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.

China's economy will surely top ours one day, but that will only make a good customer a better one. U.S. exports to China have risen fivefold in a decade. While America buys more than it sells, China specializes in low-margin fare like clothes, basic metals and household appliances, while the U.S. dominates in lucrative airplanes, drugs and high-tech equipment. China's cheap currency likely does more good than harm; it allows Apple (AAPL) and others to buy innards cheap and sell finished gadgets dear.

Don't blame China too much for high grocery bills. It is a small but growing net exporter of grain. Do blame China, and thank it in earnest, for fuel inflation. Americans are driving less for the first time in 30 years. Wind and solar farms are sprouting. The electric car, killed in the 1920s by abundant gasoline cans and scarce electrical outlets, will make a long overdue return starting in two years. Press China on pollution, but note that particles suspended in Beijing's air are less dense than they were in Tokyo in the mid-1970s and Seoul in the mid-1990s.

As for China's military menace and its remaining deficit of personal freedom, the relationship between prosperity and freedom bodes well for both. Having nearly cashed in on its reforms to date, China must further forsake Mao for Milton Friedman, or else stall. It will thus one day be a freer superpower or none at all.

Its rise might even spur American accomplishment. I'll count the gold for the London Games in 2012, but for now we can bolster our lead in freedom. Ten more percentage points on the index will propel us past Hong Kong, Singapore, Ireland and Australia for first place, and buy us higher incomes. It will require a sharp drop in government spending along with a smaller, simpler tax. (I have some thoughts on that.) If we must spend, let's buy better stuff. Here's to cheaper doctor visits and college degrees, better roads and a new electric grid, and to less war, less favoritism for corn growers and the sun-setting of perverse incentives for borrowing big to buy houses.

By the way, we'll just have to get used to towering Chinese volleyballers. New York-based Alvalon, a size and fit consultant for the fashion industry, says Chinese children have grown an inch and a half in 10 years, double the increase for American children. The average Chinese female now stands eye-to-eye with her American counterpart at five-foot-four, while American men at five-foot-nine have the Chinese by just an inch. That is surely a result of improved nutrition in China. Two decades ago some 70% of its population lived on less than a dollar a day. Now fewer than 15% do — a victory for those who root for the human condition as fervently as they do Olympic gold.