China can be proud of the rapid economic progress it has made since 1978, when it was still a centrally planned economy with little foreign trade. Today, as the world’s second-largest economy, the People’s Republic (PRC) has gained wealth but not freedom. The Chinese people have a vastly wider range of economic and social opportunities than under the dictatorship of Mao Zedong, but their basic human rights continue to be denied by a ruling party determined to maintain its monopoly on power.

As head of the Chinese Communist Party (CCP), Hu has paid lip service to “putting the people first,” but there has been little progress in liberalizing the political regime. The reality is that his idea of a “harmonious society” is one directed by the ruling elite, in which order emerges from the top down, not spontaneously under a constitution of liberty.

One of the CCP’s long-held tenets is “to seek truth from facts.” The most glaring fact is not the inequality of wealth, but the inequality of power that strips the Chinese people of their fundamental rights. Putting the people first means limiting government power and safeguarding rights to life, liberty, and property.

The great Chinese liberal Lao-Tzu understood the importance of freedom and limited government. For him and other Taoists, harmony cannot be forced; it must be natural. In the Laozi, also known as the Tao Te Ching, we read: “The more restrictions and prohibitions there are in the world, the poorer the people will be.” Denying individuals the liberty to exchange ideas, to criticize the government and party, and to associate freely without the fear of repression makes people poorer by restricting the alternatives open to them.

In 2004 the National People’s Congress (NPC), China’s rubber-stamp parliament, amended the PRC Constitution to better protect the private sector and for the first time added the words “human rights” to the document. Article 33, section 3, reads, “The state respects and protects human rights.” Such language encouraged Chinese liberals to test the waters, only to find that reality did not match the rhetoric.

The drafting of Charter 08, a manifesto for fundamental human rights, earned Liu Xiaobo the 2010 Nobel Peace Prize, the first awarded to a Chinese citizen. It also earned him 11 years in prison. The empty chair at the Nobel ceremony was yet one more iconic image of the individual versus the State. Before his sentencing in 2009 Liu stood before the court and declared, “To block freedom of speech is to trample on human rights, to strangle humanity, and to suppress the truth.”

Like others before him, Liu was accused of “incitement to subvert state power.” Yet the Chinese people have always believed that when government acts unjustly it loses the Mandate of Heaven. Charter 08 recognizes that “China has many laws but no rule of law.” The charter, initially signed by 303 liberals, now has more than 10,000 signatories—all of whom recognize that people everywhere have the rights “to freedom, to property, and to the pursuit of happiness.”

Charter 08 and Preexisting Rights

Charter 08 reveals an acute understanding of the case for limited government and the principle that the legitimate function of the State is to protect preexisting rights to life, liberty, and property, not to deny those rights. Civil society requires freedom. To achieve that freedom Charter 08 advocates a constitutional democracy with separation of powers, an independent judiciary, and a bill of rights. Freedom of expression, of religion, of association, and the protection of private property are all enshrined in the document. The hope of the Chinese framers is that Charter 08 will “bring to reality the goals and ideals that our people have incessantly been seeking for more than a hundred years, and . . . bring a brilliant new chapter to Chinese civilization.”

The official reaction to Charter 08 and to Liu’s Nobel Peace Prize was predictable: The Chinese government launched a storm of propaganda in support of the status quo. The mouthpiece of the CCP, the People’s Daily, wrote in October 2010, “By rumor-mongering and libeling, the charter denies the people’s democratic dictatorship, socialism, and the unitary state structure stipulated in the Chinese Constitution. The charter also entices people to join it, with the intent to alter the political system and overturn the government. Liu’s activities have crossed the line of freedom of speech into crime.”

Top-Down Order and Human Happiness

Yet as Premier Wen Jiabao noted last August in a speech in Shenzhen, “Without the safeguard of political reform, the fruits of economic reform would be lost and the goal of modernization would not materialize.” And in an interview with CNN in October, he recognized that “freedom of speech is indispensable for any country.”

The harmony, stability, and peaceful development that Beijing seeks will be on shaky ground until the CCP confronts the reality that top-down order is not consistent with human happiness, and that spontaneous order emerges from free markets and a genuine rule of law. Premier Wen, in his 2003 speech at Harvard, said that China has “found the right path of development” and that “the essence of this path is to . . . respect and protect the freedom of the Chinese people to pursue happiness.” In 2007, following the annual session of the NPC, he encouraged people to “oversee and criticize the government,” and said, “It is particularly important that we need to make justice the most important value of the socialist system.”

Justice, however, requires the prevention of injustice. Liu Xiaobo, Gao Zhisheng, and others entrapped by China’s jackboot justice system deserve to be heard, as do “the lost souls” of Tiananmen.

