By Rainer Zitelmann

 

 

In October 1976 it was announced that the Nobel Prize in economics for that year would be awarded to the American economist Milton Friedman. Almost exactly a month before that announcement, Mao Zedong had passed away. Just four years after his death, Friedman visited China for the first time. Upon his return, he claimed that China had the potential to replicate the rapid economic growth observed after World War II in countries such as Japan or Germany. At that time, Friedman was perhaps the only one who saw such a positive evolution of China’s economic future as feasible.

 

It is important to remember that, in 1980, 88% of the Chinese population still lived in extreme poverty. Just four decades later, that same rate has dropped to less than 1%. Never before in history has there been such an intense reduction in poverty in such a short period of time. Understanding how such progress was possible is one of the great challenges of our time and our answer to this important question depends, to a large extent, on the role of the market and the state in the Chinese economy.

 

In 1980, the prosperous future that China ended up realizing was far from obvious. Friedman was surprised because, during his visit, he found that Friedrich Hayek’s works had not only been translated into Chinese, but were quite popular. For example, there were many articles on Hayek in major Chinese economics magazines. Similarly, Friedman was pleased to discover that some Chinese economists already owned copies of the Japanese edition of his book Freedom to Choose, which had been published in Japan a few years earlier. In fact, he was aware that a Chinese translation of the work was already in preparation. As he explains in his memoirs, it is evident that Friedman was torn between the great hope that he harbored and the logical skepticism that made him doubt the adaptability of the communist regime. In a 1980 report he wrote that China’s economic reforms were moving in the right direction, but added that “only time will tell if they are finally carried out and what their effects will be.” At the time, he was convinced that China would experience some progress in the short term, although he was doubtful about the prospects for implementing far-reaching reforms in the longer term.

 

Friedman visited China for the second time in 1988, at the hands of the American Cato Institute, a leading think tank in the libertarian world, that had organized a conference in Shanghai. This was an extraordinary event in itself. Friedman delivered a speech during the meeting and did not hide the fact that the transition from the planned economy to the market system would bring many benefits, but also entail considerable costs. Friedman commented that, in his opinion, Chinese leaders were “seriously committed to the transition effort” and stressed that “the Chinese people will be the main beneficiary of its eventual success, although not the only one, because if this effort works well, all the people of the world will benefit. ” Those words were almost prophetic. After all, had it not been for the rapid growth of the Chinese economy, the world economy would not have experienced such positive growth in the past three decades. China is now the growth engine that adds more speed to the pace of expansion of the world economy, but Friedman identified the potential of the Asian country as early as 1988.

 

Friedman’s optimistic stance was encouraged by a conversation he had with then-Communist Party general secretary Zhao Ziyang, whom he described as a politician with a “realistic understanding of what it means to liberalize the market.” In his autobiography, Friedman writes that his two-hour conversation with Zhao Ziyang made a very positive impression on him: “He showed a sophisticated understanding of the economic situation and how the market works. And, just as important, he recognized that major changes were needed – and he proved to be open to them. “

 

When he visited Shenzhen, Friedman was impressed by the fact that this small port city of just 6,000 inhabitants when he visited in 1982 had become a vibrant city, with 500,000 inhabitants, in just eight years. Shenzhen was the first special economic zone in China and had applied the principles of the market economy much more faithfully than some countries in Europe or even some regulations in force in the United States. When I visited Shenzhen in 2018 and 2019, to lecture at the university, I was greatly impressed to see that it had already grown into a global metropolis, with 12.5 million inhabitants and an incredible entrepreneurial spirit.

 

In 1993, Friedman visited China for the third time. Friedman’s impressions were more skeptical this time than in 1988. Although he was able to meet again with Communist Party General Secretary Jiang Zemin, the exchange of views was more one-sided. Friedman was only able to speak for ten minutes, while Jiang Zemin monopolized the conversation and spoke for a total of 45 minutes. Friedman then expressed his doubts about the ability of China to continue down the path that he took by recognizing the right to private property and introducing the principles of the free market.

 

There is now a glaring misunderstanding in the West in assessing which factors have contributed the most to China’s enormous economic success. Many people believe that China has discovered a “third way”, a path between socialism and capitalism. Some even believe that China’s incredible success has only been possible because the state has retained a strong influence over the economy.

 

In 2018, I traveled to Beijing and met Zhang Weiying, a Chinese economist who is recognized as a follower of Hayek and Friedman. Weiying strongly disagreed with the prevailing interpretation in the West, repeatedly emphasizing that the only reason the state continues to play such an important role in modern China is the recent history of the country, since under Mao it controlled China, including almost 100% of the economy. Weiying pointed out to me, however, that China’s economic success over the past four decades is entirely based on the fact that this enormous weight of the state has been gradually and progressively reduced.

 

During our conversation, Zhang Weiying repeatedly emphasized that “China’s economic rise is not due to the state, but rather to the state’s regret.” No doubt Milton Friedman would have agreed. We can say that the brilliant economist was one of the first to accurately predict the future of China. Today, as confirmed by a World Economic Forum working paper, the private sector is already the driving force behind economic production in China: “The 60/70/80/90 combination is often used to describe the contribution of the private sector to the Chinese economy. It already contributes 60% of China’s GDP, generates 70% of innovation, supports 80% of urban employment and creates 90% of new jobs. The private sector is also responsible for 70% of investment and 90% of exports. ”Friedman, of course, was critical of the failure of China to introduce political and civil liberties to match the new economic freedoms. In Chile, he saw firsthand how free market reforms helped end the country’s military dictatorship. No doubt he hoped that greater economic freedom would also lead to greater political freedom in China. Yet despite his hopes, he remained skeptical, and rightly so, as we know today. In any case, according to Friedman’s teachings, the miracle of the Chinese economy confirms that achieving greater prosperity for the people is only possible by expanding private property rights and promoting the free market.

 


Rainer Zitelmann is a German historian, author, management consultant and real estate expert.