Testimony of Beth Farmer to Congress on the Impact of China's Antitrust Law and Other Competition Policies on U.S. Companies

On July 13, 2010, my colleague Professor S. Beth Farmer, will be testifying before the United States House Committee on the Judiciary Subcommittee on Courts and Competition Policy on the impact of China's antitrust law and other competition policies on U.S. companies.  Her testimony is worth considering carefully not merely as an excellent discussion of Chinese competition policy, but also as an analysis of the difficulties of moving from theory, to law, to implementation rules to the construciton of an efficient apparatus for implementation and them to enforcement within a system that has grown far more quickly than its administrative capacities. 

Professor Farmer's statement to the Subcommittee is  provided here:

Before the House Committee on the Judiciary
Subcommittee on Courts and Competition Policy
Hearing on:
THE IMPACT OF CHINA’S ANTITRUST LAW
AND OTHER COMPETITION POLICIES
ON U.S. COMPANIES
Written Testimony of Susan Beth Farmer
Professor of Law
Pennsylvania State University
Dickinson Law School

Tuesday, July 13, 2010
2237 Rayburn House Office Building
4:00 p.m.

Chairman Johnson, Ranking Member Coble, and members of the Subcommittee on Courts and Competition Policy, I appreciate the invitation to discuss developments in the Chinese antitrust law and their effect on American businesses.

International competition law and enforcement raise serious policy issues, and Congressional attention is appropriately focused on these important questions. The Chinese Anti-Monopoly law is now nearly two years old, having gone into effect on August 1, 2008. In that short time, three separate agencies have been organized to enforce various aspects of the law, have issued many rules, regulations and procedures, and have begun to investigate and make rulings on individual cases. Importantly, a number of these decisions have involved American businesses operating in China.

I am a professor of law at Pennsylvania State University, Dickinson Law School, where I teach American and comparative antitrust law, among other subjects. My research and writing concerns competition law and policy, and I had the opportunity to teach and research the Chinese legal system on a Fulbright fellowship at the University of International Business and Economics (UIBE) in Beijing in the spring semester of 2008.

SUMMARY

In assessing the impact of the Chinese Anti-Monopoly Law, I would begin with the words of American Justice Oliver Wendell Holmes, writing in The Common Law. He explained that 

The life of the law has not been logic: it has been experience. The felt necessities of the time, the prevalent moral and political theories, intuitions of public policy ... have had a good deal more to do than the syllogism in determining the rules by which men should be governed. The law embodies the story of a nation's development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics.[1]

The ‘experience’ of Chinese antitrust law encompasses the language of the statute, agency interpretations and decisions, and judicial rulings, all made against the backdrop of history. With this in mind, I would like to highlight the following key trends in the development and application of the law:

1. The Chinese Anti-Monopoly Law (the AML) concerns the same categories of business conduct as the American Sherman and Clayton Acts: horizontal cartels, anticompetitive mergers, monopolization and unreasonable restraints on distribution. Unlike the situation in the U.S., three government agencies are responsible for enforcing separate provisions of the AML. Also unlike American antitrust policy, the Chinese law explicitly incorporates other, non-competition factors into the analysis.

2. American businesses are particularly affected by the Chinese merger control provisions because the law and its regulations require pre-merger notification based on the parties’ total sales in China, not solely the nexus of the transaction to China. During the first year of the AML, more than 52 transactions were reviewed. One proposed merger was prohibited and five were approved with conditions. All of these transactions involved at least one foreign firm. The agency guidelines and language of the decisions employ mainstream analytic concepts but also may import noneconomic factors such as “national economic development”[2] and “national security” in mergers involving foreign investors.[3]. Greater transparency in the analysis would facilitate business planning and international investment.

3. American antitrust law prohibits monopolization[4]. The AML prohibits abuse of dominant market positions and “monopoly agreements” (market power is not a prerequisite). These offenses may be defined so broadly in regulations that they limit the ability of firms to make independent decisions, for example choosing their business partners, under the first provision, or prohibit purely parallel behavior under the latter. The Abuse of Dominance regulations also appear to include a non-competition factor into the analysis, requiring consideration of the “impact of relevant actions on the economic operation efficiency, social public interests and economic development.”[5 The Chinese agencies have not yet brought cases charging abuse of dominance and the private cases to date have not involved American firms. Further experience is needed to know whether the application of Chinese competition law in these areas is consistent with mainstream analysis.

4. Even after decades of liberalization and privatization, thousands of State Owned Enterprises (SOEs) may account for as much as half the economy.[6] These Chinese firms include  traditional utilities as well as industrial sectors of the economy. Although SOEs meet the definition of “business operators” under the AML, they may be subject to different standards and sectoral regulations, even if they possess a dominant share of the market.

5. In the field of intellectual property, dual policy concerns should be promoted. First, legitimate intellectual property rights (IPR) are entitled to protection against infringement. Second, the mere exercise of an IPR should not be deemed to be unlawful monopolization. The first concern is addressed under Chinese laws on patents, copyrights and trademarks and in international agreements which China has joined. Second, the AML, consistent with U.S. antitrust law, provides that exercising intellectual property rights is not prohibited, that is, patents, for example, are not unlawful abuses of dominance.

BACKGROUND AND STRUCTURE OF THE CHINESE COMPETITION LAW

Globally, competition laws have been developing at a rapid pace over the past several decades, supported by technical assistance and recommendations from a diverse collection of organizations including the OECD, the United Nations Conference on Trade and Development (UNCTAD) and the International Competition Network (ICN). China adopted the Anti-Monopoly Law (AML), its first comprehensive antitrust law of general application in 2007, and it became effective on August 1, 2008.[7]. It is part of important legal reforms that began as early as the “reform and opening up” of 1978, and implementation of the “socialist market economy” in 1992.[8].

Antitrust law comprises distinct types of trade restraints including horizontal agreements, both hard core cartels and other procompetitive price and non-price cooperation agreements; vertical price and non-price distribution restraints, including resale price maintenance and tying arrangements; monopolization; and mergers. Overall, the touchstone of antitrust law is the protection of consumer welfare and promotion of competition, but not special deference for particular competitors.

There is general consensus worldwide about many antitrust issues, but others are marked by divergent views in different jurisdictions. These differences may arise from unique national policies their antitrust laws are designed to promote. For example, there is widespread agreement that horizontal cartels are among the most harmful practices and should be prohibited. There is less agreement on the precise contours of where the outside boundaries lie, for example whether the appropriate enforcement mechanism should be limited to governmental actions or also provide private rights of action, and whether criminal or civil remedies are appropriate. There is less consensus about some vertical restraints and distribution practices. Monopolization, or abuse of a dominant position, is another substantive area where there is general agreement about the competitive harm of monopolization but some divergence about other issues, i.e. whether and under what circumstances competition the law can deal with oligopolistic market structures and where, precisely, the boundary lies between vigorous competition and unlawful conduct.

Merger control laws fall in a different category of antitrust enforcement in several respects. Most significantly, modern merger statutes speak in predictive terms; mergers may be prohibited if they “tend substantially to restrict competition” in a properly defined relevant market and may be blocked before consummation. In a globalized world, many large transactions cross national borders and are thus subject to review by more than one national antitrust agency. Some acquisitions may involve key national industries or may tread upon national security interests or national champion firms. Finally, government enforcement agencies investigating proposed mergers do not have the luxury of lengthy investigations. Time is of the essence in a proposed merger and failure to prohibit a transaction before it is consummated makes any future challenge as difficult as unscrambling eggs. If countries operate on different timetables, require merging firms to produce very different information, or apply different substantive standards, then the ability to compete cross-border may be hampered.

It is unsurprising that global competition laws diverge in substance and process, analysis and fundamental approach to a greater or lesser degree. The AML follows approach of the majority of antitrust laws, dealing separately with agreements in restraint of trade, monopolization, and mergers. The prohibitions of anticompetitive agreements and monopolization borrow heavily from the language of Articles 101 and 102 of the European Union treaty, with important Chinese characteristics. There are special provisions covering State Owned Enterprises and Administrative Monopolies, both of which are especially relevant in the Chinese economy. Intellectual property rights are addressed specifically. The American standards on pre-merger notification and substantive analysis have been influential worldwide, and they are clearly the ancestor of the Chinese merger law.

However, AML Articles 1 and 4 diverge from the traditional model of antitrust analysis that is based solely on competition principles. These provisions suggest that interpretation and application of the Chinese antitrust law may differ in some important respects from American standards. Article 1 provides that “[t]his law is enacted for the purpose of preventing and curbing monopolistic conduct, protecting fair market conditions, enhancing economic efficiency, maintaining the consumer interests and the public interests, and promoting the healthy development of socialist market economy.” Article 4 empowers the State to promulgate “and implement competition rules suitable for the socialist market economy, perfect the macro control, and improve a united, open, competitive and well-ordered market system.”

