Law and economic growth in China

27 October 2008

Professor Linda Yueh talks about Chinese development at first event of DFID seminar series

The first event in a series of DFID seminars on the lessons of 30 years of Chinese development success took place on Friday 24 October at the Beijing office of the United Nations Development Programme.

Speaking at the seminar was Professor Linda Yueh, Fellow in Economics at St Edmund Hall, University of Oxford. Professor Yeuh focused on the relationship between law and economic growth and the development of markets, asking if such a link exists in China.

At first sight, China appears to be unusual in terms of experiencing economic growth while having a poor legal system. It does not measure well on international indicators of law, on property rights, regulatory quality, or freedom from corruption (though it does score well on contract enforcement).

This leads to a big question: how has China succeeded in growing economically, when it has such weakly developed institutions? Is this a paradox?

Not such a paradox

A close look at evidence from Chinese and international sources shows that China's success may be less of a paradox than often thought. The relationship between law and economic growth is far from simple: while some theories argue that good laws need to exist before markets can develop ("laws create markets"), others show that laws are formulated in response to crises in markets ("crash, then law").

In China, legal and economic reforms have been mutually reinforcing, while administrative dictates have created the right incentives, such as the Household Responsibility System. The effectiveness of law has been more important than the completeness of written formal law - for example, when specific laws have followed specific cases and pressures, as with scandals around food safety.

Secondly, comparisons of Chinese laws with those of other countries at earlier stages of their development have indicated that China is less unique than is commonly considered. Despite its very low per capita income, China is in fact introducing many more laws than the US did at a comparable point in its development.

China also experiences significant international influence in these reforms. One of the key lessons to take from an analysis of China's recent progress is that the country may not be so unusual after all, and that while studying China, and before making comparisons, we need to enhance our understanding of how Western legal (and other) institutions have evolved.