Anyone who has read The Private Life of Chairman Mao (1996) by Mao’s longtime personal physician, Li Zhi-Sui, would already be disgusted with the man: his failure to bathe or brush his teeth for decades; his wanton use of hundreds of innocent peasant girls (to whom he passed a variety of venereal diseases) for his seemingly insatiable sexual desires; his pleasure in humiliating and hurting even his most loyal followers and fellow communist leaders; and his total disregard for any human life other than his own.

But Jung Chang and Jon Halliday show Mao to be a man of absolute evil. Like many Marxist leaders, Mao was not born into a working-class family. At the time of his birth in 1893, Mao’s father was a relatively successful middle-class farmer in the province of Hunan in south-central China. From an early age Mao was interested neither in physical labor nor systematic education. He preferred to loaf about and read on his own. (Throughout his life he absorbed a vast amount of literature on many subjects, and had special editions of books prepared for himself that became forbidden works for the masses.)

Like Stalin in the Soviet Union, Mao seems to have had neither personal charisma nor the gift of oratory. Rather, he had the ability to manipulate people and situations to his own advantage, slowly rising to the top of the Chinese Communist Party in the 1920s and 1930s. He was ruthless with both friend and foe, viewing everyone he encountered as mere tools to use and then dispose of in pursuit of absolute power.

Mao was married four times. He treated each wife miserably, as he did most of his children, whom he often abandoned to their fate and sometimes to their deaths. During the famous Long March in 1934–1935, when Mao lead the Chinese communist forces from south-central China to a new Red-controlled territory in the northwest region of the country, he made his third wife abandon their baby son as Chiang Kai-shek’s Nationalist armies were trying to surround them. Years later, she unsuccessfully hunted the countryside to find her lost child. Her only clue was the assumption that the son might have two of Mao’s distinguishing characteristics: oily ears and an especially pungent underarm odor.

Both before and especially after the Long March, Mao instigated reigns of terror and tyranny on the Chinese peasants who fell under the sway of his forces. Slave labor, starvation rations, and merciless propaganda and indoctrination sessions late into the night became the hallmarks of Chinese communist rule.Cruel and excruciating tortures and methods of execution were devised to assure destruction of all opposition and disobedience to Mao’s power. (The authors describe many of them in indelicate detail.)

Contrary to the left-wing myths of the time, especially in the American press, that Mao’s Red Army was the main Chinese fighting force against the Japanese during World War II, Mao instructed all his commanders to avoid battles with the Japanese. Instead, he worked to conserve his forces as a prelude to the Chinese Civil War that began in 1945 and ended in the communist conquest of the Chinese mainland in 1949.

The authors detail how Mao’s victory would have been impossible without the assistance of Stalin’s Soviet army, which overran Manchuria in the last weeks of the Pacific war. Stalin allowed Mao’s forces to occupy most of Manchuria behind the Soviet shield and turned over vast stores of captured Japanese weaponry.

The authors also explain how General George C. Marshall, then secretary of state in Harry Truman’s administration, was totally manipulated and duped by Mao and his chief diplomatic negotiator, Chou En-Lai. They persuaded Marshall that they were merely “agrarian reformers” wanting justice for the Chinese people in a coalition government with the Nationalists. All the while they were strengthening and positioning the Red Army for a grand attack to seize the rest of China. They succeeded in making Chiang Kai-shek seem to be the stumbling block to a political compromise,which resulted in the U.S. government cutting off all armament sales to the Nationalist government in 1947, just as victory was possibly in the grasp of Chiang’s armies.

Using Chinese and Soviet archival materials, the authors show that Mao happily assisted, with Stalin’s help, in the North Korean invasion of South Korea in June 1950. Mao began assembling Chinese forces to enter the Korean War long before the United Nations forces pushed back the North Korean offensive and then crossed the 38th parallel to unify a free Korea. Mao was ready to continue the war indefinitely to kill tens of thousands of Americans in a conflict of attrition, even at the cost of hundreds of thousands of Chinese soldiers’ lives. Only Stalin’s death in 1953 and the desire of the new Soviet leadership to calm international tensions forced Mao to accept a ceasefire and an end to the Korean conflict.

At an international conference of communist parties in Moscow in 1957 marking the 40th anniversary of the Bolshevik Revolution, Mao delivered a speech calling for the start of a nuclear World War III against America. He declared that it did not matter if half of China’s population was killed in the cataclysm, because there would still be hundreds of millions of Chinese left to rise out of the rubble to rule a communist world. Shortly after that, Chou En-Lai told a Soviet envoy visiting Beijing that they should be planning a new capital city for such a communist-controlled world somewhere on a manmade island in the Pacific, since both Moscow and Beijing would likely be incinerated in the nuclear destruction that was to come.That didn’t seem to bother Mao at all.

In the 1950s and 1960s Mao pushed China into a crash program to make his country an industrial and nuclear superpower. Ignorant of all economic concepts, including the ideas of scarcity and tradeoffs, Mao crushed the Chinese population into abject poverty in an attempt to make himself ruler of the world.

