Mismanaging trust

Observer: As a long-term scholar of political and legal restructuring, why do you think the problems regarding the China National Dental Prevention and Treatment Advisory Group emerged?

Li Shuguang: This is primarily an issue of the government's ability to manage popular trust. Modern political science tells us that government is a structure for the provision of public goods and services – in a sense, an institution whose success depends entirely on credibility, which comes from the quality and level of public services, and from the quality of public goods. These things determine the degree of trust in government. There must also be management of trust in government. In a market economy system, the government's policymaking process is to a certain extent simply managing confidence. If there is no trust, the market reaction will be the penalty, as the market has its own mechanisms for redress – increasing accountability through resignation of a chief executive or cabinet members, for example. However, under a planned economic system there is also a need for supervision of confidence in government, although the approach for managing confidence is different than what takes place under a market economic system. In a planned economy, large-scale government intervention in the economy takes place, however, it is not based on the profit motive – all of the links between government and economy are 'to serve the people', and will ultimately be returned to the people.

Why can government influence be so strong under a planned economic system? Because it maintains a clear distance from economic interest. Although this is not an explicit management of trust in government, it is based on a belief system that creates such trust, namely, that government actions are not tainted by any possibility of economic profit. So, during the era of the planned economy, despite the lack of a management concept or strategy, the government was still able to maintain a considerable degree of popular confidence.

Observer: Unfortunately, the problem lies in the reform period?

Li: Exactly. During economic reform, the traditional belief system that confidence was based upon fell away, while the requirements for management of trust in a market economy had not been established. As a result, the group of previously 'not for profit' organizations began to seek a profit. It was from this background that problems for the Dental Prevention and Treatment Advisory Group (DPTAG) emerged.

DPTAG is a quasi-governmental organization, a public institution with a number of administrative functions… You could say it is non-profit but it is highly profitable, and has been for a long time. We refer to this kind of institution as a "Mistress Agency" – in the traditional planned economy they were very effective, in the current market economy they are also flourishing.

Observer: They're using public trust in government to participate in the market and make a profit.

Li: Even more importantly, they are using trust in government to expand the functions of government in the market, and these functions can be incredibly troubling, because the market doesn't actually require them. Essentially, DPTAG ought to provide market monitoring, surveillance, and oversight, but it has completely exceeded this role and is trading its own trademark to obtain huge commercial profits, relying on trust in government to peddle a product and make profit, in effect simultaneously turning public trust in government into a product itself.

Worse still is that the government lacks any structure for managing this kind of popular trust, and this undermines the host of other agencies that are trading in trust in government. This kind of attitude makes it inevitable that the entire market, society, and consumer population will not trust government-- the public will harbor doubts about laws, managers involved in the game, and honest regulators alike.

Actually, some manufacturers are perfectly aware that in a perfect market economy these trademarks should not be sold, but remain keen to obtain them. Why is this? Because they've discovered one of Chinese society's best moneymaking secrets: if government trust can be sold along with your product, you will typically get a good price.

Observer: Just as product labels often include "Designated product of Zhongnanhai" or "Designated product of the Great Hall of the People" and other similar advertisements.

Li: Right. This is such and such from a state banquet, that is a state liquor of choice – on the market it will sell like wildfire because a part of the sale is confidence in government.

Observer: Then what kind of system can be put in place to address the abuse of trust in government?

Li: It's simple – the government must articulate the boundaries between four distinct categories: First, between central and local government; second, between government departments; third, between government and the market; and fourth, between government and market actors (including the public and enterprises). If the government can clearly define boundaries between these four, then the government's role is clear and recovery of trust in government will be easy. Currently, the problem is simply that these distinctions are unclear, they're all mixed together, and in the long run trust in government will continue to decline.

China's market economy is not perfect. In the course of transition to a market economy, if there is a lack of confidence in government, the market economy will definitely collapse. So, a chaotic market economy must be transitioned to a market economy ruled by law, and this requires the construction of a government that holds public confidence. From my perspective, this will require three processes:

First, the establishment of a service-oriented government: From the existing government, transition to a service-oriented government. From the original government that intervened in the economy, transition to a service-oriented government.

