China in Transition
Establishing Market Discipline - The key lies in the rule of law and ethics
Chi Hung KWAN
Consulting Fellow, RIETI
The recent food safety problems have vividly shown that China still lacks the discipline needed for a properly functioning market economy. This may not only dampen the inflow of foreign direct investment into, and exports from, China by damaging her image as the "workshop of the world," but may also come to hinder the expansion of the domestic market and economic growth in the long run. The Chinese government is taking these problems seriously and acknowledged the need to thoroughly rectify market discipline and accelerate the development of a credit-rating system ("Report on the Work of the Government" delivered by Premier Wen Jiabao to the fifth session of the 10th National People's Congress on March 5, 2007). Above all, the production and sale of counterfeit goods, false advertising, commercial fraud, pyramid schemes, tax evasion, smuggling, and food and drug safety problems are labeled priority issues that need to be addressed. Yet government measures have so far failed to produce their intended results as the rule of law and ethical standards appropriate to a market economy have yet to be fully established in China.
In a market economy, the behavior of both the government and businesses is, by nature, selfish and opportunistic. Thus, to make them behave in ways that lead to positive outcomes, certain rules need to be imposed on their behavior to clarify and protect property rights, enforce contracts, and preserve fair competition. Otherwise, market players' effort to pursue their own interests may just end up hurting one another. In order to maintain market discipline, the players must be subjected to both government-imposed "rule of law" and self-imposed "ethics."
Currently, China is in a state where two problems - absence of laws providing grounds for judgment and non-compliance with laws that are already in place - coexist; a far cry from a country under the rule of law. Since the launch of the reform and open-door policy in the late-1970s, and particularly in preparation for her accession to the World Trade Organization finally realized in 2001, much progress has been made by China in instituting a system of laws. However, these laws do not necessarily reflect the voice of the majority of the people, including consumers and peasants, due to limited public participation in the legislation process. In addition to legislative deficiencies, the lack of judicial independence, corruption in the judiciary, and the primacy of decisions made by Communist Party and government leaders over laws and regulations (the "rule of men") also testify to the absence of the rule of law. Ensuring the enforcement of appropriate laws is a prerequisite for the sound functioning of a market economy.
In reality, however, it is extremely costly to maintain market discipline solely by enforcement of laws. Filing a lawsuit not only takes time and money but also considerable energy. The defending party must also spend as much time and energy. And the prosecuting party, if defeated, ends up bearing greater losses than it initially incurred. Furthermore, the nation needs to have relevant institutions - such as courts, police, and prisons - in place and operated properly, the costs of which must be covered by tax revenue from the people. Therefore, in addition to externally-imposed discipline by means of the rule of law that calls for severe punishments for illegal conduct, self-imposed discipline must be implemented through a code of ethics stressing that one must not cause damage to another in the course of pursuing profit. This sort of sense of morality, however, is lacking in today's China where the ideology of socialism has receded, giving way to utilitarianism. Especially, amid the transition from a socialist-planned economy to a market economy, in which property rights are not properly protected, people are rushing to seek short-term profit even at the expense of others, disregarding the need to build trusting relationships that ensure long-term cooperation. Chinese bureaucrats are being ridiculed as "serving the people's money (renminbi)" instead of "serving the people (renmin)" as they are supposed to. Indeed, corruption is rampant among bureaucrats, with many using their privileged positions to advance their own interests.
Against this backdrop, President Hu Jintao has been advocating a moral code called Eight Honors and Eight Disgraces (see list below). The underlying concepts are closer to Confucian teachings, which were severely denounced during the Cultural Revolution, than to Marxist-Leninist ideas. The moral code should be seen as not only intended to ensure the stability of the current government regime by strengthening ideological control but also to establish market discipline. Given that the abuse of power has been the major cause of disruptions to market discipline, members of the ruling Communist Party must take the lead in setting good examples for the people to follow.
Eight Honors and Disgraces
- Love the country; do it no harm
- Serve the people; never betray them
- Follow science; discard superstition
- Be diligent; not indolent
- Be united and help each other; make no gains at other's expense
- Be honest and trustworthy; do not sacrifice ethics for profit
- Be disciplined and law-abiding; not chaotic and lawless
- Live plainly, work hard; do not wallow in luxuries and pleasures
Source: President Hu Jintao's remarks before the National Committee of the Chinese People's Political Consultative Conference (CCPCC) on March 4, 2006
August 1, 2007
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