Monday, August 6, 2012

China's Growth: Planning or Private Enterprise?

by Paul Gregory

Library of Economics & Liberty

August 6, 2012


China appears to have come through the world economic crisis better than many other countries. China's admirers claim that, under China's "state capitalism," planners have guided large state companies rationally and wisely through the rough seas of the world economy. The Chinese Communist Party (CPC) plans, oversees, and administers the interwoven network of state banks, airlines, railroads, utilities, oil companies, and large manufacturers, all of which make up the economy's "commanding heights" (to use Lenin's term). As Europe and the United States slump, the CPC can speedily launch infrastructure projects or shift millions of migrant workers from one locality to another. There is no messy democracy to gum up the works. New York Times columnist Thomas Friedman extols: "A one party system can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century."

But Ludwig von Mises in the 1920s and F. A. Hayek in the 1930s discredited the idea that planners can manage an entire economy. Hayek pointed out that central planners lack "the knowledge of the particular circumstances of time and place." Because the planners do not have the information that rests with hundreds of thousands of companies and millions of consumers, planning fails, as it did spectacularly in the Soviet Union. Interestingly, even socialist economist Robert Heilbroner admitted as much. China is not an exception. Its economic growth has occurred despite the government's economic planning and because of its large, dynamic private sector.

China's Economic Growth

As Figure 1 shows, China's Gross Domestic Product grew from 1979 to the present at an average of slightly over 8.5 percent per annum. Although Japan and the Four Tigers (Hong Kong, Singapore, South Korea, and Taiwan) matched that growth rate at various points in the past, more than thirty years of such high growth is unique. The CPC would like us to believe its growth is due to its peculiar brand of socialism with a Chinese face. In fact, what deserves credit is the entrepreneurship of the Chinese people.

Figure 1. China's Growth Rate of GDP, 1983-2011