China’s Future: Rule of Law, Inclusive Growth and Lessons from History

This article is contributed by The Insight Bureau. Called the 'GEMS Close-Up Report', these reports take a succinct but penetrating look at the current state of the global economy and the emerging markets. This particular report was jointly written by Dr Yuwa Hedrick-Wong, Dr Fan Gang and Dr Li Shuguang. Dr Yuwa Hedrick-Wong and Dr Fan Gang are members of The Insight Bureau network of economics speakers.

By Fan Gang, Yuwa Hedrick-Wong, and Li Shuguang via The Insight Bureau


Since the beginning of 2014 the signs are unmistakable that economic growth in China is slowing, suggesting that China has indeed reached a crossroads where serious reform efforts are at play against inertia and the status quo. Much of the discussion and debate about China being at a crossroads focuses on the stupendous imbalance in China’s economy today and, correspondingly, the daunting challenge in addressing it. Many observers have also correctly identified the beneficiaries of imbalanced growth in the past decade being the state-owned enterprises, local governments and associated vested interests that benefit from China’s state-led and investment-driven growth model.  Accordingly, the focus is now on whether the top leadership has the political will and the wherewithal to take on these vested interests in order to curb corruption and rebalance China’s economy and to reverse the trend of worsening income distribution.  

Such a top-down focus is not wrong, but it is incomplete; it misses some other vital ingredients needed in dealing with China’s massive socio-economic imbalance.  The fact of the matter is that vested interests exist everywhere in the world, not just in China. The real difference between countries lies in how successful they are in keeping such vested interests in check. While political will at the top leadership level is clearly important, overwhelmingly the evidence is that it is the rule of law that is most critical in discouraging the abuse of power by the vested interests and in ensuring that justice is done when there is abuse of power. In the context of China today, this requires establishing effective legal institutions and a credible and independent judiciary that ordinary Chinese citizens can access to challenge the vested interests -- regardless of how powerful they may be -- and have the assurance that their cases can be heard impartially with due legal process. In other words, the rule of law will allow grassroots actions to play a key role in curbing China’s powerful vested interests and the increasingly endemic corruption, and help address the severe socio-economic imbalance in so doing. 
The need to establish the rule of law as a prerequisite for reform success is the defining feature of today’s task in reforming China’s economy. In the two previous episodes of successful reforms in 1978 and 1992, Deng Xiaoping and his colleagues had to take on opponents that were ideologically driven. Deng won the ideological battle as a result of his personal authority, the utter bankruptcy of the Maoism as an economic program, and rapidly growing evidence of rising prosperity coming from liberalization and opening.  
The battleground today is very different, however. Ideology is hardly involved at all. Instead, market-oriented reform now faces opposition from members of the ruling elite, including those who were among the strongest supporters and executors of previous reforms, who have benefited massively from China’s current stage of state-dominated economy. In opposing reform, they are defending their self-interests as opposed to an ideology-based power struggle. This is why the rule of law operating through a credible judiciary and effective legal institutions is so critically important today. This is the only means through which vested interests, however powerful, can be untangled and combated in a non-arbitrary, orderly, impartial, and legitimate process. And this makes the challenge very daunting in the context of today’s China. 
Pessimists typically point to the fact that China, being a long way away from having the kind of democratic institutions that would qualify it as a liberal democracy (its village election notwithstanding), would not be able to institutionalize the rule of law. Thus, according to the pessimists, without democracy China’s reform efforts today will fail.  Optimists, on the other hand, typically point to China’s impressive growth record to argue that China is actually evolving a unique governance system that, without the institutional trappings of western democracies, can actually deliver the same or even better results.  
While both the pessimists and the optimists captured some elements of China’s multi-faceted reality, the pessimists are, well, too pessimistic, whereas the optimists are being unrealistic. There is a middle ground in mapping China’s way forward, and the success or failure of China’s reform does not hinge on whether there is democracy per se. As Samuel Huntington pointed out decades ago, the process of political development is not a linear progression of democratization leading to the rule of law leading to economic growth. In fact, these are three separate and largely independent processes, each of which could develop following its own dynamics, even though they are also closely intertwined.   In this context, we argue that the rule of law in China can evolve in the absence of democracy as defined by the standard set by the liberal democracies of the West today. In fact, an organically evolving rule of law with strong grassroots foundation may well prove to be a more successful pathway to democracy than one that is imposed from top down.    

The Diverse Paths to Democracy

In the decades after the end of the Second World War decades there was a proliferation of new democracies as colonies of the European empires, the British Empire in particular, became independent. These newly independent countries invariably adopted the democratic institutions of their former colonial masters. However, many of these instantly created democracies did not last. Some of them degenerated into dictatorships in various forms and guises and a few others decayed into failed states. Over half a century later, it is clear that democratic institutions imposed from the top do not always result in a democratic society; more often than not poor countries lacking economic development may retain the form but not the substance of democracy.  
In many underdeveloped countries, politics are dominated by family dynasties in spite of being nominally democratic. Leaders of the two dominant political parties in Bangladesh, for example, based much of their claims to authority on being the daughter and the wife, respectively, of the “father of the country” and the “hero of independence”. Pakistan’s former prime minister is himself the husband of a former prime minister who was in turn the daughter of yet another prime minister, and his son is getting ready to enter politics soon. The current president of Philippines is the son of a former president who in turn was the wife of a senator who achieved political sainthood in being assassinated for challenging Marcos, who ruled Philippines as a dictator until he was ousted by a mass uprising.  Even in India, frequently referred to as the world’s largest democracy, the Nehru dynasty ran the country for 55 of the 66 years since independence until it was decisively rejected by voters in the recent election. Yet, the president of the Congress Party today is the widow of a former (and assassinated) prime minister, who was the son and grandson of earlier prime ministers. Today, a fifth generation Nehru (if we include Motilal, father of Jawaharlal Nehru, India’s first prime minister) is being groomed to rule India. 
In contrast with the top down imposition of democracy in the post-colonial period, the experience of the emergence of democratic institutions in Europe in previous centuries suggests that democracy evolved gradually and organically, sometimes over several centuries.  Indeed, we would argue that the best exemplar of a gradual and by and large peaceful evolution from absolutist feudal monarchy to democracy is Great Britain (and England before that). And it began there with the rule of law being slowly but firmly established, and strengthened over time, with the consequence that the absolutist power of the monarch was rolled back gradually, long before democracy was established. This is an important process that created conditions conducive to the emergence of a market economy, which in turn made possible a widened distribution of wealth. With economic empowerment came demand for a more equitable distribution of political power, setting into motion the virtuous circle of a mutually reinforcing evolution of inclusive economic and political institutions. And one of the most important lessons learned is that the rule of law was established in England prior to the appearance of anything that could be recognized today as democracy. In this historical context, the rule of law is not only a critical prerequisite for democracy to emerge, but it is capable of exerting powerful influences in the absence of any formal democratic institutions to foster a market economy and to set into motion the virtuous circle of inclusive economic and political growth. We argue that this historical insight is of great relevance for understanding and mapping how the trajectories of China’s political evolution may unfold in the coming years and decades.   

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