- The Washington Times - Sunday, February 3, 2008

ANALYSIS/OPINION:

For 30 years, China has been making progress in transforming its economy from plan to market. Most prices are now set by demand and supply, China is the world’s third-largest trading nation, and private property is constitutionally recognized. Nevertheless, important remnants of central planning and control remain, which impede Beijing’s proclaimed goal of “people-centered development.”

The biggest weakness in the 11th Five-Year Program (2006-10), no longer called a plan, is the lack of any well-defined path toward institutional development that would allow farmers to acquire full ownership rights in their land, which is now collectively owned. Without genuine private property rights, farmers have no right to sell their land and less incentive to invest in the capital necessary to increase agricultural productivity. Meanwhile, local party officials have become rich by selling land-use rights to developers, and there has been a serious rise in social unrest.

Farmers, the heroes of the Chinese Communist Party, are treated as second-class citizens. In addition to the lack of private ownership rights, which would allow farmers to use their property as collateral and would add tremendous wealth to the countryside, there are serious restrictions on the farmers’ rights to migrate. Unless they can obtain an urban hukou (household registration permit), farmers and their families will be denied critical social services if they move to more prosperous urban areas in search of work. With more than 700 million people still in the countryside, China cannot afford to have an inefficient labor market by unduly restricting labor mobility.

Even where private ownership is allowed, in the case of housing, those rights are tenuous, because it is relatively easy for local governments to use the power of eminent domain to take private property and to benefit personally when that property is developed, without just compensation to the original owners. The 2007 Property Law is supposed to improve that situation, but the implementation process could be slow.

China’s robust economic growth has yielded many benefits, and the standard of living, as measured by real per capita income, has increased more than five-fold since 1978. The 11th Five-Year Program calls for another doubling by 2010, but unlike earlier five-year plans, that goal is not mandatory. More emphasis is being placed on social development objectives and balanced growth. The new spin word is “scientific development,” which actually connotes planning rather than market liberalism.

If China has learned anything from its reform experiment it should be that bottom-up, spontaneous market-based measures are more likely to generate human happiness and prosperity than top-down central planning. The major problems in present-day China stem from weak institutions, not from the lack of “scientific development.”

Peter Bauer, a development economics pioneer, liked to say the development process is too complex to have a general theory of development. What Mr. Bauer did recognize, and is now recognized by China’s leaders, is that economic growth and development are not necessarily the same.

What matters, said Mr. Bauer, is to increase the range of choices open to people — an objective best accomplished by limited government, strong private property rights, and free trade. China’s leaders seem to think that market-based growth clashes with “people-centered development.” They forget that the free market is simply a reflection of the free choices of millions of individuals who own private property and are subject to the rule of law.

The best measure of whether development is “people centered” is the extent of economic freedom — and China still has a long way to go before it is a market-liberal, as opposed to a market socialist, economy.

Although China’s economic growth of nearly 9 percent for three decades has been accompanied by greater economic freedom, China still ranks low on the economic freedom scale. In the 2008 Index of Economic Freedom, published by the Heritage Foundation and the Wall Street Journal, China ranked 126th out of 157 countries, just above Niger and Equatorial Guinea. Its overall score (out of 100 percent) was 52.8 percent, which put it in the “mostly unfree” category. In contrast, Hong Kong once again ranked first, with an overall score of 90.3 percent.

The Heritage/Wall Street Journal study is not perfect: It does not recognize the high degree of marketization in China’s coastal regions, for example, compared with the interior. But it does indicate what reforms China still needs to move up the economic freedom ladder. Wu Jinglian, one of China’s best-known reformers, has highlighted them: “deepen property rights,” “continue the privatization of state-owned companies,” and “accelerate formation of a modern market system that is open, competitive and ordered.”

Mr. Wu sees the problems of economic inequality between rural and urban citizens and corruption of party officials as stemming from “flaws in the economic and political system.” He is not alone.

In March 2007, Zhou Wenzhong, Chinese ambassador to the United States, remarked: “The system and mechanism for the socialist market economy… remains imperfect and immature. This results in unfair wealth distribution, widening urban-rural gap, regional growth imbalance, corruption, and violation of the rights and interests of the vulnerable groups.” He called for China to “face the music and resolve the problems” by maximizing “the factors contributing to harmony.”

If the Chinese people are to become “masters of their own country,” the goal proclaimed at the 17th Congress of the Chinese Communist Party, faster progress is needed in shaping legal institutions to better safeguard persons and property so markets can work their magic in increasing both wealth and well-being.

James A. Dorn is a China specialist at the Cato Institute and editor of the Cato Journal.

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