STANFORD – The recent trial of Bo Xilai highlighted the biggest challenge facing contemporary China: the corruption and abuse of power by some government and party officials. Until his fall, Bo, a former Politburo member and party leader of Chongqing, a megacity of 30 million people, was a potential candidate for China’s ruling seven-member Politburo Standing Committee.
Bo’s trial occurred at what is a critical moment for China. Millions of rural Chinese annually flood into the country’s cities in search of employment; but China’s export-led growth, which previously masked the macroeconomic costs of corruption and excessive state intervention, is slowing. As China enters an era of more subdued growth amid increased competition from other low-cost countries, this damage will become increasingly apparent – and increasingly destructive.
An economically successful China is more likely to be stable and geopolitically constructive; a China beset by serious economic problems would be far less so, and, as the first-ever developing economy to become a global power, could even become a source of systemic risk. Chinese manufacturing assembly is integral to global supply chains for many products. Moreover, China is the largest holder of US Treasury securities (aside from the Federal Reserve), has significant euro holdings, is likely soon to become America’s largest trade partner, and looms large in trade with many European and Asian economies.
Research reveals that strong enforcement of property rights and stable, predictable, and non-confiscatory tax and regulatory regimes are essential to long-run economic prosperity. The key to China’s reform, and what the Chinese people want most, is John Adams’s “government of laws, not men” – even-handed administration of reasonable laws, not special favors for the connected few. Indeed, Finance Minister Lou Jiwei echoed Adams (and Adam Smith) when he proclaimed, “…resources should be allocated by prices and markets, not government officials.”