Sunday, August 15, 2010

Less government control helps China’s economy

Published in The Tennessean, Sunday, August 15, 2010

Less government control helps China’s economy

by Richard J. 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 (GDP) 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 advisors imagine that they can micromanage the macroeconomy.

Since the collapse of the post-war, fixed exchange rate monetary system in the early 1970s, 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 US 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%. 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. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010