When a high-growth economy is compared with the UK’s sluggish performance, apologists often point at the unique characteristics of the former. It is said that it enjoys cheap labour; or can-do government unimpeded by democracy; or that it started from a zero base and has a lot of catching up to do.
Are those high-growth economies really that exceptional and short-lived before their inevitable Europeanisation? JP Floru’s latest book Heavens on Earth – How to Create Mass Prosperity investigates the origins of high growth in eight countries. The book does not detect identical policies in every single country, but it does come up with a common theme: liberate people from their societal economic constraints, and they flourish. To most IEA members the stories will be familiar and the book will come as a refresher; to outsiders it offers a summary of eight economic success stories within one very readable book.
In countries such as Chile and China liberation came in the form of protecting basic property rights; but in countries that were already highly developed it involved the rejection of regulations and tax rates which thwarted free enterprise. Most saw pronounced Laffer effects when they cut their taxes. When the Conservative Coalition of right-wing Democrats and Republicans slashed taxes in 1945 it created the highest economic growth in American history: 14.7% in 1947 - this at a time when Keynesians were clamouring for a continuation of the garrison economy out of fear that reducing government intervention would return the Depression. And in Germany, when Ludwig Erhard dispensed with the wartime market regulations which had been continued by the victorious allies, as well as slashing taxes, it created the unheard of riches of the Wirtschaftswünder. In 1961, Erhard suggested cutting high marginal tax rates to John F. Kennedy. The following year Kennedy overruled his left-wing advisers and slashed taxes – contributing to annual average growth of more than 5% over seven years. Hong Kong of course always had negligible taxes – and never stopped booming.
Deregulating is far more difficult as regulation usually benefits mighty special interest groups, whereas the costs are dispersed over the anonymous mass of consumers. When financial catastrophe forced them to do it, the Labour government of New Zealand slashed subsidies for farmers who didn’t vote for them anyway; and the Conservative government abandoned trade union privileges – again, not their natural constituency. Singapore has systematically imposed an easy-going regime for would-be businessmen. Today it tops the list of the World Bank’s Doing Businesslist: it takes 3 days to set up a business in Singapore, and 66 in Chad. Again, always booming Hong Kong never suffered from much market regulation: an interesting chapter in the book describes the never ending attempts by Whitehall to impose taxes and labour laws – attempts heroically resisted by a succession of colonial governors and financial secretaries.
One specific sort of deregulation pops up in most high-growth countries: free trade. Chile, New Zealand, Singapore and Hong Kong are all free trade champions – in most cases they introduced unilateral free trade without receiving any compensation in return. Unilateral free trade and its success put the endless shenanigans and horse trading of the GATT negotiations to great shame. Though the obvious contradiction between the EU customs union and free trade is highlighted, the book leaves that institution to others.
But why look at far-away exotic countries to extol the economic virtues of freedom? The most surprising chapter concerns Britain itself and for once not the Thatcher years: the 18th century Industrial Revolution is held up high as the earliest great success story of free enterprise. With the privileges handed out by the regulation-mad Tudors and Stuarts disappearing fast, and medieval professional protectionism being outcompeted by new industries set up by the freed populace, Britain saw the earliest and greatest liberty-fuelled economic boom ever. Where previously the poor were often not even allowed to move to other villages; and the unemployed were not allowed to change profession, they now became the masters of their own destiny. The surprising fact was initially not high growth (it only picked up significantly at the end of the 18th century) – the novelty was that being freely employed was allowed at all. The economic expansion was almost entirely driven by free-market enterprise with hardly a whiff of state interference – much as the most successful late 20th century Chinese economic entities of private agriculture and village enterprises took off without the Chinese government’s interference and often despite of it.
Some claim that pre-industrial revolution micro-management of the economy has returned to the fore today. Perhaps it is time for our own Glorious Deregulation. Heavens on Earth is a handy ‘How To’ which should be read by all politicos.
The IEA is holding a book launch for Heavens on Earth on 26th March at 6:30. If you would like to attend, please click here for details.