Lecture: Institutional Explanations for China’s Performance in the Absence of Formal Property Protection Rights

On Tuesday, October 24, Lixin Colin Xu, professor of economics at Cheung Kong Graduate School of Business delivered a talk in the Rising China lecture series.

“We are taught in basic economics that you have to have a good rule of law and secure property rights. So the question becomes: how did China grow so fast?” began Xu.

Professor Xu explained that property rights allow individuals to clarify their ownership of assets, which in turn incentivizes them to improve those assets. He also argues that protecting ideas encourages innovators to come up with good ideas and that clear property rights make transactions simpler by clarifying ownership.

According to Professor Xu, modern schools of economics differentiate between two types of property rights: contracting rights and anti-expropriation rights. He explained:  “Contracting rights protect property rights among just a few business people.” These rights prevent other businesses from using your brand or ideas. 

Xu said, “China has pretty reasonable ways of dealing with contracting issues, but China has huge problems dealing with anti-appropriation issues.”

“Key, especially for Anti-expropriation, is the rule of law,” Xu pointed out that after the Taiping Rebellion, a 19th-century civil war, China saw a lot of decentralization; with power shifting from a central empire to local governments. Those local governments that did adopt stronger civic institutions and a more powerful rule of law have more growth and greater protection of property rights, even to the modern day. Xu drew an example from Fujian province, citing a 2% greater growth rate in the province, which has a strong tradition of civic institutions. Xu argues that in provinces like Fujian, the government is more accountable and less likely to infringe on its citizen’s property rights. “Even in the one-party system, if you have strong accountability you see better results.”

Professor Xu then traced China’s history of property rights from China’s communist revolution to the reforms of CCP Chairman Deng Xiaoping. Xu connects Deng’s expansion of private property rights to growth in employment and firm revenue.

It is only after introducing the surrounding context that Xu made his main point: that China’s property rights protections are largely informal. Although China does have property rights, those property rights just haven’t looked like Western models. Xu points to the system of Guanxi, a Chinese word that he defines as an “intricate and persuasive relational network characterized by mutual obligations, assurances, and understandings: a web of connections that can be drawn on to secure favors.” Xu said that “in China, reliance on informal institutions is not a strategic choice by design but a strategy by default… the most viable way of doing business.” Xu argued that the introduction of anti-corruption laws has weakened China’s only system of property rights, explaining why those laws are often linked to a loss of growth.

Professor Xu finally argued that despite having weak property rights, there are other ways to explain the innovations that have emerged within the country. Because of China’s strong tradition of powerful government, “if you do something the state really cares about, there are huge rewards.” Xu also noted strong supply chains and infrastructure, and one of the world's most educated populations. But Xu also claimed that there are weaknesses in the Chinese system. Because of the strong history of a powerful, meritocratic state, many of the most talented innovators in society take jobs with the state as bureaucrats. And despite arguing that anti-corruption policies have decreased growth, Xu admitted that corruption creates instability in government policy over time, creating a market without incentives for long-term projects. 

Professor Xu made a final argument about Chinese culture as a factor leading to innovation saying, “There are approximately 4 million American Chinese who have produced Nobel prizes, are business leaders, etc. Those [4] million are the size of just one province.”

The Rising China lecture series is sponsored by the Walter Krause Economics Lecture Fund and the Reed College economics department and will return on November 14.