Foreign Policy Research Institute A Nation Must Think Before it Acts Property Rights Reform in China

Property Rights Reform in China

I have a truly bizarre assignment of talking about property rights in China. As many of you know, a big part of the discussion of constitutional reform right now, is about the inclusion of provisions relating to property rights. Now this sounds wacky in a system that remains officially socialist and a variety of other things, and where the translation of the proletariat— the core of the ruling classes— was of course literally the “propertyless classes.” Yet, now we’re talking about property as a constitutional principle.

If you look at the provisions that are being put in place, they are at some level, remarkable. The big two changes that get a lot of discussion are the protection in revised article 13 for lawfully owned private property— private property— that that shall not be violated— the right to hold that. And we also get an addition that says compensation shall be paid when such property is taken for a purpose that serves the public interest. Article 11 is also to be changed. Where we used to have references to a couple of types of non-public, or non-collective economies— the individual economy and the private economy— we now have more the generic reference to the non-public sector of the economy. And the state instead of guiding, supervising and managing them, now encourages, supports, and guides them— or will once these amendments are ratified in March— and promotes their development according to law as opposed to simply overseeing their existence. We have elsewhere in article 10 another provision that adds a “shall pay compensation” requirement with respect to real property— and again a public interest requirement for so acting.

There are other elements scattered about the agenda of constitutional reform that also speak to the property question. In the preamble, there is a reference to the “builders of socialism” as a stratum that gets included among the good guys. This is taken to be, at least in part, a reference to the first group in the three represents— the entrepreneurial stratum, which is among the key property owning classes. Also, in the preamble we get the inclusion of the “three represents.” This, of course, again looks to those who have the biggest stake in property rights being protected— the entrepreneurial classes. And we have other two provisions that I’ll return to a bit later, a provision that the state shall protect citizens’ rights, which some people are reading as also heralding a potential, deeper entrenchment of property rights, although that may be wishful thinking. There is also a state pledge to create a system of social security appropriate to China’s current level of development, with improvement as the level of development rises. This has some interesting intersections with private property rights.

Now in some respects this sounds remarkable and in other respects it’s really fairly modest. There were provisions about property, indeed private property, in the constitution before. They just tended to be more interstitial and not so categorical. And there were, of course, a variety of laws on the books which have not been much supplemented during this period of discussion of property rights in the constitution. There was much discussion of how broad constitutional reforms should be. Even getting these modest property rights provisions in was fairly contentious. There was a good deal of disappointment that the Third Plenum of the 16th Central Committee last fall didn’t go further than it did in embracing property rights— that it wasn’t a bit more forthcoming. And there was a discussion of whether there should be a big constitutional reform or a small constitutional reform. Those favoring small constitutional reform won with arguments of gradualism and such.

There certainly were more radical ideas out there, there were conferences in Qingdao and Beijing, talking about more radical types of constitutional reform. There are certainly people who link an even more robust embrace of property rights to some pretty far-going constitutional reforms, including democratic elections, constitutional courts to review the conformity of laws to the constitution, and so on. For one example, you can look at Cao Siyuan’s latest book, which goes into those arguments in some detail. Cao is one of the most influential and visible of many intellectuals and scholars who favor such an agenda.

So, we have seen a politically contested move toward relatively modest-seeming byt symbolically significant changes in the text of the constitution on property rights. These changes were cast largely in terms of economic justifications, and not particularly populist ones. These justifications are the Jiang Zemin era type arguments that under market conditions private property rights are necessary for economic development and social progress. The idea is that you need to guarantee property rights, particularly of the entrepreneurial classes, to energize them and bring the “builders of socialism” fully into play. You need property rights to help build a prosperous economy. There were also some hints of the dark side of the economic argument: You need to do something to sort out property rights because of the discontent with official violation of property “interests,” even if one couldn’t yet fully call them rights.

This raises a question about the constitutional reform to include property rights that was this politically difficult and so legally modest— was it economically necessary? Were the economic arguments compelling? After all China’s done pretty darn well economically— though it’s hard to know what the counterfactual is, of how it wopuld hve done under a regime of optimal property rights— but it’s done pretty well economically despite a regime that has been squishy or ambiguous in its protection of property rights. You have high growth rates, you have the transformation to a marketized economy which is all about buying and selling rights in some form or another, many of them property-based. You had massive investment by foreigners who supposedly care about property rights more than the Chinese do, if you buy the old stories of basic differences in legal culture. And you had a sectoral transformation from agriculture, where you possibly could get away with vague rights, into industrial and service sectors, intellectual property sectors— where clear rights are thought typically to be more central factors in securing economic gains.

