March 25, 2007 to March 26, 2007
Private Property
Private Property and Socialism: A Contradiction? BECKER
In March the National People's Congress of China passed a law to take effect in October that legalizes private property and gives it equal status to public property. As a matter of principle this is a revolutionary measure since the abolition of private property is a basic tenet of traditional socialism. However, de facto, China has long ceased to be a socialist country as the private sector has grown rapidly to produce about two-thirds of its GDP.
In 1989 I visited Poland as that country was beginning a transition from a socialist state to one based on private enterprise and private property. In a meeting with the head of the ideology department of the Communist Party, I asked whether private property is consistent with communism and socialism? His answer was that they were still debating that! The Polish Communist Party was shortly afterwards swept out of power before the ideologues could provide an official answer, but China has now given its own answer.
It is clear from the contentious debate over legalizing private property that its official recognition is a major step away from China's claim to be a socialist state. Although a law legalizing private property was proposed years ago, it was delayed until now by vocal opponents who correctly believe that widespread ownership of private property is inconsistent with socialism. Dissent this time, however, was not welcomed, and the 3000 delegates to the Congress overwhelmingly passed the law with only a few votes against. This legalization of private property, when added to the admission not long ago of entrepreneurs into the Communist Party, completes China's official recognition of the dominance of capitalism in its economy.
I will concentrate my remaining comments on likely consequences of the new law for the economic development of China. That nation has had an extraordinary development during the past 30 years, with an average annual growth rate of its GDP exceeding 7 per cent without any laws fully legalizing private property. The inference I draw is that official protection of private property is not essential in generating rapid development from low levels of income, and that China has had enough de facto protection of property to allow its private sector to grow rapidly from negligible levels to the predominant form of economic organization.
Despite limited official protection, houses, land, businesses, and corporate shares are privately bought and sold. Strong profit incentives encourage the formation of new businesses, investments in farms and companies, and improved productivity. Recent calculations indicate that the efficiency of China's economy improved at over 4 per cent per year since 1993, while the growth in capital per worker contributed an equal amount to its annual growth of 8.5 per cent in labor productivity. These are unprecedented achievements, especially when one recognizes too China's large improvements in output per worker during the 15 years prior to 1993.
I would qualify this very rosy picture in three ways. Studies indicate that long-term investments in agriculture have been discouraged by uncertainty among farmers about whether they can maintain possession of their land in the longer run. Numerous riots and other violent incidents have taken place in rural parts of China in protest against the forced expropriation of land by local governments that provide little compensation. Even the new law will not give farmers fully marketable rights over the land they now will own in principle but not fully in fact. City dwellers have also been increasingly concerned about the security of the ownership of their homes since they have faced expropriation of their land by city governments in need of land for other purposes. The new law states that compensation has to be offered for houses and land taken by governments, but is silent on how big the compensation should be,
I believe property rights that are much more secure than in the past are necessary to enable China to grow much further, and begin to join the club of higher income nations. The advanced economies that China would like to emulate protect software, patents, franchises, buyback provisions, complicated leases and property ownership clauses, and still other forms of tangible and intangible property. This protection is necessary if investment is to be encouraged in such forms of property that are increasingly important as an economy progresses.
Even with laws officially protecting private property of the type just passed, full protection requires an independent judiciary that enforces these laws in a reasonable and efficient way. Anglo-Saxon countries have been the best protectors of property rights in good part because that is how their legal systems operate. China lacks such a judiciary, and so enforcement of contracts of all types through the courts has not been guaranteed. Chinese courts are an arm of the central government, and have judges who do not even claim to be independent. Courts in China are known to be often arbitrary, which means that enforcement of laws and contracts is sometimes capricious.
If effectively implemented, the new law legitimatizing private property will have important implications for the future direction of the Chinese economy. That these implications are evolutionary rather than revolutionary is indicative of how far China has come from its socialist past
Private Property in China--Posner's Comment
One would have to know a great deal more about China than I do to be able to evaluate the law that the Chinese legislature has just approved ("Property Rights Law of the People's Republic of China," March 16, 2007, available in English translation at http://www.lehmanlaw.com/fileadmin/lehmanlaw_com/Laws___Regulations/Propoerty_Rights_Law_of_the_PRC__LLX__03162007_.pdf) codifying private (and also public) property rights. Law on the books often differs from law in action (the Soviet Constitution of 1936 is a famous example), and so the new law may turn out to have rather limited significance--or may not.
If property rights are understood in practical terms, then socialist and even communist countries invariably recognize and enforce some private property rights (as well as of course the property rights of public entities). For a property right is simply a right to exclude other people from the use of some thing of value. So a tenant has a property right, and even in a communist country if someone enters without your permission the apartment you've rented from the state you can get the police to eject him. Firms buy factories in China without worrying, or at least without worrying much, that other firms might hire thugs to seize or burn down the factories; the police would prevent that kind of private expropriation. Even in its heyday, socialism (as distinct from communism) connoted merely redistributive taxation and public ownership of a handful of major industries; most property was privately owned and the owners had the full panoply of legal protections of those rights. A socialist country such as the United Kingdom once was (though it was a distinctly watered-down socialism, despite the pretensions of the British Labour Party) might provide greater practical protection to rights of private property than a disordered capitalist state that had incompetent or corrupt judges and police.
The problem is less socialism versus capitalism than statism versus private ordering. The threat to private property in a statist country is that the government will expropriate it. Apparently a good deal of that goes on in China, with local Chinese governments taking farmers' land and selling or leasing it for industrial or urban development. A major aim of the new property law appears to be to curb this practice. But whether the aim will be achieved will depend on implementation "on the ground," as it were. As Oliver Wendell Holmes argued in his famous article "The Path of the Law," from the standpoint of a lawyer and his client the law is merely a prediction of what government will do to the client if he does some act. That the act may appear to violate a law is just the beginning of the predictive inquiry. If because judges and police are corrupt or incompetent or inaccessible nothing very bad will happen to the client if he does an act that may be illegal, he is likely to go ahead and do it. So maybe local governments in China will continue seizing farmers' property. In a country of more than a billion people that despite its rapid development is still poor, has a weak legal infrastructure, and is rife with corruption, it must be difficult to implement national laws at the local level. The new law may turn out to be largely aspirational.
But there is more to property law, including the new Chinese law, than limiting governmental expropriation of private property. Becker rightly emphasizes the importance of a well-functioning system of property rights to the growth of developed economies. In an underdeveloped economy, with economic activity largely local, family ties and reputational concerns may be such effective substitutes for legal enforcement of formal rights that the costs of such enforcement may exceed the benefits. Some economic activities do not require investment, such as hunting and the gathering of wild fruits, nuts, or berries, and so the function of a property-rights system of encouraging investment may be unimportant. And a country that consumes but does not produce intellectual property may be better off refusing to enforce intellectual-property rights. And finally a poor country may not be able to afford the kind of legal infrastructure required to enforce complex property rights. This can create a chicken and egg problem, if the absence of such rights keeps a nation so poor that it cannot afford the necessary machinery of enforcement.
A notable feature of the new Chinese law (which occupies 45 pages in the English translation that I cited) is its detailed provisions regarding secured lending. Enforceable security interests enable lower interest rates, facilitating borrowing and lending, essential activities in a modern economy. These and other provisions of the new law should reduce transaction costs and--to the extent enforced, a key and open question--enable China to continue its rapid economic growth.