Second, the establishment of a responsible government: As soon as problems emerge there must be accountability, someone steps down, someone accepts responsibility.

Third, only after a responsible government has been established can we discuss a government based on rule of law.

So, as we move from the current economy-oriented government towards a rule of law oriented government, there are several thresholds. After we have finished crossing these thresholds, a comparatively more trustworthy government will have been built. Such a process requires continual focus on management of trust in government, continual perfection of the management of this trust, and learning and acquisition of management techniques and skills. As the government establishes a system for managing this confidence, it will require corresponding systems, techniques, and mechanisms. This is the process I feel China's transition to a market economy ruled by law will require. Reforming public institutions is a top priority.

Observer: There are many public institutions such as the DPTAG, and considerable portions are participating in the phenomenon of utilizing trust in government for private gain.

Li: That's right. Therefore, I contend that we should take advantage of the events involving DPTAG to begin reform of public institutions – this should be a future direction of our governmental reforms.
Of course, public institutional reform is more difficult than reform of State Owned Enterprises (SOEs). Why? Because these institutions have many other functions: one portion may have incidental administrative functions, another portion may have ideological functions. Similarly, DPTAG was created as a multifunctional institution, and the number of these institutions is increasing. Our market economy is increasingly chaotic, trust in the market economy is gradually eroding, and the entire chain of market transactions is in chaos. The public can have no reasonable expectation of stability. This situation requires us to undertake radical reform of public institutions: it is imperative to clarify their legal rights and responsibilities, and address the issue through rule of law, to provide them with accurate places and clear roles in the market – these roles require a unified set of rights, responsibilities, and benefits. 

Observer: And it would need to be clear.

Li: Exceedingly clear. Then no issues will arise.

Observer: Despite what we've been doing in recent years, we haven't been particularly effective: the issues with Dental Prevention and Treatment Advisory Group seem almost inevitable.

Li: That's because we haven't actually been doing much, or rather we say we're taking action but it is insufficient. For example, so far we haven't actually begun reform of public institutions. We have consensus on building the market economy, and speaking from this perspective, we must push reform of public institutions – only in this way can we improve and implement management of government trust. And implementing a system to manage trust in government will result in huge improvements in social justice issues and chaos in the market economy.

I characterize China's reform as "legislation-dependent reform". For example, before the promulgation of Corporate Law of the PRC, our industries had fundamentally no concept of things like corporate governance, and held a traditional outlook on SOEs, the market economy, and other basic elements. But as soon as Corporate Law was released, all of the enterprises became corporations overnight, and subsequently created corporate charters, boards of directors, oversight committees, and shareholders' groups. I've always felt that a well-designed system will quickly change the status quo. In fact, our society already has a strong foundation for resolving the issues with public institutions – a very good foundation – we just need to carry out reform based on the needs of a market economy.

Observer: The problem is, as you've said, some associations are actually government departments' "Mistress Agencies", and also their "checkbooks" – how will they determine to act against these interests and sever the connection?

Li: This question is connected to another issue, that the government's public accounting system has yet to be developed. In 1994, we issued Budget Law of the PRC and Rules for the Implementation of the Budget Law of the PRC, which proposed the establishment of three systems for public finance accounting, state-owned capital accounting and social security accounting. But after 13 years, these systems have not been established even today. Public finance and public accounting systems have not been created, and government departments continue to hold a lot of power and maintain many administrative application processes, this is a major problem. The issue is related to internal government reform: the government should first be transformed into a public service-oriented government, and public service is directly linked to the operation of public finance. Really, the drive for reform comes primarily from the market and society.  I believe China's reform also requires patience. The market economy itself will gradually set a direction. Inherent in the market is the ability to make natural adjustments, including political mobilization, impetus for reform, changing behavior of interest groups, stakeholders, and social classes. This is a relatively slow process.

Observer: The worrisome thing is that the power for interventions will also cause the market mechanism to be distorted.

