复旦大学：《发展经济学》阅读材料与文献_Challenges of China's Economic System for Economic Theory

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INTERACTION OF ECONOM/C INSTITUT/ONS AND THEORYT Challenges of China,'s Economic System for Economic Theory By greGORY C. CHow The challenges of the market economy in Most assets in China are publicly owned, by China for economic theory touch on four top- the central government, by provincial and lo- ics: private versus public ownership of assets, cal governments, and by villages as collec- estern legal systems versus Eastern semifor- tives. Incentive systems have been adopted mal legal systems, individualism versus the make the management of these assets efficient collective good, and multiparty versus one- The most prevalent is party political systems. I came in contact with" responsibility system. Notable examples these issues while advising the government of are the leasing of land by the village to farm Taiwan in the 1960s and 1970s, and the gov- households and the leasing of enterprises of all ernment of mainland China in the 1980s and kinds by different levels of government. The 990s(see Chow, 1994 Ch. 4-5). Others terms of the lease include fixed rents and forms have studied these issues as scholars, including of profit-sharing. In all cases there is a positive Patrick Bolton(1990), Bolton and Philippe relation between profits of the enterprise and Aghion(1992), Masahiko Aoki and Hyung. the economic benefits of the management and Ki Kim(1995), and oliver Hart(1995) workers Providing incentives for the manage men of publicly owned assets is a key to I. Private versus Public Ownership China’ s suCcess In a private communication, Milton China is an interesting experimental station Friedman questioned the above statement or both public and private enterprises, as "Most assets in China are publicly owned state-owned enterprises coexist with collec- Two kinds of" need to be distin- tively owned enterprises( many by township guished. Land as an asset is publicly owned and villages)and private enterprises (owned The enterprise managed by a farm household individually, by foreign corporations, or using the land is privately owned. This private jointly with foreign corporations ) Some state- enterprise leases a piece of publicly owned owned enterprises, especially those having land to produce and make profits, as in a cap joint ventures with foreign corporations, ap- italist society, but the government or village pear to be efficient, as they are financially in- authority owns the piece of land under a chi dependent and are making large profits. Many nese socialist system. Publicly owned assets collectively owned township and village en- consist mainly of land, state enterprises, and terprises are successful in increasing output township and village enterprises. The govern- and making profits. The successful experience ment can lease a state enterprise to a manager of the township and village enterprises in who operates it for profit. The advantages and China is sufficient to challenge the dogma that disadvantages for the manager to own rather only private enterprises in a capitalist econ- than to rent the enterprise from the govern- omy can be efficient ment are discussed in Hart(1995) In addition to managing existing assets, government units at different levels have cre- ated new enterprises. Even universities as Oliver Hart, Harvard University public institutions have created and own enterprises, some selling research and con- Princeton NJ 08544. I thank Michael Bordo. Milton sulting services, and others selling products Friedman, and Richard Quandt for helpful comments produced in factories run by

AEA PAPERS AND PROCEEDINGS MAY /997 An example of this outside China is Ex Libris, cerning publicly versus privately owned versity in Jerusalem. Ownership ox a public and in Hart(1995). T in Aoki and Kim(1995) a library software firm owned by Hebrew Uni- enterprises are treate The latter provides a use- institution in China confers advantages to the ful discussion of"Firms, Contracts and Finan enterprise, including the institution,'s reputa- cial Structure"and notes two features of an enterprise can share. Possible disadvantages of contracts are incomplete The second is that public ownership might be the social costs as- because of this, the ex post allocation of power publicly owned enterprises in China are sub- roughly to the position of each party if the ject to competition from other public enter- other party does not perform(e.g, if the other P Theories to explain he eficiency of ch ortunistically ) Hart's the of Chi- ories are relevant for the topic of Section II on nese state enterprises are found in Theodore modern legal system versus the informal Chi Groves et al. (1994, 1995) who appeal to the nese in terms of solving the ex post allocation improved incentives provided for the of power and for explaining the possible ad hent and workers of these