The Chinese leader Deng Xiaoping said, “It doesn’t matter what color a cat is as long as it catches mice.” Explained in the Teaching Company’s “Why Economies Rise or Fall,” Deng cared about results more than economic ideology as he propelled the Chinese economy toward capitalism.
Through Deng’s leadership, China allowed farmers to keep and sell excess crops, productivity swiftly rose, and agricultural markets evolved. Then, as infrastructure emerged to connect these markets with factories, and education and technology developed, “Made in China” became a household term in the U.S. Throw in currency control, low wages, and you get a country whose economy is now #2 in the world.
Ranked by GDP, the U.S is #1 (close to $15 trillion), China is #2 (close to $5 trillion), and Japan is #3 (close to $5 trillion but less than China). Completing a list of the top 10, then we have Germany, France, the U.K., Italy, Brazil, Canada, and Russia.
If China continues to grow at a 10% rate while the U.S. growth rate remains close to 3%, then China will be #1 in 2 to 3 decades. However, the Chinese per capita GDP and average standard of living will still be far behind most of the world’s largest economies.
The Economic Lesson
It can be tough to compare economies. Even if GDP comparisons use the same components (consumer spending, business investment, government spending, and exports minus imports), still we have to remember that purchasing power differs. Also, we can use per capita (per person) comparisons and other indiviudal standard of living yardsticks.
Just like teachers, the writers of the Index of Economic Freedom give grades. Instead of students, though, countries receive their grades after being “tested” on such economic issues as starting a business, tax policy, and private property. The highest grades are earned by the countries that give citizens the most freedom to produce and distribute goods and services without government interference.
For the 2010 Index of Economic Freedom, Hong Kong, with a grade of 89.7 was first. Ranked last at #179, North Korea’s score was “1″. The United States was #8 with an average of 78.
A recent NY Times article illustrated why North Korea fared so poorly. Demonstrating a citizen’s lack of monetary freedom, the North Korean government devalued its currency last November. Suddenly, a family’s life savings of $1560 became $30 (4,050 North Korean Won). In the business sector, with all factories run by the state, production is stagnant and workers, sometimes, are not paid. In agriculture, (as with the former Soviet Union) individual plots of land are far more productive than large state-owned collectives. The results? The North Korean economic system has produced massive poverty and inadequate food.
The Economic Lesson
Countries produce and distribute goods and services through three basic economic systems: tradition, command, the market system. North Korea’s centrally commanded economic system is government controlled. While the United States primarily has a market system in which people are free to function economically, still there is some command whenever government policies affect market activity.
Timothy Taylor, in his Teaching Company course, “America and the New Global Economy,” says that Mahatma Gandhi wanted farms and businesses to remain small so that there would be no exploitation. After Gandhi, the business climate remained unwelcoming with the “license raj”. Professor Taylor explains that the license raj meant businesses needed a plethora of licenses to start and function which retarded econmic development.
Curious about the current business climate, I went to the World Bank “Doing Business” site which ranks nations for their ease of doing business:
U.S. : 6 days to implement the procedures for starting a business.
India: 195 days to implement the procedures for starting a business.