A Comparison of Chinese and European-Style Federalism from a Law and Economics Perspective

Abstract

China’s transition from a planned to a market economy has been very successful, although the reforms have been quite different from those proposed by most Western observers. Despite the fact that property rights were not well defined or formally secured, and that one party dominated the political system, China has become one of the fastest-growing economies in the world. What are the reasons for this success?

Following the tradition of Hayek, Tiebout and Brennan/Buchanan some scholars place emphasis on the political decentralization initiated by the Chinese central authorities and the competition between provinces and lower level political entities triggered by this decentralization. In the EU, a specific federalist structure has been evolving, whereby the Member States transferred, step by step, more and more competences to supranational authorities. One important goal of European integration was to create a common market and thereby to improve the economic performance of the Member States.

Two questions arise. First, under what conditions will a federal structure contribute to economic growth? Secondly, what are the specific features of the federal structures in the EU and China, respectively, and what are their social costs and benefits?

In the next chapter, we will briefly present the concept of marketpreserving federalism, which tries to find an answer to the first question.Thereafter, we will discuss to what extent the federal structures in the EU and in China are expected to have economically beneficial consequences, and whether China can learn something from the EU experience.

JEL Classification: P26, P48