enterprises Oper- vantages of the township and village enter- ating losses in state enterprises may be the prises. These advantages stem from the local result of antiquated capital, slow adaptation of governments power to enforce contracts and management to a new market environment or from the credibility of such a"public"enter the governments responsibility to provide prise in raising funds as compared with an en ownership per se. Causes of losses in Chinese state enterprises are studied by Athar Hussain II. Modern Legal System nd Juzhong Zhuang(1996) Theories to explain the efficiency of town A modern legal system as practiced in a hip and village enterprises are found in Western developed economy is sometimes Martin L. Weitzman and Chenggang Xu considered essential for the proper functioning C. Chang and Y. Wang(1994), of a market economy. The non-Western legal hua Che(1996), and David D Li(1996). system in China is considered deficient by Weitzman and Xu(1994)appeal to the co- Western investors and economists. Although operative nature of Chinese culture, Chang it might be called a"semi-legal system, it is and Wang(1994 )and Li(1996)to the eco- definitely a legal system, as law has been prac- ic power of local governments or their of- ticed in China for several thousand years ficials, and Che(1996)to the creditworthiness How this system is different from legal of local governments. Weitzman and Xu systems in the West. One major difference is (1994 )and Li (1996)allow for ownership that under Chinese law a contract is enforced rights being vague, an issue related to the sub- partly by an informal social relationship ject of Section II. A related subject is corrup known as guanxi Guanxi plays an important tion, as studied by Susanto Basu and Li role in insuring that a contract is honored. (1996). Rewards to government officials First, there is a question as to whether all could provide incentives not only to promote contracts should be strictly enforced. An eco- economic reform, as discussed in Roger H. nomic answer is that, given an objective func Gordon and Li(1995), but also to facilitate tion, there is some optimum degree for enterprise operations. enforcing contracts to balance the costs and Once the ownership of an enterprise is sep- benefits. A formal model to determine the op arated from its management, as in a modern timum degree would be useful. Second corporation, the incentive of the management granted that it is advantageous to have a cer- to pursue profits for the owners becomes prob- tain contract enforced, there is the question of lematic. Corporate governance issues in the enforcement through legal means versus en- context of public enterprises are important top- forcement through guanxi. Guanxi ics for research. Some important issues con- work of human relationships which sets the

VOL 87 NO. 2 INTERACTION OF ECONOMIC INSTTTUTIONS AND THEORY les of behavior among the parties concerned. and the optimum combination of the two in a When applied to two individuals engaging in society certain business dealings it is like a handshake People in China are sometimes considered accompanied by a verbal or written agreement insufficiently law-abiding, as in the case of vi for each party to do something in the future olation of intellectual property rights. The op contingent on the occurrence of certain events. timum level of enforcement of patent rights The events might involve the sale of certain any economy is an interesting question On the merchandise for profit. The agreement stipu- one hand, patent enforcement helps encourage lates how profits should be shared. The judicial technological innovations, But as a monopoly system need not be relied upon to enforce such right, a patent discourages innovations which an agreement. The high cost of enforcement might infringe upon this right and makes the under the American legal system suggests that invented products more expensive to consum perhaps there is some advantage in enforce- ers. Opinions on the economic effects of pat ment partly by an informal network. Third, ents differ. For example, the view of Almarin given the fact that not all contingencies can be Phillips(1966 p 302)is"that a weakening of anticipated and written down explicitly, how the patent rights of large corporations. would complete should a contract be? In areas where do little to hinder the 'Progress of Science and the contract is vague, should disputes be set eful arts' and. in some market situations tled by legal means or by informal relations? would be instrumental to these ends. Patents What explains the appearance of the semi- have been invented partly to serve the eco- legal system(with the other half being sup- nomic interests of industrial monopolies at the plied by the informal network )in China and expense of the common people. For example, some other Asian countries and the modern patent protection for American pharmaceutical legal system that appeared