China’s use of a mix of central planning and competitive markets has increased the country’s national income dramatically for two decades. However, recently economic growth has slowed, and some serious planning mistakes have been made.
In the light of these developments, it is interesting that some high-ranking Chinese economic policy makers recently asked two German economists to let them know what policies had been used to create Germany’s rapid economic recovery after the devastation of the Second World War, its solid economic growth thereafter and its protection from the worst effects of the global recessions of 2001 and 2008, implying that China’s leadership may be in search of solutions to the problems its development model has produced.
These two economists sent to China a collection of essays, which explain the Social Market Economy Model (SMEM) that was used by Germany’s Chancellor Konrad Adenauer and his Minister of Economics Ludwig Erhard to shape the country’s early postwar economic policies in spite of much opposition from politicians who preferred socialism and economic planning. The model presently still informs most of Germany’s economic policies.
This model was developed by economists at the University of Freiburg in Germany. It argues that national income is maximized if individual and business incomes are determined in free markets for production and distribution while government regulations and spending are used to meet the requirements of the needy, provide public goods such as defence and construct economic infrastructure such as highways.
The effort of China’s leaders to improve its economic performance by learning about and adapting policies that have been successful elsewhere is not without precedence. Deng Xiaoping in the 1980s considered the prosperity of market economies and replaced the centralized planning model with one that imitates their economic system.
The SMEM model should also be considered by Canada, which is experiencing a period of growing economic problems: low rates of growth, investment and productivity while unsustainable fiscal deficits are growing. These problems are in part caused by policies that violate the operating principles of the SMEM model in several important areas.
For example, farmers wanting to produce dairy products have to buy quotas and, in effect, join a cartel, which sets production levels and prices at which the farmers are allowed to operate. The farmers earn high and stable returns on their investments, but the industry operates with many inefficiencies and consumers pay much above world prices. The SMEM model suggests that these costs would be avoided if the production and sale of dairy products were left to competitive markets and farmers were paid subsidies out of general tax revenue at levels considered to be socially desirable.
Another example involves the market for medical services. Canada’s governments effectively own and operate institutions and employ health care workers to provide the public with all required medical services at zero cost at the point of use. This policy is designed to ensure that all Canadians have access to medical care regardless of their level of income. The SMEM model suggests that the medical services should be provided by the private sector and that subsidies should be paid to those who cannot afford to buy them.
Yet another example is the housing industry. Many municipalities impose regulations that allow the construction of multiple housing units only if builders spend funds on public art and build units to be sold or rented at below-market prices. These regulations raise the cost of all housing unnecessarily. The SMEM model suggests that builders should be allowed to produce housing without facing these regulations so that it can be constructed and sold at the lowest prices possible. General tax revenue should be used to pay for socially desirable art and subsidize those who cannot afford housing at market prices.
The drift away from SMEM in Canada has reached a peak with the 2019 passage of Bill C-69. It requires private investors in pipelines and other large infrastructure projects to obtain a “social license” by compensating all “stakeholders” whose interests are damaged by these investments. This bill will raise the cost of infrastructure investments and the services they provide for consumers. The SMEM model suggests that these costs should be avoided by allowing these investments to proceed without having to incur the costs imposed by Bill C-69 and that stakeholders’ interests should be taken care of by payments from general tax revenue.
Canadian politicians love imposing on private investors and producers the cost of non-market benefits of the sort just described. It allows them to buy the votes of the recipients of these benefits without having to impose vote-costing taxes on the public. But in the process, they are destroying the free market system that has brought Canada one of the highest standards of living in the world and history. They should consider the cost of the increasing abandonment of SMEM-model based policies, especially Bill C-69.
Emeritus Professor of Economics
Simon Fraser University
Senior Fellow, The Fraser Institute