China And The Knowledge Economy: Seizing The 21St Century
| Author | Carl J. Dahlman and Jean-Eric Aubert |
| Profession | Excerpts from Chapter 4: Updating Economic Incentives and Institutions |
| Pages | 615-626 |
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In October 2001 the World Bank Institute and the World Bank' East Asia and Pacific Region jointly published a major new study: China and the Knowledge Economy: Seizing the 21st Century. 1 The study reviews the acute challenges faced by China in the face of the knowledge and information revolution, and recommends seven priority actions for moving the country toward a knowledge economy. The very first of these recommendations is: "Pursue reform of the economic incentive and institutional regime through the rule of law and its enforcement, property rights, a clearer regulatory framework, stronger economic competition, and extracting political influences from business management." 2 In view of the prime importance attached to the rule of law and legal reform for building a knowledge economy, the relevant chapter is excerpted below. 3
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The legal system in China is extraordinarily complex, often unclear, and sometimes even contradictory. This uncertainty seems to result principally from the many uncoordinated legal initiatives of the different levels of government - central, provincial, and local - and the various government ministries, each with specific responsibilities and administrative territories. A complicated grid has developed, leading to an accumulation of legal and bureaucratic regulations. ... Additional problems include corruption, weak enforcement mechanisms, inadequately trained (and underpaid) judges, and long consensus efforts to unite administrative players with contradictory interests. This penalizes entrepreneurs, particularly those not plugged into power networks and foreigners unfamiliar with the legal and administrative climate.
...
Moreover, several important legal pillars of a market economy are still lacking. Property rights are still undefined in many areas. Unclear rules for the ownership of state enterprises impede their restructuring. Competition and anti-monopoly laws are incomplete. Many laws affecting the financial sector, such as bankruptcy and the regulation of financial institutions, are also ineffective. So are laws to provide adequate social safety nets, consumer protection, and environmental regulations.
The highest Chinese institutions, such as the National People' Congress and the State Council, should initiate appropriate policy measures to address these barriers. Needed are adjustments to laws, auditing or hearing procedures for preparing those adjustments, and providing the financial and human resources to implement laws and regulations.
Clarifying and enforcing the law are of utmost importance. These mechanisms require informed and diligent prosecutors, well-established courts, cataloging of and adherence to precedents from prior decisions, and imposing stiff penalties. China has traditionally paid little attention to the rule of law in the western sense. The predictable and equitable application of the law has not been fully integrated into Chinese practice. Some areas for further development:
- Creating transparent, stable, and predictable legislative processes;
- Enhancing public understanding of the law;
- Improving access to legal advice to protect the rights and obligations of parties to economic transactions;
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- Solidifying public confidence in the fairness of dispute resolution mechanisms; and
- Ensuring that the government, as well as individual enterprises, is accountable to the law.
Special attention also needs to be paid to the development of appropriate incentives for knowledge creation, valuation, and protection. Urgent action is needed on widely spread copying practices, which are problematic not only for foreign enterprises, but also for an increasing number of domestic ones, notably the new technology-based firms. A series of laws were recently passed to update the intellectual property rights regime in China to place it on par with those of industrial countries.4 However, serious problems of enforcement remain, requiring multi-pronged actions that include education and awareness campaigns, recruitment and training of appropriate human resources, streamlining of the judicial and administrative procedures, and strengthening of penalties. Intellectual property rights issues in certain sectors, such as pharmaceuticals, where there are major areas of friction with foreign companies, should receive the greatest attention. The counterfeiting practices that plague not only foreign investors,5 but also many domestic producers, should be energetically combated with vigilant monitoring and penalties. Chinese authorities are well aware of most of these issues and stronger enforcement actions are being taken on trademarks and copyrights; however, enforcement on patent legislation is lagging behind. This area will need to be strengthened, particularly as China moves to more sophisticated technologies and upgrades its own technology development and patenting mechanisms.
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However, China should also participate in the global discussion addressing the evolving international agreements on intellectual property rights. Many new and complex issues, particularly in biogenetics and software, with important implications for China are being opened as the technological base evolves. China should actively represent its interests in the formulation of these agreements. It can also play an important leadership role in representing the interests of other developing countries in this complex area.
Establishing effective regulation is a complex, arduous, and never-ending task. Even in the most advanced countries, continual tweaking ensures that the economic system encourages competition and equality, yet discourages rent-seeking and fraudulent activity. But guiding economic participants to interact effectively through capable regulation still is much less demanding than controlling all economic...
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