Since 2008, three separate government agencies have been established and assigned responsibility for individual antitrust issues under the AML: the Ministry of Commerce, Anti-Monopoly Bureau (MOFCOM), the State Administration for Industry and Commerce (SAIC), and the National Development and Reform Commission (NDRC). MOFCOM is responsible for reviewing proposed mergers, referred to as “concentrations” in the AML and enforcing the antimerger articles of the law. SAIC has responsibility for enforcing the prohibitions against abuse of dominant positions, monopoly agreements and anti-administrative monopoly regulation. The NRDC is responsible for price agreements and has issued regulations on anti-pricing monopoly regulation. These categories are not airtight, so it is important that the regulations are consistent and applied transparently.

The agencies have been busy drafting and adopting rules and regulations, reviewing mergers, including transactions involving multinational firms, and rendering decisions in the nearly two years since the law became operational. Some of the proposed regulations have invited comments from interested parties, including the American legal experts testifying today, and the ABA Antitrust Law and International Law Sections and the American Chamber of Commerce - People’s Republic of China (AmCham) have provided extensive analysis and recommendations that have been reflected in some revised regulations.

Most recently, SAIC disseminated three regulations on May 25, 2010, concerning monopoly agreements, abuse of a dominant market position and abuse of administrative powers. Comments were invited and provided by the ABA Sections of Antitrust Law and International Law, among other parties. These documents were revisions of earlier drafts and reflect some of the previous recommendations. On July 5, 2010, MOFCOM released a set of provisional rules concerning  divestitures in merger cases, but did not seek comments at this stage. The openness of the Chinese enforcement agencies to considering views and recommendations of international competition experts is salutary. International benchmarking and promulgation of recommended practices have become features of effective antitrust enforcement in this era of global competition. Much of the networking now occurs in organizations such as the International Competition Network, but there is an important place for bilateral consultation and sharing of expertise among agencies and with non-governmental advisors. Future consultation on these and other draft regulations should be encouraged and should involve a variety of experts. Ultimately, clear rules based on sound economic principles will benefit the agencies enforcing the law, businesses seeking to comply, and the ultimate consumers. Beyond agency regulation, investigation and enforcement, Chinese courts have rendered a number of decisions in private actions under the dominance articles of the AML, none involving U.S. businesses.

In a 2010 Policy Brief, the OECD reported on positive economic developments and challenges China faces. The Report praises the growing competitive market economy, increased privatization, and new antitrust policy, stating that “market forces are now generally the main determinant of price formation and economic behaviour.”[9]. It recommends lowering barriers to private competition and promoting foreign investment by limiting government intervention in markets, including State Owned Enterprises.[10].

The trend towards a market economy in China carries the promise of continuing harmonization with modern antitrust analysis, but the AML’s application of non-economic factors, undefined national security considerations in merger review, and potential special treatment of SOEs indicate that there may be some important divergences. American businesses operating in China are subject to the Chinese antitrust law for the “conduct of economic activities within the territory of the People’s Republic of China” and for extraterritorial activities that have “the effect of eliminating or restricting competition on the domestic market of China.”[11]. Indeed, American firms that meet the threshold turnover in China are subject to the mandatory pre-merger notification requirements for transactions that may, or may not, have a significant impact in China.

1. LEGAL STANDARDS INCLUDE NON-ECONOMIC FACTORS

The stated legislative purposes of the AML include traditional theories of consumer welfare, for example, protecting competition, enhancing efficiency and prohibiting monopolization. Article 1 of the law goes further, however, and also seeks to advance the “healthy development of [a] socialist market economy” and promote “public interests.” These non-competition goals are not defined in the statute, but Article 4 empowers the State to “make and implement” regulations “suitable for the socialist market economy, [to] perfect the macro control, and improve a united, open, competitive and well-ordered market system.”

The SAIC Regulations on the Prohibition of the Abuse of Dominant market Positions (draft for comments, May 25, 2010), article 8, may have incorporated one such non-economic consideration into the list of justifications for firms charged with abusing a dominant market position. These listed factors include competitive effects and business justifications (both traditional economic considerations) but also the effect on “social public interests and economic development.”[12] This provision is in accord with the AML legislative purposes, but is not generally within the mainstream of modern antitrust analysis.

2. MERGER REGULATIONS AND DECISIONS

Even before the Anti-Monopoly Law, MOFCOM promulgated guidelines for foreign acquisitions of Chinese firms. The Provisions on Acquisition of Domestic Enterprises by Foreign Investors law (Foreign M&A Rules) provide that “when a foreign investor acquires a domestic enterprise, it shall abide by Chinese laws ... and adhere to the principles of fairness, reasonableness, compensation of equal value and good faith. It shall not ... disturb the socio-economic order, damage the public interest ...” Article 12 requires “parties involved in acquisitions of domestic firms by foreign investors” to obtain approval if the “acquisition involves in any major industry, or has or may have an impact on the state economy security, or may result in transfer of the actual controlling right of the domestic enterprise owning any famous trademarks or traditional Chinese brands.” Approval is also required if the transaction “involves in any major industry, or has or may have an impact on the state economy security, or may result in transfer of the actual controlling right of the domestic enterprise owning any famous trademarks or traditional Chinese brands.” This concept was transplanted, in part, to AML Article 31, which provides for additional review of transactions between foreign buyers and domestic firms and “national security” is implicated. That term is undefined in the AML and has not yet been explicated in regulations, so the breadth of the concept is unclear. Does it include economic interests of the state or solely national defense? As discussed above, the potential consideration of non-economic factors could inhibit competition and decrease consumer welfare, a result antithetical to the generally-recognized goals of antitrust.

Since 2008, MOFCOM has supplemented the Anti-Monopoly Law with a series of regulations that set monetary thresholds for pre-merger notification, describe the filing requirements in more detail, define relevant markets and establish standards for investigations of transactions below the filing thresholds or are otherwise not notified. These regulations were first produced in draft form and, in accord with the best practices recommended above, comments were solicited and provided by a number of sources including American antitrust experts.

Adding to the body of regulatory law, MOFCOM distributed new rules on divestiture standards and procedures on July 5, 2010. These regulations are concrete and practical, applying to any divestiture of assets required by the agency or agreed by the parties as a condition for approval of the proposed merger. Generally, the parties are required to maintain any such assets, operate them independently, and provide information and assistance to prospective buyers. The rules require appointment of a trustee to monitor the entire process and, if the parties cannot find an appropriate buyer, require another trustee to do so. There was no opportunity to comment on the specifics of the regulation, but preservation of assets and efficient divestiture practices appear sound and within the mainstream of antitrust practice.

The reputation of merger enforcement will depend on transparent analysis based on sound principals and equitable treatment of all proposed transactions, whether they involve foreign or domestic firms. This process has the additional effect of protecting the competitive process rather than individual firms and ultimately benefits consumers by offering them more choice in the competitive market. As Justice Holmes observed, the life of the Chinese anti-merger law, supplemented by its rules and regulations, is revealed most clearly by experience in the cases. Current official statistics are unavailable, but it is reported that MOFCOM reviewed 52 proposed transactions during the first year of the AML (August 2008 to July 2009) and approved 46 of them without conditions.[13]. One transaction was prohibited and five were approved with conditions. The prohibited transaction, Coca-Cola/Huiyuan, involved a foreign buyer seeking to acquire a well known domestic firm. The five transactions approved with conditions all involved foreign firms and, according to the same source, no transaction involving two domestic firms was rejected outright or approved subject to conditions.[14]. A recent briefing paper commented that the AML merger articles generally do not reflect “inherent bias” against non-domestic firms, while expressing concern about Article 31 and the specific transaction discussed below.[15].

The prohibited merger of Coca Cola / China Huiyuan Juice Group is an early but instructive example of the merger control process. Huiyuan, the Chinese target firm, was founded in 1992, in Shandong Province and, by the date of the proposed transaction, had a national distribution network. It was the largest privately owned juice-producer in China, selling juice, water, tea, dairy and nectar drinks. The acquirer, Coca Cola had marketed carbonated soft drinks in China since 1976, and Minute Maid juice since 2007. The proposed transaction was a $2.4 billion all cash offer, made in 2008. The reaction of Chinese netizens to the proposed acquisition was strongly negative. A Sina.com poll found that 80% of 229,000 responders voted against the proposed merger because foreign firms should not take over Chinese “pillar brands.”

The first step in merger analysis, both in the United States and under the AML, is a determination of the product and geographic markets. The firms had less than 10% of a hypothetical market that included “all beverages.” Huiyuan was the largest juice firm in China, with under 46% of the 100% pure juice market. If the merger had been approved, the merged firm would have possessed approximately 37% of a market defined as “juice drinks,” but only 18% of a market defined as “carbonated soft drinks.” Coke itself had 16.3% of “carbonated soft drink” market premerger, less than the 17.9% market share of the largest firm in the market, Groupe Danone. 

