 to 1971, resisted requests from White­hall bureau­crats for eco­nomic data. When later asked what his best reform was, he replied, “I abol­ished the col­lec­tion of sta­tis­tics.” Cow­perth­waite knew the dan­ger of hand­ing such sta­tis­tics to social engineers. Hong Kong had vir­tu­ally no restric­tions on trade, min­i­mal reg­u­la­tion, and a flat per­sonal income-tax rate of 15 per­cent. Cowperthwaite’s pol­icy of “pos­i­tive non-intervention” con­sisted of ensur­ing that gov­ern­ment did very few things, but did them well. The peo­ple were free to pro­duce, trade, and pros­per — which they did. By the end of British rule, Hong Kong had a per capita income that was slightly higher than Britain’s. Hong Kong might never again have another John Cow­perth­waite, and it will decline accord­ingly. The United States could do worse than copy Cowperthwaite’s exam­ple, and it has. Richard J. Grant is a pro­fes­sor of finance and eco­nom­ics at Lip­scomb Uni­ver­sity and a scholar at the Ten­nessee Cen­ter for Pol­icy Research. His col­umn appears on Sun­days.