The Challenges of Doing Business in China

 |  Includes: FXI, PGJ
by: David Wolf

Uber-establishment public intellectual and Newsweek International editor Fareed Zakaria does a decent job calming the otherwise financially panicked in a palliative column from June 13.

What I found most intriguing about the article was the conclusion (proving, once again, that it does occasionally pay to read long essays all the way through,) where he explains that the West is in the throes of a crisis of morals as much (or arguably more) then a crisis of finance. When he first started this bit of his rant I shook my head. I thought.

Yes, we've all heard this before - the old Wall Street is an Ethical Wasteland argument, with Bernie Madoff, Allen Stanford, Alan Greenspan, Wall Street traders, and subprime mortgage brokers all trotted out as poster children.

But then Zakaria pointed out that Wall Street was not alone.

Most of what happened over the past decade across the world was legal. Bankers did what they were allowed to do under the law. Politicians did what they thought the system asked of them. Bureaucrats were not exchanging cash for favors. But very few people acted responsibly, honorably or nobly (the very word sounds odd today). This might sound like a small point, but it is not. No system—capitalism, socialism, whatever—can work without a sense of ethics and values at its core. No matter what reforms we put in place, without common sense, judgment and an ethical standard, they will prove inadequate. We will never know where the next bubble will form, what the next innovations will look like and where excesses will build up. But we can ask that people steer themselves and their institutions with a greater reliance on a moral compass.

(Italics mine)

Leave aside for a moment the problem that when you start blaming society, you deflect the blame from the bad guys. I do not get the impression that this is Zakaria's intent.

No More Higher Ground

Zakaria makes two points, one implicit, one explicit but not sufficiently so, that we need to take into account for China.

The first is one I have discussed and heard from other China hands over the past year. Anyone who thinks that Chinese leaders and the Chinese people are blind to the malfunctioning moral compass in the West - especially in the wake of current events - is wrong. If we ever were in a position to preach, either at a systemic, enterprise, or personal level, we have lost that position.

And that means that any American who excoriates corruption in China will be dismissed as a hypocrite; any foreigner who tries to explain to a factory owner why it is better to make produts safer will be held to a higher burden of proof; and any executive trying to preach the importance of integrity and ethics to a recent recruit will face annoyed skepticism.

The Law of Rules

But the larger point - the one I do not think Zakaria makes plain enough - is that rule of law is not all that we have made it to be. As we talk about China's development, we attach to the concept of "rule of law" a Holy Grail-like quality, as if the quest for the rule of law, as much as finally attaining it, will be the answers to many of China's major social challenges.

In pointing out that in America, the paragon of societies living under a fully developed body of law, legislative process, and criminal and civil court systems, is deeply socially flawed in spite of the rule of law, Zakaria sends us a warning about China, one that will discomfort many of us. Rule of law, as important a goal as that may be for China, is inadequate to ensure that leaders, enterprises, and people behave in ways that are not sociopathic.

A rule of law must be paired with what I would call a Law of Rules, a detailed code of behavior that is rigid enough to withstand relativism, is adaptable enough to stand despite massive social change, and is set forth by a body or entity that operates at a level removed from our own unlimited ability to rationalize almost any behavior. Law of Rules is more than just a moral compass. It is a clear description of how to live, so that the rule of law - the nation-specific constitutional, criminal, and civil codes standards of behavior - need only come into play in exceptional cases. The rest of the time, it is our fear of doing wrong and our desire to do right that guide us, not the fear of the cop, the lawsuit, the jury.

The Law Gone Missing in China

Twice in the last hundred years, China has had its Law of Rules stripped away. The first was what might best be called Confucianism, an imperfect but longstanding code of behavior rooted in a system of rigid interpersonal obligations. Ripped away in the aftermath of the 1911 overthrow of the Manchus, it died a slow death, and was eventually replaced by Maoism.

Maoism was battered by almost continuous challenge and upheaval, until finally its precepts of egalitarianism, service, self-sacrifice, and patriotism were abandoned in the 1990s. What replaced them were two simple maxims: "To Get Rich is Glorious," and "It doesn't matter if the cat is black or white, as long as it catches mice."

Now, we are told, all that we need to lay upon this highly practical foundation is a legal system backed with apolitical courts, and everything will be fine. Not bloody likely. If the fear of prison and death are not enough to keep the chief executive of a dairy from making decisions that will kill babies, no rule of law can hope to end such behavior.

There is no silver bullet solution to this problem for China, no simple path to change, because the change that must take place is not in institutions but in individuals. This is not one battle, but 1.3 billion battles. And for that reason, it is the greatest single challenge facing China today.

Where to begin?