Social Networks, Rule of Law and Economic Growth in China: The Elusive Pursuit of the Right Combination of Private and Public Ordering

Abstract

Although social networks exist in every society, they are widely believed to play a different and more prominent role in Asian societies, especially those with a Confucian heritage, than in Western states, particularly Western states with mature capitalist economies, liberal democratic political systems with robust civil societies, and well developed legal systems characterized by rule of law and a modern bureaucratic administrative system. This article explores the role of social networks in economic organization, development and growth in China, with reference to the experiences of other countries where relevant.

I consider the relationship of private ordering, networks of relationships and informal law to formal law and rule of law, taking up in particular the claims that the former are an adequate substitute for the latter and sufficient for sustained economic growth (or at least sufficient if combined with sound economic policies and favorable contingent factors such as political stability, adequate natural resources, an advantageous geographical location, etc.). The relationship between private ordering, social networks, informal law and economic growth has long been the subject of controversy. While neo-classical economists struggled to explain the East Asian Miracle, others were quick to champion social networks, clientelism, corporatism and a rule of relationships as alternatives to rule of law and clear property rights. Although the Asian financial crisis took some of the wind out of the sails of the challengers to neo-classical economic theory, the subsequent quick turn around of many of the economies breathed new life into what appeared to be a settled debate, especially since the recovery was attributed in part to family and social networks. The high incidence of family businesses and the relational nature of much business in Asian countries appears to have helped cushion the shock of the Asian financial crisis by providing a social welfare network in countries where the social security system is typically weak, and by making it possible to raise capital to start over, thus contributing to a speedy economic recovery.

Notwithstanding the rapid return to health of some of the Asian economies, I shall argue that relationships, social networks and private orderings are not an adequate substitute for formal law and rule of law, and that the latter are necessary for sustained economic growth. Nevertheless, there is a role for private ordering, relational networks and informal law as complements to formal law. This is especially true during a transition period where markets are imperfect and institutions weak. But even in mature economies with well-developed institutions and rule of law, social networks, private ordering and informal law still play a complementary but nonetheless significant role.

Keywords: social networks, economic development and growth in China