Limited Property Rights and the Rise of the Private Sector in China:
The Case of Wenzhou Chambers of Commerce
Meina CAI
University of Wisconsin-Madison, USA

Why and how has the private sector flourished and become the main engine of economic growth in China, despite weak legal protection of private property rights?  Departing from the existing state-centric approaches, I argue that the success of the private economy in China can be traced in part to the action of its private entrepreneurs.  Treating Chinese property rights as endogenous, I argue that private entrepreneurs have promoted property rights informally through business organizations and chambers of commerce in particular.

The existing literature on Chinese property rights almost exclusively focuses on the rise of township and village enterprises (TVEs).  The dramatic privatization of TVEs since the mid-1990s, however, calls for scholarly attention to be shifted to the private sector.  Most of the literature examining the private sector and business organizations focuses on China’s prospects for democratization.  Where the literature explains the rise of the private sector in China, the focus has been largely on the local state.  In contrast, relatively little has been done to address the vital relationship between property rights, private firms, and business organizations in China.  My approach of focusing on the role of private firms and their organizations in promoting property rights fills this gap in the literature.  

The arguments developed in this paper are supported by the case study of Wenzhou chambers of commerce.  Chambers of commerce are able to promote property rights effectively by building up a reciprocal relationship between local governments and private entrepreneurs.  These voluntary organizations create incentives for government agencies to resist arbitrary expropriation by providing government agencies benefits such as taxes, employment opportunities, and local economic growth.  By establishing themselves along locality and sectoral lines, chambers of commerce create cohesive interests among their members and facilitate their common interests through reputation-based punishment mechanisms. 


The Determinants of Taxation Outcomes in Latin America:
Do Political and Institutional Factors Really Matter?
André CANUTO
Federal University of Pernambuco, Brazil

Over the previous 15 years Latin America has shown an impressive increase in the aggregate tax revenue. Despite some variation across the countries, the tax burden in the region hiked up in the early nineties and till the end of the 2007 fiscal year it has not yet stopped growing. There was great scepticism about these countries' chances of improving, in the short term, their extractive capacity. Which factors could then explain such surprising improvements in tax collection in such a short period? What factors account for observed variation across the countries?

In the language of the transaction-cost politics, tax policy, as part of the economic process, is ultimately the product of an equilibrium outcome inside a political process. This political process is influenced by the costs of negotiating and implementing agreements, most notably costs of coping with information asymmetries and of making commitments credible which are associated with institutional legacies (NORTH, 1990; DIXIT, 1996). In this sense, what was the institutional configuration that helped reduce transaction costs and thus enabled many countries to embark on successful taxation initiatives?

Using data from a panel for 18 Latin American countries, we assess the contribution of political and institutional factors as well as the role of tax morale (defined as individuals’ attitudes toward tax evasion) as fundamental determinants of a nation capacity to collect revenues.  These factors are usually viewed as the variations in tax shares that cannot be explained inter alia by standard economic factors such as the Olivera-Tanzi effect, the potential tax base owing to the fluctuations in the economic environment and in tax structure, and have not been systematically investigated in current scholarship. This alternative approach for analyzing tax effort provides a good understanding of tax policy outcomes in developing countries with volatile macroeconomic conditions and great political instability.


Roofs or Stars: How Do Culture, History and Traditional Chinese Thinking Affect Private Property Rights Allocation in Mainland China’s
Land and Housing Market?
Rui CHEN and Rita LI
University of Hong Kong, Hong Kong SAR

There is a strange phenomenon in China’s rural housing: dwelling buyers only buy a residential unit but NOT the land on which the house is built. Legally speaking, those who buy these residential units are illegal buyers. If in time the government needs to use the land for some other purposes, it might declare the transaction void, and the house would need to be returned to the land owner. This kind of housing transaction accounts for up to 40-50% of land in Shenzhen, and 20% in Shanghai.

In sharp contrast, however, those who buy dwellings in urban areas buy both the legal title to the land and to the housing.

Why is this the case?  Our research questions are these: (1) Why there are two different kinds of policies under the same ruling body? (2) Why do risk-averse home buyers take the risk? We try to look at the issue from transaction costs theory, history of land policy, and traditional culture in both ancient and modern China. Empirical data, case studies, and traditional Chinese literature writings will be searched for our study.


Why the License Regulation of the Cell Phone Industry Collapsed:
On the Enforcement Cost of Monopoly
Xiaofang CHEN and Zhimin LIAO
Renmin University of China, China

This paper provides an explanation of the collapse of license regulation in the cell phone industry in China.