in the West after companies might have harmful effects in re- the Industrial Revolution? What are the cir- stricting the sales of drugs which cannot be work?The Chinese government has been try- velopment of new drugs encouraging the de- umstances that make the informal system offset by the benefits in ing to modernize its legal system to make it Less than strict enforcement of a law can resemble that of a Western country, partly for sometimes be beneficial. Consider a law to the convenience of Western investors and make abortion illegal in the United States. Its partly to enable Chinese producers and traders rationale is to protect the lives of unborn ba to enter the world market. This does not nec- bies, but this law is in conflict with the moth essarily mean that the current legal system ers right to choose A solution is to enforce works poorly for China,s internal economic the law less than strictly according to par development. At least the system is not so bad ticular circumstances. Such a law would that it hindered the rapid economic growth that discourage unwanted pregnancy, but if un- has taken place since 1978 wanted pregnancy does occur, the right of the It would be interesting to study the econom- woman could be respected. As a second ex ics of guanxi (see Janet Tai Landa and Jing ample, birth control by contraceptives was il- Lu, 1997). Guanxi is a form of human capital. legal in Massachusetts, but doctors made Having like having knowledge of diaphragms available by placing them on a which friend would be helpful when needed, table and allowing patients to help them having a reputation similar to that conveyed selves. The trouble with strict enforcement of by a college degree, and having a good credit a law is that it imposes uniform treatment on rating. Developing guanxi is accumulating hu- all persons, even those who hold different man capital just like getting a college degree opinions as a matter of their freedom. Less or promoting a reputable brand name. The ser- than strict enforcement allows the coexis- vice from this form of human capital can sup- tence of opposite viewpoints in a society plement legal enforcement of contracts by Both Catholics who opposed birth control and social pressure. A formal model should ex- other citizens who favored birth control plain the relative roles of legal enforcement of benefited from a less-than-strict enforcement contracts and the enforcement thr of the law in massachusetts Two other

AEA PAPERS AND PROCEEDINGS MAY /997 examples of laws for which selective enforce The practice of human rights ment may be beneficial are the law prohibit- among countries. People in Western socie ing suicide and the legalization of the death ties consider human rights to be violated in nalty. In the case of the death penalty, the Singapore. China does not practice the same governor is given the authority to make an kind of human rights as the United States exception to strict enforcement. Economists With the consent of many, and perhaps a ma need to reexamine the relationship between jority, of its citizens, the Chinese govern the Western legal system and the effective ment considers a high degree of individual functioning of a market economy. What fea- freedom and the practice of American-style tures of the Western legal system are essen- human rights to be harmful to the common tial, and under what circumstances? good of the country. Among other things, it It is said that China is ruled by people and makes the enforcement of law and order imply that the Chinese system is bad. A State tioned with a limited amount of political Department official having had dealings with freedom in mainland China, Taiwan, Sin the Chinese once remarked to me that"After pore, and South Korea. signing a contract, the Chinese often regard the The welfare economics for a market econ provisions in the contract as a starting point omy that emphasizes the common good de for further negotiations. Referring to a per- serve further study. Much has been written sonal contractual experience Hart(1995 p 2) about the welfare state in which the govern remarks, ""In fact, the contract is best seen as ment provides consumption goods or redistrib providing a suitable backdrop or starting point utes income to individual citizens. The pros in the United States for such renegotiations and cons of welfare programs have been ex- rather than specifying the final outcome. a tensively discussed. An important research formal legal system does not necessarily solve topic is the modeling of government provision al of education for the common good, and not personal relationships may be able to solve. simply for the private needs of individual cit izen as in the case of many welfare programs II. Individual versus Collective Welfare Three key questions are raised in welfare eco nomics. First, how is a welfare function de Individualism is an ideal in a western mar- fined for an individual citizen