While tens of millions of Chinese starved and died, he lived a life of luxury with dozens of atomic bombproof mansions built for his pleasure around the country, all with large swimming pools constantly heated in case he were to show up. But he spent most of his time in Beijing, lying in bed for days on end, eating his specially prepared foods, reading books banned for everyone else, and enjoying group sex whenever the urge came over him.

The authors explain that the Cultural Revolution of 1966–1976 was all a grand plan of Mao’s to settle scores with real and imaginary enemies in order to assure his absolute and unchallenged power over China. In the process, the country was pushed into horrific violence and terror that almost destroyed everything left of civilization in China.

Mao Zedong died in bed, an old and sick man in 1976, at the age of 82. His legacy was the murderous destruction of an entire society.

China’s transition from plan to market since 1978 has not only increased prosperity but also has led to a new way of thinking. In a 2005 poll covering 20 countries, GlobeScan found that China had the highest proportion of respondents (74 percent) who agree that the “free market economy is the best system on which to base the future of the world.” That outcome is remarkable given that only a short time ago Beijing embraced a state-led development model.

The same poll found that U.S. citizens have strong support for the free market (71 percent) while Russia, which has a long anti-capitalist history, still has rather weak support (43 percent favored the market), and France, with its long attachment to socialism, has even less support with only 36 percent saying they favor a free market.

The significant change in the Chinese people’s attitude toward economic liberalism is further illustrated in the Chicago Council on Global Affairs’ 2006 multination survey of public opinion. Eighty-seven percent of those surveyed in China thought that “globalization, especially the increasing connections of their country’s economy with others around the world, is mostly good for their country.” That result compares with 60 percent in the United States and 54 percent in India.

It is not surprising that the Chinese people would embrace globalization as it has opened China to the outside world, brought about rapid economic and social change, and helped lift millions out of absolute poverty. In 1978, only 12 large state-owned enterprises (SOEs) had the right to engage in foreign trade. Today virtually any firm is free to enter the import-export business. China has become the world’s third largest trading nation and is the leading destination for foreign direct investment. Those regions that have experienced the greatest amount of economic freedom have also grown the most and have the highest living standards. Guangdong, Zhejiang, and Fujian are all heavily “marketized” (SOEs account for only a small fraction of output) and have growth rates far above the national average.

In widening the range of opportunities open to people, globalization has increased personal freedom and put pressure on the Chinese Communist Party (CCP) and National People’s Congress to pass a Property Law last March. It recognizes the importance of the private sector and better protects property rights—all with a positive impact on civil society.

People are free to own their own homes, operate their own businesses, and seek work in the private sector. Those and other economic freedoms would have been impossible under central planning and autarky. One can now read a leading business magazine like Caijing and see a glossy photo of the Statue of Liberty on the same page as an advertisement for private condominiums in Beijing. F. A. Hayek’s Road to Serfdom and the Cato Institute’s Toward Liberty can be found in Beijing bookstores. High-school students in Shanghai can now open their new history textbooks and find much discussion of globalization and economic reform but only a single reference to Mao.

Most surprising, one can travel to the Southwestern University of Finance and Economics in Chengdu and see a life-size statue of Adam Smith, who in 1776 wrote in The Wealth of Nations: When “all systems either of preference or of restraint” are abolished, “the obvious and simple system of natural liberty establishes itself of its own accord.”

Spontaneous order, or economic harmony, arises out of voluntary exchange based on what Smith called the “laws of justice.” The role of market prices and profits is to coordinate the myriad individual plans in the pursuit of happiness.

Smith’s principle of spontaneous order—or freedom under the law—is similar to Lao Tzu’s principle of nonintervention (wu wei). Long before the Wealth of Nations was written, Lao Tzu argued that when the ruler takes “no action . . . the people themselves become prosperous.” Today China’s President Hu Jintao is promoting the idea of a “harmonious society” and “peaceful development.” In doing so, he should embrace the ideas of Lao Tzu and Adam Smith, and realize that limited government and the rule of law are essential for peace and harmony.

The problem is that the CCP has no desire to let go of its monopoly on power. Creating “free private markets,” as the late Milton Friedman recommended to General Secretary Zhao Ziyang when they met in 1989, would require widespread private property rights and further undermine the CCP’s influence. That is why China’s leaders continue to favor market socialism rather than market liberalism.

Nevertheless, the momentum for market liberalization is strong, especially since China joined the World Trade Organization in December 2001. Trade liberalization has been good for China and good for the global economy. Even though millions of Chinese workers have been dislocated, the Chicago Council survey found that 65 percent of those polled in China believe that “international trade is good for the job security of workers.” In contrast, only 30 percent of Americans surveyed thought free international trade benefited workers.