The parties to the transaction notified MOFCOM under the pre-merger notification requirement and the review proceeded through a second stage review, which stated that the investigation was proceeding under AML and not the foreign M&A law. On April 18, 2009, MOFCOM prohibited the transaction and published a brief analysis finding that there was a threat to competition, which was not offset by any justification in the AML. The decision does not provide a detailed economic analysis of the product market, defined as “fruit juice.” The threatened anticompetitive harm, according to the decision, was Coke’s power to use its dominance in the carbonated soda market to limit competition in the juice market, resulting in higher prices and fewer choices for consumers, a monopoly leveraging theory. In an official statement, the agency stated: “If the acquisition went into effect, Coca-Cola was very likely to reach a dominant position in the domestic market and consumers may have had to accept a higher price fixed by the company as they would not have much choice.” Additionally, the decision found that power of the brands in the transaction would raise barriers to entry and threaten small and medium juice firms. The Foreign Ministry rejected concerns that the decision was based on national protectionism. The case raises several issues not yet clearly answered under the AML and the merger regulations: did the transaction implicate national security? Does acquisition of a famous domestic brand threaten economic security?

3. ABUSE OF DOMINANT MARKET POSITION/MONOPOLIZATION

In the first two years of the AML, standards of the offense of abuse of dominance have been developed through SAIC rules and private enforcement actions. There have been a number of private actions, but no reported dominance cases involving U.S. firms. The important policy considerations in the monopolization cases are both procedural and substantive.

Abuse of dominance cases are complex, requiring the decision-maker to apply sophisticated economic analysis to distinguish between lawful competition and unlawful predation. The SAIC itself is responsible for investigation and enforcement in cases alleging abuse of dominance or monopoly agreement. It has broad authority to decide whether or not to initiate and decide a case at the SAIC level, or, where appropriate, to delegate the matter to one of the provincial, autonomous regional or municipal agencies[16]. The need for judicial expertise is also appreciated and cases are likely to be directed to the Intellectual Property sections of lower courts or to the Intermediate Courts because of their experience in handling complex cases. This is a positive development that should give litigants’ confidence in the quality and efficiency of the decisions.

4. STATE OWNED INDUSTRIES, ADMINISTRATIVE MONOPOLIES

AML Article 7 provides that “With respect to the industries controlled by the State-owned economy and concerning the lifeline of national economy and national security ... the State shall protect the lawful business operations ... and shall supervise and control the business operations of and the prices of commodities and services ... to protect the consumer interests and facilitate technological progress.” Further, it requires SOEs to “be honest, faithful and strictly self-disciplined, and accept public supervision, and shall not harm the consumer interest by taking advantage of their controlling or exclusive dealing position.”

Articles 32 - 37 prohibit the abuse of administrative power. These strong provisions prohibit public agencies from abusing their power to limit competition or benefit particular firms, prohibit discrimination among national regions, and prohibit special consideration for local firms in public purchasing and bidding. These sections, as supported by the July 2010 SAIC regulations, are not typically found in antitrust laws, but they are appropriate and pro-competitive in the highly regulated Chinese context. If enforced, these sections are both pro-consumer, because they promote competition, and pro-private enterprise, including American businesses that wish to operate in China.

5. INTELLECTUAL PROPERTY

AML Article 55 provides that the mere exercise of intellectual property rights is not prohibited and is not a violation of the antitrust law, but “abuse” of intellectual property rights that restrains competition does violate the statute.[17]. This provision has the potential to advance the dual considerations important to intellectual property: legal protection of IP as property rights and recognition that the intellectual property, even including patents, does not necessarily give the owner the kind of “power” prohibited by the abuse of dominance provisions.[18].

While a detailed discussion of the Chinese laws and international agreements protecting intellectual property rights is beyond the scope of this comment, the legal infrastructure, including creation of special IP courts, is in development.[19].

CONCLUSIONS

Chinese antitrust law, interpretation and enforcement have undergone significant reform in the two years since the AML came into effect. The organization and staffing of the enforcement agencies and the publication of numerous procedures, guidelines and regulations suggest that capacity building is important and ongoing. The Holmesian ‘life’ of this law shows consideration of international best practices and a trend towards the consumer welfare model of antitrust thought, mediated by domestic approaches to national policy and governance. Finally, the AML and regulations include certain non-economic considerations and other provisions, such as treatment of SOEs and administrative monopolies, that are specific to the national history and development of the Chinese market economy.

ENDNOTES

1Oliver Wendell Holmes, Jr., The Common Law 1 - 2 (Boston: Little, Brown & Co. 1881).

2AML Art. 27(5).

3AML Art. 31.

4Unlawful monopolization requires more than merely a large share of a market. The elements of the offense are (1) monopoly power and (2) predatory or anticompetitive conduct. Sherman Act §1 also prohibits horizontal and vertical conspiracies and agreements in restraint of trade, but discussion of those agreements is beyond the scope of this statement 5Regulations on the Prohibition of the Abuse of Dominant Market Positions by Industrial & Commercial Administration Authorities (Draft for Comments) (May 25, 2010 (unofficial translation by Freshfields Bruckhaus Deringer LLP). 

6See Joel R. Samuels, “Tain’t What You Do”: Effect of China’s Proposed Anti-Monopoly Law on State Owned Enterprises, 26 Penn State Int’l L. Rev. 169 (2007).

7Anti-Monopoly Law of the People’s Republic of China (promulgated by the Standing Committee of the National People’s Congress on Aug. 30, 2007, effective Aug. 1, 2008). The AML had been under development for more than a decade before it was adopted. 

8Zhenguo Wu, Perspectives on the Chinese Anti-Monopoly Law, 75 Antitrust L.J. 73 (2008); Donald C. Clarke, China: Creating a Legal System for a Market Economy (prepared for the Asian Development Bank, Nov. 9, 2007). These articles provide a valuable description of the history and developments culminating in Chinese law reform, including adoption of the first antitrust law of general application.

9OECD Policy Brief, Economic Survey of China, 2010 (Feb. 2010).

10Id.

11AML Art. 2.

12Regulations on the Prohibition of the Abuse of Dominant Market Positions by Industrial & Commercial Administration Authorities (Draft for Comments) (May 25, 2010)(translation by Freshfields Bruckhaus Deringer).

13Mayer-Brown JSM, China’s Anti-Monopoly Law Merger Control Regime - 10 Key Questions Answered (Part 1) (March 2, 2010). Assuming a fairly constant stream of transactions, it is possible that MOFCOM has reviewed nearly twice that number at the 2-year anniversary of the law.

14Id. The conditional approvals were InBev/Anheuser Busch, Mitsubishi Rayon/Lucite, Pfizer/Wyeth, GM/Delphi, and Sanyo/Panasonic.

15Id. The paper expresses concern but does not contend that the process is permanently flawed and recommends careful compliance with the merger regulations and cultivation of good relationships.

16Procedural Rules by Administration of Industry and Commerce Regarding Investigation and Handling of Cases relating to Monopoly Agreement and Abuse of Dominant Market Position  (unofficial translation by Jones Day) (2009)(referred to as Administration of Industry and  Commerce (AIC) authorities).

17AML Art. 55.

18This is in accord with the recent Supreme Court decision in Illinois Tool Works, Inc. v. Independent. Ink, Inc., 129 U.S. 1109 (2006). Although the case concerned a tying arrangement and not a monopoly, the issue was whether market power should be presumed when a product is patented. The Court rejected the presumption of power and held that proof of power was required.

19For brief summaries, see Kristina Sepetys and Alan Cox, Intellectual Property Rights Protectionin China: Trends in Litigation and Economic Damages, (NERA 2009), Righard S. Gruner, Intellectual Property in the Four Chinas, 37 Int’l Law News (ABA Section of Int’l Law, Spring 2008).

Local Empowerment From Outside: Kimberli Morris on Law Library Development in Iraq

Wars tend to produce great changes in technology, culture, politics economics, law and the  theories used to support their frameworks.  Like other wars, the American invasion and occupation of Iraq during the first decade of 21st century has produced great changes that are only now beginning to be felt in law, culture, military strength and tactics, and law.  All of these changes have been tested and tried within the great laboratory of human change under conditions of stress that has been Iraq since Mr. Saddam Hussein fled Baghdad.  Of great interest to most people interested in the mechanics of these changes--and their control, has been on the possibilities for using positive law and its processes to effect fundamental changes on the political culture of a polity, even one as tentatively formed as Iraq.   See, Larry Catá Backer, God(s) Over Constitutions: International and Religious Transnational Constitutionalism in the 21st Century. Mississippi Law Review, Vol. 27, 2008. Others have seen in the Iraq war a useful laboratory for the examination of possibilities of changing religion and religious culture, bending either or both to a particular objective.   See discussion in Amitai Etzioni, Mosque and State in Iraq, Policy Review, Hoover Institute, Oct.-Dec. 2003. Others have sought to affect the construction and operation of a host of Iraq institutions what, in the aggregate, tend to define the parameters of Iraq social, economic and political life from the bottom.  Many of these efforts have been undertaken for the best of all reasons--local empowerment, recipient centered aid, capacity building and the like. These efforts are worthy of considerable attention and praise.  Many have sought to fill in gaps left by war and the inability of more big picture organizations from providing the sort of assistance necessary.  See United Nations Efforts for the Coordination of Humanitarian Affairs,  Expanded Humanitarian Response Fund (ERF)m and NGO Mico Grants, Bulletin No. 7 (April 2008).

