J. C. Hidalgo, Progress requires economic freedom

The impact of high growth rates, led by China and subsequently followed by India and other emerging economies, has been dramatic. In the last 20 years the proportion of people living below the poverty line in developing countries has declined by half, dropping from 43 percent in 1990 to 21 percent in 2010. In the same period child mortality worldwide went down by 40 percent and average life expectancy increased by more than four years. People are living longer and healthier lives, and for the first time in history, a world without poverty appears within reach.

It is worth noting that an expanding global economy, and not government activism, is the driving force behind this unprecedented progress. A recent study by World Bank economists David Dollar, Aart Kray and Tatjana Kleinenberg shows that nearly 80 percent of the improvement in the incomes of the poorest 40 percent in 118 countries is the result of economic growth, and not redistribution programs.

The reality is much different from what the proponents of the Beijing Consensus convey: political authoritarianism is the source of human rights abuses, widespread corruption, and in the long run is incompatible with economic development. As Milton Friedman pointed out, economic freedom is a necessary condition for, and is conducive to, political freedom. As China’s swelling middle class continues to prosper, the demands for greater political and civil liberties will grow as well. We have seen it in the past in countries as diverse as Chile, South Korea and Taiwan. Therefore, the big conundrum for the Chinese leadership nowadays is how to address the likelihood that further economic liberalization might lead to political liberalization.

State capitalism is not the engine of China’s fast-growing economy either. Instead, it is the source of serial mal-investment, pervasive cronyism and continued friction in the global trading system. The latter is an important threat to the future of globalization as developed countries resist the expansion of emerging countries’ state-owned enterprises through investment barriers or outright protectionist measures. Fortunately, the shine is rapidly coming off SOEs. A report last year from the World Bank and the Development Research Center, a government-sponsored Chinese think tank, warned that the large role of state-owned enterprises represented a risk to the economy. As the financial burden of bad investments by Chinese SOEs becomes more apparent in the years ahead, their appeal as a model to be followed should greatly diminished.

The seminal work of the late Angus Maddison showed that for millennia almost all of humanity lived in abject poverty until the era of modern growth began in the West at the start of the 19th century. In the last twenty years we have witnessed the beginning of a similar phenomenon, but at a much greater scale, with the rise of the emerging economies.

Just as was the case 200 years ago, higher growth and rising prosperity accompanied economic liberty. The basic liberal premises that Adam Smith identified in 1776 as contributing to the wealth of nations continue to be valid today. And yet skepticism toward free markets is still widespread. The false prophets of socialism and nationalism continue to preach the virtues of their ideologies even though the evidence suggests that long-term sustainable human progress requires greater levels of economic freedom.

The prospects of living on a planet without extreme poverty and ever-increasing wealth are exciting. But if history is any guide, we should remain aware and vigilant of the dangers of gradual backsliding, and even swift reversals, in the march to progress. As we have seen in the last decade, even good times can create serious challenges. The Jeffersonian admonition that the price of liberty is eternal vigilance is similarly applicable to economic development: the price of increased prosperity is the constant defense of free market policies, which, as liberals well know, ultimately means the defense of individual freedom.

From Juan Carlos Hidalgo, The Rise of Emerging Economies: Challenges and Liberal Perspectives

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