Why has the government been un-able to stimulate household consumption? Conventional wisdom blames “precautionary savings” – Chinese households save an ever-increasing proportion of their income to pay for healthcare, retirement and higher education because China’s social safety net is inadequate, and its social services are under-provisioned. Although this observation correctly identifies the problem, its explanation is insufficient. One ought to examine what role China’s closed political system plays.
In other words, is there a connection between freedom and consumption? Reviewing data on political freedom, civil liberties and household consumption for the years 1985 to 2005, we find two intriguing clues.
First, China is among a small group of countries that has become less free (as measured by Freedom House’s Freedom Index) and experienced a significant drop in their rates of household consumption (defined here as a decline of 20 per cent or more). The others are Venezuela, Kuwait, Lebanon, Bhutan, Swaziland, Iran, Uzbekistan and Saudi Arabia – not exactly the countries that China should strive to emulate.
Second, although the overall relationship between freedom and consumption is complex, countries that have become freer in the past two decades are more likely to have registered an increase in their consumption rates.