Do free markets still beat central planning?
In 1944, Friedrich A. Hayek suggested that the spontaneous order of markets was inherently superior to the supposedly dynamism-draining totalitarian order of communist or fascist regimes. The ensuing decades  when free-market economies thrived and the Soviet Unions centrally planned economy imploded  seemed to vindicate him. Then along came China. The metrics of Chinas phenomenal economic rise are well known: three decades of double-digit GDP growth; some 700 million people lifted out of poverty; an infrastructure boom; the emergence of innovative tech giants and a comprehensive blueprint for continued (sustainable) growth and development. Chinas success has eroded the belief that free markets represent the best development strategy for everyone, to the point that even the International Monetary Fund  long a leading champion of free-market ideology  has been rethinking its own orthodoxy. Yet Chinese-style central planning is still viewed with disdain in the West, where observers disparage it for its supposed opacity and repressiveness. In a word: no. Despite its vocal support for free markets, the U.S. governments spending has risen steadily since 1970. In 2019, it stood at 35.7% of GDP, compared to 34.8% of GDP in China. The COVID-19 crisis has accelerated this trend. Indeed, America owes its economic recovery largely to massive government intervention. Moreover, U.S. President Joe Bidens administration is now pushing forward legislation that would significantly increase the governments economic role. With both China and the U.S. moving toward greater centralization of power over the economy, it is clear that common dichotomies like state versus market and capitalism versus socialism are overly simplistic. The two countries face many of the same challenges, beginning with ensuring that plutocratic elites are not making decisions at the expense of the masses. Both the state and the market are social constructs. If markets order themselves spontaneously, based on self-interest, as Hayek observed, it may be that the growing bureaucracies in both socialist and capitalist countries order themselves according to vested interests. If this is true, it becomes vital to constrain those interests, in order to ensure that the state remains focused on delivering social goods. As long as the U.S. clings to its identity as a free-market system, it will struggle to address this challenge. Instead, what President Dwight Eisenhower warned against in his farewell address  the acquisition of unwarranted influence by the military-industrial complex  could continue unabated (though today it might be renamed the military-industrial-tech-financial-media complex). This might go some way toward explaining why trust in U.S. institutions is so low today. Of the 26 countries ranked in the 2020 Edelman Trust Barometer, the U.S. ranked 18th for trust in NGOs, business, government and media among the general population. In 2021, it ranked 21st. By contrast, Chinese NGOs, business, government and media together enjoyed the highest level of trust in 2020. While that level fell by 10 percentage points (from 82% to 72%) in 2021, China remains in second place. This probably reflects the fact that China has proven its ability to translate policy goals into concrete projects and programs, with visible benefits for the entire population, not just the elites. According to a recent study based on survey data from 2003 to 2016, Chinas poorer residents feel that government is increasingly effective at delivering basic health care, welfare and other public services.  To the German political scientist Sebastian Heilmann, Chinas unorthodox policymaking  together with the Communist Partys resilience  makes the country a red swan: a deviant and unpredicted challenge to the Western model of development. We would argue that China is not an aberration at all, and its success should not be shocking. China has made the most of central planning to pursue an adaptive and experimental policymaking process, by which institutional structures are constantly updated to reflect new ideas and best practices, adapted to local conditions. As Jiang Xiaojuan recently pointed out, the will at the top is vital to progress, as it prevents deadlock on complex issues like climate change, where vested interests can easily block progress. But this does not mean that policymaking in China is not collaborative. On the contrary, before making a major policy decision, Chinas leaders consult with think tanks and academics to gain theoretical insight and visit local communities to learn about the situation on the ground. They then launch pilot programs to reveal and resolve practical implementation issues, thereby devising reforms and programs that can be adapted to more contexts. To be sure, Chinas approach is not immune to rent-seeking or the entrenchment of special privileges. The targeted application of policies and programs can engender fragmentation, waste and excessive competition  all of which can undermine Chinas quest to build an open, complex and vibrant market economy. Furthermore, as Jieun Kim and Kevin J. OBrien have shown, the bureaucracy can actively resist progress, with local officials fearing, for example, that greater transparency could undermine their operational flexibility and prospects for promotion. But the same thing can happen if particular market actors gain too much influence. Overcoming such challenges requires agility, creativity and political will. Well, its probably the wrong question. Institutional arrangements are complex systems, shaped by history, geography and culture. The objective should not be to identify a one-size-fits-all approach, but rather to devise the combination of characteristics that would deliver the greatest good for the greatest number of people, with the right checks and balances, in a particular country. Here, Chinas system of policy experimentation, implementation and institutionalization of reform algorithms to support constant adaptation in a constantly changing environment has been a game changer for the countrys development. The proof is in the results. Andrew Sheng is distinguished fellow at the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng, chairman of the Hong Kong Institution for International Finance, is a professor and director of the Research Institute of Maritime Silk-Road at Peking University HSBC Business School.Project Syndicate, 2021.