or family, for a ket economy, as expounded by F. A Hayek collection of citizens, and for a political or (1949). This ideal is not generally accepted in ganization? Second, how are the welfare func Asian countries. Individual rights may be in tions of different economic and political conflict with the common good. Economists entities in the society formed? Third, by what have learned that under appropriate conditions process do the welfare objectives of these the pursuit of individual self-interest in the entities affect the economic outcome in the so- marketplace can lead to efficient social output, ciety? When the collective good is empha- n idea well articulated by the Chinese histo- sized, answers to these questions may be rian Sima Qian(see Leslie Young, 1996). In different from those given under an individu Asian societies, the common good is often alistic society considered to be more important than individ Consider the determination of the educa- ual rights. Not only is individual freedom re- tion levels of the citizens for example. For a stricted, but members of a society are educated purely individualistic society, the welfare to serve the society. The society is more than function of each citizen or family might be a collection of individuals. hence the welfare assumed to have its own level of education as of the society is more than the sum of the wel- the only argument, and the welfare function fares of its individual members. People in of the government may be assumed to be an many developing countries are striving for na- aggregation of the individual welfare func tonalism and may consider the common good tions obtained by sor hting scheme. and national unity more important than indi- When collectivism is emphasized, the edu- dls of other citiz

INTERACTION OF ECONOMIC INSTTTUTIONS AND THEORY some aggregates of these levels also enter the The study of the relationship between an elfare function of each citizen. Further- economic system and the associated political more, the welfare function of the government system is an interesting topic. The develop may depend not only on the individual wel- ment of Western countries, along with the fare functions, but on some measure of col- increase in economic power of a large seg lective education. In addition, traditional ment of the population, gradually led to welfare economics takes welfare functions democratic government, as the rich citizens given. A collective society tends to motivate demanded more rights to govern their own its citizens to serve the common good. The destiny. As the Chinese people bec formation of welfare functions has to be ex- richer and more educated, they will demand plained. An American president may choose more political rights from the government. to motivate citizens to achieve a higher level Under a one-party system, political repre of education as a national purpose. In a so- sentation of the people in China through ciety emphasizing the collective good, gov elected members of the People's Congress ernment leadership is stronger, and its effects has been strengthened in the past decade require more careful study. Finally, the pro- What forms of political institutions are likel cess by which a given set of individual and to emerge from the current practice of a mar government welfare functions affects the eco- et economy nomic outcomes may differ according to the Several topics concerning the relationshi degree of individualism versus collectivism between a democratic government and eco- the society. In the next section, possible nomic behavior can be mentioned. In macro- differences in this process due to the institu- economics, the outcomes of elections and tion of a one-party versus a two-party politi- business cycles are interrelated, one affecting cal system will be discussed the other, as studied by Ray C. Fair(1988) and others. In political economy, Avinash Multiparty versus One- Party System Dixit and John Londregan(1996)have pro vided a model for the determination of the in What is the relationship between a multi- come transfers to each group of voters under party political system and a market economy? a two-party system. The social-welfare func The answer is not simple. A one-party polit- tion for each voter or party is a(voter-or ical system is consistent with a market econ- party-specific) weighted average of the omy, as evident from the institutions in economy's deadweight loss and the population inland China, Taiwan(until recently ) variance of consumption. A voter in each South Korea, and Singapore, all of which group maximizes her objective function, ractice a one-party system. Although Japan which is a(group-specific)weighted average had a multiparty system, the country was of the consumption level of the group and the ruled by the liberal Democratic Party from individuals own social welfare. Each political 958 to 1994. A multiparty democratic sys- party maximizes its objective