Of course, the goal of trade is not to protect jobs but to create wealth—and global wealth is much greater today than it was two or three decades ago. Trade liberalization, the information revolution, and financial integration have combined with pro-market institutional change to make China’s future bright. Trade is not a zero-sum game: the richer China becomes, the more prosperous the global economy. Protectionism would destroy the market forces that have helped lift millions out of poverty, embolden hardliners, and politicize economic life. Both economic and personal freedom would suffer.

One lesson from China’s transition from central planning to a market-oriented system is that poverty is best addressed by institutional change rather than foreign aid and government intervention. Several decades ago most of the world’s poor were concentrated in Asia, not Africa. The reverse is true today. Foreign aid has not improved the plight of the poor.

Likewise, increasing the minimum wage is not a panacea. Politicians promise a higher wage but do nothing to address the underlying causes of poverty. Rather, if the legal minimum wage is above the prevailing market wage for unskilled workers, employers will cut back on hours, reduce benefits, and switch to labor-saving methods of production.

Hong Kong has no minimum wage yet is prosperous. China has no national minimum wage and lets the market guide local minimum wages so that they do not interfere with economic growth and employment. In Shenzhen, one of the most marketized cities in China, the minimum wage was increased last year to 810 yuan per month (about $105). Many companies already pay more than the minimum, so the higher minimum wage is unlikely to interfere with job opportunities. Indeed, there is a labor shortage, so market wages will be forced up by competition. As one local labor official said, “We are adapting to the market through the pay raise, rather than interfering with the market.”

Entrepreneurship Everywhere

The spirit of entrepreneurship is evident everywhere in China. One of the most popular TV game shows is “Win in China,” a contest in which the person with the best business plan is awarded venture capital financing of $1.2 million and gets to retain 20 percent of the equity. The first show in 2006 attracted 120,000 entrants. The host of the show, Anna Wang Lifen, launched the program because she sees entrepreneurs as “the heroes of our peaceful times.”

Although China has made substantial progress on its march toward the market, much remains to be done. Free markets require widespread private property rights, a transparent and just legal system, and the free flow of information. Moreover, if China is to develop world-class capital markets, Beijing must make the yuan fully convertible and allow capital freedom.

The right to freely buy and sell currencies and assets is an important element of personal freedom. In his “Memorandum to General Secretary Zhao Ziyang,” Friedman listed what he considered the fundamental lessons from studying the process of development. The first lesson, which he thought applied to China as well as India, is that the government should “end exchange control, establish a free market in foreign exchange, and permit the exchange rate to be determined by the market.” Without such reforms, he thought, corruption would continue. Although Hong Kong does not have a freely floating exchange rate (it has a currency board that fixes the Hong Kong dollar to the U.S. dollar), there are no capital or exchange controls. The high degree of capital freedom has enabled Hong Kongto become a leading financial center.

China is moving gradually toward a more flexible exchange-rate regime and slowly relaxing capital controls. That process will take time, but it appears China’s leaders support the long-term goal of a fully convertible currency. Ending capital and exchange controls would give the Chinese people greater investment options and increase efficiency. But, again, such reforms would threaten the CCP’s power.

Opening the CCP to capitalists is not sufficient. The Party’s monopoly on power has to be contested at some point. Nor is it sufficient to amend the PRC Constitution to better protect private property when there is no independent judiciary to enforce contracts. If China’s future is to rest with the free market, there must be political as well as economic liberalization. Ultimately a free market cannot exist without a free people. The real challenge for Beijing will be to institute a rule of law that protects persons and property against the state. The people’s preferences will then rule rather than the Party’s. China’s leaders would do well to follow the path of Lao Tzu and Adam Smith by adhering to Hong Kong’s model of “Big Market, Small Government.”

An earlier version of this article appeared in Vital Speeches of the Day (November 15, 2005).

From a liberal perspective the goal of economic development is not simply to maximize output but, rather, to increase freedom of choice. As Peter (Lord) Bauer wrote in Economic Analysis and Policy in Underdeveloped Countries, “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.” Those countries that have liberalized trade—such as China and South Korea—have expanded individual choices and outperformed those that have clung to protectionism—such as Cuba and North Korea.

When considering how individuals and nations move from poverty to prosperity, one needs to emphasize that natural constraints (scarcity of resources) can be overcome if artificial constraints (such as trade restrictions) don’t impede development. This idea is consistent with Hong Kong Chief Executive Donald Tsang’s call for adherence to the principle of “small government, big market.”

There is a saying in China: “If no artificial constraints, then there is nothing you cannot do.” Nonintervention (wu wei) results in spontaneous order (zi fa) if government is limited to the protection of persons and property. In the fourth century B.C., long before Adam Smith, the great Chinese philosopher Lao Tzu held that when the ruler takes “no action,” “the people of themselves . . . become prosperous.”