Li: Where there is freedom there are the seeds of justice. The degree of freedom determines the path of societal development. We can divide countries into three categories: those with high, moderate, and low levels of state control. In countries with perfect market economies, it is not that there is no government management, but government control is quite low, because the market acts as a powerful monitoring force. Of course our government's power to control the economy is still very strong, but I don't believe the government can fundamentally influence the market. In the short term the government is sensitive and can have great influence over concepts of market prices, regulation of the flow of goods, and market confidence levels-- but this influence is only short term.

Socialist rule of law is the only option

Observer: In reality Dental Prevention and Treatment Advisory Group is not a single case, even more important is that currently a number of government departments are trading in trust in government.

Li: If a government sells trust, that reflects a problem in the political system. The purpose of social governance, or one could say a reasonable basis for the existence of government, is the distribution of justice. If a society does not pursue justice, or fails to value justice, then that society is an extremely unfortunate one, as is the government. When justice is not universal in a society, the interests of ordinary people are often damaged needlessly, shoddy imitation goods spread unchecked... Justice is not universal in that society, and that kind of government is a corrupt government. Therefore for any society and any government, fairness and justice are the two most fundamental values. At the same time, the proper meaning of socialism is fairness and justice. Faced with a wide range of contemporary social issues, we ought to establish an environment that provides all with a fair chance, a fair chance to share in the rewards of reform. Fairness and justice are achieved through the law, through the implementation of the legal system, and particularly through a judiciary capable of just, equitable, fair, and effective distribution of justice.

Observer: Current ideological and theoretical views are diverse, some suggest "Democratic Socialism," "People's Socialism" or "Harmonious Socialism"…

Li: The source of many societal problems is lack of rule of law. No end of slogans, ideologies, and "isms" can solve these issues-- only rule of law. Realizing the goals of socialism necessitates a law-based approach. First, good laws are needed. Good laws and draconian laws are not the same, having a system does not make that system a good one. Currently many government departments are legislating solely out of self-interest. After good laws are enacted, they must be enforced, as opposed to being shelved and put on show like vases. If there are issues during the process of implementing these laws, there must also be a system for addressing them – we need an independent and authoritative judiciary. I believe what we need most is "Rule of Law Socialism"

Observer: Can you elaborate on the connotations of "Rule of Law Socialism"?

Li: "Rule of Law Socialism" has these implications: The first is a good environment for rule of law, and a community that exists in that environment. Second is a government that operates based on rule of law. Third is an independent judiciary system. Fourth is sufficient legal training, as well as the existence of a highly professional and expert community including lawyers, accountants, public servants and professional organizations. In addition, there must be a well-developed system for civic education.
In "Rule of Law Socialism," the people lead based on democratic concepts and the government rules by law. A system socialist rule of law must respect and protect human rights, and respect and protect citizens' property. At present, China's reform is in fact moving towards "Rule of Law Socialism", including revisions to the Constitution and the creation of Property Law of the PRC and so on. Without rule of law, we can't even begin to discuss Socialism.

Observer: You're saying, it doesn't matter what other attribute is added to "Socialism", in the absence of the rule of law, these are empty talk.

Li: Rule of law is the basis of any rules based system, without rules, nothing can be accomplished. The illegal brick kilns in Shanxi, the DPTAG issue, and all the problems encountered as we deepen reform – from the stock market to the professional soccer market – these are all rule of law issues. Problems with the management of trust in government are also fundamentally issues of rule of law.

A society without rule of law must be a confused and distorted society, one without order and without trust. Socialist rule of law resolves these issues: fairness and justice in the society as a whole, democracy and governance, stable investment environment and transactions in the market, and society's long term prosperity. Establishing market mechanisms based on rule of law is the only way to maintain society's prosperity in the long run. Socialist rule of law is China's only path to long-term prosperity, and our only option.

Observer: It's the only option?
Li: Yes. Rule of law socialism is the only option. Only through socialist rule of law can we respect human rights, protect human rights, respect citizens' property, guarantee their rights to freedom of speech and expression, ensure social order and equitable distribution.  Only within the framework of rule of law will China be able to maintain lasting, long-term prosperity.