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Taobao, Federalism, and the Emergence of Law, Chinese Style

Taobao, Federalism, and the Emergence of Law, Chinese Style

By Lizhi Liu & Barry R. Weingast. Full text here.

All developing countries face the problem of how to build the legal and institutional infrastructure (for example, securing property rights and the rule of law) necessary to support efficient markets. The historic path for the West involved parliaments and independent judiciaries that constrained the ruler. China’s path has differed considerably; from the beginning, it involved “federalism, Chinese style.”

This Article explains how private actors are devising new institutional rules in China that hold the promise of creating what we call “law, Chinese style.” Taobao—China’s dominant online trading platform with over four hundred million users—is not simply an exchange platform, but one in the process of developing a modern legal system that enforces contracts, resolves disputes, and prevents fraud. We argue that the delegation implicit in law, Chinese style, parallels China’s earlier reforms during the 1980s and early 1990s that helped create federalism, Chinese style. In parallel with the earlier delegation, the new form of delegation also involves the delegation of authority and policy experimentation. Importantly, this approach to legal development is much less politically constraining on the central government than the Western approach.

Additionally, the emergence of Taobao’s national market has important political and economic effects, especially with respect to federalism. From the beginning of the reform process, the Chinese common market has been hindered by internal trade barriers. Taobao’s national market holds the potential to circumvent internal trade barriers and grant tens of millions of rural people access to markets previously beyond their grasp.

As Taobao becomes larger in user base, it gains more political clout with the central government—and it is more likely to raise suspicions from the government as well. It remains to be seen, therefore, whether, and to what extent, Taobao and the central government will be able to continue their collaboration as circumstances change.