function, which tem is also not required for the practice of is a(party-specific) weighted average of its human rights. Human rights have been prac- vote share and its social-welfare function by ticed in Hong Kong under British rule, but choosing an income-transfer strategy that will there has not been a democracy, because gov- produce a particular vector of final consump ernment officials have not been elected by the tions for all groups. The final consumption Hong Kong people until very recently, and vector is determined in a Nash equilibrium as then only to a very limited extent. Democracy each party maximizes its objective function in the sense of a government of the people, taking the other party's strategy as given. How the people, and by the people can be prac- is income redistribution determined under ticed under a one-party rule. Sun Yat-sen one-party political system in which elected tried to form a democratic government in representatives in a congress can enact laws China under the leadership of the Nationalist on tax and transfers? Possibly the above model Party and later asked the Communist Party to may be relevant if the party proposes two can- join when Soviet help was needed didates who behave like the two parties in the

AEA PAPERS AND PROCEEDINGS MAY /997 model. Alternatively, one may model the Bolton, Patrick. Renegotiation and the d economy as if the government maximizes an namics of Contract Design. European bjective function while each group of voters Economic Review, May 1990, 34(23), pp can propose a final consumption schedule, as 303-10 in Gene M. Grossman and Elhanan Helpman Bolton, Patrick and Aghion, P. An Incomplete (1994), or simply vote yes or no to a govern- Contracts Approach to Financial Contract ment strategy, as in Grossman and Helpman ng. Review of economic Studies, Jul (1995). The governments objective function 992,59(3),pp. 473-94; reprinted in can be similar to the objective function of the Michael J. Brennan, ed, The theory of cor- party, as in Dixit and Londregan(1996), or porate finance. Cheltenham, U. K: Elgar may include political contributions as in (fort Grossman and Helpman(1994). There are Chang, C and Wang, Y. The Nature of the other possibilities, depending on institutional Township-Village Enterprise. Journal of Comparative Economics, December 1994 19(3),pp.434-52 on economic growth? Some citizens in Hong Che, Jiahua. Township Village Enterprises Kong are concerned that introducing demo- An Organizational Approach in Investment cratic politics might affect the current fat tax Finance. Mimeo, University of Notre system which provides incentives for entre- Dame, 1996 preneurship. Some economists in Taiwan Chow, Gregory C. Understanding China's have stated that the recent introduction of a economy. Singapore: World Scientific Pub multiparty system has made rational govern- ment economic decision-making difficult and Dixit, Avinash and Londregan, John.""Ideology, thus hinders economic growth. What is the Tactics, and Efficiency in Redistributive statistical relationship between the rate of Politics. Mimeo, Princeton University, growth of different countries and the number 1996 of political parties or the practice of democ- Fair, Ray C. The Effect of Economic I racy? Can economic analysis shed light onon Votes for President: 1984 Update (2).pp litical Behavior, Summer 1988, 10(2 In this paper I have stated a number of ques 168-79 tions worthy of further economic research. Gordon, Roger H and Li, David. Government These questions have been stimulated by the Incentives and Policies during the Transi reality of recent economic development in tion in China and Eastern Europe. Mimeo, evolving, but some features may be long- Grossman, Gene M. and Helpman, Elhanan. lasting, and the existing institutions provide Protection for sale. American Economic ample challenges for research In future eco- Review, September 1994, 84(4), pp 833 50 European countries will appear more fre The Politics of Free-Trade Agree- quently in the index. The American economics ments. American Economic Review, Sep profession is in the process of internationali ember1995,85(4),pp.667-90 zation, as is the American economy itself Groves, Theodore; Hong, Yongmiao; McMillan, John and Naughton, Barry. Autonomy ar REFERENCES Incentives in Chinese State Enterprises Quarterly Joumal of Economics, February Aoki, Masahiko and Kim, Hyung-Ki Corporate 1994,l09(1),pp.183-209 governance in transitional economies: In Chinas Evolving Managerial Labor sider control and the role of banks. Wash Market. Journal of political ec ngton, DC: World Bank, 1995 August 1995. 103(4),pp. 873-92onomy Basu, Susanto and Li, David D. Corruption and Hart, Oliver. Firms, contracts and financial Reform. Mimeo, University of Michigan, structure. Oxford: Oxford University Press, 1996

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复旦大学：《发展经济学》阅读材料与文献_Challenges of China's Economic System for Economic Theory