Geopolitics, Economic Freedom and Growth in China and the West

Abstract

Three hundred years ago China and Europe were about equally poor. Then the West forged ahead of Asian societies, thereby generating rising global income disparities until the end of the 20th century. Since 1979 the Chinese have raised per capita incomes sevenfold. This history of economic performance poses two explanatory challenges. Why did China fall behind Europe or the West? Why has China started to close the income gap recently? Here, a unitary explanatory framework is suggested for answering both questions. Because of weak property rights, lack of scarcity prices, and too little economic freedom, China grew much more slowly than the West. The West benefited from better institutions than China because of political fragmentation resulting in limited government and comparatively free markets. Similarly, China could start its attempt to catch‐up with the West only after climbing out of the socialist trap by a de facto improvement of property rights and economic freedom, by “market‐preserving federalism” and by vigorously joining the capitalist world economy. This account of Western and Chinese performance ultimately rests on geopolitics. Interstate rivalry between European states, kingdoms and principalities contributed to safe property rights and the European miracle. Competition between European states forced them to establish limited instead of absolutist government and therefore to provide space for the commercial and industrial revolutions in the West. Similarly, rivalry between the People's Republic of China on the Mainland and the Republic of China on Taiwan, the hostile competition between Communist China and the Soviet Union, the historical rivalry between China and Japan, and the geographical closeness of US troop deployments to China forced the People's Republic of China leadership in the late 1970s to consider the consequences of falling further and further behind the West, Japan, and Taiwan. Thus, geopolitical threat perception has been the midwife of Chinese economic reform policies. The current financial and economic crisis is likely to increase government interference with the economy and to reduce economic freedom in China as well as in the West.