Revising the Law-Growth Hypothesis: a case study of reform-era China

From Deng Xiaoping’s inception of the Open Door Policy and his Four Modernizations in 1978 to his southern tour in 1992, the world has marveled at China’s explosive economic growth, despite its shaky legal system. Intimately tied to Chongqing, an area in which widespread governmental corruption coexists with simultaneous GDP booms, Alice Xie, School of Arts and Sciences senior, tackled the question of how economic growth can be achieved without the strong rule-of-law, as the inaugural presenter of the newly established Undergraduate Presentation Series. While the United States and token developed nations uphold the law-growth hypothesis, whose central tenant is that a sound state legal system must precede substantial economic growth, Xie argues that the ‘China rule-by-law paradox’ refutes this widely accepted theory.

Xie first focused on the sudden upshot of economic growth following Deng Xiaoping’s two reform initiatives. Ushering in a new era of limited privatization and economic liberalization in his first reform period from 1979 to 1989, Deng emphasized the development of a legal system. Though these words were well intentioned, the Chinese government had only just begun to reconsolidate power from the Mao era and had little to no enforcement capabilities.  Consequently, the legal system played a cyclical game of “catch up” with growth.  Laws served virtually no catalytic purpose, and were enacted primarily to promote the already existing post-business activity.  Xie concluded that a sound legal system in this first reform period was irrelevant to China’s spontaneous economic boom; even if laws were to have been put in place to regulate business activity, the Chinese central government would not have had the capacity to enforce them.

Under the second reform period, China witnessed citizens’ widespread enthusiasm to engage in private activity despite its illegal status. These undertakings included “Red Hat institutions,” or private entrepreneurs that went through legal loopholes to pose as a publically owned business. The government’s attempts at restructuring State-Owned Enterprises on the stock exchange proved futile as business owners surreptitiously engaged in under the table deals. Local officials were promoted on the basis of their respective province’s GDP growth; unsurprisingly, illegal collaboration with local officials became a widespread phenomenon.  

Finally, Xie argued that China’s rule-by-law system could plausibly serve as a substitute for the rule-of-law system found in many developed countries. While the rule-of-law system restrains the government’s sphere of power, the rule-by-law system utilizes law as a tool of the government to serve short-term goals. The Chinese paradox and its early and middle stages of economic growth without a working legal system and recognition of rule of law institutions serve as a challenge to the law-growth hypothesis.


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