My Colleague, Kimberli Morris, a Reference Librarian at Penn State Law School, was part of one such project. Her work was recently described.  Kimberl,i A. Morris, "The Spirit of Law Librarianship: Legal Education Reform in Iraq," in The Spirit of Law Librarianship:  A Reader  (Roy M. Mersky and Richard A Leiter, compilers, Chicago: Alert Publications 2005); Kimberli A. Morris, "A Law Library Development Project in Iraq:  Looking Back Two Years Later," Documents to the People 37(2):19-22 (Summer 2009).  Her work was part of a larger project to help rebuild three Iraqi law faculties undertaken through DePaul University's International Human Rights Law Institute headed by Professor Cherif Bassiouni. See Raising the Bar: Legal Education Reform in Iraq Project (2003 – 2005). 

The goals of Morris' team were ambitious--to restore and upgrade the libraries of three Iraqi universities and research technologies support services.  That would require a four stage program of physical plant renovations,equipment procurement and installation, staff training and development, and lastly acquisitions and collections development.  Kimberli A. Morris, "A Law Library Development Project in Iraq:  Looking Back Two Years Later," Documents to the People 37(2):19-22 (Summer 2009), at 19.  Each of the universities faced different challenges.  In Baghdad, for example, looters burned part of the collection, the rest saved by the quick work of staff.  The University of Basra had been cut off since 1985.  Id.   And the Kurdish University has little access to materials sibnce the sanctions period.  

These good intentions and plans soon bumped up against the reality of a turbulent occupation 21st century style, in which the usual brutality of the occupying force, useful in the interests of maintaining order and applying overwhelming force to the reconstruction of the defeated state, is substantially transformed by notions of self actualization.  Still, each of the objectives were met in some form by the end of the program finding period.  Book shelves and air conditioning were installed, computer workstations were set up, and staff training started.  Id., at 20.  Acquisitions, especially of electronic materials was started.  Id. The staff training provided an example of the difficulties of  intervention at the nexus of political. cultural and religious systems.    The training was coordinated among a number of universities and held in Jordan.  because many of the staff were women, religious and cultural rules made more complex transaction--acquiring the permission of responsible males, appropriate letters from institutions and dealing with occupation governments and host states.  Id.    Even meetings of the staffs of the three universities within Iraq proved to be daunting.  Id. A planned trip to the United State sproved impossible--ironic in the context of the American funded project, run by Americans to build capacity and win hearts and minds" funded by the American government.  Id., 20.-21.  But again, operating between a variety of rule systems--occupation government, religious authorities, U.S. authorities, employers, aid organization, project contract rules, etc., many of which were autonomous and among which communication (structural coupling) was imperfect almost guaranteed failure.  "As I left Iraq, I felt the library program had been a very narrow success.  There were some major disappointments. . . .  And the successes, while real, were barely a drop in the ocean of what was needed."  Id., at 20.  

Morris' discussion and analysis provides a valuable window on the nature of capacity building at the operational level.  It suggests both the prospects and limits of such interventions.  It serves to remind us that development is not the product of the application of a set of theories and hypotheses tied to a prevailing ideology in an elegant way.  Development aid is a messy affair; all the more so in the context of capacity building and local empowerment where there might exist significant cultural differences between donor and recipient.  Morris reminds us that a key to success is the ability of both to begin to work together as colleagues, yet the essence of aid projects is to retain the hierarchy inherent in the donor-recipient relationship.   This was, as Morris suggested, the key to creating effective relationships with Iraqi librarians.  The work of people like Morris, and programs like that  of the efforts to rebuild Iraqi university libraries suggests both the value of "narrow successes" and the complexity of managing polycentricity in global governance, especially on the ground.  As globalization produces more distinct governance units that overlap in dynamic and flexible ways, inter-systemic coordination will become an increasingly important factor in  the development of global interactions.  These issues enrich Morris' analysis. And it suggests the close connection between work at the "product delivery" level and that at the level of high "theory".  That connecition  ought to be considered not merely by those seeking to engage in similar capacity building work, bit also by the big picture theorists who tend who think of projects like these as bloodless abstractions. 

 

Ashby Monk on CIC Restructuring

On his excellent site, Oxford SWF Project, Ashby Monk recently noted the possibility of restructuring the Chinese sovereign wealth fund, China Investment Corporation (CIC) for more effective penetration of American capital markets.    Ashby Monk, CIC To Be Restructured For USA?, Oxford SWF Project, July 6, 2010. Monk explains:

News reports abound today that the CIC will be restructured in order to allow for more investment opportunities in the United States. Indeed, the intention would apparently be to undo the CIC’s ‘bank holding company’ label at the US Federal Reserve Bank of New York, which would in turn eliminate the need to register with the Board of Governors of the Federal Reserve System and remove various investment restrictions that constrain all US bank holding companies.

Id. And he teases out some potential implications:

1. This restructuring will remove roughly $70 billion worth of assets from the CIC.
2. It will also eliminate a hugely important dividend stream for the Chinese SWF.
3. Still, some see this as a potential victory for the CIC. Indeed, according to the FT today: “If CIC does receive payment in return for the shares, the fund will nearly double overnight the amount of liquid cash on hand for investing.”
4. Finally, a friend of mine thinks that a restructured CIC will wind up under the purview of the PBoC/SAFE (instead of reporting directly to the State Council).

Id.  Additional insightful comments were provided by Andrew Rozanov, Rien Huizer.  Id.

Like their Western counterparts, the Hong Kong Media reported on CIC's possible restructure, but they all indicated that this news was from Western Media. So no more detail was disclosed. But they interviewed several local professionals who stated that the necessity of this restructure is weak, while the obstacles would be huge. Interestingly, there was an expression of some suspicion that the reason for Central Huijin's spin-off might not be merely US's regulation on bank holding companies. Instead, the reason might be internal to the ongoing power struggles over China's vast state controlled wealth.  The restructuring, then, would be just another step in the ongoing restructuring of China's state-owned assets that has been taking place for a while. See Investment and foreign media said the Department of payment options to consider stripping to avoid the U.S. investment review, Century Business Herald , July 7, 2010 (外媒称中投考虑剥离汇金股权 以回避美国投资审查 2010年07月07日 00:4121世纪经济报道) . Importantly, this report stated, again citing other media reports, that many of these issues are to be considered and perhaps resolved at the upcoming National Financial Conference (悬念待解。据媒体报道，原定于今年下半年召开的第四次全国金融工作会议，将涉及15项议题，其中就包括汇金的去向及对中投的诸多安排).  Id.  There was also a suggesiton that the move was prompted by difficulties in acquiring U.S. approval for the opening of branches of banks indirectly controlled by CIC through Central Huijin.  (此前，英国《金融时报》报道称，美方曾以工商银行[4.13 0.24%]和建设银行[4.71 -0.63%]控股股东涉及主权基金为由，暂缓批准两家银行在美开设分行的申请。美方认为，美联储的决定是基于技术原因独立作出。中美双方最初曾接近达成一致意见，但中投公司的成立使情况发生了变化。Id.).  The official position for some time has been that such restructurings are meant to maximize shareholder equity.  That has produced a management team that even officially is committed to change as market and investment context changes, and as the priorities of the state changes as well.  See, e.g., Xu Yaping, China Investment Corporation invested sector adjustment and reorganization to achieve maximum equity, News Center - China Network china.com.cn / news (April 30, 2009).  

All of this might help explain the recent stories of reorganization designed to create a second sovereign wealth fund.--a "CIC No. 2". A recent report noted that a deputy director of the State-Owned Assets Supervision and Administration Commission (SASAC) disclosed in a conference that the State Council had approved to start a new SOE in order to actively manage state-owned assets. This new company would be formed  from a merger of several other old SOEs. See Chief:  Will There Be a CIC 2?, July 5, 2010 (首席：中投二号会不会难产？) (but plans still on hold).  This suggests that internal power allocation considerations indeed might be playing as important a role as either external market factors (more efficient penetration of American capital markets) or internal market factors (bank and financial sector capitalization issues).  For a recent insightful discussion o the problems, and potential opportunities, of internal restructuring, consider Hong Li, "China Investment Corporation:  A Perspective on Accountability," International Lawyer 43(4):1495-1513 (Winter 2009) (arguing that CIC is one effort at successful transition to a market economy and an instrument for depolitization  rather than a tool for the attainment of geopolitical ends, but that "the opaqueness of the internal structure without a firewall between state and market - - - is stirring controversies among the public and policymakers on the drive and method of the CIC investment."  Id., at 1512).  Yet on this score it might be useful to recall the closing paragraph of a Hoover Institution report:

SASAC’s mandate is to “own” these corporations and to manage them in the public interest. SASAC is thus ally and adversary of the central enterprises. SASAC is the ally of these large public corporations in that it seeks to improve their managerial competence and technical capability and increase the value of the state-owned assets. A vital strand in increasing the value of the public’s ownership stake is the increasing of oversight of the managerial stratum that actually runs these firms and reducing the “agency loss” that occurs through weak oversight. In a politicized environment, that makes SASAC the adversary of today’s entrenched managers and their politician allies. When the issues have an undercurrent of adversarial relation—as does the remittance of after-tax profit to the government—SASAC makes progress only slowly and tentatively, as it grinds against the formidable power of large, wealthy, and politically connected organizations. 

