Property Rights, Freedom & Economic Development
It is an honor to speak before such a distinguished group on such an important topic, "Building a New Vision for Asia-Pacific Democracy and Human Rights." This morning we examined the recent dynamism of Asian democracy; this afternoon we shall consider the interaction between democracy and prosperity. The vision I shall offer can best be labeled a market-liberal vision, with a sharp focus on the primacy of property as the basis for both a free-market economy and a liberal constitutional order.
In such an order, freedom is the predominant value, and democratic government, to be legitimate, must respect the fundamental right to property--broadly understood as the rights to life, liberty, and the pursuit of happiness. My emphasis, therefore, is on limited government, first as a moral imperative and second as the means to economic development.
The failure of central planning and the collapse of communism in Eastern Europe and the Soviet Union have show n us that the best route to peace and prosperity is through limited government the rule of law, and free trade. We have also learned that electoral democracy (i.e., universal suffrage), in the absence of effective constraints on the power of government does not guarantee either liberty or prosperity.
Democracy and Prosperity
The title of this session, "Democracy and Economic Prosperity," should not imply that democracy is a precondition for material advance. As I noted above, universal suffrage is neither necessary nor sufficient for economic development. Indeed, we know that many democratic countries have poor track records in achieving sustained development. Why? The reason is simple: those countries have failed to limit the power of government and to expand economic freedom; they have failed to create the institutional infrastructure of a market-liberal order. On the other hand, Hong Kong, which has limited government and the rule of law but not universal suffrage, is consistently ranked number one in terms of economic freedom.
When democracy trumps liberty, human rights will suffer. If interest groups can capture government for their own ends at the expense of the public, economic freedom will be attenuated. Economic life will become politicized as protectionist and redistributive schemes corrupt the free market. The further the destruction of private property and freedom of contract is carried, the greater the damage to the market-liberal order. Property rights are an important human right--and that right includes the right to be left alone to trade according to one's comparative advantage. Restricting market exchange limits freedom of choice and reduces economic well-being. When political authorities replace the market, people lose their rights while government gains excessive power.
The right to vote, which is an important human right, should not mean the right to plunder other people's property. The first principle of a free society is to protect private property, which means the right to be left alone, the fight to compete or not compete, the right to exercise freedom of conscience, and the right to defend one's fundamental rights to life, liberty, and property.
Freedom and Development
To maximize individual freedom requires that coercion be minimized. A just government seeks to prevent harm by protecting persons and property. James Madison, the chief architect of the U.S. Constitution, wrote, "In a just and free government, the rights both of property and of persons ought to be effectually guarded." People will then be free to pursue their own happiness without violating the rights of others. It should not be surprising that such a regime is conducive to economic development. Indeed, it is only in the free society that true development can occur. As the late development economist Peter Bauer noted, "I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to people, as the principal objective and criterion of economic development." He went on to say, "My position is much influenced by my dislike of policies or measures which are likely to increase man's power over man, that is, to increase the control of groups or individuals over their fellow men."
Bauer's view of economic development as a process consistent with, and dependent on, private property and freedom of contract placed him firmly in the tradition of the great classical liberals. His adherence to the principles of free trade and free people reflected his deep respect for the dignity, rationality, and capabilities of poor people around the world. His early studies of the Malayan rubber industry and West African trade showed how individuals could prosper through hard work and foresight, given the right institutional environment.
More recent studies have shown the close link between economic freedom--as indicated by the security of property rights, the freedom to trade and to invest, the freedom to choose one's occupation, and so on--and economic development. In a study of 150 countries, Lee Hoskins and Ana Eiras, in the 2002 Index of Economic Freedom, found that those countries in which private property rights are secure and transparent have created more wealth (as measured by real GDP per capita) than countries in which private property rights are insecure and corruption is high. Likewise. James Gwartney and Robert Lawson, in the Economic Freedom of the World 2002 Annual Report, find a strong correlation between economic freedom, as measured by the EFW index, and per capita income, economic growth, and life expectancy. Those results point to the importance of private property rights and limited government, not only for creating a just society in the Madisonian sense but also for alleviating poverty.
Economic and Political Freedom
Economic freedom is an important part of our overall freedom. Moreover, an increase in economic freedom tends to promote political freedom. As people acquire property and their per capita incomes rise, they demand a greater voice in government. In particular, they demand limits on the power of government to take their property and their wealth. Harvard economist Robert Barro, for example, has found, "that improvements in the standard of living ... substantially raise the probability that political institutions will become more democratic over time."
The lesson of Taiwan is that economic liberalization can lead to political reform. Taiwan's leaders were willing to experiment with institutional change and had the courage to let the people speak--in the market and in the polity. According to Lee Teng-hui, Taiwan's first democratically elected president, "Vigorous economic development leads to independent thinking. People hope to be able to fully satisfy their free will and see their rights fully protected. And then demand ensues for political reform." That process has also occurred in South Korea and is slowly occurring in China. Indeed, Lee predicted, "The model of our quiet revolution will eventually take hold on the Chinese mainland."
