The dramatic growth of the Chinese economy over the last half century has been transformative, both for China and the world, and much ink has been spilled in an effort to draw lessons from China’s experience. Typically, the actions of the state have the starring role: the central state combined political control with gradual economic loosening, local states were given the freedom to act as entrepreneurs, a developmental state directed growth and managed integration with the global economy.
In her illuminating book From Click to Boom: The Political Economy of E-Commerce in China, Lizhi Liu makes a bold new argument: it is not what the state did, but rather what it did not do. The state exercised deliberate inaction and strategic nonregulation, thus allowing e-commerce platforms to provide many of the functions that would typically be provided by the state – an argument that has broad implications for many parts of the developing world.
The empirical context is China’s e-commerce industry, an industry that involves “impersonal exchanges between small, anonymous traders in distant localities” (p. 3), exactly the sort of transactions that should require formal institutions to enforce contracts, prevent fraud and settle disputes. Why, in the absence of formal institutions to guarantee contracts, would Chinese consumers trust one another? Even more perplexing, why would this market explode into the world’s largest e-commerce market, transforming the Chinese economy and becoming a leading force in e-commerce globally?
According to Liu, in the absence of the formal institutions that are widely viewed as crucial prerequisites for economic growth (e.g. state protection for property rights, contract enforcement and the rule of law), the Chinese state outsourced the development of these functions to e-commerce platforms: escrow payment systems were used to compensate for lack of trust, credit scoring systems were used to lower the risk of lending, juries composed of users were used to adjudicate disputes (p. 14). Liu calls these institutions private regulatory intermediaries. As their scope grew, the state had the ability to shut these intermediaries down at any point but made a deliberate decision not to. This was strategic non-regulation.
In addition to having a novel and important argument, the book is a model of innovative research in political economy. It is grounded in a wealth of original data and cutting-edge methods, combining over 200 semi-structured interviews with national surveys and randomized control trials (conducted in collaboration with the major e-commerce platforms).
Liu provides fascinating insight into how e-commerce has changed the dynamics of China’s political economy. E-commerce entrepreneurs are less reliant on resources that are typically controlled by local governments (e.g. land use rights, capital and loans, business licenses), but they have become more reliant on the national e-commerce platforms, both for the institutional support they provide and for their ability to drive traffic. E-commerce platforms often have the upper hand with local governments, due to their ability to exploit interjurisdictional competition in order to gain leverage (p. 112), but they are very much at the mercy of the central government. The centre relies on the platforms’ ability to facilitate e-commerce and drive consumption, but the centre’s ability to control the internet and shape regulation ultimately gives it the upper hand. The extent of collaboration between platform firms and the central government – and the revolving door between the two – is revealing and provides strong evidence that private firms can be very much servants of the state, no less than state-owned enterprises.
The Chinese state comes off quite well in this telling – after all, the state is strategically deciding not to regulate e-commerce. Was it the wisdom of policymakers that led them to create space for private platforms to devise their own solutions to China’s institutional weaknesses? Or were policymakers taken unaware by the rapid growth of e-commerce, and thus institutional outsourcing was inadvertent rather than strategic? Discerning the intentions of why policymakers did not do something is not easy – akin to explaining why the dog didn’t bark in the night – but some support for the inadvertent argument can be found in the large number of countries that, when faced with the rapid rise of new technology-enabled business models, similarly found themselves on the regulatory backfoot. In fact, the explicit model of many platform businesses in the initial years of rapid growth was to move fast before regulation could catch up (e.g. Uber, Airbnb, etc.).
The book is also notably optimistic about the governance role of platform firms. According to Liu, the “platforms are akin to ‘semi-governments’ in many governance areas, providing institutional substitutes for the state” (p. 184). While the role that these platforms have played in China’s transformation, and that Liu so ably documents, is remarkable, one should be cautious in seeing them as a substitute for the state. Institutions created by the state are typically the result of contestation, and, given that these institutions shape who wins and who loses in a society, the battles can be intense. Chinese e-commerce platforms have developed institutions that are encompassing, impersonal and limited – Liu’s definition of private regulatory intermediaries (p. 38) – not out of a sense of social responsibility or as the product of contestation, but because these are the most effective business models for their platforms. While the interests of platforms and the state were aligned during the boom years of Chinese e-commerce they can also quickly diverge. The regulatory crackdown on e-commerce after 2020, discussed at the end of From Click to Boom, was an initial sign of such tension.
Liu’s important book provides a template for understanding how platforms can shape markets and society, and it documents a remarkable transformation, but it is only the first chapter in a rapidly evolving story.
