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"The rise of e-commerce has transformed China's economy over the past two decades. By late 2020, close to 800 million Chinese people had shopped online and more than 60 million citizens were directly or indirectly employed in e-commerce-related industries. Yet the rapid rise of the industry seems to defy conventional wisdom. For instance, China's e-commerce market took off without strong formal institutions to support it, challenging the prevailing notion in political economy that certain formal institutions like state-provided secure property rights, contract enforcement, and the rule of law are crucial pre-conditions for supporting efficient markets. Using a vast array of qualitative and quantitative data, Lizhi Liu reveals how, with weak rule of law, China instead outsourced part of its institutional functions to e-commerce companies themselves-prominent examples include Alibaba's Taobao.com and Tmall.com. Liu calls these companies "private regulatory intermediaries" (PRIs) and shows how they fulfill various legal, social, and political functions that the state might otherwise take on. Taobao, for example, has a complex reputation mechanism, a credit score, a fraud detection program, and even a jury-like system in which users can adjudicate cases or vote to change platform rules. Liu also explores how, beyond the systematic level, e-commerce has significant individual-level effects-namely, that e-commerce reduces the household cost of living but also distracts citizens from local political issues. Ultimately, this project goes beyond traditional analysis emphasizing either the rule of law or informal networks in supporting market development; it provides a lens to understand institutional experimentation broadly and deepens our understanding of state-business relationships in the Chinese context"--
About the author
Lizhi Liu
Summary
How the world’s largest e-commerce market highlights a digital path to development
How do states build vital institutions for market development? Too often, governments confront technical or political barriers to providing the rule of law, contract enforcement, and loan access. In From Click to Boom, Lizhi Liu examines a digital solution: governments strategically outsourcing tasks of institutional development and enforcement to digital platforms—a process she calls “institutional outsourcing.”
China’s e-commerce boom showcases this digital path to development. In merely two decades, China built from scratch a two-trillion-dollar e-commerce market, with 800 million users, seventy million jobs, and nearly fifty percent of global online retail sales. Contrary to conventional wisdom, Liu argues, this market boom occurred because of weak government institutions, not despite them. Gaps in government institutions compelled e-commerce platforms to build powerful private institutions for contract enforcement, fraud detection, and dispute resolution. For a surprisingly long period, the authoritarian government acquiesced, endorsed, and even partnered with this private institutional building despite its disruptive nature. Drawing on a plethora of interviews, original surveys, proprietary data, and a field experiment, Liu shows that the resulting e-commerce boom had far-reaching effects on China.
Institutional outsourcing nonetheless harbors its own challenges. With inadequate regulation, platforms may abuse market power, while excessive regulation stifles institutional innovation. China’s regulatory oscillations toward platforms—from laissez-faire to crackdown and back to support—underscore the struggle to strike the right balance.
