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Hayek offers communist China path to prosperity

Benjamin Herscovitch | 24 April 2014

benjamin-herscovitchIn September last year, Chinese Premier Li Keqiang warned that 'China's reforms have entered a deep-water zone, or the most difficult phase.'

With Beijing moving to give markets a 'decisive' role in allocating resources, President Xi Jinping's administration now threatens the advantages enjoyed by massive state-owned enterprises (SOEs) and legions of corrupt officials.

Yet Xi must resist pressure from vested interests and commentators who argue that further liberalisation, or what has been dubbed 'Hayekism,' will 'prove poisonous to China's reform efforts.'

Indeed, despite the progress of China's 35 years of 'reform and opening up,' the biggest threat to economic dynamism and social stability is the conceit that the Chinese Communist Party (CCP) is best placed to make decisions for individuals and markets.

Preferential government-backed credit for SOEs has produced gargantuan corporate entities not even half as profitable as their private sector peers and prone to mismanagement and corruption.

The forced expropriation of land has resulted in 64 million Chinese households having their farms seized and homes destroyed, and provokes as many as two-thirds of China's roughly 90,000 annual 'mass incidents' of social unrest and protest.

The one-child policy has forced abortions on untold numbers of women, left China with a steadily shrinking working-age population, and fuelled a severe demographic imbalance of 115 newborn boys for every 100 newborn girls.

Meanwhile, the rigid household registration (hukou) system has left hundreds of millions of migrant workers unable to capitalise on property rights and educational opportunities as they flock to China's booming urban centres in search of employment.

President Xi has made a promising start: Not even two years in power, he has proposed a roll back of the unfair advantages enjoyed by SOEs, taken tentative steps to strengthen the private property rights of farmers, moved to partially dismantle the one child policy, and mooted overhauling the hukou system.

However, liberal intentions are not enough; Xi's reform agenda must fully implement F.A. Hayek's lesson that individuals and markets typically make much wiser decisions for themselves than government would make for them.

Failure to live by this lesson will burden China with mounting economic inefficiencies, deepening demographic crises, and widespread social unrest.

Dr Benjamin Herscovitch is a Beijing-based Research Fellow at The Centre for Independent Studies.