The CRC Series on Competition, Regulation and Development
Edited by Paul Cook, Raul Fabella and Cassey Lee
Chapter 6: Guanxi and Taipans: Market Power and the East Asian Model of Competition
Raul Fabella INTRODUCTION Solutions to idiosyncratic and non-standard obstacles to production and exchange are par for the course for a special set of players known as entrepreneurs. These hurdles may be technological, organizational and ﬁnancial or risk-related. In frontier or underdeveloped areas, the common missing ingredient is the absence or the severe inadequacy of formal or stateprovided contract enforcement and property rights protection (North, 1990; Barzel, 2002). Ex-post opportunism makes for a prohibitive transaction cost that results in highly fragmented or even missing markets. Not only is the state remiss in contract enforcement, it may itself serve as a vehicle for expropriatory tendencies among the political elite. For an entrepreneur to thrive, it must solve these twin weak governance problems. The guanxi system, also known as relational contracting, solves the contract enforcement and ex-post opportunism problem by limiting exchanges among players who are also members of a group or community that is subject to an existing, informal but eﬀective, system of sanctions. Guanxibased contracts face lower opportunism risk and transactions cost than, and thus can drive out, those contracts dependent only on absent or weak state-provided or third-party enforcement (TPE). In North’s (1990) phraseology, guanxi is a second-party enforcement mechanism (SPE), drawing its power from community sanction. Williamson (1983) called this genre of eﬀort private ordering in the absence of adequate public ordering. Because political power may be lodged outside this group or community, the guanxi entrepreneur, if successful, also faces considerable expropriation risk. The wielders of political...
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