Why Is China a high-Lambda society?

Author:Marangos, John

Cultural and social values influence the level of cooperativeness in society, which in turn determines the level of lambda. Lambda ([lambda]) represents the parameter used to determine the degree of cooperativeness among a particular societal group or society. Martin Weitzman and Chenggang Xu (1994) used a prisoner's dilemma game to demonstrate the influence of cooperative culture on property rights theory. The prisoner's dilemma was originally described as a static, noncooperative game with complete information. It is static as it is only played once and is noncooperative, with decisions made simultaneously so that players cannot learn from one another or communicate (McCarty 2000, 326). Weitzman and Xu (1994) let the outcome of a prisoner dilemma game be quantified by the parameter [lambda]. This [lambda] is valued between zero and one. A high value of [lambda], near one, means a cooperative solution, which comes close to looking as if it were the outcome cooperative collusion. A low value of [lambda], near zero, means a noncooperative solution that is far from the cooperative solution, thus yielding low individual payoffs. (1)

The parameter [lambda] stands for the ability of a group of people to resolve prisoners' dilemma-type free-riding problems internally, without the inclusion of explicit rules of behavior. With a [lambda] value of one, people in a group would be able to resolve free-riding problems completely internally, regardless of the size of the group. With a [lambda] value of zero, not even two people, the smallest group of people possible, can resolve the free-riding problems regardless of how much negotiation takes place. With a value of [lambda] between zero and one, people would be able to cooperate effectively when a group is sufficiently small, but they may not be able to cooperate as effectively when a group is sufficiently large (Weitzman and Xu 1994, 138). As such, [lambda] is the degree of cooperativeness in society's culture.

Lambda is useful in determining whether there is a need and reliance for well-defined ownership within a broad range of cultures. Weitzman and Xu (1994) suggested that there was a lot of anecdotal evidence that could be cited to argue that Asian countries are high-[lambda] societies relative to countries in Europe, which by comparison are more low-[lambda] societies. Traditional Chinese cultural values, which are rooted in the Confucianist, Taoist, and Buddhist philosophies, consist of a sense of order, vertical and horizontal relationships, obligation to the group, and the preference for harmony and cooperation in interpersonal relationships (Gao and Handley-Schachler 2003, 44). Confucianism provides the philosophical basis for the collectivist values prevalent in China. Social relationships are regulated by the five Confucian virtues of Ren (humanity-benevolence), Yi (righteousness), Li (propriety), Zhi (wisdom), and Xin (trustworthiness). China, using its cultural foundation, has been able to stimulate and maintain successful economic reform without reliance on or the apparent need for well-defined property rights. This paper attempts to explain why a high-[lambda] society such as China was able to operate in the absence of defined property rights, in contrast to Weitzman and Xu (1994, 139), who relied only on anecdotal evidence. In addition to this, the Chinese "ownership maze" demonstrates ownership structures which in the formal sense are vague, iii defined, and fuzzy yet can stimulate and maintain successful economic reforms (Yusuf 1994, 76; Weitzman and Xu 1994, 131; Wang 1992, 554; Sing and Gelb 1994, 17). In this paper, by using the notion of cooperative culture I demonstrate that economic reform does not need to rely on well-defined property rights at most in the short run. Throughout this paper I will demonstrate that in China cooperative culture allows for the development of efficient and successful informal institutions without the aid of standard conventional property rights. This lack of property rights is a trait unique to countries that have a high [lambda], and the degree of this cooperativeness is rarely seen in countries that have a low [lambda]. In addition, I will argue that cooperative culture influences economic development and that is one of the reasons why China has a successful economic reform program. However, a process of disembedding the market has been initiated in China with its increasing capitalist characteristics that result in the destruction of trust, the rise of corruption, and the development of an inefficient and dishonest economy.