If you look at what happened sector by sector, the different kinds of property you can think of that are being discussed as in need of greater protection in Chinese law, you see a lot that sure looks like trading in property rights. In the rural sector: a broadening of contract based land use rights for peasants, a secondary market in land use rights, the transfer of land use rights outside of the collective, the conversion of agricultural land on a massive scale to residential and industrial uses by people who believe they have a good enough claim to the land to invest in capital in it. In the urban sector anybody who’s been to a Chinese city has seen the plowing under of the hutong and the building of large skyscrapers, and then the tearing down of a serviceable buildings to put up another larger one. You have the fairly rapid transformation to an increasingly industrialized, higher tech and internationalized economy in which transactions involving rights, or effective substitutes for them, are central and would not be undertaken unless parties thought the available protection of such rights-like interests looks good enough. This all has occurred despite what I think are fairly described as not terribly strong or clear property rights protections in the law on the books, let alone the law as implemented. Much of this has developed through a process in which the formal law has followed along at the very end, as it does in the conference. That is, the social or the economic practice wmereges and then we see a “backing and filling” in which such developments are approved and systematized in the law. Thus, the secondary market in rural land use rights emerged in the early `80s, but it gets constitutionalized in 1988. Private property as a economic phenomenon burgeons, but it takes a long time before we see the laws recognizing China’s myriad forms of ownership for enterprises now— private, partnership, small, medium, so on and so on.

We saw the merger and acquisition, or the privatization, or the foreign buyout of many former state-owned enterprises long before anybody was sure of just what legal rights the acquirers were buying. Indeed we’re still not sure, when you accumulate a large number of shares in a company, just how much transfer of control or ownership would follow. Bankruptcy laws are another area of similar developments— lots of enterprises go bankrupt and bankruptcy, especially the liquidation process that is the central feature of bankruptcy in China, is all about sorting our property rights. Yet the bankruptcy law on the books in China since the late 1980’s has not had much teeth and applied nominally only to state-owned enterprises. Whereas most of the entities that go into something that looks like bankruptcy did so at best in the shadow of— or with reference to— the formal state-eneterprise bankruptcy law, which we are told every year is on the verge of replacement by a new, revised, comprehensive bankruptcy law.

So what does this tell us about the strength or weakness of an economic imperative to property rights reform in China? Let me give you a quick sketch of the debate, in a point, counterpoint format. One argument says, look, China has done pretty well, not in spite of the weaknesses of the legal protections for property rights but rather because of some of the ambiguity. And this is an argument that surfaced quite markedly in the middle to late 1990s to explain how things were going in the years preceding that. The argument is that you can “satisfice” with respect to property rights. “Good enough” may do it, and if you try to get too good, if you try to get too clean and crisp in articulating property rights legally, it can backfire. This theory emerged in the aftermath of economic “shock therapy” for former Soviet Bloc states. What Jeffrey Sachs and his ilk— in their prior incarnation before they discovered the importance of slowly built legal institutions— did to Eastern Europe, on this view, illustrates the danger: If you privatize too quickly and too rigidly and too clearly and too completely, you wind up with an economic mess. If you are China or any other transitional economy, you don’t want to be the typical post-Soviet state, at least not if China’s economic success is the alternative.

Even if excessively clear property rights would not bring an economic apocalypse, somewhat mushy property rights are, on this view, at least good enough. It’s somewhat lumpy— if you do well enough, provide security that is not complete but that is good enough, people will go forth and invest and have sufficient security of expectations. But beyond this “good enough” , there was an argument that said ambiguous, uncertain property rights actually were economically functional— they were highly adaptive.

