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HOLMES: Freedom trumps China’s economic model

- - Wednesday, November 17, 2010

ANALYSIS/OPINION:

Will a rising China supplant the United States as the world's leading economic light? Joshua Ramo, a former Time magazine editor, maintains that Beijing's system of authoritarian "market socialism" — or "Beijing Consensus" — is a better model for developing countries.

But John Lee, a brilliant Australian political scientist, thinks differently. In "Will China Fail?" he argues that China's current approach to the market, which funnels most of its efforts on building dependency on the regime, is "flawed, failing, and unsustainable."

Yes, the U.S. economy will grow even weaker if we continue to pile up crushing national debt while pursuing Europe's failed welfare-state model. And yes, China is a growing economic power. But Mr. Lee's argument that the Beijing model is fundamentally flawed is ultimately more convincing than a tortured argument resting on a whole new model of development.

China is living off economic reforms that began in the late 1970s and stalled in the 1990s, and have been backtracking since 2003. Prodding from Beijing, which fears that further economic reform might erode political control, has resulted in China's mixed economy growing just enough to create a regime-dependent middle class.

This approach is problematic. China's high annual growth rates mask an underlying unemployment challenge. As many as 200 million rural workers are looking for jobs. Eight percent growth is needed just to stay even with the expanding work force. Mr. Lee argues that should growth fall below 8 percent, every percentage point under that mark will throw 10 to 15 million people out of work.

Moreover, China's export economic model, with its pegged currency and large public sector, intentionally suppresses domestic consumption. In other words, its rulers want growth to benefit people they can control. Most Chinese export wealth is controlled in some fashion by government-supported elites. The vast majority of China's poor benefit little.

A second major flaw in the Beijing model is its large, highly corrupt and inefficient public sector. State-owned and -controlled corporations receive about 70 percent of capital but produce just 30 percent of output, Mr. Lee notes. What fuels most of China's economic growth are islands of private enterprise in and around big cities. The private sector is more dynamic than the state sector but still small by comparison. China scores so poorly on the Heritage Foundation/Wall Street Journal Index of Economic Freedom because, despite areas of private enterprise, Beijing still controls most of the economy.

Third, this "market socialism" is fast becoming the world's greatest creator of economic inequality. In one generation, China has gone from the most equal to the least equal society in Asia. While China's "middle class" may number as many as 200 million, more than 1 billion are missing out. Often those in the so-called middle class are regime-dependent; their prosperity results from Communist Party connections and government favors given them or their bosses. Don't expect them to challenge the system anytime soon.

Fourth, China's economic growth has not led to bounty in social and public goods. The World Health Organization identifies China as one of the most inequitable countries in the world in terms of distribution of and access to health care. It is ranked 188th, ahead only of Brazil, Burma and Sierra Leone.

Fifth, with a growing middle class beholden to the government, the vast majority of those left behind feel increasingly alienated. High levels of corruption and a sense of unequal burdens fuel rural resentment. Beijing tries to foster Chinese pride by appealing to nationalism, but it may not be enough. The economic model's internal contradictions may overwhelm the Communist Party's efforts to distract the poor from their problems.

The central question is whether the new middle-class urbanites will some day shake off their dependence on the government and demand more freedom. After the Tiananmen Square massacre, the Communist Party decided it would never again allow elites and young people to become isolated from their rulers. Essentially, it is trying to buy them off with jobs, foreign travel and a rising standard of living.

Meanwhile, Beijing counts on the rest of China, the vast majority of its people, to accept their lot. But poorer people see urban people not only as richer but as more favored. It's an unstable situation for a Communist Party that began by making revolution in the countryside.

Those who think the "Beijing Consensus" holds lessons for the rest of the world should think again. While the "American Consensus" has run off the rails in recent years, that does not mean its model of economic liberalization and freedom has failed. The problem is that America has fallen off the free-market wagon and is acting more like China - not the other way around. Both nations need more free-market economics and less Chinese-style "consensus"-directed solutions.

Kim R. Holmes, a former assistant secretary of state, is a vice president at the Heritage Foundation. Follow him on Twitter @kimsmithholmes.