In 1998, strict license regulation was imposed by the Ministry of Information Industry (MII). The regulation was said to protect the domestic corporations from foreign competitors, and to prevent the waste of repeated investment. Before 2005, there were only 50 licenses issued to 39 corporations, most of which were state- owned enterprises. The regulation brought huge profits to SOEs and to the regulator. Some corporations of MII didn’t have production lines, but they earned billions of RMB each year by leasing licenses to private companies.

However, in 2005, the MII transferred its power of license issuance to the Committee of Development and Reform. Two years later, the license system was completely repealed.

Why was the regulation repealed? It was said the domestic corporations had come to be strong enough that they didn’t need protection any more. We instead argue that when the enforcement cost of monopoly sharply increased due to a technical innovation, the monopoly became valueless for the SOEs and the regulator. That’s why it was repealed.

According our investigation, the production cost of cell phones was once very high. In 2004, an invention of Integrated CMOS Chip by a Taiwan company simplified the production and significantly lowered the cost of cell phones. In that year, numerous non-licensed factories emerged and produced cell phones. The illegal cell phones were so cheap that they soon flooded the market. Nearly all the SOEs suffered huge losses due to the competition of cheap cell phones. The situation became worse, for many legal cell phone corporations were next to bankruptcy in 2006 and 2007.
 
Because the Integrated CMOS Chip extremely lowered the threshold of the industry, the regulation authority found it impossible to prevent the mushrooming illegal tiny factories, so they couldn’t keep the monopoly profit for the licensed corporations. Then we observed the abolishment of license regulation along with the bankruptcy of SOEs. These facts validate the hypothesis that the increased enforcement cost of monopoly explains the collapse of regulation.


Protection as Persistent Equilibrium:
Agriculture in the ASEAN Free Trade Area (AFTA)
Jose Rowell T. CORPUZ and Desiree A. DESIERTO
University of the Philippines, Philippines

Why do nations tend to protect their agricultural sector? Amidst participation in various international and intraregional free trade agreements, and despite their espoused beliefs that there are gains from trade, countries always seem to try to exclude certain agricultural crops.  Indeed, multilateral trade agreements (MTAs) have faced deadlocks due to the reluctance of member nations to agree to particular provisions on the trade of agricultural products. Consequently, Preferential Trade Agreements (PTAs) – so-called “pseudo-WTO” - have become a bandwagon in intraregional trade.

This paper posits that such protectionist behavior in agricultural trade is a persistent equilibrium – a path dependent outcome derived from the strategic interaction of optimizing players that are constrained by historical and institutional arrangements that foster and/or limit the scope of trade.

We use a 2x2 coordination game to allow for multiple (Nash) equilibria: a completely “free-trade” outcome, a purely “protectionist” stance, and a mixed arrangement.  Choosing between two strategies “Free-trade” and “Protection”,  two players represent competing groups – one gains more from free trade in agriculture, while the other benefits more from protection, but each would prefer coordinating on either free-trade or protection than not coordinating at all.  (Coordinating on “protection” might then entail the two groups voluntarily entering into a PTA.)

The particular payoffs of the game are parameterized by historical forces that shape the players’ preferences for (agricultural) trade.  As specific illustration, we look at the participation of the Philippines in AFTA, and examine its historical origins, existing laws and agencies, and relevant cultural norms and ideologies.  Some of these foster free trade, while others (perhaps inadvertently) protect the domestic agricultural sector.  The interplay between such forces highlights the difficulty in ascertaining the ‘net’ preference for agricultural trade vis-à-vis protection.  Consequently, when the overall institutional framework is itself unclear about its stance on trade, the likely outcome is a mixed equilibrium where the country joins AFTA 'in paper’ but also enters into separate PTAs.  This, in turn, casts doubt on the efficiency of AFTA, especially if other member nations obtain mixed equilibrium arrangements as well.


Establishing an Autonomous Cordillera Regional Government:
A Case of Vertical Disintegration
Santos Jose O. DACANAY III
University of the Philippines, Philippines

Twenty years after the ratification of the 1987 Philippine Constitution that provides for the establishment of an autonomous region of the Cordilleras in Northern Philippines, the region is poised once again to enact and ratify an organic act for the third time creating a regional government after two failed plebiscites in 1990 and 1998.  The paper explores whether the establishment of a regional government as an additional, intermediate layer between the national and local government units is a case of vertical disintegration.  Vertical disintegration occurs when various diseconomies of scale or scope breaks the administrative and government process into separate entities, each performing a limited subset of activities and providing public goods whose benefits accrue to different levels: local, regional and national.  Hence, the paper extends George Stigler’s work which suggests that the size of the market (or government jurisdiction in this case) limits the extent of specialization which disintegration represents.

