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NUMERO 20 - 29/10/2014

 Does law matter for economic development: the case of China

Traditionally, law has been seen as particularly important for economic development, and variations in laws quality across countries had been used to explain the cross-national disparities in economic performance. It has also been proposed that good laws can support a well-functioning banking and financial sector which in turn co-determine the overall direction and quality of the economic development. However, the importance and role of law in economic development has recently been doubted, with many pointing out the stark contrast between Chinas weak laws and spectacular economic performance over several decades. Although it is true that Chinas growth does not seem to endorse the general thesis that only strong law can support strong economic performance, I believe that Chinas seemingly contradictory example simply highlights the necessity to refine the theory and differentiate between transition economies on the one hand (e.g. BRICS) and market economies (e.g. US, UK) on the other, but it does not fundamentally undermine the importance of law for economic development. My argument is two-fold. Firstly, many commentators rely on a mistaken assumption about the initial and subsequent growth of Chinas economy, claiming it occurred entirely or almost entirely without the support of law. I will show this to be incorrect on both accounts. Second part of my argument focuses on the real utility of extra-legal substitutes, with particular focus on the later stages of the transition. I will argue that although social norms and other extra-legal substitutes can support development up to a certain stage, sole reliance on such substitutes becomes an obstacle to further growth once the economy gets to a more advanced stage in transition. I will provide examples which show that China is already experiencing problems due to imperfect or even missing laws, and argue that remedying such inefficiencies and enabling further growth are only possible with stronger, better-enforced law. Parallels will be drawn with the development in Russia and the historical experience of the Central and Eastern European transition in 1990s... (segue)

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