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A Question From Douglas Elmauer

This post has been written in response to a question Douglas Elmauer (Escola de Direito de São Paulo, Brazil) asked following the Rountable on The Implications of the 19th Communist Party Congress.

To what extent does Chinese openness to the global capitalist market help in the process of democratization and in strengthening the "rule of law" that provides legal security for foreign investors and companies? Perhaps the progressive economic opening may one day irritate politics to the point of a constitutional rupture in the future.

Dear Douglas,

thanks for this very thought-provoking question. A conventional response would rely on either of three contrasting approaches to the free market as an agent of democratization:

A first approach would confirm this nexus, and then proceed to look for the most appropriate locus of irritation in China’s political system, in the hope a constitutional rupture may lead to democratization and to stronger guarantees for multinational corporations.

A second approach would invoke the existence of regional variants of democracy, and of the rule of law. Under this approach, the question of democratization is simply not relevant to China: given the country already practices its own variant of democracy, multinational corporations already enjoy a significant level of legal security.

A third approach would solve the conundrum by denying the existence of a causal relationship among the mechanisms used to coordinate the production, distribution, and consumption of commodities (economic planning, markets hovewer qualified), the mechanisms used to coordinate the lives and behaviors of all those who live within the same national state, and the guarantees provided to multinational corporations.

Arguments have be constructed, and relevant data and analyses – qualitative and quantitative – have been produced in support of either approach. So there is an element of truth to each one of these approaches. At the same time, I feel a conventional response to your question cannot be given.

Irritants are what drives the development of political systems. The lack of legal security for multinational corporations and investors on the Chinese markets has been perhaps the most powerful of these irritants, and its effects are becoming visible at the moment of writing.

A fundamental shift is taking place in Chinese governance. A more stable and predictable risk environment for multinational corporations, as well as small and medium sized enteprises is being created by monitoring the behavior of all market players and assessing their compliance with:

- domestic and transnational legal norms;
- quality and safety standards (among others);
- their contractual obligations.

Multinational enterprises – but also SMEs – are governance units: they are autonomous actors, making their decisions based on their own goals, priorities, and values. Within themselves, enterprises adopt various governance systems. The creation of a stable and predictable risk environment, by a state, must acknowledge the importance of each one of these governance systems. A mere reliance on the state law, and a neglect of the function standards, certifications, and contracts play in corporate governance, and on the transnational and domestic market could create uncertainties for enterprises.

This process calls for opening up governance to participation by more diverse actors. I am of the opinion that such a democratization is being achieved by allowing citizens, consumers, professional associations, administrative organs, and enterprises to monitor the behavior of all market players, and assess the extent of their compliance with legal, and contractual obligations.

This mechanism may be bringing China’s market closer to the ideal construct of a Smithian free market. On this market, the state is voluntarily limiting its role to providing the mechanisms and the ‘venues’ where compliance is monitored, and assessed, and to making these mechanisms known to everyone.

Enterprises are then free to compete both on the transnational and domestic market – their survival depending on their profitability, but also on their ability to understand evolving compliance regimes, and adapt to them.


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