The level of analysis in the study is the entire value chain of the local to the administrative regional government in the Cordilleras, and the fiscal transfers of the national government to the region.  This approach portrays both the processes and the institutional context of fiscal administration and public goods provision, depicting episodes of vertical disintegration.  The paper is based on qualitative and quantitative sources of evidence: legal documents and organic laws, and the corroborating panel data of local government units’ income and expenditures for the period 2002 to 2006.  Results show that vertical disintegration was conceived in order to share risk in the conflict-ridden Cordilleras by clustering indigenous or culture-based local government units which require proximity for building a common framework and sharing new ideas.  The requisite condition that vertical disintegration is possible if and only if total fiscal revenue is higher under vertical separation than under integration was not supported by the data.  This suggests that in order for the establishment of an autonomous region to be sustainable, the spatial dimension of vertical separation should correspond to a re-designed fiscal structure based on the distribution of fiscal capacity.


Criminal Law and the Proof Beyond Reasonable Doubt Standard:
An Institution That Stamps Stigma
Laarni ESCRESA Guillermo
University of Bologna, Italy

The last two decades saw an expansion in the scope of criminal law as previously tortious offenses like the violation of an environmental standard and insider trading are criminalized. The main rationale is to move away from civil law’s traditional limitation on compensatory damages and take advantage of criminal law’s punitive sanctions. A tradeoff exists however, as the latter’s higher standard of proof leads to lesser convictions. Thus, whether or not the total expected punishment faced by an individual under criminal law is higher than the former becomes ambiguous.

This paper argues that this particular ambiguity will disappear once we consider the role of stigma as an additional sanction that is weak or absent in criminal law. We looked into the properties of criminal law as an institutional technology that has a relatively stronger capacity to stigmatize certain behaviors. Interestingly, this view has dominated legal scholarship but is treated with guarded skepticism in economics. An examination of its substantive concepts and procedural rules point to the “proof beyond reasonable doubt” standard as necessary for stigma to become binding as a social sanction. In a situation where asymmetric information with respect to individual types exists and when the wrongness of an act is as of yet to be established, a high standard of proof ensures a strong correlation between the two and hence, leads to a higher magnitude of the stigma. We attempt to illustrate this relationship in a model that leads to a separating equilibrium with a high standard of proof and a pooling equilibrium when mere preponderance of evidence as in tort law is required.


Will the Property Rights Reform of the Media Industry
Lead to a Free Press in China?
Jiao HU and Yuting FAN
Peking University, China

After nearly 30 years of economic reform, China finally made some critical steps to introduce private property rights in its media industry. It gives us a great opportunity to see how this change will affect media control and other economic/social aspects of China. While previous studies (Coase, 1974; Djankov et al., 2003) have shown that government ownership of media is not favorable, we will provide a specific case of a transitional economy.

From 2005, the Chinese government started to permit entry of non-state-owned capital into the media industry, although shares hold by this kind of capital cannot exceed 49% in any media. Recently in 2008, this limitation is further loosened. Also, the government promised that in next three years, more than 200 publishing houses and many newspapers/magazines owned by government branches will be made into “modern enterprises.”

This kind of change is familiar in most industries of China during last 30 years. But when it applies to the press, things could be much different and interesting. The most important difference is that the press is directly related to China’s ideology control. After private capital enters, government will still put harsh restrictions on the products of the press. Then, what does the property rights reform mean? Will the censorship be weakened? Will a free press come out eventually?

We build a model to capture this. At the beginning, government has 100% control over the press. Propaganda leads to very limited market, causing a great financial burden. As the economy grows and people are willing to pay more, the media seek to print more non-ideological content. In this market-expanding process, censorship becomes more difficult. To avoid even greater financial cost, the government has to introduce private capital into the press, which in turn expands the market further. We predict that both property and content control will be loosened. When this process will end depends on exogenous budget constraint of the government and technology.

Empirically, following Djankov et al. (2003) and using data before and after the reform, we will test the relationship among property rights change, media control intensity, and other social/economic outcomes. Data collection is in progress.


