Hard Regulations and Soft Constraints: China’s Institutional Crisis and Models for Change

Following years of rapid economic growth, China currently faces a crisis of its economic institutions. Unconstrained business behavior has led to the accumulation of externalities with high social costs. In this paper we consider the challenges of institutional change that China faces, especially the need to evolve a system of ‘hard constraints’ reinforced by ‘soft constraints’. We describe the U.S. experience in evolving economic institutions through periodic crises of its economy, and analyze the importance of the U.S. experience as a model for contemporary China. We suggest that China’s institutional evolution is likely to be eclectic, drawing on international models, but still largely rooted in the ‘civilizational logics’ that are deeply embedded in the country. Thus, the current revival of Confucian ideals in China is likely to prove significant in informing the process of institutional change that is currently underway.