Wu wei does not imply “the complete absence of all activity, but only of such as is forced, artificial, and unspontaneous,” according to Derk Bodde, the translator of Fung Yu-lan’s classic A History of Chinese Philosophy.

The Taoists saw a good government as one consistent with nonintervention so people could improve their welfare. Thus in the Chuang-tzu, we read: “Where knowledge and plans are not utilized, one must fall back upon the natural. This is perfect peace, the acme of good government.”

In the Han Fei Tzu (Han Fei was a legalist who died in 233 B.C.), one sees a clear understanding of the importance of free trade for creating harmony and prosperity:

When a man sells his services as a farm hand, the master will give him good food at the expense of his own family, and pay him money and cloth. This is not because he loves the farm hand, but he says, “In this way, his ploughing of the ground will go deeper and his sowing of seeds will be more active.” The farm hand, on the other hand, exerts all his strength and works busily at tilling and weeding. He exerts all his skill cultivating the fields. This is not because he loves his master, but he says: “In this way I shall have good soup, and money and cloth will come easily.” Thus he expends his strength as if between them there were a bond of love such as that of father and son. Yet their hearts are centered on utility, and they both harbor the idea of serving themselves. Therefore in the conduct of human affairs, if one has a mind to do benefit, it will be easy to remain harmonious, even with a native of Yüeh [a barbarian state]. But if one has a mind to do harm, even father and son will become separated and feel enmity toward one another.

This passage was written more than 2,000 years before The Wealth of Nations!

In 1987 China’s paramount leader and reformer Deng Xiaoping recognized the principle of spontaneous order when he said: “Our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously.”

Kate Xiao Zhou, in her 1996 book How the Farmers Changed China, describes the demise of China’s collective farms and the creation of the household-responsibility system (baochan daohu), with its township and village enterprises (TVEs), as “a spontaneous, unorganized, leaderless, nonideological, apolitical movement.”

China began to unilaterally liberalize foreign trade well before joining the World Trade Organization in December 2001. The first four special economic zones (SEZs) were created in 1980, and since then the coastal provinces (such as Guangdong, Zhejiang, and Fujian) have become highly “marketized.” The nonstate sector, including private firms, now overshadows the state sector.

Nicholas Lardy, a China specialist at the Institute for International Economics, has pointed out that in 1978 only 12 large state-owned enterprises (SOEs) were authorized to conduct foreign trade. However, by 2001 there were 35,000 domestic firms engaged in international trade, including private enterprises, and more than 150,000 foreign-funded enterprises. Today any registered firm can engage in foreign trade. Moreover, China reduced the average tariff rate from 55.6 percent in 1982 to 15.3 percent at the beginning of 2001. The average tariff on manufactured goods is now less than 9 percent. As a result of this dramatic liberalization, China is now one of the world’s most open economies.

China’s approach to development has been primarily “bottom-up,” or experimental. Typically, local leaders would permit reform on a trial basis and not penalize entrepreneurs who were experimenting on their own. When successful, politicians would take credit and let the experiment spread. At some point Beijing would sanction the reforms.

Piecemeal reform has led to numerous ownership forms, including cooperative shareholding, foreign-funded enterprises, private firms, and TVEs. Economists Gary Jefferson and Thomas Rawski call this process “induced privatization.” Under it the state sector has shrunk from a dominant position in 1978 to less than one-third of industrial output value today.

Property Far from Secure

By letting the nonstate sector grow, China has avoided the difficult political decision of outright privatization of large SOEs. Private firms were not legal until 1988, and in 2004 the PRC constitution was amended to give greater protection to the growing private sector. Private property rights, however, are still far from secure, and corruption is rampant. So while economic liberalization has progressed, and China has become the world’s third-largest trading nation, the Chinese Communist Party (CCP) retains its monopoly on power.

Nevertheless, China’s opening to the outside world has increased personal freedom and prosperity, and has led to a demand for safeguarding private property rights. Jianying Zha, in her fascinating book China Pop, writes, “The economic reforms have created new opportunities, new dreams, and to some extent, a new atmosphere and new mindsets. . . . There is a growing sense of increased space for personal freedom.”

Kathy Chen of the Wall Street Journal notes that the development model adopted by the newly emerging urban centers, such as Shishi in Fujian, is “small government, big society” (xiao zhen fu, da she hui).

When the National People’s Congress amended the constitution to make “legally acquired private property inviolable,” that was a clear signal the market was here to stay—and a far cry from Mao Zedong’s admonition to “strike hard against the slightest sign of private ownership.”  

There is no doubt that globalization and the information revolution have increased personal freedom in China. More than 100 million Chinese have access to the Internet. 

And I am sure that computer whiz-kids will stay one step ahead of government censors. Moreover, if Shanghai is to become a world-class financial center, there will have to be a freer flow of information and open capital markets.