Barry Naughton, SASAC and Rising Corporate Power in China, China Leadership Monitor, No. 24. (Spring 2008) The threat of a CIC2 might be as effective a tool of SASC against the managers of the CIC conglomerate (or competitors of SASAC at the state level), as it might be directed against market conditions.  What is clear now is that, flush with wealth, the Communist Party, the state apparatus responsible for oversight and direction, and the powerful managers of these wealth-retaining and producing enterprises, are engaged in a long and increasingly public battle not merely  over the direction of investment, or even its form, but also over which of them will control what portion of that wealth.  These temptations of power over wealth might well pose the greatest risk to the state system developed by Deng Xiaoping and his successors.

Deng Xiaoping in 1979

And it might pose the greatest challenge to the internal stability of the state since the death of Mao Zedong and the days of the Cultural Revolution. And in a sense, these moves remind us of the tremendously dynamic process that is the evolution of the Chinese state-market system, and its effects on the political and economic culture of a state now culturally far more developed than before 1976. 

Official Portrait Tienanmen Gate

Values Economics and Corporate Governance--Engaging With Shareholder Wealth Maximization and Corporate Behavior

The dominant system of global private economic ordering, grounded in classical liberal economic theory and based on robust private markets and a limited state regulatory role, has come under attack. That attack has been sharpened over the last several decades as the development of many poor states has failed to accelerate and as a consequence of the economic crisis of developed states that began to be felt in earnest in 2008. Like legal systems, economic systems grounded solely on rational activity without a foundation in normative value systems, are either incomplete or subject to perversion. The systems built on this grounding in the material (that is in materialist systems) are concerned with the attainment of the foundational object, and are indifferent to the means to those ends, except to the extent that the means are more or less efficient in the attainment of that objective. Like the great 19th century systems of constitutional law, these systems privilege process and not the normative values that underlie them. They look to Rechtsstaat and not Sozialstaat constructions of value, efficiency, and the right. Just as in constitutional law value systems provide the critical element in constructing legal systems, so in the law of economics, normative systems are vital for the construction of those values that necessarily infuse rationality. Economics itself, in the West, has sought to engage in these notions.

The corporate social responsibility movement is, to some extent, built on these notions.  It seeks, sometimes in an unstructured and unsystematic way, to build "values" into the process of welfare maximization that continues to serve as  the ordering basis of human activity (especially in the commercial sphere).   But that tentativeness suggests forward movement.  A recent post by Jim Kelly in Global Governance Watch describes a number of different emerging approaches to developing normative values frameworks for corporate governance.  Jim Kelly, Vatican Joins Transnational Elites in Devising New Forms of Capitalism, Corporate Governance Watch June 30, 2010. Kelly identifies the following schools:

1. Moral capitalism. Steve Young, the author of Moral Capitalism: Reconciling Private Interest with the Public Good, is the Global Executive Director of the Caux Round Table ("CRT"). The CRT's 2009 Principles for Responsible Business (updated in 2010) comprise seven principles and more detailed Stakeholder Management Guidelines covering each of the key stakeholder dimensions of ethical business practices: customers, employees, shareholders, suppliers, competitors, and communities.

2. Co-op capitalism. Noreena Hertz, Professor of Globalisation, Sustainability and Finance at the Duisenberg School of Finance, promotes the concept of "co-op capitalism," which, according to a 2009 FastCompany.com article, "calls for businesses, governments, NGOs, and the public to experiment together to design new, more-adaptive business models and financial structures that take both profit and larger social goals into account."

3. Creative capitalism. As Bill Gates, the former Chairman of Microsoft Corporation, explained in a January 2008 speech delivered at the World Economic Forum in Davos, Switzerland, "creative capitalism" is "an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world's inequities."

4. Connected capitalism. In a March 2009 speech delivered at a program sponsored by the Council on Foreign Relations, Neville Isdell, then the Chairman of the Board of the Coca Cola Company, introduced "connected capitalism," as "a new model of how businesses must engage with society across four platforms: communities, institutions, social challenges and values." According to Isdell, connected capitalism requires business leaders to "connect your business to the communities that you serve;" "connect your business with civil society and governments to address relevant large-scale problems;" "connect your philanthropy, your sustainability agenda, with the core of your business;" and "connect your business with the values of your own employees."

5. Cohesive capitalism. As Ben J. Verwaayen, Chief Executive Officer of Alcatel-Lucent, France, explained in a panel discussion held on January 28, 2010 during the 2010 Annual Meeting of the World Economic Forum in Davos, Switzerland, and in an online posting the next day, "cohesive capitalism" is a capitalism that "has to show its contribution to strengthen the cohesion of society at large." Organizations must challenge individuals "to contribute to society in which they operate," what Verwaayen refers to as a "cohesive society."

6. Sustainable capitalism. In a June 24, 2010 opinion piece in The Wall Street Journal, former U.S. Vice-President Al Gore and David Blood reminded readers that "before the crises and since, we (and others) have called for a more long-term and responsible form of capitalism-what we call ‘sustainable capitalism.'" According to the pair, sustainable capitalism "explicitly integrates environmental, social and governance (ESG) factors into strategy, the measurement of outputs, and the assessment of both risks and opportunities." While Gore and Blood opined that "the rising inequality in our society is clearly unacceptable," they "do not support government-mandated compensation caps or other prescribed compensation policies." However, "if the business and investment communities do not act, governments may." (emphasis added).

7. Social capitalism. For Kevin Rudd, Prime Minister of Australia from December 2007 until June 24, 2010, government action is at the center of what he referred to as "social capitalism" in an article he authored for the February 2009 issue of The Monthly. For Rudd, whether the new regime is called "social capitalism," or "social-democratic capitalism," or "social democracy," "the concept is clear: a system of open markets, unambiguously regulated by an activist state, and one in which the state intervenes to reduce the greater inequalities that competitive markets will inevitably generate."

8. Humane capitalism. As Pope Benedict XVI explained in paragraph 46 of his third encyclical, Caritas in Veritate ("Charity in Truth"), "the traditional valid distinction between profit-based companies and non-profit organizations can no longer do full justice to reality, or offer practical direction for the future."

Id.  Mr. Kelly criticizes the current application of Humane capitalism by representatives of Pope Benedict XVI. "At face value, Pope Benedict XVI's vision for the pursuit of humane capitalism at the national level, with respect for the rule of law and the subsidiarity principle, is a positive and hopeful one. However, disappointingly, an address delivered on June 8, 2010 at the 14th regular session of the Human Rights Council by Archbishop Tomasi, the Holy See's permanent observer at the United Nations offices in Geneva, evidences a complete disregard for the spirit and practical application of Pope Benedict XVI's call for humane capitalism." Id.

Mr. Kelly argues for what he terms "constructive capitalism" as a better values based alternative . "Ultimately, the evolution of capitalism should be rooted in the democratic process and rule of law at the national level, specifically in the context of the organic development of human rights. This calls for what this author refers to as "constructive capitalism." Constructive capitalism is capitalism that, in addition to focusing on increasing shareholder value, promotes improvement and development, both internally within businesses and externally within society. "  Id.  And he describes what he terms the seven phases of constructive capitalism: attitude, awareness, assessments, acknowledgment, alliances, adjustment, and advocacy.  Id.

Left off the list are normative value systems that do not derive from out of conventional economics--principally the Marxist inspired values systems that, while dismissed as anachronisms within developed states, still finds a ready audience within least developed states and among elites still tied to Marxist theories of social and politician ordering.  They are also worth considering, if only because of  potential to affect global discussion of values in economics and its consequences for corporate governance. The problems of values economics, and its growing importance within conventional economics, Marxist and religion based alternatives (and principally within Catholic social thought) are explored in some detail in Larry Catá Backer, "Values Economics and Theology:  The Contribution of Catholic Social Thought and Its Implications for Legal Regulatory Systems," Economics, Management, and Financial Markets 5(2):-- (2010).

The move to values economics has significant implications for corporate governance.  These effects are consequential--they derive from an application of values notions to modify the understanding of shareholder or corporate institutional welfare maximization.  That, in turn, can substantially alter the way in which directors approach an understanding of their duty to manage the corporation, officers to  run the day to day operations of the entity and shareholders to approach the best mix between the income, property and control values of their shares.  This reworking can have significant effects on current efforts to change the way in which corporations engage in business with human rights implications consistent with their paramount duty to maximize value.  For a discussion of impediments under current models, see, e.g., Larry Catá Backer, Using Corporate Law to Encourage Respect for Human Rights in Economic Transactions: Considering the November 2009 Summary Report on Corporate Law and Human Rights Under the UN SRSG Mandate, Law at the End of the Day, Jan. 14, 2010. 