The Transfer of Agriculture Surplus Labor Force in China
and Its Influence on Manufacturing
Taiwen FENG, Linyan SUN, and Zhe HE
Xi'an Jiaotong University, China

In the past 20 years, China has achieved rapid growth in manufacturing. Manufacturing gives employment to more than sixty million people in 2006, which accounts for 29.12% of the entire employed person. However, the competitive advantage of our manufacturing mainly consists in lower labor cost. At present, there appears the shortage of the labors in some areas and industries. Meanwhile, the labor costs are going up quickly. Some manufactures went bankruptcy in the Pearl River delta since late last year. In contrast, there are great deals of surplus labor in rural areas. But when the mobility of surplus labor will be finished? It is an important question for the development of manufacturing in China.

After the late 1970s, a large number of people moved from rural to urban areas, since Chinese government relaxed the migration control. Moreover, rapid development of sectors such as manufacturing, construction and services in urban areas accelerated the demand for cheap labor. It is important to study the migration of labors for us, because the economy especially manufacturing will continue to develop in a high rate before the mobility of the surplus labor is finished. The tendency of China’s economy has attracted a lot of attention. Therefore, studying the economy development from the perspective of labor is important for us to determine the “inflection point” of China’s economy. Furthermore, it can also offer help for us to make strategies of developing manufacturing.

In this research, we will build a three-sector model to address the transfer of surplus labor force in the primary industry. We assume that the labor market is perfect competitive, so the mobility of surplus labor will finish when the marginal output is equal for all the three industries. As a result, the number of years for the mobility of surplus labor to be finished will be estimated. Furthermore, we study the determinants of the employment elasticity of manufacturing in China. Through this research we can learn much about the migration of the surplus labor in rural areas in China; also it is helpful for policy makers to adjust family planning.


Law, Economics, and Society: The Role of Law in Economic Development
Ivo GICO Jr.
Brazilian Institute of Public Law - IDP, Brazil

The modern development economic theory has yet to identify the real relevance of law in the development of countries.  We have now many examples of democracies who failed to develop and more stringent political systems that enjoyed consistent growth rates.  My current research agenda is to investigate the relationship between the emergence of rogue cultures, where the lack of trust in formal institutions has led to a pathological collective opportunistic behavior, creating a sub-optimal equilibrium (underdevelopment), and the legal response to this culture.

In Brazil, the so called “Brazilian way” (jeitinho brasileiro) is a paradigmatic example of the behavior mentioned above that has widespread roots in all social levels.  As a result, the legal system has degenerated in to an amorphous aggregate of excessively protective – and in many instances ineffective – measures and rules.  These rules contradict most of the conventional wisdom regarding the necessary characteristics of liberty, property, contracts and finance law, normally resumed as Rule of Law.  No close attention is paid to the underlying transaction costs issues created.  It comes to no surprise that almost half the Brazilian economy is now conducted under the shadow of Government, with all obvious fiscal and social implications.

China’s unprecedented growth has offered the same kind of institutional challenge, as more and more complex and trustworthy institutions are required for the immense population that continuously migrates to a modern capitalist society.  In many aspects, though for different reasons, Brazil and China seem to face the same institutional challenges and the solution may be surprisingly very similar.

Avoiding the one-size-fit-all approach, my primarily interest is to try to identify the major characteristics that a legal system has to build up in such an opportunistic environment in order to revert to a healthier environment for development.  I do not propose that Law itself would be a sufficient condition for economic development, but according to the currently available knowledge, from a transaction cost perspective, it is a necessary condition that may be hindering the development of legally underdeveloped countries.


Transaction Costs and the Price of Money:
A Case Study of Silver Dollars in the Qing Dynasty of China
Qi HAN
The Transition Institute, China

This research attempts to explain an economic phenomenon in Chinese monetary history. In the Qing Dynasty (1644-1911), foreign silver dollars flew into southeastern China in exchange for China's tea and silk. At the beginning, all silver dollars were regarded as lumps of silver and priced according to the amount of pure silver they contained. Most of them were reminted into sycee (lumps of silver, usually in the shape of a horse's hoof). Gradually, several kinds of silver dollars won the credit of local people and began to be used as currency along with sycee. The price of these lucky silver dollars eventually surpassed the price of sycee which contained as much pure silver as they did. This price phenomenon seems weird, as in Chinese tradition only the amount of pure silver counted when sycee was priced. This research tries to use historical material and economic theory, especially transaction cost theories of money, to explain the time and space pattern of the prices of silver dollars as compared with sycee. The tentative answers lie in the low evaluating cost of silver dollars and the familiarity of local people with some particular kinds of silver dollars.