President Hu Jintao has recently indicated his adherence to a policy of “peaceful development,” which is precisely the policy that China has been following since 1978. The United States would be wise to continue a policy of engagement and avoid destructive protectionism. Foreign-funded enterprises and private firms account for more than 60 percent of China’s foreign-trade sector. U.S. protectionism would harm the very sector that is working to decrease poverty, increase exposure to the West, and pressure the CCP to accept change.  

Institutional reform (especially trade liberalization) has substantially reduced poverty in China—real per capita income has increased nearly fivefold since 1978, with significantly larger increases in the highly marketized coastal areas. But there has been little increase in political freedom. Further economic liberalization—especially privatization of large SOEs and capital freedom—is constrained by political issues. Whether reformers in the CCP will gain the upper hand remains to be seen.

An array of government interventions continues to restrict economic and personal freedom, and, hence, China’s future development. Artificial constraints include capital and exchange controls, state-owned banks and enterprises, interest-rate controls, and especially the lack of a transparent legal structure that protects persons and property.

“Free Private Markets”

In 1988, at the Cato Institute’s historic conference in Shanghai, Milton Friedman called for China to abandon its socialist market economy and make the transition to a full-fledged system of “free private markets.” Progress has been made since that time, as markets not planners determine most prices. There is private housing and private enterprise, but China is still plagued by widespread state ownership and control, especially in the financial sector. Without capital freedom, investment alternatives will be limited and investment decisions will continue to be politicized.

Privatization is the only way to rid the system of corruption. But as long as the CCP gains from the present socialist market system, change will proceed slowly, if at all. Economic reform eventually will require political reform. The question is whether the gradual increase in economic freedom will be sufficient to bring about political change that supports, rather than retards, further liberalization.

We should not forget that trade expands choice and, therefore, should be promoted as a fundamental human right. U.S. protectionism would be self-defeating and strengthen Chinese nationalism and anti-American sentiments. Engagement is the only rational policy to promote peace and prosperity.

One key policy shift could yield important gains for Chinese citizens. In a speech at the opening of the party congress, President Jiang Zemin gave a sweeping endorsement of private property. He said, “We need to respect and protect all work that is good for the people and society and improve the legal system for protecting private property.” Though the notion of private property has existed in China for some time, this is the first time that it has received official attention at such high levels. As one party secretary stated, “From now on, public and private property will be viewed on an equal footing.”¹

This process is already underway. In August the Standing Committee adopted the Rural Land Contracting Law (RLCL), which strengthens 1998 legislation giving 30-year land-use rights to farmers, and explicitly outlaws “administrative readjustments” by local cadres.² For the 210 million farm families in China, this legislation ensures incentives for long-term investment, and should result in increased productivity and efficiency.

Similar reforms are taking place in urban areas. In Shanghai, almost 90 percent of homes are now privately owned, which has led to the creation of profitable mortgage markets and allowed homeowners to use property as collateral for consumer loans.³ Party delegates also formally endorsed Jiang’s invitation for entrepreneurs to join the CCP, a handful of whom were voted into the powerful Central Committee. Though it may seem remarkable that the Communist Party would open its doors to the “running dogs of Western imperialism,” in reality this move merely formalizes the status quo. A quarter of China’s 100 richest multimillionaires listed in this year’s Forbes magazine survey claimed to be CCP members.⁴ Most CEOs of private companies or public corporations also have party connections. A prominent example is Jiang’s eldest son, who heads the country’s largest telecom firm, China Netcom, now privately held.

Jiang and party loyalists devised clever political rhetoric to justify the induction of “red capitalists.” At the party congress, the Constitution was amended to include Jiang’s signature political philosophy, the “Three Represents,” alongside “Mao Zedong Thought” and “Deng Xiaoping Theory.” Jiang’s theory calls for the party to represent the “advanced productive forces, the advanced culture and the interests of the broad masses.” While the “Three Represents” may help recast the party as vibrant and progressive, in truth it is an intentionally vague political device designed to reconcile the party’s increasingly pro-market views with Chinese socialism.

The Communist Party has every incentive to reform. The private sector in China has grown at an annual rate of 20 percent since the start of the reform era in 1978, far above the economy’s 8 percent average growth for the same period.⁵ More than 30 million private businesses have been established, contributing a significant share of tax revenue to the government and employing millions of people laid-off from failed state-owned enterprises.⁶ According to the World Bank, the nonstate sector in China now accounts for two-thirds of the country’s productivity and GDP, even though the state still controls two-thirds of China’s industrial assets.⁷

Personal Connections Count

But to successfully rekindle its popularity, the party must do more than simply show that it too is open for business. To many in China, there is little difference between the communist leadership and its new business comrades; they are all part of the same entrenched ruling class that thrives in an unjust and corrupt system. Given that legal institutions in China are weak and individual success is often a function of personal connections, it is hard to disagree.

