Chapter 7: Law and Markets
* INTRODUCTION One of the enduring paradoxes in China’s remarkable economic growth experience over the three decades since 1978 is the lack of a wellestablished legal system supporting the increasingly decentralised marketising economy (see, for example, Allen et al., 2005; Cull and Xu 2005). It is a notable puzzle in that robust institutions are thought to be required both in theory and in practice to support markets (see, for example, Acemoglu and Johnson 2005). For instance, in a Coasian or Walrasian sense, a market economy is predicated on well-defined property rights and low transaction costs that permit efficient exchange to take place (Coase 1937). The transition experience of many other economies such as the former Soviet Union was in part predicated on the establishment of private property rights and removal of the inefficient state in the burgeoning market economy. In China’s case, however, many of its reforms have been undertaken without an established rule of law and in the absence of a change in ownership from state (public) to private. This raises the questions as to how China was able to instil economic incentives in the absence of private property rights and how an imperfect legal system could protect against expropriation that would normally limit investment and other private economic activities, particularly foreign direct investment (FDI). The gradualist and evolutionary nature of both economic and legal reform provides a basis for understanding the relationship between law and growth in China. Therefore, this chapter will propose that legal and economic reforms – extending...
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