Abstract
Yongqin Wang’s book is the most recent account of China’s economic growth. It is an interesting and concise account of his previous Chinese-language work on the theory of interlinked relational contracts. The book is clearly written for an academic audience and peers in the field with limited practical or professional relevance.
In Chapter 2 Wang develops a theory of interlinked relational contracts based on mathematical and theoretical abstractions from the perspective of contract theory. The main conclusion is that the efficient governance structure is limited by the extent of the market. Chapter 3 develops an economic model to characterize the selection of market extent, using a production function and numerical simulation. Chapter 4 summarizes Wang’s proposal for a theory which elaborates why effective contractual or governance modes are a function of market extent. Chapter 5 then intends to unravel the Chinese miracle from a perspective of interlinked relational contracts, basically reassessing previously researched institutions such as township village enterprises and collective firms as transitory institutional arrangements. In Chapter 6, Wang considers the East Asian development model and looks for lessons for China’s transition, in particular, factor market reform, liberalization and timing of democratization. Chapter 7 puts relational contracting in China’s historical context.
The book concludes that, in early stages of economic development, Chinese economic growth relied more on interlinked relational contracts rather than formal contracts. Why? The extent of the market and division of labour endogenously determine the efficient forms of contract. When market extent is limited and levels of specification low, and when markets are not fully developed, the contracting between agents takes the form of interlinked relational contracts.
The book suffers from unfortunate empty statements that distract the reader, such as on page 41: ‘In this process, economic growth makes market expansion a desired option, while market expansion contributes to faster economic growth.’ The book is also full of similar broad-brush statements about differences between traditional and modern societies, which are made without definition or conceptualization. Such statements are in essence irrelevant for the argument of the book.
The conclusion that economic development does not necessarily lead to transformation from relation-based to rule-based governance since both are self-sustaining in fact conflicts with the insight that innovation-based growth requires the rule of law and rule-based governance, while it was claimed earlier that relation-based governance is self-sustaining and not necessarily replaced by rule-based governance. The underlying assumption based on orthodox economics that democratization is a prerequisite for economic development as an institutional foundation is not only worrying but also denies the book’s potential for original insight.
The insights and arguments in the book are interesting but somehow incomplete. In particular, it is hardly possible to explain China’s economic growth without a good analysis of the emergence of the private sector. The role of interlinked relational contracts has been discussed in many ways and forms, such as social capital, guanxi, informal institutions and embeddedness, making the argument neither novel nor directly insightful. In particular, Douglas North’s work on economic growth and institutional change in the 1990s provides a clear theoretical and empirical logic for explaining the prevalence of relation-based and informal exchange arrangements in China’s economy. An interesting contribution is the lessons the Chinese model can learn from the East Asian model. However, a clear definition of the model under discussion would be necessary. All in all, the book touches upon many interesting debates in the context of China’s economic growth that are all worth discussing.