China as a Test Case: Is the Rule of Law Essential for Economic Growth?

Abstract:     
China is the fastest growing country in the world. Yet its adherence to the Rule of Law is frequently criticized. Does the coexistence of these two facts mean that institutions in general, and the Rule of Law in particular, are not necessary for sustained economic growth? The experience of the Asian Tigers, who had an overall growth record in their early years at least equal to China's, suggests that China may face a slowdown in growth. China is still a poor country, poorer than the Asian Tigers when their growth slowdown began. The Asian Tigers faced many of the same problems of crony capitalism, connected lending and poor corporate governance that China now faces. China's institutional and governance weaknesses involve a weak judiciary, including a lack of judicial independence; a weak financial sector with inadequate banking and corporate bond markets; and an outmoded bankruptcy system. Yet China's leadership, starting with Deng Xiaoping, has avoided some of the missteps of the transition countries of the former Soviet Union and has recognized the need for an evolutionary approach toward a more efficient economic system. But there is nothing in China's experience to date that would lead to the conclusion that institutional and Rule of Law issues are not important in economic development.

Keywords: China, rule of law, institutions, governance, corporate, creditor, shareholder, purchasing power parity, PPP, exchange rate, growth rate, Asian financial crisis, crony capitalism, total factor productivity, TFP, state owned enterprises, SOE, Communist, CCP, judicial review, judicial independence

Working Paper Series