The Institutional Paradigm of Economics and the Chinese Experience (I)
Zhou Li’an
Scholars have asked many questions about China's economic growth. The discussion in this paper begins with the famous "Zhang Wuchang’s Question": "I could write a thick book criticizing China in a week. However, China's rapid growth has been going on for so long, against so many odds, that it has never happened before in history. China must have done something right to produce the economic miracle we are seeing. What is that? That is the real question."
I can well understand the confusion behind the question posed by Zhang Wuchang. On the one hand, China's economy has many problems; on the other hand, China has indeed achieved an economic miracle that has never been seen before in history. This confusion arises because when we look at China's economic development. It is "foggy" to look at China through Western glasses. We need to read our own institutional paradigm from a Chinese perspective.
Review of Institutional Paradigm
In order to understand the background of the "Zhang Wuchang’s Question", I will first take a brief academic journey to help readers review how mainstream Western theories define the institutional conditions that need to be met for a country to achieve sustainable economic growth.
(I) Property Rights System
One of the first important aspects addressed was the theory of the property rights system for which Douglass C. North won the Nobel Prize in Economics. He argued that the Netherlands and the Great Britain were the first countries in Europe because they had early patent laws that provided judicial protection for creations and inventions, including private property rights and contracts, and encouraged technological inventions. This view is supported by the empirical research of MIT professor Daron Acemoglu and others, that countries with successful economies have good judicial protection of property rights, while countries with staggering economies are also those that have failed to protect property rights. On further scrutiny, this observation can be extended to mean that if the state is too powerful, it cannot make credible commitments to any private group, and thus cannot truly protect private property rights effectively. For the state to be truly effective, its power must first be limited and subject to certain checks and balances, and also not be too weak to provide adequate public goods and judicial protection. This raises an important paradox of modern government, namely, how to guarantee both limited and effective power. The dominant economic theory is that only governments that meet these two conditions can sustain long-term economic growth.
According to this theory, the property rights system does play an important role in driving China's economic growth. Over the past 40 years, China has made tremendous progress in protecting private property and enterprise, but there is still much room for improvement in terms of social expectations. For example, private companies are still worried about changes in national policy: some of the discussions about whether private companies should withdraw from the market reflect concerns about the uncertainty of property rights protection. In addition, China has many ambiguous property rights regulations. For example, land urban land is state-owned, yet rural land is collective, and there is no way to implement a specific owner. Intellectual property rights of researchers in state-owned enterprises and institutions are also vaguely defined.
If we rank countries according to the dimensions of limited government, independent judiciary, and property rights protection, China is clearly at the bottom of the list. So why has China been able to support such rapid growth? This is still an acute problem today. When we look at China from the perspective of the property rights system, on the one hand we see its importance, but on the other hand we can see more confusion.
