In China's Growth, Linda Yueh aims to discover what has propelled China to become the world's second-largest economy and bettered the standard of living in this most populous nation. She employs data at household and firm level to shed light on the details of the key growth drivers, including institutional change, labor productivity, corporate restructuring, human capital, technology transfers, and innovation. Yueh's compelling explanations of the incentives that have made China's remarkable growth possible help us to understand the recent rise of this giant economy. Scholars and students alike will be enlightened by her work.
For many economists, China's “remarkable growth performance was accompanied by a relatively underdeveloped legal and financial system, which makes China a puzzle or paradox given the focus of economists on the importance of well-defined legal and formal institutions” (p. 7). Yueh is arguing that China's development is different from the classical model, which claims that a strong private property regime is foundational. Yueh posits that China did not follow the classical model because it lacked a private property regime until very late. As Yueh argues: “It was not until the Property Law of 2007 that equal protection was granted to both private and public property” (p. 303). This complements her claims that China's growth began with “‘institutional innovations,’ which were informal institutional arrangements that gave profit incentives to farmers, state-owned enterprises (SOEs), and even local governments” (p. 22). Surprising or not, Yueh is correct in saying that a formal legal system may not be a requirement in all cases of economic development.
Yueh raises a good question: How can we explain the Chinese case, in which there was only a weak legal system lacking well-established laws? As a matter of fact, civil disputes were largely addressed through mediation in traditional Chinese law before the so-called “modern” Western law was introduced in the late Qing dynasty. That is to say, in Chinese communities, many kinds of informal tools, such as customs, and rules within some groups, have been employed to solve business struggles.Footnote 6Guanxi is certainly one tool among these. Those who stick to formal legal law would miss this point.
Furthermore, Yueh finds “some correspondence between the levels of income and legal reform between the US and China.… [T]he US Patent Act of 1790 was adopted when US per capita GDP was US$1,257, and China's Patent Law was first promulgated in 1985 when its GDP per capita was US$1,519” (p. 45). She states as well that “the US was a leader in international norms, whereas China revised its IPRs to comply with international law” (p. 45). Yueh seems to misunderstand the true role of intellectual property rights (IPRs), particularly when she tells us that the United States has been the leader in setting norms for the international community in the contemporary era. Her misunderstanding is especially clear in the case of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
Approximately fourteen American multinational corporations lobbied for TRIPS as a means to protect their own interests. After congressional approval, the United States asked the European Union and Japan to support this agreement to maintain the advantageous position held by advanced economies in the global market. Developing economies, despite their poor legal infrastructures, are now required to follow the TRIPS rules and are unable to acquire new technology without paying licensing fees.Footnote 7 In addition, China does not comply as fully with IPRs as it may appear. Some have argued that the success of China's industrialization of knock-off (shanzhai) handsets is mainly because governments pretend not to see the infringement of IPRs.Footnote 8
Other minor issues may also need to be addressed by Yueh. First, in the conclusion Yueh seems unconfident about China's legal reform. She argues that “China … will take some years yet before the legal system is better developed. Even then, with a one-Party state, the extent of effectiveness of the law may be stymied by the dictates of policy” (p. 319). Here, we need to remind ourselves that this one-party state seems to have managed China well since conducting its economic reforms.
Second, in terms of China's rise in the global economy, Yueh holds the belief that since China is still at a low level of development, “global integration would benefit its own development as well as that of the entire world” (p. 267). In my view, China's growth may, however unexpectedly, cause a different kind of side effect: China (and other giant economies) will absorb a large proportion of the capital that industrialization requires. This will compress the developmental space of late-industrializing countries, thus making other developing states obsolete.Footnote 9
All in all, although some of its claims may require further consideration, China's Growth is quite convincing in its overarching argument. Yueh's work is a solid contribution to social research.
