World Bank to China: Economic Freedom or Bust

To read about the departure from traditionalist policies by the multilateral agency the World Bank, who usually espouse on more regulations and bigger governments, but now recommends Economic FREEDOM for China or else risks a collapse in the face unsustainable state based Keynesian policies, is certainly a refreshing development.

The mainstream seems to be more and more assimilating the reality that only economic freedom (laissez faire capitalism) is the key to prosperity.

From the CNN Money

The World Bank and a Chinese think tank will have a stern warning in store for China's government on Monday: Transition to a freer commercial system, or else face an impending economic crisis.

As first reported by the Wall Street Journal, the "China 2030" report recommends China enact reforms promoting a freer econom. Those reforms include a major overhaul turning China's powerful state-owned companies into commercial enterprises.

The World Bank confirmed it will release the report Monday in Beijing.

The report is compiled by the World Bank and the Development Research Center, a research group that reports directly to China's State Council. According to the Wall Street Journal, it encourages China to also promote innovation, competition and entrepreneurship as a means of economic growth, rather than allowing growth to be primarily government engineered.

The world's second largest economy has been rising rapidly, averaging around 10% growth a year for the last three decades. Much of that momentum has come as China's rural population moves into the cities and as the government has funded massive infrastructure projects and retained a powerful influence over the country's biggest companies.

State-owned companies dominate China's banking, energy, telecom, health care and technology sectors. Overall, they account for about 40% of the country's gross domestic product, estimate Andrew Szamosszegi and Cole Kyle, who have researched the topic for the U.S.-China Economic and Security Review Commission.

Their latest report to the commission puts it bluntly: The Chinese government has not "expressed an interest in becoming a bastion of free market capitalism."

Yeah. The last statement seems like an epiphany for the World Bank.

Here is the official press release from the World Bank, where you can download on the report

China should complete its transition to a market economy -- through enterprise, land, labor, and financial sector reforms -- strengthen its private sector, open its markets to greater competition and innovation, and ensure equality of opportunity to help achieve its goal of a new structure for economic growth.

These are some of the key findings of a joint research report by a team from the World Bank and the Development Research Center of China’s State Council, which lays out the case for a new development strategy for China to rebalance the role of government and market, private sector and society, to reach the goal of a high income country by 2030.

The report, “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”, recommends steps to deal with the risks facing China over the next 20 years, including the risk of a hard landing in the short term, as well as challenges posed by an ageing and shrinking workforce, rising inequality, environmental stresses, and external imbalances.

While I agree that current policies by the Chinese government have been merely blowing bubbles—which eventually would meet its fate—paradoxically, much of the world have been pursuing the same policy template, albeit at varying degrees. (yes the Philippines too)

In particular, crisis afflicted nations led by the US and key developed economies seem to be reversing their embrace of the market economy paradigm as inflationism has emerged as the dominant trend in policymaking.

Add to this are the numerous regulations being imposed, aside increases in taxation that suppresses and inhibits ‘competition and innovation’.

Selective censures would only be discerned as politicking that may cause insulation and would likely be ignored by the Chinese authorities.

The World Bank has to make Economic Freedom (laissez faire capitalism) the foundation of their economic development model for everyone.

As the great Ludwig von Mises once wrote,

A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society.

Confusing Corporatism with Capitalism

Bashing capitalism has been the chic thing to do for people who bear ideological spite on it or for those who advance statism as solution to social ills.

Yet in reality, current crisis has not been laissez faire capitalism but about the nefarious relationship of the welfare-warfare state, their private sector allies and their behind-the-scene guarantors or backers, the central banks. Such political arrangement comes in various nomenclature: state capitalism or corporatism or crony capitalism or economic fascism.

Professors Edmund S. Phelps and Saifedean Ammous at the Project Syndicate explains the difference, (bold emphasis added) [hat tip Peter Boettke]

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on “reckless capitalism” and “lack of regulation,” which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.

In short, capitalism essentially is about serving consumers (or the needs of the masses), while corporatism is about fulfilling the interests of political masters.

Critics of capitalism have been engaged in equivocation by deliberately mangling the definitional context of capitalism.

Nevertheless, pushing for the same state based political solution will bring about the day of reckoning, as the Professors conclude,

The legitimacy of corporatism is eroding along with the fiscal health of governments that have relied on it. If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. Then “capitalism” would again carry its true meaning, rather than the one attributed to it by corporatists seeking to hide behind it and socialists wanting to vilify it.

