China's Gold-Medal Growth Holds More Promise Than Threat

Lately I'm intimidated by Chinese women. One is six-foot-three and punches volleyballs into the sand. Another, at 287 pounds, smashes opponents to the floor like sacks of laundry. The most fearsome weighs just 73 pounds and flutters around wooden bars with a child's grace (and, some accuse, a child's age). Each morning I check the Olympic gold medal standings and find that China is further ahead of America. The count is now 41 to 25. But for one remarkable Baltimore swimmer, China would be leading 41 to 17.

The standings only affirm what I've long read in the financial pages: China is trouncing my beloved America. China's economy has grown by an average of 10% since 2000, five times the U.S. rate. Its personal income has soared while ours has stagnated. Its surplus of goods sold to foreigners minus ones bought from them is the largest in the world. So is America's deficit of the same. Between 1990 and 2007 China's share of world manufacturing quadrupled. Its economy will match America's in size by 2035 and double it by midcentury, reckons Albert Keidel, a former top China advisor to the U.S. Treasury and World Bank, now a senior associate with the Carnegie Endowment for International Peace.

Other trends I read about seem more threatening. China's soaring demand for food makes U.S. grocery bills more expensive. Its fuel subsidies likewise bloat our gasoline bills. Its smog alters the world's climate. Its currency, kept artificially cheap by its government, allows Chinese manufacturers to undersell American ones. And China will surely spend its future wealth to build a massive military, which it will be tempted to put to mischief.

Worst of all is what China's growth says about the link between freedom and prosperity. One is supposed to beget the other, I'm told. Yet China is only 53% free, compared with 81% for America. This, according to the Index of Economic Freedom compiled by The Heritage Foundation, a right-leaning think tank, and by The Wall Street Journal. Scores are based on 10 "freedoms." China wins decisively on only one: small government. Its central planners spend just 18.5% of gross domestic product. America's central planners spend 36.6%. On taxes the two are roughly matched. The U.S. wins easily on most other freedoms. It allows businesses to start and operate with relative ease. It protects property rights. It is less corrupt.

So why does free America grow slower than not-nearly-as-free China? A nation's level of freedom predicts only its level of prosperity, not its growth in prosperity. America is properly richer, with $46,000 of GDP per head, compared with $5,500 for China, adjusted for local purchasing power. Growth in freedom, meanwhile, predicts growth in prosperity. China's freedom score of 53% is, in fact, a sizable and recent achievement. Just 30 years ago it would have scored near zero, according to the Heritage Foundation. Since the 1976 death of Mao Zedong, the architect of Chinese communism, China has phased out collectivized farming, freed prices, developed a stock market and gradually permitted foreign investment.

Those reforms have bought blazing growth. They might be nearly spent. The Economic Freedom index's authors calculate that a 10 percentage point increase in score corresponds with a doubling of income per head. Considering America's level, China's freedom score ought to afford it income of $6,600 per head. It is close to that now. Signs of a slowdown loom. American stocks are down 12% in value this year, but Chinese ones have fallen twice as much. The trade gap between the U.S. and China, while huge, is shrinking. For the 12 months ended in June America's exports grew 23% in dollar terms, vs. 17% for China, reports The Economist.