The Case of China
Social, economic, and political order can be based on coercion or consent.
Zhang Shuguang, an economist at the Unirule Institute in Beijing, one of China's first private think tanks, noted in his foreword to Case Studies in China's Institutional Change:
"Mandatory economy and market economy belong to entirely different ideologies and different ethics.... Planned economy is based upon some idea of ideal society and beautiful imagination, but compulsory implementation has been its only means of realization. In such a system, [the] individual is but a screw in a machine, which is the state, and loses all its originality and creativeness. The basic ethics required in such a system is obedience. In the market system, which is a result of continuous development of equal exchange and division of labor, the fundamental logic is free choice and equal status of individuals. The corresponding ethics in [the] market system is mutual respect, mutual benefit, and mutual credit."
China's greater reliance on markets since 1978 is gradually transforming ethical practices: voluntary exchanges are replacing state controls, and people are beginning to experience the spontaneous order of the marketplace. That cultural transformation is easily seen, especially in the coastal cities.
In their book China's New Political Economy, Susumu Yabuki and Stephen Harner find "a clear tendency toward higher GDP growth rates as the proportion of non-state-owned enterprise increases." Provinces with greater economic freedom grew considerably faster than those with less freedom, as indicated by the size of the state sector. For example. Fujian, Guangdong, and Zhejiang--provinces where state-owned enterprises (SOEs) account for less than 30% of industrial output value--grew at rates close to 20% per annum, on average, from 1990 through 1995. Qinghai, Heilongjiang, and the Ningxia Autonomous Region, where SOEs are the dominant producers, experienced average growth rates in the range of 7 to 8% per annum. The higher growth rates in the freer areas are also more meaningful since firms are producing in response to consumer preferences. The growth rates reported for SOEs are suspect because managers who are also members of the Communist Party of China have an incentive to overstate production and because inventories may have little market value.
The importance of foreign-funded enterprises in the coastal areas and foreign trade in general cannot be overestimated. The Chinese people have benefited tremendously from the presence of alternatives to SOEs. Experimentation with non-state ownership forms has been highly successful, and officials have recognized the importance of private ownership in creating wealth. The People's Daily recently reported, "Zhang Dejiang, secretary of the Zhejiang Provincial Committee of the Communist Party of China, said that the contribution of the private sector in pushing forward the rapid economic growth of the province can not be overlooked" (April 7, 2002). It is now time to allow even greater freedom and recognize not only the usefulness of private property but also its sanctity as a basic human right.
The liberal constitutional order of freedom has served the world well in bringing about peace and prosperity. The failure of central planning and the collapse of communism in Eastern Europe and the Soviet Union have illustrated the futility of state control as a solution to the problem of social organization. Extending the range of the market, by limiting the scope of government, will extend human freedom, depoliticize economic life, promote peace, and increase prosperity. In a market-liberal order, people will be free to choose and to develop civil society by limiting politics to its proper sphere.
There is no perfect system, but as Vaclav Havel so elegantly stated in his Summer Meditations, the free-market economy is "the only natural economy, the only kind that makes sense, the only one that can lead to prosperity, because it is the only one that reflects the nature of life itself." That is the major lesson we should have learned from the failure of statism during the 20th century.
Long before Adam Smith wrote his famous Wealth of Nations in 1776, the great Chinese philosopher Lao Tzu instructed rulers, in the Tao te Ching, that
When taxes are too high, people go hungry. When the government is too intrusive, people lose their spirit. Act for the people's benefit. Trust them; leave them alone.
His advice has stood the test of time. The challenge for China is to create a new constitutional order that reflects the consent of the governed and that limits the power of government to the protection of persons and property. Expanding economic freedom is an important first step in the path toward creating a liberal constitutional order. That is why China's entry to the World Trade Organization is so important, as is the entry of Taiwan.
In closing, let me sum up five lessons that should now be self-evident:
* Private property, freedom, and justice are inseparable.
* Justice requires limiting government to the protection of persons and property.
* Minimizing the use of force to defend life, liberty, and property will maximize freedom and create a spontaneous market-liberal order.
* Private free markets, in addition to creating wealth by increasing the range of choices open to individuals, also promote political freedom.
* Governments rule best when they follow the rule of law and the principle of noninterference (wu wei). Democracy and liberty are then consistent.
Those five lessons should be carved in stone, both in the West and in the East. The real key for economic and human development is not better government planning, forced redistribution, and foreign aid. The key is adopting a constitution that protects persons and property against the discretionary power of government and lays a framework for freedom under the rule of law. Thank you.
James A. Dorn is vice president, Academic Affairs, the Cato Institute. His remarks were delivered to the Asia-Pacific Democratic Cooperation Forum, in Taipei, Taiwan, on August 26, 2002, and were originally published in the September 15, 2002, issue of "Vital Speeches of the Day".…
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Publication information: Article title: Property Rights, Freedom & Economic Development. Contributors: Not available. Magazine title: Executive Speeches. Volume: 17. Issue: 6 Publication date: June-July 2003. Page number: 25+. © Not available. COPYRIGHT 2003 Gale Group.
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