I am with the professors that given the current direction of policymaking, the top-bottom or centralization based political economic system is likely headed for self-implosion.

And I am hopeful too that capitalism will emerge from their ashes, especially backed by accelerating advances in technology. But as caveat, nothing in life operates in a straight line or that the transition towards a decentralized-capitalist political economy could be messy.

Asians are World’s Top Blog Readers

That’s according to Comscore.com

Global analysis of the Blog category revealed that Japan led all markets in blog engagement, with the average visitor in Japan spending more than an hour (62.6 minutes) visiting blogs in June. South Korea ranked second with an average of 49.6 minutes on blog sites, followed by Poland at 47.7 minutes.

Japan was also among the top markets for Blog category penetration with 80.5 percent of its online population visiting blogs in June. Taiwan ranked highest globally with 85.5 percent of its online population visiting blogs, followed by Brazil (85.2 percent reach), South Korea (84.9 percent reach) and Turkey (81.9 percent reach).

There could be many interpretations from the above survey.

For one it shows of the deepening extent of web based information acquisition most possibly at the expense of traditional media.

Another, the breadth of readership has been globalized and has not been limited to developed economies.

Next, more and more people are learning to appreciate blogs as one of the principal web based sources of information.

From a marketing point of view, the above represents as high growth markets which any enterprising bloggers could capitalize on.

Lastly, the above dynamics can be seen as increasing manifestations of the democratization of information and knowledge, or of the intensification of the information or knowledge revolution.

As the great Friedrich von Hayek once wrote,

The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

The knowledge revolution should serve as catalysts to the development of transformational ideas that could promote innovation via the ‘Bourgeois revaluation’ or heightened appreciation of the benefits of free market or laissez faire capitalism.

The knowledge revolution and increased social connectivity should also deepen specialization (division of labor) and encourage more voluntary trade and commerce.

And importantly, attune greater number of people towards more decentralized path or way of social interactions, which alternatively means to wean away from the vertical flow (e.g. mass education, mass media) or structures (e.g. centralized bureaucracies, mass production) or lifestyles (e.g. 9-5 work schedules, mass cultures) derived from the industrial age template.

These material changes are hardly appreciated by the public but will persist as the world evolves.

UPDATE: My blog's readership departs from the comscore survey, where most of my readers come from Northern America, UK and the Philippines, as one would observe from the lower right column of this blog. My experience may be shared by many local bloggers too.

Nonetheless my comments above have been mostly premised on the comscore survey.

Social Inequality: The Anatomy of Plutocracy

One of the most popular misimpressions or smear campaign tactics directed against free markets or laissez faire capitalism is that such a system promotes a political order known as plutocracy-or the rule of the wealthy.

This idea either lacks the comprehensive understanding of capitalism or simply operates on the premises of deliberate equivocation (propaganda).

The Consumer Reigns In A Laissez Faire System

In the laissez faire political economic order, it is the consumer that ALWAYS reigns supreme.

Consumers ultimately determine who to reward (by profits) and who to punish (by losses). Thus, the wealthy are those entrepreneurs who manage to continually satisfy the ever dynamic desires of consumers.

As the great Ludwig von Mises wrote, (bold highlights mine)

In the capitalistic society, men become rich — directly as the producer of consumers' goods, or indirectly as the producer of raw materials and semiproduced factors of production — by serving consumers in large numbers. This means that men who become rich in the capitalistic society are serving the people. The capitalistic market economy is a democracy in which every penny constitutes a vote. The wealth of the successful businessman is the result of a consumer plebiscite. Wealth, once acquired, can be preserved only by those who keep on earning it anew by satisfying the wishes of consumers.

In addition, market dominance is neither guaranteed nor in a state of permanence because consumer desires always changes.

Importantly, the highly competitive nature of markets impels entrepreneurs to attain excellence by exploiting windows of entrepreneurial opportunities.

As Professor Israel M. Kirzner writes, (bold highlights mine, italics Prof Kirzner)

What makes possible the entrepreneurially driven process of equilibration is active market competition. It is only the possibility of unrestricted entrepreneurial entry which permits more alert entrepreneurs to deploy their superior vision of the future in order to correct the misallocations of resources reflected in the false prices which characterize disequilibrium. It is the continual threat of such entry which tends to keep incumbent entrepreneurs alert and on their toes.

A good example of such process can be seen from how Apple, the technology behemoth company, has attained its present dominance.

