Who has been the greatest force for economic liberalisation over the past 40 or 50 years?
Was it Margaret Thatcher in Britain, who led the way with a programme of privatisation? What about Indian Prime Minister Manmohan Singh, who did so much to open up an economy of over a billion people?
In terms of the sheer number of lives improved, there’s a case to be made that the greatest reformers were those to be found working for the IMF in the 1980s and 90s. It was that much maligned institution that did so much to introduce market discipline in Africa, South America and parts of Asia.
I would argue that the real heroes of economic liberalisation weren’t politicians or officials, at all, but rather a group of farmers living in a remote corner of Anhui province, China in the late 1970s. Faced with the prospect of catastrophic food shortages, some of those living in Xiaogang village decided to try something different on their collective farm. In defiance of all good communist orthodoxy, they made a contract with each other, agreeing that each family should farm their own slice of land separately – and keep the proceeds.
Local government administrators noticed that as farmers began farming for themselves, output shot up. More fearful of famine than of ideological purity, officials at first turned a blind eye. This meant that the practice of families farming their own fields spread, and farmers were soon even allowed to sell what they produced at a profit. With this, productivity improved so dramatically that officials soon stopped merely overlooking such practices. They started to claim that it had been their idea all along.
By the time that President Deng Xiaoping announced a series of farm reforms in the early 1980s, he was simply acknowledging what had become the reality on the ground across much of China.
Whether it really was the actions of a single group of villagers in Xiaogang, or whether what happened there also occurred in thousands of villages across China, the key point is that it was this sort of spontaneous human action – accident, you might say – rather than the designs of officials in Beijing that was decisive. The key role played by officialdom was not to instigate anything, but to not stifle what others started.
The key to successful economic liberalisation at any stage of development, in any country, is not taking any kind of action from on high with a blueprint or a plan, but learning how to let go.
Politician that favour free markets first need to overcome various vested interests ready to tell them that liberalisation can’t be done. In Britain today, for example, there are plenty of people on hand to explain why land must not be built on. Or why tariffs are needed to protect those that farm beef or assemble cars. Or why only those who have obtained some sort of certification should be permitted to teach in a classroom.
Even if they overcome all that and achieve high office, however, politicians that favour free markets often fall short because they end up implementing policies based on the erroneous belief that you can liberalise by fiat.
Think back for a moment to some of the flagship Thatcherite reforms of the 1980s, such as selling off some of the state-run industries. A triumph for free marketeers? Yes, but only in part. The state might have relinquished ownership of those industries, but the state did not give up control.
Post-privatisation, a new system of regulatory oversight was put in place, with an alphabet soup of regulatory agencies — OFWAT, OFGEM, OFWAT — overseeing whole areas of economic activity. So much so, in fact that today we have not so much a free market economy, but a kind of crony capitalism (see the UK energy market, railways or telecoms sector for details).
It’s no coincidence that the one standout success of Thatcherite reform did not depend on any Whitehall blueprint or plan or regulatory agency. It involved conferring on people a simple right to buy their own council house – not unlike the way farmers in Anhui in China were able to start farming their own fields. The key thing officialdom did was allow folk to act in their own interests by opting out of collective control.
What steps could an incoming Prime Minister take today to liberalise the UK economy?
Instead of (yet another) plan to improve education from Whitehall, with plans and programmes and targets, how about allowing schools to opt out of the national curriculum, and giving parents a legal right to control their child’s share of the local authority education budget?