The Role of Lambda on Economic Development in China

The concept of a cooperative culture, with an absence of well-defined property rights, is an odd combination for economic success; however, this mixture has seemed to be successful in China. Collectivization has always been viewed as an inefficient economic structure (Wen, Li, and Lloyd 2002, 716-8; Smyth 1997, 234-5). All of the former socialist countries of Russia and Eastern Europe have abandoned collectivization and attempted to adopt a free market with the establishment of well-defined property rights based on the logic that "all economic transitions from socialist countries have been based on the recognition that private ownership and freedom of contracts makes the market economy more efficient than other economic systems" (Wen, Li, and Lloyd 2002, 713).

This emphasis on the presence of well-defined property rights, according to Mei Wen, Dong Li, and Peter Lloyd (2002), is an essential part of economic transition, and thus the absence of well-defined property rights is expected to bring with it chaotic and inefficient business exchanges, not to mention, crime, corruption, and failure of any attempt from the central government to conduct successful economic reforms. As in property rights theory, "without well-defined private ownership, the firm will tend to operate relatively badly, and any system without widespread well-defined property rights will tend to perform relatively badly" (Weitzman and Xu 1994, 125). With this in mind there is a critical factor, cooperative culture that has not been incorporated in the property rights analysis. Well-defined property rights may not be the center point of economic efficiency or economic growth.

Many explanations have been put forward in an attempt to rationalize why China has been so successful in reforms with this lack of defined ownership. Chun Chang and Yijiang Wang (1994) argued that the conflict of interest between central and local governments was the answer to China's success in economic development, while David Li (1995) suggested the risk-sharing behavior between nominal owners and local governments in an imperfect market environment was the answer. Weitzman and Xu (1994) argued that culture and sociological factors were the reason for China's economic success through the use of ambiguous property rights. The reasoning behind this argument is that cooperation allows for economic success without the use or implementation of well-defined property rights. If individuals are bound by trust and cooperate effectively among each other they will be able to solve economic problems in such a way that there is no need for the use of written contracts or well-defined property rights. This ability to work without property rights is a controversial concept and moves away from conventional property rights theory.

In China there are two main types of property: state property, which is the property of the whole people, and the cooperatives, the township and village enterprises (TVEs). For the purpose of this paper the analysis and arguments will be directed to cooperatives and collectives in the form of TVEs, as these are the most important form of collectives in China (Wen, Li, and Lloyd 2002, 716). A TVE is an industrial business unit that is located in and owned by all the residents of a rural community. A rural community can be a township (about 3,500 households) or a village (about 200 households) owning a number of enterprises (Che and Qian 1998b, 2). In 1993 about three-quarters of the nonstate industrial output, that is, 42 percent of the national total and equal to the size of the state-owned enterprises, was produced by nonstate enterprises that involved government ownership other than the national government; TVEs accounted for nearly 50 percent of the industrial output within the nonstate sector (Che and Qian 1998a, 488-9).

The TVEs enter into informal contracts based on reputation, which is considered the core asset of all TVEs. It is the effect of reputation and culture that underpins the functioning of informal institutions in China (Smyth 1997, 235; Weitzman and Xu 1994, 141; Kung 1995, 106). However, the theory of well-defined property rights lacks the ability to factor in cultural cooperation as an important determinant of economic development. Thus conventional property rights theory may have been inadequate to explain economic development due to the fact that it does not consider this critical dimension of cooperative culture and, within such, the ability and desire to be cooperative (Weitzman and Xu 1994, 136-9).

Standard property rights theory aspires to be culture free or universal. The theory assumes explicitly and implicitly that all people are indiscriminately noncooperative regardless of their cultural background (Weitzman and Xu 1994, 126). In the prisoner's dilemma game the level of cooperativeness within the society determines the need for contracts and the use of well-defined property rights. If a country has a low cooperative nature, then the reliance on well-defined property rights and contracts expands. In China, culture and trust are stepping stones of everyday life, and as a result Chinese people do not rely on well-defined property rights, regardless of the size and complexity of the prisoners' dilemma faced. Russell Smyth (1997, 243) argued that there...

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