Looking across the skyline from the 26th floor of Millbank Tower, a 1960s block just a few hundred yards from the crumbling Houses of Parliament, you could be forgiven for believing that London is being rebuilt. There are cranes everywhere. At night their safety lights create a glowing necklace of red around the city. With a GDP about that of Sweden and a population of more than 8 and a half million, expected to grow to 10 within a decade, London is buzzing. Why? The answer is simple; freedom to generate business with light government regulation inspires extraordinary economic activity. This is the clue to the age-old conundrum of freedom and growth. Too much government interference and heavy regulation and you dampen out entrepreneurship; too little and you encourage exploitation. All round the world governments are backing off from meddling in business. Even Cuba, which was the only bastion of communism remaining after the demise of the Soviet Union, is gradually opening its doors to economic freedom in the hope that the economy will improve. It has taken its time. In a few weeks we shall be celebrating the 25th anniversary of the fall of the Soviet Union. I lived there at the time and witnessed the effect of this dramatic change on the life of the people. In the 1920s Stalin created a State which was the Communist Party and a Communist Party which was the State. When Yeltsin abolished communism in 1991, suddenly there was nothing there; no State and no Communist Party, just a humungous vacuum which was quickly filled by crime and corruption. Why did the Soviet Union fail? The simple reason is that the economy collapsed because there was no freedom. The economy was top down, a command economy, where all decisions were taken by party officials. Factories produced what they were told by the officials, not necessarily what the customer wanted. The well-known story of the factory fulfilling its target by producing the required number of Wellington boots—all left footed—is probably apocryphal, but it does indicate the target culture. Just produce the goods, never mind that nobody wants to buy them! With no freedom and no incentives, why bother? A common joke around Moscow at the time was “we pretend to work and they pretend to pay us”. No wonder the system failed so dramatically.
In the Soviet Union there was neither political nor economic freedom. But what happens if you test each of these separately against economic growth? Here you may get a different picture. You could argue that many Asian countries have prospered with little or no political but plenty of economic freedom. Countries such as China have had phenomenal economic growth over the past decades, far exceeding even the highest in the West. It is rather ironic that if western countries had a growth rate of 6.7% (the latest projection for China, which is considered to be a “slowdown”) they would consider this to be a major problem of overheating and would take steps to slow it even further. Most Asian countries, of course, started from a low economic base and, perhaps, having little political and large economic freedom is the most suitable model for rapid development. India appears to contradict this. Having a high degree of both political and economic freedom it still achieved an impressive annual growth rate of 7.1% in the last quarter. Not enough, however, says Prime Minister Narendra Modi, it should be in double digits to accommodate the millions of Indians joining the workforce each year.
The West has different problems. With mature economies and in some cases a declining population (although the controversial issue of immigration is tending to correct this), the problems are income inequality and job security. Recent economic analysis has shown a level of ambiguity between economic freedom and income inequality. Take UK for example. Even with lower taxes and less regulation there has been negligible downward flow of wealth to the poor as the rich have become richer. The same in the US, where this has become a major issue in the current Presidential election. More important and alarming than inequality, however, is the black cloud over job security due to the phenomenal rise in Artificial Intelligence (AI). Companies all over the world have significantly reduced staff numbers by introducing AI in various forms. Robots are being developed and introduced in a surprising range of business activities and human work, not just in making cars. Amazon is experimenting with deliveries by drones, Uber with driverless cars. Robots never go on strike or demand pay rises. It is estimated that in less than 10 years AI will be carrying out most of our legal services and even much of our health consultation. Don’t relax if you are in other professions, everyone is under threat. Across the globalised economy, governments will be powerless to stop this progress, freedom or no freedom. Some 50% of current jobs will disappear over the next few decades. So where will be the jobs of the future? Where will be the spending power to maintain the retail economy, which if not found will reduce GDP, which in turn will reduce taxes collected by governments and so on in a vicious downward spiral? This is the modern-day challenge to politicians all over the world, which must be solved quickly if they are to avoid mass unemployment. A mighty challenge indeed.
Former civil servant and diplomat John Dobson worked in UK Prime Minister John Major’s Office between 1995 and 1998 and is presently a consultant in the private sector.