“Outsourced” institutions of market economy in China?

An article by Edward S. Steinfeld in last weekends’ Washington Post Outlook section presents an interesting claim about China’s attempts to develop a market economy. He observes that even though China “provides none of the checks expected of a healthy market system: a free press, an independent judiciary, meaningful property rights and a real legislature,” its economic growth shows no signs of stalling and its lure as the world’s preferred factory persists. The author’s suggestion on why those two seemingly irreconcilable trends exist is the concept of China “outsourcing” its market institutions from abroad through integration with the global economy.

The answer lies neither in some unique Chinese recipe for growth nor in some savvy dodging of global market norms on Beijing’s part. The real story isn’t about “China Inc.” or “state mercantilism.” The heart of the matter is outsourcing — not multinational companies’ outsourcing of jobs and manufacturing to China, but China’s outsourcing of rule-making authority to the rest of the world. (…)Accession to the World Trade Organization, for example, granted foreign firms unprecedented entry into China’s domestic market. The self-induced competitive threat then forced the restructuring of thousands of Chinese firms and the elimination of socialist-style guarantees of lifetime employment. The listing of Chinese companies on overseas stock exchanges exposed those firms to supervision by stringent watchdog agencies such as the Hong Kong Monetary Authority and the U.S. Securities and Exchange Commission. The integration of Chinese producers into global production chains subjected them to the quality standards of brand-conscious global multinationals, scrutiny by the foreign press and the sensitivities of informed global consumers.

Steinfeld concludes that since all these positive external pressures on the Chinese economy exist in the absence of greater respect for human rights or progress toward democratization, they bring into question the institutional link between political and economic freedoms and development. He says:

An open media and representative government are indispensable ends in themselves, but I am far less certain that they are preconditions for modern markets and sustained development. (…) History suggests that economic, social and political change advance in organic, messy, highly varied and frustratingly intertwined chicken-and-egg processes — the very type of evolution undergone in the United States in the early 20th century and the very type we are witnessing today in China.

While certainly history has taught us that there is no one universal linear path toward development, I’m much less in agreement that we can talk about a functioning modern market economy without internal institutions such as open media and representative government. Growth in itself is not necessarily a sign of functioning markets or economic development. Instead, transparent and inclusive governance that keeps businesses well-managed and the state accountable for its economic policies and its institutional quality is a necessary element of markets. Otherwise what we get is corrupt state capitalism based on crony relationships between the government and big business, where the rules of the game are not the same for everybody.

Can those checks be ensured through pressure from abroad and top-down adoption of international rules? Maybe to some extent. But in the longer term an economy that lacks the most basic feedback loops of participatory governance cannot fully take advantage of the local knowledge that is better suited to design and enforce local rules than any “outsourced” system.