China must transform its manufacturing-dependent, export-led model. Photo: AFP

China must strengthen its institutions before unleashing market forces

Scott Moore says its environment will have little protection without judicial and other reforms


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.

This weakness will undermine its attempts to overcome its developmental challenges. Despite a nod in the announced reforms to fostering an "ecological civilisation", they say little about the need for institutional reform.

If China's leaders seek to rely more on the market to solve the country's problems, they must strengthen three institutions in particular. First, the judiciary needs a complete makeover. China's judicial system follows a Soviet model in which the task of judges is less to ensure the impartial administration of justice than to bolster the party's power. Despite progress towards judicial reform, and a call in the recent communiqué for "relying on law to rule the country", China's courts remain highly susceptible to political influence. Party leaders must redouble their efforts to depoliticise and professionalise the judiciary, as well as enhance its capacity to handle complex disputes.

Second, China needs to greatly enhance the capacity of its bureaucracy, starting by fighting rampant corruption within its ranks. Under President Xi Jinping , the government has made clear that this is a high priority. But the challenges for the bureaucracy go much deeper, and include a lack of authority or the resources to effectively regulate powerful state-owned enterprises. Efforts to unleash market forces should be coupled with increasing resources for China's administrative state to smooth out the rough edges of its rapid growth.

Finally, China must improve its system of administration. Relationships between central and local governments are riven with confusion and perverse incentives: local officials often receive seemingly contradictory instructions from different central government ministries, and are left trying to improvise responses. Formalising flexible implementation of centrally mandated policies would do much to improve central-local relations, as well as to encourage co-operation between governmental bodies at different levels.

For China, sustainable development undoubtedly means pursuing reforms to liberalise the economy. But the same process that promises to unleash the talent of the country's entrepreneurs will also exacerbate challenges like environmental degradation. If China is to complete the journey towards becoming a liberal market economy, it must not only deepen market reform but also bolster its institutions - a task that requires resolve alongside reformation, and steadiness more than speed.

This article appeared in the South China Morning Post print edition as: China must strengthen its institutions even as it opens up to market forces