China, like other countries undergoing radical transition, must resolve the political and economic issues that determine its pattern of future development. The search for a workable model has often led to the conclusion that authoritarian rule may be a necessary evil as a means for speedy economic development. In this sense, the trade-off between political freedom and economic prosperity is portrayed as a cruel choice. An incarnation of this trade-off is evident in China with collateral damage being felt in Hong Kong.
The implied trade-off between rapid economic growth and political freedom suggests that democracies are at a disadvantage relative to authoritarian, even totalitarian regimes, during the transition process. While economic freedom may be required for development of political freedom, the reverse may not be true.
Thus, it is widely believed that a continuation of its authoritarian regime can more readily ensure rapid economic progress for China. However, there are compelling counter-examples that exist in the real world.Numerous authoritarian regimes exhibit little or no economic success, for examples: Cuba and Zimbabwe, Burma, Bangladesh, Pakistan, Afghanistan, Iraq and Iran. Thus, neither the imposition of authoritarian rule nor repression constitute necessary nor sufficient conditions for economic growth.
In sum, the visible hand of the interventionist state does not guarantee successful economic development. Policy makers are as fallible as the private decision makers they seek to replace. This fallibility is to be expected regardless of whether the guiding principles are based upon ideology, like communism, or paternalism guided by Confucianism.
In spite of these claims, competitive capitalism joined by liberal democracy (liberal capitalism) can be seen to provide better incentives through the wider disbursement of a direct personal stake in economic development. Access to personal rewards from involvement in the making of the economic pie is the source of a strong motivation for individual effort. Increased productivity arising from the incentive structures of liberal capitalism would offset the presumed advantages of coerced accumulation under China's perverse system of market socialism. Of particular interest are the evolving characteristics and role of real entrepreneurs in China.
True entrepreneurs are by their nature iconoclastic and contrarian who tend to challenge the status quo, whether the competitive structure of a market or authority structures. This would include opposing government policies that obstruct attempts to expand their economic fortunes. Authoritarian regimes attempt to control economic activities, often by constructing entrepreneurs through the offer of special privileges to cronies. However, only real entrepreneurs generate growth.
China's ongoing economic malaise (chronic deflation and uneven growth) is symptomatic of the long-run effects of the gradualist approach to its economic transition policy. As in most authoritarian regimes, the primary purpose of Beijing's extensive controls over the economy is to maintain and to protect the existing structure of entrenched political and economic interests. Somehow the abject failures of central planning were not lesson enough to convince Beijing's technocrats that such controls are counter-productive.
In the end, short-run gains to countries whose leaders opt for the cruel choice of imposing the repressive hand of government intervention will be offset by unintended long-run costs. The economic costs of stunted-growth potential will be accompanied by additional social and political costs.
Survival and success in the open and highly-competitive international economic order that is emerging require flexible institutions and innovative, risk-taking entrepreneurs. China's experiment with authoritarian capitalism is unlikely to meet these requirements.
One of the lessons of the Asian financial crisis was that attempting to trade political freedom for rapid economic growth is that short-run gains mask long-run losses. In China, the cruel realities of the long run are coming into sharper focus sooner than most leaders in Beijing would have liked.
Christopher Lingle is Global Strategist for eConoLytics.com .
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