The argument was that in China’s transitional economy, in the hey day of the township and village enterprise, the collective enterprise of the new sort, the reform era sort did better under a regime of ambiguous property rights. Because the government was still so deeply entangled with these enterprises, because the ability to go out and make money was so bound up with the need to get cooperation government gatekeepers, government sources of finance, regulatory bottlenecks of one sort or another— indeed being increasingly used corruptly, it made sense for enterprises to invite the government in, in some form, as a partner. We know from the studies of the many different forms of TVEs and such that cropped up during this era that such enterprises in diverse ways prospered in this environment and through such tactics. In that context, ambiguous property rights worked pretty well— they allowed the flexibility to bring the government in in a way that maybe clearer laws would have made more difficult or produced more obvious conflict.

Ambiguous or uncertain property rights avoided the problem of the anti-commons— something that comes up regularly in the literature on what went wrong in many post-Soviet systems— where too many people held clear legal property rights. Somebody could block the use of an asset because he is a government official, or because he was a private or public actor holding some other right or claim. There was also a more narrowly legal argument that basically said, China was changing so fast that it needed to adapt on the fly. The rights on the ground, the functional economic realities were changing so quickly that the attempt to write them down in a statute was actually going to do more harm than good. Especially in a Chinese context where, as we know, getting a law through the NPC, or even the NPC’s standing committee, can be a laborious process— once you get a law in place, it’s hard to go back and change it. What would follow then would be a needlessly hard choice: either one winds up ignoring the outmoded law, which is bad for the rule of law, or one winds up implementing it, which would be bad for the economy. And those who favored the development of the rule of law in China worried that the rule of law would lose when that particular push came to that particular shove.

Also if you’re constantly tinkering with the text of the laws you’re drawing on a resource that was extremely scarce in China— legal talent in the ’90s to draft and to implement laws. Moreover, it is, of course, devilishly hard to get the proper sequence of law reforms going when you’re changing pieces of the puzzle all the time. That is, even if you know what the right property law will look like given the existing framework of other laws and practices and what the right property law will look like when a significant phase of reform is completed, you may still not know what the right property law is to adopt now in a context that is about to change in uncertain ways and at an unknown pace.

There’s also a political argument for not doing too much too soon— for going very gradually in increasing protection of property rights in China. Obviously, property is a hard ideological nut to crack in a way that, say, contracts was not. We saw Jiang Zemin working mightily to redefine for the state sector to be the leading sector in the economy. Susan Lawrence did a wonderful analysis of that at another conference recently. Regrettably, I don’t have time to go into the pattern in detail. But, in short form, you see the gradual hollowing out of what it means for the state sector to be dominant. This was tough sledding politically, not least because it required tackling, at least in part, the property problem: enterprises “built” and “owned” by the “whole people” or the “collective” could be transferred into private hands. Ownership by the state as the agent of the people, which had long been the pillar of the state sector’s status as the leading sector needed to be removed and that pillar’s removal needed to be claimed not to jeopardize the stability of the socialist structure.

We also have seen the emerging concern about what happens— a concern most articulately pressed by China’s new intellectual left, if you will— the concern about what happens if you were to protect property rights robustly first, before you get the social security system in place, before you get the safety net in place, before you get means for redistribution in place. The fear is that you essentially wind up doing more of what China’s economic policies have done in recent years: privileging the rich at the expense of the losers under reform, with all the social tensions that that can reinforce.

Finally, the argument against clearer and stronger propery rights derives in part from a sense that some of the basic decisions still haven’t been worked out on how to strike the balance between incentives to spur growth and imperatives of social equity, and about how far and how fast political reform can be allowed to go. These factors underlie some of tensions you see in what’s on the constitutional reform and broader legal reform agenda right now. There, of course, is the standard, modernization theory-related arguments that never die because there is some persuasive power to them: If you have property rights that may help generate and shape the attitudes of a genuine middle-class, a genuine bourgeoisie, who may start pressing for political reform that the ruling elite doesn’t want to accept. Maybe short of that, property rights that are not vague or weak may fuel some of unrest from many sectors. That is, in China there are many people who are plenty angry about all sorts of things. As we’ve heard about earlier today, from Liz Perry and others, the problems in the countryside from peasants who face arbitrary rule and economic difficulties, the urban workers who face layoffs and uncertainty and eviction from residential areas slated for redevelopment. Such discontented elements already invoke property rights and kindred policies. Given more robust and clear property rights, they may go even farther off the tracks, as the regime sees it.