Although this research is not directly focused on institutions, it may well improve our understanding of monetary institutions in two ways. First, silver dollars' popularity and circulation in China eventually induced China's government to mint silver dollars and to prescribe that the silver dollar minted by China's government was the only legitimate unit of account and medium of exchange in China. This research may help to understand the whole process of institutional change of silver dollars in China, which is valuable to institutional economics. Second, this research might throw some light on the relation between money's economic functions and the qualities of commodities which serve as money. To make clear such a relation is indispensable to understand the functions of monetary institutions as well as institutional change of the monetary system.


Build-Operate-Transfer (BOT) Contracts in Strong and Weak States
Karl Robert L. JANDOC
Asian Development Bank, Philippines

To say that strong institutions are essential to economic development is hardly controversial. Strong institutions, which can be both formal (e.g., laws, third party enforcement) and informal (social networks), are often present in what is called a “strong state”.  North (1990), North (1981) and North and Thomas (1973) have emphasized that institutions (especially formal ones) were instrumental in the development of markets—that is, institutions were crucial in facilitating anonymous exchange and long-term contracting.  Strong formal institutions are present when the state can credibly commit to its prescribed rules and regulations and when these rules are not subject to truck and barter in the market.  Thus, many development experts prescribe institutional reform as a fundamental step towards economic progress.

Institutional reforms involve many government processes.  Much of the controversy surrounding BOT projects stems from the awarding process. In many developing countries, the guidelines on how to grant projects to a concessionaire are sometimes being tinkered with, much to the dismay of the general public. The key issue here is commitment. If the government can commit to certain rules (for instance, the “two-envelope system” in Solicited projects), it can be shown that this feature alone has important welfare effects. On the other hand, if the government is unable to commit to these rules, the participating bidding firms will alter their behavior such that the eventual welfare outcome is less than what is socially optimal.

Using a standard auction framework, this paper attempts to characterize BOT contracts under strong and weak states where the issue is the presence of the ability to commit to certain rules of awarding.  It shows how the equilibrium quality and payment package changes when states are unable to stick to its rules. The second section presents an auction model that characterizes BOT contracts with a strong state. The third section will then look at the derivation of equilibrium quality and payment under weak states where the government cannot assure commitment. The fourth section compares the equilibria of these two regimes. The final section presents policy implications and issues from the modeling exercise.


Rising Energy Prices and Energy Policy Adjustment in China:
Evidence from China’s Manufacturing
Ting KONG, Lin-yan SUN, and Zhe HE
Xi'an Jiaotong University, China

Manufacturing plays a very important role in China’s economy. According to a forecast, China will become the world's largest manufacturer in 2009 with its manufacturing value added accounting for 17 percent of the world, more than the 16 percent of the United States. However, energy affects the sustainable development of China’s economy and manufacturing. As a motive and a restricting factor, energy not only limits China’s economic development potential and future but also affects China’s economic structure.

China has been implementing energy price controls for a long time. Price controls, which maintain the domestic energy prices below the level of “free” market prices, aim to protect consumers and manufacturing in international trade. However, the low energy price policy leads to high and inefficient energy consumption in China. Therefore, many scholars are considering whether there is a need for China to adjust its energy policy.

The Chinese government indeed has made some efforts to promote energy price reform, but still far from enough. For instance, they raised refined oil prices nine times from 2003 to 2008 in the context of the continuous rising of the international oil price, yet the domestic price is still lower than the international price. Nowadays, the prices of oil, natural gas, and electricity are still charged by the Chinese government, which is quite different from the international market pricing mechanism. China’s low energy prices can not sufficiently reflect the social costs beside the production costs. Once the government releases the energy price controls, the profit space of enterprises and industries will be compressed. Therefore, the rise in energy prices will significantly affect the profit of the manufacturing industries.

This study focuses on the impact of China’s energy policy adjustment to manufacturing industries. Every change of energy prices can stand for energy policy adjustment or energy reform. Then with time series data for some variables, including prices, energy intensity, construal variable, and so on, we build a model of the impact of energy prices on manufacturing industries to study the effect of energy policy adjustment. This approach will help us know more about China’s energy policy from the level of the manufacturing industries.