If the Chinese Communist Party wishes to regain the trust of the masses, party leaders must prove they are genuinely interested in extending the benefits of this new “capitalism with Chinese characteristics” to all citizens. That will require the establishment of the rule of law, not just property rights.

What an irony: the communist party may only be able to survive by letting capitalism bloom.

The best way to promote human rights around the world is to promote free trade. Trade liberalization improves ties among nations, increases their wealth, and advances civil society. Protectionism does the opposite. Governments everywhere need to get out of the business of trade and leave markets alone. Western democratic governments, in particular, need to practice the principles of freedom they preach and think of free trade not as a privilege but as a fundamental human right.

A free-market approach to human rights policy does not mean an attitude of indifference toward human rights abuses. Using slave labor or political prisoners and compelling very young children to compete in international markets are wrong. But blanket restrictions, such as the denial of most-favored-nation (MFN) trading status or the use of sanctions not directly targeting the wrongdoers, should be avoided. The problem is that even limited actions are very difficult to enforce and unlikely to bring about political change in an authoritarian regime.

Protectionist measures are more apt to radicalize than liberalize closed societies. The logical alternative is to use the leverage of trade to open authoritarian regimes to market forces and let the rule of law and democratic values evolve spontaneously as they have in Chile, South Korea, and Taiwan. The expansion of markets creates a culture of commerce and economic liberty that naturally spills over to social and political life. As people become freer in their economic life, they will demand greater autonomy in other areas, including a stronger voice in government.

Free Trade as a Human Right

The proper function of government is to cultivate a framework for freedom by protecting life, liberty, and property, including freedom of contract (which includes free international trade), not to use the power of government to undermine one freedom in an attempt to secure others. The right to trade is an integral part of an individual’s property rights and a civil right that governments should protect as a universal human right.

Market exchange rests on private property, which is a natural right. As moral agents, individuals necessarily claim the right to liberty and property in order to live and to pursue their interests in a responsible manner. Governments should afford the same protection to economic liberties, including free international trade, as to other liberties.

Restrictive trade practices impede not only the flow of goods and services but also the exchange of information and the transmission of values that occur with free markets. When market exchange opportunities are curtailed, government power grows, with adverse effects on human liberty. Likewise, when markets expand, individuals gain autonomy and government power diminishes. People become less dependent on the state and more dependent on one another when markets open and protectionism declines. A case in point is China.

The Chinese Experience

Before China’s open-door policy, initiated in 1978, the Chinese Communist Party (CCP) had a monopoly on economic, social, and political life. China isolated itself from the West, and the Chinese people had little opportunity to expand their horizons. The repressive system of communal farming prevented China’s large rural population from determining its own fate, and state enterprises made the urban population totally dependent on government. The lack of an alternative to the centrally planned economy made China a giant serfdom where individuals had little hope of improving themselves and their families.

After 1978, China’s economic reforms—which liberalized trade, ended collectivized farming, and created new employment opportunities outside the state sector—freed millions of people from the iron grip of the CCP. The return of farming to families under the household responsibility system (baochan daohu) changed the whole dynamic of economic, social, and political life. The state was no longer the master for the 80 percent of China’s population that lived in rural areas. Farmers became risk-takers, created new markets, developed rural industries, and migrated to urban areas. They and their families were no longer slaves to the state: they resisted coercion and initiated what Kate Xiao Zhou calls a spontaneous, unorganized, leaderless, nonideological, apolitical movement that transformed the old communist system and enhanced human rights.^[1]

The quiet revolution that has been taking place in China’s economy since 1978 is combining with the information revolution to strengthen the fabric of civil society, especially in China’s southern coastal provinces. Commenting on China’s cultural transformation, Jianying Zha writes in her book China Pop, The economic reforms have created new opportunities, new dreams, and to some extent, a new atmosphere and new mindsets. The old control system has weakened in many areas, especially in the spheres of economy and lifestyle. There is a growing sense of increased space for personal freedom.^[2] Anyone who has visited China and seen the vibrancy of the market, the dynamism of the people, and the rapid growth of the nonstate sector will concur with Zha’s cautious optimism.

Commercial life in China is evolving naturally as people flee the countryside for improved living conditions and the chance to strike it rich in the growing nonstate sector.^[3] If this current growth continues, by the year 2000 nonstate enterprises will account for more than two-thirds of China’s industrial output and as much as 40 percent of China’s gross domestic product.^[4]

The liberalization and decentralization of economic life in China has widened the scope for civil society. Princeton University professor Minxin Pei believes that the gradual development of China’s legal system toward affording greater protection for persons and property, the growing independence and educational levels of members of the National People’s Congress, and the recent experiments with self-government at the grassroots level will help move China toward a more open and democratic society. He points to the upward mobility of ordinary people, occasioned by the deepening of economic reform, and to the positive impact of trade liberalization on political norms. In his view public opinion and knowledge of Western liberal traditions, such as the rule of law, have set implicit limits on the state’s use of power and have promoted the democratization of the legal system. There has been a sharp rise in the number of civil lawsuits against the state, and individuals are winning about one-fifth of their cases, according to Pei.^[5]

Of course, as long as the CCP stands in the way of private property and the rule of law, China will continue to experience corruption, and the future of freedom and civil society will remain precarious. But isolating China, by the use of trade sanctions or by denying China MFN trading status, would only make matters worse and slow political change. Trade has a civilizing influence, and that influence is more likely to change China than foreign intervention and protectionism.

