Obstacles to China development

The possibility of social unrest in China due to widening inequality has been widely discussed. Here is some recent coverage from the Times.

But just as problematic is the vast misallocation of resources resulting from local government corruption, lack of transparency and absence of rule of law (i.e., "crony capitalism"). See here for an example involving the Apex scandal and export of TVs and DVD players. Apex is one of the largest distributors of DVD players and TVs in the US, and is primarily responsible for driving the price of DVD players below $50 dollars. Now it appears that Sichuan Changhong Electric Appliance, their main supplier, will report as much as $500M in losses due to lack of payment from Apex, stretching over a year. How could Apex get away with this? Who was paid off? The Times suggests that a Party boss and former Changhong executive was involved and has been sacked over the affair.

The head of a leading research institute in Beijing once said to me in this regard that "hardware is easy, software is hard" - meaning that it is easier to build factories, roads and airports than to implement a functioning market system and civil society with transparency and rule of law. The transition from a low-trust society (where the people don't trust their government, or even their neighbors) to a high-trust society (where things like the financial and legal systems are expected to work, and do) is difficult.