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Qian Yingyi: The Spirit of Contract as an Important Foundation for the Rule of Law

Source: China Economic Net Date: 2015-03-23

Qian Yingyi, Dean of Tsinghua University School of Economics and Management indicated in his remarks at the China Development Forum 2015 on 21 March that an important foundation for the rule of law is the spirit of contract, which has three parts at its core, i.e. conclusion of the contract on an equal basis, compliance by all parties with the contract, and a fair mechanism in case of disputes or independent jurisdiction.



His speech goes as follows:

The title of my speech is “the rule of law is an institutional cornerstone for the market economy”. I wish to talk very briefly, from the perspective of a scholar on economics, about why the rule of law is an institutional cornerstone for the market economy.

In China, two expressions, i.e., “market” and the “rule of law”, have gained consensus like never before. The rule of law is actually one of the expressions in the 12 national core values of China. So there is much consensus on these two expressions. And the relationship between these two expressions is exactly the topic we are talking about today, that is, the institutional foundation for the market economy is the rule of law. Why? Over one year ago, the third plenum of the 18th CPC Central Committee stated the view that the market should play a decisive role in resources allocation and government should better play its role. I think the two aspects hinges upon one rule or one institutional foundation, that is, the rule of law.

Just now Jacob Wallenburg made a very important point which I fully agree with and which has also been a topic under discussion by economists for a long time. In Chinese, “the rule of law” is sometimes translated to “govern according to law” or “law-based governance”. This is due to the difference between Chinese and English. But as a matter of fact, that makes huge difference in substance.

From the perspective of economy, a crucial foundation for the rule of law is the spirit of contract. In my opinion, the spirit of contract has three aspects, i.e. conclusion of the contract on an equal basis, compliance by all parties with the contract, and a fair mechanism in case of disputes or independent jurisdiction. I believe these three aspects lie at the heart of the spirit of contract.

Why is this? Economic activities involve a lot of transactions and why engage in economic activities? Because the parties can all win in the process. But each party has its own interests, which is just normal. In the absence of a contract, some of the previously agreed terms may not be followed. Do you think that may be a good thing for some parties? Not at all. Because nobody is stupid. If somebody knows that you will fail to comply, then they will stop doing business with you. And as a result, all lose. That’s why the spirit of contract is required for all to win. Everybody must follow the contract. What is important is that all the contracting parties must be equal and must comply with the contract. Disputes are usually inevitable. But in case of disputes, there must be a mechanism of judicial procedures or mediation procedures, which means that an independent party will conduct independent trials. That is crucial, because only when all contracting parties have this expectation can economic activities be completed with an all-win result. But it is human to have some opportunistic and selfish tendencies, thus some temptation not to comply in order to gain selfish benefits. But those people don’t know that such practice cannot last.  That is all about the spirit of contract.

In addition, we need a whole set of basic systems to properly balance the relationship between the government, companies and the market. Our experiences show that there is no other system or institution that can better solve this problem. The problems with the practice of China are either over-interference by the government, which dampens the enthusiasm of companies, or inaction by the government. There are cases in which inaction on the part of the government has caused a lot of problems. How can we ensure that the market and entrepreneurs are truly main players and at the same time the government can play a better part? That can be done within the framework of the rule of law. For example, in the past 30 years and more, the government made direct inputs in economic development. There are good things about that, as it has promoted economic development. But that also brings two problems. One is the distortion of the market and the other is corruption. Now we have realized that. What we want now is that the government needs to reduce its powers and be service-centered. That is a right thing to do. But that can only be done within the framework of the rule of law. I think much of what we are doing now is on that right track. For example, this year’s government work report said something to the effect that those in power cannot be arbitrary, which means that government powers should be based on rules and not be exercised arbitrarily. That is the practical meaning of the rule of law.

Just now Mr. Jacob Wallenburg also said that the government and companies, the government and consumers and residents all follow the same rules as equals. In that case, we can call it the market economy based on the rule of law. What I think is good is the consensus we have reached on the importance of the market and the rule of law. And next step shall be how we understand and implement them in specific terms. It is fair to say that it will take a long journey. It involves conceptual issues as well as realistic institutional development. It’s like legal system development and cultural development. The spirit of contract is not just a legal issue, but also involves cultural development, as it requires in everybody a culture for the spirit of contract.