The Civilizing Influence of Trade

Commerce brings people together, not only to trade goods but also to exchange information. Trade liberalization helps to depoliticize economic life, widen human experience, and reduce the threat of war. Peace and free enterprise tend to reinforce each other. When countries restrict foreign trade, they reduce wealth, diminish freedom, and increase the likelihood of conflict. They also block the natural formation of civil society, which is fostered by the growth of commerce. Traders find it in their own self-interest to treat their customers with respect. Good manners and good business go hand in hand; commercial society and civil society are inseparable. Trade also fosters the rule of law as people find it useful to accept common rules, respect one another’s rights, and be generally tolerant.

In The Wealth of Nations (1776), Adam Smith described how the development of commercial life in Europe gradually introduced order and good government, and with them, the liberty and security of individuals.^[6] Likewise, the English liberal Richard Cobden wrote in his 1835 pamphlet England, Ireland, and America, Commerce is the grand panacea, which, like a beneficent medical discovery, will serve to inoculate with the healthy and saving taste for civilisation all the nations of the world. According to Cobden, not a merchant visits our seats of manufacturing industry, but he returns to his own country the missionary of freedom, peace, and good government.^[7]

Harvard economist Robert Barro’s recent empirical work, summarized in Getting It Right, shows that earlier writers were correct in seeing a close relationship between free trade and free people. Barro finds that improvements in the standard of living . . . substantially raise the probability that political institutions will become more democratic over time. He argues:

The advanced Western countries would contribute more to the welfare of poor nations by exporting their economic systems, notably property rights and free markets, rather than their political systems, which typically developed after reasonable standards of living had been attained. If economic freedom can be established in a poor country, then growth would be encouraged, and the country would tend eventually to become more democratic on its own.^[8]

Conclusion

Trade policy and human rights policy should not be yoked. Imposing punitive tariffs on China by removing MFN trading status or using other restrictive practices to sanction China for human rights violations will do more harm than good. As Kate Zhou has shown in the case of China, commercial activity is liberating and a major way out of governmental control.^[9] We should not lose sight of that lesson in the pursuit of some feel-good policy that has little chance of changing China’s political climate but will devastate its blossoming market sector. Keeping people in China and elsewhere in poverty by restricting their human right to trade is neither ethical nor logical.

What China needs is a new system and a new way of thinking. The full range of human rights will come to China only when property rights are treated as fundamental civil rights and when civil rights are protected by the rule of law. As Harry Wu, a former political prisoner in China, put it, “Until private ownership is allowed on a wide scale, genuine liberalization—representative government, free markets and individual rights—will remain elusive in China.”^[10]

2. Jianying Zha, China Pop (New York: The New Press, 1995), p. 202.

3. The nonstate sector consists of all enterprises not directly controlled by the central government or by provincial governments. Nonstate enterprises include urban and rural collectives (of which township and village enterprises are particularly important), individually owned enterprises, foreign-owned enterprises, and joint ventures. Unlike state-owned enterprises, collectives face a hard budget constraint and are primarily market driven. See Michael W. Bell, Hoe E. Khor, and Kalpana Kochhar, China at the Threshold of a Market Economy, Occasional Paper 107 (Washington, D.C.: International Monetary Fund, 1993), p. 13.

4. Ibid.

5. Minxin Pei, Economic Reform and Civic Freedom in China, Economic Reform Today, No. 4 (1994), p. 12.

6. Adam Smith, The Wealth of Nations, edited by Edwin Cannan (New York: The Modern Library, 1937), p. 385.

7. Richard Cobden, Commerce Is the Grand Panacea, in David Boaz (ed.), The Libertarian Reader (New York: The Free Press, 1997), pp. 320-21.

8. Robert J. Barro, Getting It Right: Markets and Choices in a Free Society (Cambridge, Mass.: The MIT Press, 1996), p. 11.

9. Zhou, p. 100.

10. Harry Wu, A Chinese Word to Remember: ‘Laogai’, Washington Post, May 26, 1996, p. C7.

“Restrictive trade practices impede not only the flow of goods and services but also the exchange of information and the transmission of values that occur with free markets. When market exchange opportunities are curtailed, government power grows, with adverse effects on human liberty.”

“The full range of human rights will come to China only when property rights are treated as fundamental civil rights and when civil rights are protected by the rule of law.”