Monthly Archives: April 2005

WSJ Debate: Can property rights capitalism emerge in China?

Nobel prize winning economist Douglass North recently opined on the pages of the Wall Street Journal that China needs to establish clear property rights in order to make capitalism work there. I wrote a letter in response that questioned the feasibility of this approach. To my pleasant surprise, the Journal saw fit to publish my letter. I have reprinted the letter here below and the North article itself can be found at:,,SB111283514152300351,00.html.

As Chinese stock markets continue their descent the fragility of the Chinese economy continues to worry many around the globe.

The letter:

Mr. North is certainly right that Chinese leaders need to establish clear property rights if they are to move to the next stage of modern capitalism. What he seems unable to explain is why that move is likely to be deeply problematic, if not impossible.

To establish property rights to assets effective enough to enable efficient trading and innovation to take place would almost certainly require a violent confrontation with the Chinese working class and peasantry — groups that, understandably, believe they have a claim to the nation’s wealth senior in priority to that of the party and newly emerging wealthy elite. That confrontation has been taking place sub rosa since the bloody suppression of the democracy movement centered in Tiananmen Square in 1989. But conflict is now more open, with strikes and even violent confrontations between the state and aggrieved citizens increasingly the norm.

The regime is clearly hesitant to unleash a final confrontation. To resolve this conflict, China must find an alternative way forward that relies, instead of on authoritarianism, on democracy and social equity.

Stephen F. Diamond
Assistant Professor of Law
School of Law, Santa Clara University
Santa Clara, Calif.

Impasse in Corporate Law Reform

A key aspect of the effort to reform corporate govenance after the collapse of Enron, Worldcom and Tyco, has been to strengthen the role of independent directors. The NYSE, for example, now requires a majority of independent directors on the boards of listed companies as well as Audit, Nominating and Compensation committees composed of just independent directors. But if shareholders cannot have a meaningful role in selecting these independent directors, what difference do these rules make?

In a recent paper delivered at Stanford, Professor Jeffrey Gordon from Columbia explored the significance of independent directors. He argued that they play an important role interpreting the signals of surrounding markets, particularly the capital markets to insiders. While just a draft at this point the paper is a valuable exploration of the issues surrounding independent directors.

Nonetheless, unless the SEC passes the proposal of its staff that shareholders be offered the opportunity to nominate independent directors by piggybacking on the proxy process now controlled solely by management, even formally independent directors will remain overly dependent on the CEO who is responsible for securing their position.

Trade Gap Widens, Fuels Calls For Tougher Stance on China

As I suggested could happen in an article published last fall, trade tensions between China and the U.S. have begun to heat up. Below is a link to a graphic from a recent analysis of the issue by the Wall Street Journal. It makes clear why China is on top of the hit lists by protectionists. There is no doubt that China, backed by global multinational corporations, is an adept player in the international economy. They are exploiting cheap labor who are denied basic human rights to force the country’s entry into the global economy. But is narrow protectionism the right response? Can American workers afford to cut off their potential alliance with Chinese workers? An alternative approach would offer support to Chinese workers to form their own independent unions and political parties. While the international labor movement pays lip service to this approach, it does very little in a concrete way. The time to change this may have finally come. – Trade Gap Widens, Fuels Calls For Tougher Stance on China