In an indepth Q&A with The Wire’s Kristina Northrup, Meg Rithmire, F. Warren McFarlan Associate Professor of Business Administration at Harvard Business School, talks about China’s real estate bubble; if China can develop a modern financial system without rule of law; and why it’s not China that is reshaping the global order, but the world’s response to it. Highlights:
Rule By Law and Rule By Market
“There’s a phrase that legal scholars use to talk about the rule of law in China: it’s rule by law. It’s the party state using law to rule the people, and not allowing law to constrain its own actions. It’s the same with the market. Instead of allowing markets to discipline actors in the financial system or discipline firms, especially state-owned firms or connected firms, markets are used to discipline some people, or to uncover how people are going to behave. But it’s the state that does the disciplining, and so I call that rule by market.”
Can China Develop a Modern Financial Sector?
“A question that people are missing is, can you have a monopoly on political control and no rule of law, and a modern financial sector? The evidence so far is, no. It’s really hard to have a modern financial sector without rule of law, without transparency, and accountability, while you have a party that refuses to allow markets or law to discipline itself.”
Don’t Underestimate the Chaos Factor
“What’s really interesting is that for a long period of time, the question people were asking was, how will China reshape the global order? How will they reshape global institutions? Actually China would prefer open institutions for trade and investment, for a variety of reasons. It’s actually the host countries and other trade partners that have erected barriers in response to China.
What the fallacy would be is to assume that every firm’s action reveals something about what the state wants to do. If we’re trying to learn about what China wants, how it behaves, how Chinese firms work, and then we say they’re all extensions of the state and acting as extensions of the state, we miss a lot of the story, which is the chaos of how China’s industrial policy works, the chaos of the financial sector, the ways in which private firms are subverting the interests of the Chinese state, and the kind of learning and experimentation that’s part of what China has always done in its economy and in other realms. Instead of thinking of every action of a firm or an individual as revealing some data point in some master plan, we should realize that it’s all pretty chaotic.”