China has no easy road to prosperity

Repressive and all-controlling government is barrier to growth

As the American economy struggles, China is on the mind of most Americans. Already, 47 percent of Americans believe China is a greater economic power than the United States.

In fact, China’s GDP is less than half that of the United States. Americans believe China holds most of the U.S. national debt. In fact, China holds only 7.5 percent of the outstanding U.S. Treasury securities.

Even respected economists project China to pass the United States to become the next economic superpower. Looking only at China’s very impressive recent growth and totalitarian government that can “turn on a dime,” those forecasts seem plausible.

Indeed, anyone who visits China may be seduced by its economic growth . The Chinese have leapt into the 21st century.

That said, China faces a number of serious hurdles to overcome.

China’s central problem is that its government controls all segments of the economy , from its “State Owned Enterprises” to its courts and regulators. There is little separation of power between the government and major industries.

In the past 60 years, Americans have feared that other countries with extensive government involvement in their businesses might pass the United States. The Soviet Union during the 1950s and ’60s had extraordinary growth in GDP.

From the 1960s through the ’80s, Japan did even better, growing to be the world’s second-largest economy. It had major direct government involvement in a very strong industrial policy and Keiretsu, where the government worked with companies to establish groups around a major bank and operate in concert to provide them a sizable advantage in international trade.

While the Japanese economic stagnation of the last decade is harder to dissect, its model is no longer one we would hope to emulate.

The Soviet Union, Japan and China all had great success in their early growth phases for good reason: The United States already blazed the trail in many areas. Other competing countries did not need to make the big gambles on how to proceed. The U.S. was making the discoveries and other countries could engineer improvements or developments with much less risk.

Just like traveling through an unchartered wilderness, the leader must make the decisions as to which way to go and backtrack when mistaken.

The followers can travel faster and easier on the blazed trail. When they reach the front of the trail, these other countries now have to make decisions — by governmental fiat rather than free-market allocation of resources — which can result in costly mistakes.

America’s free-enterprise system is designed to do well in making these “leader” decisions. The U.S. economy succeeds because it encourages innovation at all levels, and for the most part keeps the government out of picking winners and losers.

In addition, U.S. freedoms are an integral part of our economic success; such freedoms are unavailable in China. Freedom House rates China 181st out of 196 countries in freedom of the press. This keeps China mired in corruption. (It’s 78th of 178 countries in Transparency International’s “corruption index.”)

Corruption is antithetical to economic growth.

China’s repression of freedom hinders vital growth in research and development, education and innovation.

The absence of basic freedoms and the rule of law inhibit obtaining accurate and comprehensive data on the Internet, creating acceptable working conditions, preventing the theft of intellectual property, stopping the actions of corrupt local officials, avoiding forced technology transfers, receiving fair treatment in the courts and regulatory bodies, and sustaining economic growth and development.

This is already reflected in recent comments about the difficulty of doing business in China by CEOs like Jeffrey Immelt, of General Electric, Peter Loescher, of Siemens, and BASF’s Juergen Hambrecht. In the World Bank’s rating of “ease of doing business,” China came out 79th out of 183 countries.

The U.S. must face up to its many problems. But those who envy how China’s autocratic system avoids the endless debates of Washington policymaking must also remember that China’s government-run economy, lack of press freedom, widespread corruption, and difficult environment for business in the long run will undermine the soundness of Chinese resource-allocation decisions.

It does not sound like a country about to become No. 1.

Originally published 1 May 2011 on