Business, Human Rights and Non-Profit Corporations

The binary--good/bad, public/private, military/civilian, profit/non-profit corporation--remains a basic building block for the ordering of reality within most disciplines.  It serves as the bedrock animating (and often unstated premise) in discussion of policy and in the construction of institutions and law systems.  But the binary tends to oversimplify, and distort, as much as it might serve to order and discipline human organization and law.  

The difficulties and contradictions of the binary as an ordering mechanism in law is particularly troubling in its application to corporations.  Most jurisdictions make the basic assumption that there is a fundamental difference between for profit and not-for profit corporate entities.  The  difference is grounded in the idea, grounded in history, tradition, and public policy (facilitating the charitable impulse as a holdover from a world in which government was less intrusive), that corporations  nor organized for the production of profits would be operated differently from for profit corporations in virtually every instance.   The lack of shareholders, the different role for directors and officers, and the different assortment of stakeholders  suggested a different regulatory framework.  Consider, e.g.,  Eric D. Werker and Faisal Z. Ahmed,  What Do Non-Governmental Organizations Do? HBS Working Paper Number: 08-041 (DSec., 2007). Yet the functional equivalence of non-profit and for-profit corporations may suggest that a more forgiving regulatory framework for non-profit corporate governance may require rethinking. 

A recent article suggests the need to rethink the fundamental validity of the profit/not-for-profit binary for purposes of framing principles of corporate governance.  Danné L. Johnson, Seeking Meaningful Nonprofit Reform in a Post Sarbanes-Oxley World, St. Louis University Law Journal 54(1):187-240 (2009).  Professor Johnson notes the significant economic role played by non profit corporations, their financial impact, and their impact on U.S. labor markets.  (Text pages 190-95).  Professor Johnson notes the similarity of legal duties imposed on directors in both profit and non-profit entities.  (Text 195-200).  Citing for support the work of Juidth L. Miller ("The Board as a Monitor of Organizational Activity:  The Applicability of Agency Theory to Non profit Boards," Nonprofit Management & Leadership 12:429 (20902) and Edward Glaeser ("Introduction," in The Governance of Not-For-Profit Organizations 1, 36 (E.L. Glaeser, ed., 2003)), Professor Johnson argues for the adoption of Sarbanes-Oxley style reforms for the non profit sector (Text, 217-240).   Professor Johnson suggests that borrowing certain governance principles and methods from Sarbanes-Oxley--certification, independent audit committee rules, internal control systems, principally, would imporve non-profit corporate governance. (Text 234).

Such calls for a revaluation of governance frameworks suggests a substantial weakening of the profit/not-for-profit governance binary in fact and form.  Consider, with respect to the issue of accountability, e.g., Alnoor Ebrahim, The Many Faces of Nonprofit Accountability, HBS Working Paper Number: 10-069 (Feb., 2010).  That convergence might be made stronger still by the move toward corporate social responsibility as an important factor in corporate governance.  It suggests that the usual core approach for CSR--its focus on the profit motive and the maximization of shareholder value--overly narrows the application of CSR values.  Profit, as the predicate for CSR, ignores the functional equivalence of institutional activity.  Non-profit corporations may violate international human rights norms, child labor provisions, and may be complicit in the violation of the rights of employees, or the communities in which they operate to the same extent as profit corporations.   This suggests that the usual division between profit and non-profit corporations is too simplistic.  While it is true enough that civil society actors may function to monitor for profit corporations in their activities (Backer, Larry Catá, Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator. University of Connecticut Law Review, Vol. 39, No. 4, 2007).  it is also true that these "monitors" may also breach the norms they are meant to protect.  It may be time to consider including non-profit entities within the soft law CSR governance frameworks of the OECD and perhaps John Ruggie's business and human rights protect-respect-remedy framework.  [PDF] Protect, Respect and Remedy: a Framework for Business and Human Rights

Author: John Ruggie, Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises  Dated: 07 Apr 2008.

Studying the "Higher Law" of Scientific Development (科学发展观) in Chinese State-Party Constitutionalism

The concept of Scientific Development (科学发展观) as both constitutional doctrine and leadership principle of Chinese Communist Party doctrine continues to play a foundational role in the emergence of Chinese Party-State meta constitutionalism.  The concept is particularly interesting both as an articulation of "higher law" that informs both the approach to the leadership (领导) role of the Chinese Communist Party under the Constitution and the substantive principles under which the state apparatus (the National People's Congress system) operates.  It is all the more interesting as an example of the way in which Chinese constitutionalism, and the articulation of its fundamental doctrines, requires reading both the State and Party constitutions together.  My research assistant, Ma Lian recently provides a review of the evolution of the concept within Chinese intellectual and Party circles--at least to the extent that such development is available publicly.  

__________________

  

Interpreting Scientific Development Concept

The Scientific Development Concept (kexue fazhan guan) was written into the Chinese Communist Party’s Constitution in 2007 at the Party’s 17th Congress – a symbol that it has become the latest dominant guideline for the Party as well as the country. In the past few years since the adoption of the Scientific Development as the Party’s new theory, there have been discussions about what exactly Scientific Development is while the country has seen several campaigns aimed at pushing for the implementation of the new ideology.

What is Scientific Development Concept?

In general and officially, Scientific Development Concept is understood as an overarching guideline for building China’s socialism under new conditions. Every aspect of work is supposed to be done according to Scientific Development Concept. Specifically, according to a study guide issued by the Party’s Publicity Department to help better understand the concept, Scientific Development Concept has four key points: One, the top priority of Scientific Development Concept remains to be development. Two, the core of Scientific Development Concept is people first. Three, the basic requirement is overall, balanced and sustainable development. Four, the fundamental approach is making overall plans and taking all factors into consideration. [1]

The Study Guide has seven chapters and an introduction.

Chapter One: Scientific Development Concept is the latest achievement of the theoretical system of socialism with Chinese characteristics. This chapter reviewed the history of applying Marxist theory in China and concluded that there were two major theoretical breakthroughs in coming up with a China version of Marxism. One is Mao’s Thought and the other is the Chinese characteristic theory system, which includes Deng’s Theory, Jiang’s Three Represents and now Hu’s Scientific Development Concept. This chapter has four points: a) Scientific Development Concept is consistent with Marxism, Mao Zedong Thought, Deng Xiaoping Theory, and the important thought of Three Represents. b) Scientific Development Concept is based on national conditions, past experience and new requirement for development. c) Scientific Development Concept is based on analysis of international situation, the world development trend and development experiences of other countries (must take China’s development into the global picture and improve the ability to manage domestic and international situations). d) Scientific Development Concept is a strategic thought that must be upheld and implemented in developing socialism with Chinese characteristics (it answers the question of what kind of development we should pursue and how we develop).

Chapter Two: Development is the top priority of Scientific Development Concept. This development must be good and quick (not the other way around). Good is before quick. It points out that growth does not equal to development. It talks about changing China’s economic development approach, transitioning China’s resource consumption economy to an innovative economy. It calls for building China to be an innovative nation. It also mentions building new socialist rural China, etc.

Chapter Three: People first. The beginning paragraph explains what is included in the concept of “people” – workers, peasants, intellectuals, and other laborers as well as all strata of the society. It traces back to China’s ancient philosophy about people as essential to a state. It emphasizes the importance of making the Party serve people. It also talks about combing the development of economy and society with the all around development of each individual, or human beings.

Chapter Four: Development should be comprehensive, balanced and sustainable. It brings up a four-dimension development of building socialism with Chinese characteristics. Economic, political, cultural and societal buildings are integral parts of the socialist cause.

Chapter Five: Development should take all factors into consideration. This is a chapter about methodology. It calls for proper handling of relations between regional differences, central and local, people and nature, domestic and international, individual interests versus group interests, current versus future, etc. It calls for good handling of different interests. It also talks about combining Party building with the four-dimension – economic, political, cultural and societal building.

Chapter Six: The implementation of Scientific Development Concept. a) Uphold the Party’s fundamental line of “one center (economic) two basic points (the four cardinal principles and reform).” b) Build harmonious society. In this section, a definition or basic characters of a harmonious society is given out – democracy and rule of law, fairness and justice, integrity and friendship, energy and stability, harmony between man and nature. c) Deepen reform and opening up. d) Indeed strengthen and improve Party building. “The key to truly implementing Scientific Development Concept lies in the Party.” “The Party’s ruling ability and its advancement should be improved and reflected on its role in leading scientific development and promoting harmonious society building.”It warns that the party’s ruling status is not always guaranteed. “All Party comrades should firmly remember that a party’s advancement in the past does not mean its advancement now; and it’s being advanced now does not mean that it’s being advanced in the future.”

It admits that the ruling ability of the Party today is not compatible with the new conditions and new tasks. It calls for pushing Party building in a spirit of reform and innovation. The Party building project has five aspects: Party’s thinking, organization, working style, institution building, and anti-corruption and clean governance building.

Combine party’s ruling ability building with studying and implementing Scientific Development Concept.

