Feb 11, 2015 06:59 PM

Getting to the Heart of Economic Reform

A new wave of enthusiasm for entrepreneurship has hit China. Over the years, corruption has undeniably dented our economy, as can be seen in the dirty deals uncovered by the anti-graft campaign now taking the country by storm.

This much is clear: to nurture a new generation of entrepreneurs, we need a society based firmly on the rule of law.

Early this month, Communist Party General Secretary Xi Jinping told senior officials attending a Central Party School workshop on the rule of law to set a good example by respecting the constitution themselves. All are equal before the law, he said, and leading party members must never breach the legal boundaries.

These words go to the crux of upholding the spirit of the law.

The rise of social media, the popularity of mobile devices and advances in technology such as big data have enticed many Chinese to think up and experiment with innovative business models.

According to the State Administration of Trade and Industry 2.91 million people individually or jointly registered a business last year. Unlike in previous waves of private-sector enthusiasm, those spearheading this one appear ready to shake up the production chain and rewrite the rules.

China must seize the opportunity to allow the spirit of commerce and wealth creation to flourish, so that it may galvanize social development, and bolster equality and justice in society.

Thus, we must face up to the problem of power abuse that impedes fair competition, a real killer of market initiative. This brings us to the heart of China's economic reform – to untangle and bring under scrutiny the complex relationship between government and the market.

Over the past 30 years, while the economy grew by leaps and bounds, the related problems of power abuse and market distortions have only become more and more common. They take mainly two forms. One, those in power encroach at will on private rights and property. Two, those in power collude with the rich to game the system. In both cases, the greedy have found a way to turn the power conferred on them by the people into a vehicle for private gain.

Like a chronic illness, the problem of power abuse has long impeded the healthy development of society.

Arguably, the most insidious harm it inflicts is on entrepreneurs, by poisoning their minds and warping their conduct.

Chinese entrepreneurs are highly insecure: anyone who became a target of an anti-crime campaign, like Chongqing's "beat the black" crackdown, could easily lose everything they have overnight, with even their freedom and life at stake. If they chose to "cooperate" with corrupt officials, there was still no guarantee they would come out this safely.

In such a toxic environment, many entrepreneurs have little interest in running their business well by improving their management and technical skills. Instead, they spend their time cultivating connections and seeking quick profits. At the first hint of the law closing in, many take their wealth and flee overseas. One moment, they are the winners of this insiders' game; the next minute, they are its victims.

The Shanxi network of vice and corruption, in which several businesses have already been exposed in a stunning unraveling, is but a microcosm of the problems faced by the wider economy.

Distorted as it may be, China's hybrid government-market system is greatly appreciated by all rent-seeking capitalists, who enjoy the best of both worlds. They make their money through the market, but at the same time they can rely on their cronies in government to protect them from market competitors and enjoy the privileges of power they bought with their money.

Of course, there are plenty of honorable businesspeople, but too many galling examples of misbehavior tell us business development will stall until a functioning legal environment is firmly in place.

There are many problems to fix in the current business set-up, including for the established industries. For example, the property and land-related sectors are a veritable hothouse of corruption. But, more urgently, the government should ensure that new businesses are given a fair start, unencumbered by legacy problems.

To this end, it must continue to streamline and rationalize requirements for business entry and ensure suitable oversight of administrative power.

In the end, the government must do more than catch the "big tigers" to defeat corruption. It must thoroughly reform the political system, to put power in its proper cage, so that it cannot be abused to allow big capital to kill off competition and misallocate resources.

This may be the best time to be an entrepreneur in China. But only when a rules-based business environment is in place can the spirit of enterprise become a gold mine for Chinese economy.

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