Apple’s Sphere of Influence From Minyanville.com

Apple’s success wasn’t granted by fiat orders from political leaders but from its numerous attempts to satisfy consumer demands via competition derived innovative consumer friendly technology devices.

The above is an example of one of the many failed Apple products (chart and the rest of the story from Minyanville). In other words, Apple’s recent string of successes came at the cost of her previous failed experiences or experiments.

I have recently noted on how Mattel, makers of the famous Barbie dolls, has closed shop in China for failing to adapt to local tastes and how Philippine conglomerate Jollibee has captured the largest market share in the Philippine fast food industry by toppling US based counterpart McDonald’s by ingenously configuring her products to the palate of Filipino consumers.

The point is—the political economic order of the rule of the wealthy (plutocracy) would NOT sustainably persist or would unlikely occur under a pure laissez faire system.

State And Crony Capitalism Equals Plutocracy

The apologists for statism, who see Plutocracy as the main source for inequality, hardly realize that for the wealthy to politically sustain its dominance means to adapt ANTI-COMPETITIVE measures by co-opting with the political leaders.

Writes Art Carden (bold highlights mine)

Bourgeois riches come from customer service. Aristocratic riches are expropriated. Aristocracy rests on intrinsic value whereas capitalism rests on the exchange of value for value.

Libertarian William Graham Sumner wrote, (bold highlights mine)

[M]ilitarism, expansion and imperialism will all favor plutocracy. In the first place, war and expansion will favor jobbery, both in the dependencies and at home. In the second place, they will take away the attention of the people from what the plutocrats are doing. In the third place, they will cause large expenditures of the people's money, the return for which will not go into the treasury, but into the hands of a few schemers. In the fourth place, they will call for a large public debt and taxes, and these things especially tend to make men unequal, because any social burdens bear more heavily on the weak than on the strong, and so make the weak weaker and the strong stronger. ("Conquest of the United States by Spain.")

And it has not been different here in Southeast Asia, Joe Studwell writes, (as I earlier quoted here)

Centralized governments that under-regulate competition (in the sense of failing to ensure its presence) and over-regulate market access (through restrictive licensing and non-competitive tendering) guarantee that merchant capitalists-or asset trader, to use a more pejorative term-will rise to the top by arbitraging economic inefficiencies created by politicians. The trend is reinforced in South-east Asia by the widespread presence of what could be called as ‘manipulated democracy’, either in the guise of predetermined winner democracy (Singapore, Malaysia, Suharto’s Indonesia) or else in the scenario where business interest gain so close a control of the political system that they are unaffected by the changes of government that do occur (as in Thailand and the Philippines). In both instances politicians spend huge sums to maintain a grip on power that has some semblance of legitimacy. This can only be financed by through direct political ownership of big business or more usually, contributions from nominally independent big business that is beholden to politicians. Whichever, the mechanism creates a not entirely unhappy dependence of elites between politicians and tycoons.”

If Confucius once said that ‘give the man a fish you feed him for the day, teach him to fish and you feed him the rest of his life’.

From a political standpoint, libertarians and classical liberals advocates on the method that teaches the man how to fish, so as to make him productive to the society.

Whereas for statists, who along with politicians, will naively insist on feeding the man for the day (moment), by picking on someone else's pocket, supported by a legalized coercive framework that are enabled or facilitated by a politically constructed paper money system, which from the account of the entire history of man’s attempt to produce political nirvana has always failed.

Yet such accounts for exactly the Anatomy of Plutocracy.

Any political economic order which depends on political privileges or distribution of resources—endowments, protectionism, subsidies, bailouts, behest loans, economic concessions et. al. represents NOT a laissez faire system but a political system known as STATE CAPITALISM or CORPORATISM or CRONY CAPITALISM. The important difference is that consumers in a laissez faire system represents as real power, whereas politicians signify as the most powerful agents in the state capitalist order.

In today’s setting, the cooptation of the banking cartel-military industrial complex-green industrial-government labor union-welfare state-central banking system (in the US or elsewhere) are representative of PLUTOCRACY IN ACTION!

As the great Milton Friedman said in this lecture,

A society that aims for equality before liberty will end up with neither equality nor liberty. And a society that aims first for liberty, will not end up with equality but will end up with a closer approach to equality.

Bottom line: Statism or government interventionism, which enables or sustains a political economic order of plutocracy, is what engenders social inequality. The more societies politically organize herself towards attaining social equality, the more inequality gets amplified.

Here, noble intentions and economic reality are separated.