TCS Daily

When Form Follows Function: China's Property Pangs

By Philip Levy - March 20, 2007 12:00 AM

The People's Republic of China late last week gave private property equal legal status to state property. The 247-article law, not yet publicly released, was intended to bolster China's market reforms.

This would seem to represent a landmark in China's move from an isolated socialist state to an international economic power. In some ways it is. Aside from the symbolic move away from one of the central tenets of socialism - state ownership of property - one could tell it was significant by the uproar it caused.

True, it was a distinctly 'one party state' kind of uproar. There were no impassioned speeches of opposition in the National People's Congress nor nail-biting votes. In fact, the People's Daily reports that it took less than a minute for the nearly 3,000 deputies to pass the measure and only 90 attendees failed to vote in favor.

But the law had first been introduced in 2002 and suffered notable delays. The Party made clear this time around that dissent was unwelcome, effectively discouraging protest. In an apparent attempt to mollify the stifled opposition, China's Premier Wen Jiabao did not even mention the advance in his major two-hour address to kick off the annual legislative session.

Putting symbolism aside, though, what of the substance? There are a couple reasons to think this is less dramatic than it seems. Both have to do with the subtleties of how "rule of law" really works.

One would normally think of property rights as a prerequisite for a market economy to function. Yet China seems to have enjoyed rapid growth and over $2 trillion in economic transactions without having the present law in place. The private sector reportedly accounts for two thirds of this activity. How could all of this activity take place without formal property rights?

Informal property rights can substitute for formal ones. The enforcement of these informal rights can come through family ties, communities, or social custom. Even here in the United States, it is parental glowering rather than local law enforcement that stops my daughters from taking each others' toys. Studies in the developing world have found that it is possible to have reasonably well-functioning markets for housing, both sales and rental, even among people without formal title.

There are limits, though, to how well these informal substitutes work. One developing-world study found that the ability to buy, sell, or rent in these lawless conditions could depend on how well established the community was, how long an individual had held the property, and even whether it was a man or a woman trying to sell.

Though China has managed reasonably well without the new law, it could represent a positive step to have it on the books. How big a step depends on whether individuals and companies in China can make use of the books. One can have all sorts of wonderful laws written up, but if there is no independent judiciary willing or able to enforce them, they are not worth much.

In China, the courts function as an administrative arm of the government. Judges are members of the Chinese Communist Party. There is no pretense that they represent an independent source of power that could check the predatory inclinations of high officials. Protection against such predation - as in improper land seizures -- was one touted objective of China's new property law.

In those countries where we think of the rule of law as functioning well, courts do protect against the power of the State. Where judges are not dependent upon political patrons and there is a tradition of judicial supremacy, this constraint can be very effective. There are plentiful examples in the developing world, though, of judges who serve at the whim of the executive. In such cases even the most elegant laws protecting individual rights have limited value. Even for enforcing private transactions, a dependent judiciary can be an invitation to corruption.

To quote the old proverb, though, a journey of a thousand miles begins with a single step. There is no instant formula for achieving the rule of law. Proclaiming an individuals' right to private property at least offers the hope that some day they will be able to enforce that right.

Philip Levy is resident fellow at the American Enterprise Institute.


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