Is there a positive relationship between law and economic growth? A paradox in China

Abstract

Traditional theorists concur that good legal system has been linked with well-defined property rights, reduction in transactions costs, increase in investments, and economic growth. Nevertheless, China experienced a strong economic growth in spite of a poor legal system. To explore the reasons behind, this research paper reviews the literature about the relationship between law and economic growth from global perspective. After that, this paper tries to locate the reasons on why the formal rules and regulations may not have strong correlation with China’s growth. The research concludes that while many people label Guanxi as something negative, Guanxi is an informal system of legal rules from a Western perspective, or de facto, China’s style of legal enforcement. Nevertheless, as the Chinese economy grows, transaction costs may become too high if we rely on guanxi and good legal system is needed to ensure a sustainable economic growth.