Combine party’s advancement building with Scientific Development Concept.

Chapter Seven: Sum up and call for efforts to implement Scientific Development Concept. Use Scientific Development to arm one’s mind. Continue to liberate thought and change thoughts that are not compatible with Scientific Development Concept.

Attempted Interpretations

Scholars have various sayings about Scientific Development Concept since its inception. Some believe it is closely linked to the Three Represents and it is the implementation of the Three Represents. It is not only a question of practice but also a theory. It is brought out against a changed situation in China – the gap between the rich and the poor is increasing, the environment is becoming unsustainable if economic development continues the old way, and a lack of the development of human beings during the first 30 years of reform.[2]

The official interpretation of Scientific Development Concept does not seem to be complete because it does not give out a clear definition, as criticized by an article published on an academic journal. The authors of this article said that by far there is still not a single good definition of Scientific Development Concept.[3] The authors believe that before defining Scientific Development Concept, there should be a definition for “scientific” and “development” first, and a standard norm to test what is scientific and what is not.

The four points of Scientific Development Concept only explain some components of this concept – priority, core, requirement and methodology. In order to understand what the concept is, one needs to understand what scientific and what development means separately and what they mean together. Scholars of various backgrounds have been trying to define and describe Scientific Development.

Yu Jin, who’s been researching on Scientific Development Concept, wrote in his Sina blog that “scientific” here is not about natural science, nor social science. It is serving as an adjective to modify the “perspective on development.” He believes that “scientific” here means first, the development we are talking about is conforming to the common laws (not in a legal sense, but in a universal sense) of modern economic development. He explains that economic development is constrained by not only factors like resources, market, etc, but also society, politics, and culture factors. Therefore, only through a coordinated development of these multiple dimensions, can we obtain a sustainable development. Secondly, “scientific” means that this development is in line with the current world trend – respecting human rights, protecting environment and pursuing sustainable development. China as a responsible country must incorporate these ideas and trends into its guidelines for development and apply them into policy making and implementation. Third, this new perspective on development reflects Chinese people’s needs today. After 30 years of fast economic growth, people now care about high quality life, cultural life, and political life. [4]

Xin Xiangyang, a scholar of Marxism, has similar interpretation to “scientific.” It is the “scientific” in “scientific socialism.”[5] In this sense, Scientific Development Concept is the science about development laws (not in legal sense). It is the science about China’s characteristic reform and development laws. In other words, the concept is tailored to the unique conditions of China’s development.

Chen Zhigang, another scholar of Marxism, also believes that “scientific” is not the scientific in common sense – rock science.[6] It is about Marxist outlook or perspective on history, truth and values. The core of Scientific Development Concept – people first, requires a change from blindly pursuing economic development to all around development, from a focus on material wealth to a focus on human beings, and a change from pursuing efficiency to pursuing fairness.

Chen believes there is no big difference in the understanding of “development” in the academic circle. It is believed that the development of a society is different from that of the nature, which is about the increase of quantity. Societal development is about quality, and overall progress of a society. Scientific Development Concept differs from traditional modernization theory and development theory, which are about industrialization, urbanization, market, and economic growth (GDP as a growth index).

Other scholars believe Scientific Development Concept implies a great transition of the Chinese national strategy. Pang Yuanzheng, a Party School professor, says this development means a process from industrialization to information society and post-information society where all around development is pursued.[7]

Bai Wangang, who heads a consulting company, offers an insightful interpretation. He interprets it from three changes: [8]

One, Scientific Development Concept is a change of thinking paradigm. Compared with Deng’s “crossing the river by feeling stones,” the Scientific Development Concept symbolizes a powerful turn from Deng’s theory about China’s development path – not fumbling in the dark but actively pursuing the correct path. In Deng’s era, what he suggested was acting first and then coming up with a theory. Therefore, the government was more directly involved in economic matters. But in Hu and Wen’s era, they tend to have the government play a macro role of coordination and adjustment by setting up institutions and mechanisms, rather than directly involved in market operations.

Two, Scientific Development Concept implies to a change of governance – having a big central administration to reverse a situation where central command has been ignored or altered at local levels. This refers to a situation where because of flexible local implementation of central command in the past 30 years of reform, the central government is losing power to local administrations. A latest reform on the size of ministries indicates that the central government wants to curtail increasing local power.

Three, Scientific Development Concept means a change of economic development mode – from export oriented economy to self-relying economy. (Adjusting the current disparity between wealthy coastal area and poor inland area.)

A lawyer expressed his thinking about Scientific Development, arguing that it should be an open and developing theory.[9] Zhou Yongkun says Scientific Development Concept belongs to the discipline of humanities, not the scientific knowledge system. It is a question of philosophy. Scientific Development Concept is also a thought, which implies that there is no absolute truth and therefore it should be an open theory. The development in Scientific Development Concept should be directing the development of society. It should be based on the protection of rights enshrined in the Constitution. In another word, the core question of the Scientific Development is inherently related to constitutionalism.

Another blog article by a member of a democratic party pointed out that the previous 30 years of reform is not scientific. He said the reason for being not scientific lies in many problems that have been exposed after the first 30 years. He criticized that the slogan of “letting a portion of people get rich first” was problematic.[10] He calls for all people to get well off, not just a group.

Wu Jingshi, an independent thinker, says Scientific Development Concept is not an innovation but a return to normal thinking and normal action. She said the current Chinese society is abnormal. Scientific Development Concept is the middle road, is about long term development, not short term. She compared the reform era as waging a battle in a battle field. She said ruling a country is not like fighting a battle. You must have reason and wisdom, not just courage and passion. She said Scientific Development Concept is trying to return to reason and wisdom, rejecting the mentality of fighting for political power – revolution.

Scientific Development Concept = Liberation of Thought?

Fang Ning, a political scientist, summed up three major ideologies that have been having impact on China since reform. They are liberalism, nationalism, and neo-leftism. He said Scientific Development and Harmonious Society are conforming to the thought of neo-leftists.[11] He believes that the Scientific Development is not only about an adjustment of policy, but also about a critical (critique) overview of the previous reform and a call for ideological change. Scientific Development Concept emphasizes on equity and sharing national wealth among all citizens of China. It also calls for a coordinated development of the economy and the people of that society. “These are exactly what neo-leftists advocate.”[12]

Liu Haibo, a scholar of law from China Academy of Social Sciences (CASS), calls for liberation of thought and believes the birth of Scientific Development Concept implies another wave of liberation of thought – saying goodbye to the high investment, high pollution development mode in the previous 30 years.[13] He criticized the domination of economists in decision making in the reform era.

Zhu Andong, a lecturer of political economy in Qinghua University, criticized neo-liberalism as unscientific. He called for liberation of thought targeting neo-liberal thought that has been influencing China during the latter 15 years in the reform era. He said China must reject and oppose neo-liberalism in order to implement Scientific Development. He also encourages analysis of who will be supporting Scientific Development and who will not.

Gan Yang, one of the leading representatives of neo-leftists in China, published an article comparing two articles that represent the Left and the Right factions within the Party. Apparently Gan was taking the side of the Left. Zhang Qinde, a Leftist, believed that the reform, especially the time under Jiang, was a disaster. Therefore, he believed Hu and Wen have been trying to rectify problems caused by the previous administration (Jiang). However, Xie Tao, who is labeled as a Right, worries that Zhang and the Leftists are trying to negate the achievements of the 30 years reform.[14]

In another article Gan pointed out that the current liberation of thought is about rejecting a blind admiration for American road.[15] This is similar to the opinion that the current liberation of thought is not like the situation in the beginning of reform, i.e. the first wave of liberation of thought where people had been brainwashed by the Cultural Revolution and people had been hostile toward everything from the West. The current liberation should be a review and reconsideration over what happened in the 30 years of reform in which Western ideas and ideology have been very popular and predominant.

To sum up, scholars and people have different interpretations to the Scientific Development Concept, as it was translated literarily. In general, the interpretations fall into two groups. One group believes that it is a continuation of the Three Represents because at least two of the key points align with the Three Represents. For example, point one, development is priority. This is a reflection of the first Represent – the advanced productivity. Point two, people first. This is a reflection of the third Represent – the broadest masses. Officially, the Scientific Development Concept is described as the latest theory following Marxism, Mao Zedong Thought, Deng Xiaoping Theory, and the important thought of the Three Represents.

The other group, however, believes that the Scientific Development Concept implies a major change of the Party’s ideology – different from Deng’s focus on economic development. This group also believes that it indicates a review of the past 30 years of reform which has brought huge material wealth but also damaged environment, increased income gap, and left holes in many aspects of the society, i.e. social welfare, medicare, education.

The new theory, as previous theories, has been studied nationwide through large scale campaigns. It is worth noting that Party building has been very intensive recently, which is quite understandable since Party is the key to the implementation of Scientific Development Concept.

