Chinese capitalism

The Los Angeles Times is reporting “China relaxes business regulations“.  The article describe government efforts to prevent laws and regulations from hampering business:

The Industry and Commerce Administration of Zhejiang province … earlier this year released what local media called the “three noes” policy. Two of the noes have to do with minor licensing and registration issues. The third one, though, states that there should be no punishment for businesspeople who make “common violations that don’t directly cause harmful consequences.” Instead they should be given suggestions and admonitions to correct their errant behavior, officials said.  …

In China’s southeast industrial hub of Guangdong province … the government cautioned investigators about detaining or taking other action against entrepreneurs or key company managers that could disrupt business. Even if authorities have gathered all the evidence, action may be delayed until the manager has finished conducting business.

On the environmental front, there is evidence of regulatory capture:

In China’s southeast, Jiangxi Copper Corp. is expected to begin work next month on a $730-million lead-zinc smelting operation along the Yangtze River.  … Jiangxi province’s environmental protection bureau boasted that it had finished the environmental-impact review in just three days

According to the article,  favorable treatment for capitalists is nothing new:

Even during ordinary economic times, giving privileged policies to businesspeople in China is common.  Some smaller locales have offered investors immunity for traffic violations and other misdemeanors.

It’s easy to see how these policies could boost economic growth in the short term by removing constraints on business activity.  Whether these policies serve the broader public interest, however, seems questionable.

A Public Interest Capitalism perspective raises three questions.

  1. Are these policies sustainable?  Even leaving aside concerns about environmental destruction, economic theory gives us compelling reasons to believe that the rule of law is essential to advanced economic development.
  2. Are these policies equitable?  Perhaps investors and entrepreneurs merit special privileges.  I tend to think not, but the US tax system gives preferential treatment to capital gains.  Policies that relax regulatory enforcement are particularly problematic from an equity standpoint, however, because they benefit most those who are profiting from illegal, socially destructive activity.
  3. Will these policies promote innovation?  To the extent that these policies protect incumbent businesses, they create obstacles for creative destruction.  This may not be too much of a problem when the economy is growing rapidly and generating entrepreneurial opportunities, but it could hinder readjustment when growth slows.
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