Rule of Law and China's Economic Future

The shift to a consumer-led growth model will require a level playing field.

The West’s bifurcated reaction to the new leadership of China’s Communist Party can best be summed up by this headline: “Economic reform yes, political reform no.” It’s as if one issue had nothing to do with the other.

In fact, the party’s economic plans will require a parallel effort to promote a professional and independent judiciary—in part to match the rising expectations of China’s new urban consumers. This convergence of will between party and people could finally see the rule of law come to China.

On the economic front, the party’s new leadership wants to avoid the dreaded “middle income trap” by rebalancing the economy away from state-enterprise investment and toward urban household consumption.

The backbone of their policy package is to boost consumer demand by emptying the countryside and accelerating urbanization (already past 51 percent). Elements of this strategy include strengthening the legal rights of farmers against “land financing” by local governments, eliminating the one-child policy (which applies mainly to urbanites), and eliminating the rural-urban segregation contained in the hukou household registration system.

Reform of the hukou system is especially significant because it would give millions of migrant laborers and their children, currently residing illegally on urban fringes, legal access to housing and guaranteed education in their cities. This rural-urban discrimination in social-welfare policy is the primary deterrent to urban migration, and eliminating it would trigger a new wave of urbanization.

Complementary policies would expand the competitive private economy, thus providing China's new urbanites with better goods, services and capital at cheaper prices. Some of the proposed changes include breaking up state-owned monopolies, providing greater government antitrust supervision over remaining monopolies, and strengthening legal protection against the actions of state-owned enterprises.

Ultimately, it is hoped that the competitive pressures of an urban private economy will lead to innovation and move the Chinese economy up the value chain past the “middle income trap” to land squarely in developed-country territory.

But in order to succeed, these reforms require a professional judiciary that will enforce the law free from personal bias, partisan considerations, government pressure, or the particularized desires of private interests.

Such a judiciary would guarantee the fair competition, conflict management, protection of ideas, and creative destruction necessary for a dynamic, advanced economy. In legalese, this judiciary would objectively apply antitrust, contract, intellectual property and bankruptcy law. More broadly, such a judiciary would manage the heightened friction and injustices involved in modern urban life, primarily through the enforcement of tort and criminal law.

In other words, China’s new socioeconomic model relies on the rule of law, and the party’s new leadership must deliver.

There has already been some positive signaling by Mr. Xi, both at the commemoration of the 30th anniversary of China’s constitution and during his recent “southern tour” in Guangdong Province. The message is clear, but cynics will rightly recall that the same has been repeated many times before.

Fortunately, rule-of-law enthusiasts no longer have to rely on the kind hearts of China’s leadership. We can now rely on their naked self-interest. It is economically imperative that the new leadership provide for the rule of law. If they do not, their economic plans will flounder.

If they succeed, economic and rule-of-law reforms will together create growing middle and upper-middle classes toiling away in service- and knowledge-based private enterprises in China’s giant cities. These people will first demand, then support, and finally become accustomed to the rule of law. Their demands will not arise from any newly found political liberalism, but rather from their base desire for fairness toward their families and businesses in the new urban private economy.

Increasingly, many of these people will agitate for the rule of law as members of the party itself. The party extended membership to private business owners a decade ago, and now actively recruits on elite college campuses and in the “new social stratum” of young, urban professionals.

This convergence of will between the party’s leadership, entrepreneurs, and urban workers in China’s new economy could finally see the rule of law come to China. Conversely, failure on the rule of law front would doom Mr. Xi's economic reforms and bring middle-income stagnation to the Chinese economy. As the world attempts to claw out of the global recession, we should insist on the rule of law in China—not for the sake of local rights activists, but out of concern for our empty wallets.

Matias A. Sueldo is an Assistant Professor of Law at the Renmin University of China in Beijing.

Image: Flickr/Michael Coghlan. CC BY-SA 2.0.