Study Campaign

Right after the 17th Party Congress, on which Scientific Development Concept and Harmonious Society were formally introduced into the Party Constitution, a nationwide campaign was waged among party members to study and implement the Scientific Development Concept. This study campaign lasted one year and a half from September 2008 till April of 2010, with a previous six-month period of pilot campaigns in several places in the first half of 2008.[16] It was reported that 3.7 million party organizations and 75 million party members participated in this study.[17] Party officials and members have been asked not only to study the meaning of Scientific Development but also implement it in their daily work. For instance, while economic development is still the priority, but an environmentally conscious and balanced development is desired. Party officials have also been asked to care more about people’s interests and to solve problems for them, as a way of practicing the Scientific Development Concept – the core of which is people first. [18]

At the close of this large scale study campaign, Hu Jintao gave a wrap-up speech at the campaign’s review meeting. He talked about three issues.

First, he confirmed the achievement of the study campaign – it was a good education of Scientific Development Concept among party members; the idea of following Scientific Development Concept is clear; people got benefit and party-people relations became closer; local party organizations were strengthened.

Second, he summed up good experiences from this campaign. Those good experiences include 1) an emphasis on learning and education among party members. 2) an emphasis on development, a development that should not only care about GDP growth, but should be high quality development that keeps people first and all-round and sustainable. 3) an emphasis on the role of Party leaders. 4) an emphasis on depending on people and putting people’s interests first. 5) an emphasis on innovating mechanisms.

Third, Hu called for building the Party “in a spirit of reform and innovation.” He kept using “scientific” in the following points about party building. “Use scientific theory to guide Party building, scientific institutions to guarantee Party building, and scientific method to promote Party building.” He talked about four aspects about party building: One is calling for building the party to be a party that keeps learning and applying what it has learned into practice (to build a party of learning was mentioned). Two is improving the capability of party leaders and party organizations, in which selecting moral and capable leaders is mentioned. Three is building strong and capable local party organizations (the excellence campaign was mentioned). Four is asking party members and leaders to work close with people, for the people, picking up again what had been the party’s good old traditions. [19]

The Excellence Campaign

Immediately following the high-profile study campaign among party members nationwide, the Party’s Organization Department waged a practice campaign that is aimed at consolidating and exploring the achievement of the study campaign. This practice campaign is calling on party organizations and party members to build excellent local Party organizations and become excellent Party members (Chuang Xian Zheng You: this campaign encourages local party organizations and party members to become the best.).[20]

The Excellence Campaign is one of the two major projects about Party building appeared in the 17th Party Congress Report and reiterated in the document of the 4th plenary session of the 17th Party Congress. The other project is building the Party to be a learning Party.[21]

The Excellence Campaign is headed by the Party’s Organization Department Head Li Yuanchao, who served as the Governor of Jiangsu Province before he was promoted to the current position. [22] The campaign, which is the continuation of the Study Campaign, is a constant work of Party building at local levels.[23] The basic qualifications for being an excellent Party organization can be summed up into “five good” – good leaders team, good Party members team, good working mechanism, good work performance, and good feedbacks from people. The basic requirements or qualifications for an excellent Party member can be summed up into “five leads” – lead in learning Scientific Development as well as broad knowledge to raise one’s knowledge level; lead in excellent work performance; lead in serving people and protecting people’s interests; lead in observing Party discipline and State law; and lead in upholding morals and fighting against immoral and unlawful practices.[24]

The campaign’s organizers also asked various sectors to have their specific additional qualifications according to their different needs on the ground. For example, Party organizations in rural areas should combine the Excellence Campaign with the work of promoting rural development. Each sector should have a theme in their Excellence Campaigns.[25]

According to the View issued by the CCP Office, in the first year of the Excellence Campaign, the focus should be on celebrating the 90th anniversary of the founding of the Party (July 1, 2011). The campaign should be oriented toward further implementing Scientific Development and building a long term mechanism of studying the guideline. In the second year of the campaign, a review will be held before July 2012, to praise and publicize good examples of Party organizations and Party members.

Building a Party of Learning Campaign

If the Excellence Campaign is weighing more on practice, the campaign of building a party of learning is emphasizing on study. Launched a bit earlier than the Excellence Campaign, the call for building party organizations of learning is also targeting Party building. The layout of this campaign appeared in another View issued by the CCP Office. As the Feb 8 View introduced, “Building a Marxist learning party is a strategic task brought up at the 4th plenary session of the 17th Congress … building party organizations of learning at various levels is a basic project of building a Marxist learning party. ” [26]

What should be learned? First of all, the theory of Chinese socialism – Marxism, Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the important thought of Three Represents, and the Scientific Development Concept. Second, further studying and implementing Scientific Development. Third, learn and practice socialist core values and morals. Fourth, learn and master various knowledge required in the course of China’s modernization. Fifth, learn and gather successful experiences in practices.[27]

Finally, the interpretations of the Scientific Development Concept may evolve and develop over time as the current leadership continues until 2012. How effective the theory will be in addressing many serious problems such as transitioning China’s economy from manufacturing to high-tech and low-pollution economy, tending people’s interests in living, education, and medical care, and fighting rampant corruption, remains to be seen.



[1] Study Guide, available here http://theory.people.com.cn/GB/68294/135509/index.html


[2] Jin Wei, “Summary of Scientific Development Research” http://hxd.wenming.cn/mkszy/2009-11/19/content_68353.htm


[3] Cui Weicheng, Kang Bolin, “Personal view about the definition of scientific development” China Social Science Journal Vol 5, 2009, http://www.stsy.sjtu.edu.cn/achievements/2009/1019/article_37.html


[4] Yu Jin, “How to understand the meaning of ‘scientific’ in the ‘Scientific Development’” http://blog.sina.com.cn/s/blog_5715a19c0100jqpt.html?k=%E7%A7%91%E5%AD%A6%E5%8F%91%E5%B1%95%E8%A7%82&t=utf-8


[5] Xin Xiangyang, “On three basic questions of scientific development” http://news.xinhuanet.com/comments/2006-02/22/content_4210184.htm


[6] Chen Zhigang, “Latest progress in the research of scientific development” http://www.china.com.cn/book/zhuanti/kxxsqy/2008-01/17/content_9548890.htm


[7] Pang Yuanzheng, “What is development in scientific development”http://theory.people.com.cn/GB/41038/4328235.html


[8] Bai Wangang, “About Scientific Development” 05/10/2010, http://www.china-co.com/blog-2.php/id-395-1.html


[9] Zhou Yongkun, “Scientific Development Concept should be a developing theory” http://guyan.fyfz.cn/art/456927.htm


[10] Tan Junfeng, My opinion about scientific development, http://www.23class.com/boke/view.aspx?id=652


[11] Fang Ning, http://news.ifeng.com/opinion/specials/thinking/200812/1209_4817_914434_7.shtml


[12] Ibid.


[13] Liu Haibo, http://vip.bokee.com/20080304485992.html


[14] Gan Yang, Comment on Zhang and Xie, http://blog.sina.com.cn/s/blog_406c715f0100c72m.html


[15] Gan, http://www.tianya.cn/publicforum/content/no01/1/395520.shtml


[16] Chen Jiaxing, et al, “Report on the study campaign nationwide,” People’s Daily, 04/06/2010, http://kxfz.people.com.cn/GB/136094/11297000.html


[17] Ibid.


[18] Chen’s article. Ibid.


[19]Hu Jintao, “Speech at the review meeting of the campaign of studying and implementing Scientific Development” People’s Daily, 04/06/2010 http://kxfz.people.com.cn/GB/186090/index.html


[20] Xinhua column, “Excellence campaign is spreading out nationwide,” 06/01/2010 http://news.xinhuanet.com/politics/2010-06/01/c_12166235.htm


[21] Ibid.


[22] Li Yuanchao’s bio information is available here http://news.xinhuanet.com/ziliao/2002-12/30/content_674868.htm


[23] Zhong Zuwen, “Excellence campaign is the continuation of the study campaign,” 06/03/2010,People’s Daily, http://dangjian.people.com.cn/GB/11772255.html


[24] “Five good and Five leads” available here http://www.xinhuanet.com/politics/cxzy/


[25] Central Office of the CCP issued a view about the Excellence campaign, 05/14/2010, http://news.xinhuanet.com/politics/2010-05/14/c_1299838_5.htm


[26] CCP Office View on promoting party organizations of learning, 02/08/2010, http://news.xinhuanet.com/politics/2010-02/08/content_12955104_2.htm


[27] Ibid.

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This review provides a glimpse at the public face of a political concept with constitutional and governance dimensions that affect Party, Government and enterprises in their domestic and international operations. Understanding Scientific Development, or better put, understanding the way in which Chinese elites frame their legal discourse through the principles of Scientific Development (among other "higher Principles"), provides a sounder basis for analysis of Chinese legal developments.   In particular, such principles explains not merely the context in which political and legal action is understood (and thus conceptualized) but also the limitations under which both Party and State apparatus operate in everything from the focus on corruption, to the relationship between government and Party, and to the more fundamental relationship of governing substantive values to (and as) fundamental law (Fa--法).   And those relationships in China, as they do elsewhere, color all other socio-legal engagements--from the court system to the understanding and application of statutes and other rules.