That’s one side of the story— the argument in favor of relatively vague and weak property rights and against clear and strong ones, based on their past or expected impact on economic prosperity and political stability. Let me give you a quick form of the other side-the argument that things need to change rapidly, despite the risks. There is an argument that doing more to legally clarify and entrench property rights and doing it more quickly is something that needs to be pursued now. On this view, China’s past success is not terribly relevant. The argument is that what worked in the past may not have been optimal then and certainly is not what China needs to do now. This argument emphasizes the big changes that have been and are going on in China’s economy: First, the destateification of the economy, the pattern of the government being so deeply entangled with enterprises is declining, as we’ve heard earlier in this conference. In that context the argument for ambiguous property rights, the old theoretical argument, starts to wane.

Second, Globalization— the doors rapidly have opened wider for foreigners to come into China and for Chinese companies and capital to reach beyond China. Partly, this means playing by the rules of an international system that takes property rights and their legal protection very seriously. There’s also pressure to level the playing field. The WTO’s non-discrimination principles create obligations to “level down” the advantages that protectionism has provided to Chinese enterprises, of coruse. But at the same time it has also brought arguments in China asserting the need to “level up” the rights protections, to reap the economic efficiencies that come with that, for Chinese enterprises, if they’re going to survive in the brave new WTO world of market competition.

Third, China rapidly has developed a more sophisticated economy— it has gone rapidly from agriculture, to industry, to real estate development, to mortgage-backed securities, to intellectual-property-intensive service industries and other sectors— where the “rights equation” may be a lot more complicated, where the arguments for clearer and stronger legal property rights become more compelling.

These kinds of arguments lie behind a lot of the attempts to draft lots of laws which look like they assume or provide on property rights, not just constitutional provisions, but rules on rural land use and transfer, urban land use, owners associations, cooperative and condominium structures, the property rights of enterprises, the rights of shareholders within enterprises, intellectual property protection, and so on and so on.

An important part of the argument here that I have not yet stressed and with which I will close is that China especially needs clear and strong property rights because in the contemporary Chinese context, there may be a special need for a legal clarity. First, so much is in flux legally in China that not everything that needs to be addressed can be addressed now, or even soon. You have got to fix something first, and property rights are a good place to get something fixed, something around which other needed reforms can emerge and in which they can be based, something that can play this role because it addressed fundamental and ubiquitous (if controversial) issues. Secondly, the system’s ruling elite has shunned democratic political reform, and in lieu of it, has relied on law to impose some of the checks on the government’s going off the tracks that in other systems can be performed electorally. In effect, the judgment by the reform-era leadership seems to be: hold up the constitution to object, try to sue; that’s a better route then trying to elect, and a better route than nurturing resentments silently until they become politically volatile. Property rights create a promising basis or focus for this type of unrest-preventing development, creating relatively individualized incentives to expose and where necessary ameliorate state or private misbehavior and social discontent. At the very least, thus, on this view, clearer and more robust property rights, though they carry risks and will cost the state something, offer valuable political steam control; that is, you have peasants burning themselves, you have peasants or workers burning down the local town hall, you have evicted urban residents marching, often about issues that involve questions that many legal systems have addressed, and that China’s legal system has begun to address, through property rights.

Most of the discussion of property rights that I’ve offered has focused on the implications for the economy, continuing to move it forward and getting it to perform optimally. The other side of the discussion of property rights has focused on their role in generating and dealing with the threats posed by the losers in China’s rapid economic development. As the argument for rapid and significant development of propery rights sees it, the taking of land rights from peasants at under-market value, the seizing of urban real estate and forced relocation of residents— things that have prompted protests around Chinese cities— are in part a product of ambiguous or inadequate property rights. Simply, the regime may need to give something on that front to maintain stability. Putting such policy moves into law matters because of the strange alchemy of law in China; that is, the regime has said for long enough that it’s serious about law, that if a principle put it down in the constitution, that’s an important programmatic statement, and people seem to take law seriously enough, as many anecdotes have shown us today, that they can waive even constitutional law around— not enforce it reliably in courts as my colleagues have pointed out— but use the constitution or other laws to put leverage and momentum behind invigorating statutes on the books and pushing forward for new statutes.

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