China must strengthen its institutions before unleashing market forces

The Central Committee of the Chinese Communist Party has outlined its vision for the future of the world's second-largest economy. For many economists, it was high time: consensus has been growing that, to secure future growth, China must transform its manufacturing-dependent, export-led model into a cleaner, more sustainable economic structure.

The announcement was widely criticised for being short on details and determination. But the real danger is that China's reforms will unleash greater market forces too quickly. Without a massive effort to strengthen the country's basic institutions, a push towards greater marketisation is likely to undermine, rather than enhance, sustainable development, particularly with respect to China's environment.

Party leaders need look no further than the smog enveloping many cities to be reminded of the ramifications of rapid and unchecked growth. Truly sustainable development stems directly from strong institutions, and it is here that party leaders must focus the bulk of their reform efforts.

Perhaps nowhere are the consequences of China's weak institutions more evident than in the realm of environmental policy. Despite its reputation at the world's largest polluter, China has in fact taken an aggressive stance towards environmental degradation. It has adopted strict laws and has been at the forefront of developing market-based solutions to environmental challenges.

Indeed, several of its environmental policies are unique in the extent of their ambition. A proposed cap on total national water use under the "three red lines" programme would be the first such limit implemented in a major economy. A potentially even more ambitious experimental cap-and-trade programme for carbon emissions is expected to cover almost 7 per cent of the country's total emissions by 2015. But, despite their ambition, these measures have made little impact on China's air quality, water scarcity or carbon emissions.

Although the country has successfully imported model environmental policies, it has yet to develop the complex institutional infrastructure needed to make them work, especially an independent judiciary, a capable bureaucracy, and effective co-operation between central and local governments.