Prácticas de mejora

To some extent, whether the potential of long-term economic development for China can be realised depends on whether the institutional reform is able to keep pace with economic development. Markets play a central role in allocating resources and distributing income in all but the centrally planned economies. A commitment to building a market economy is the central concern for most developing economies at the moment. As a (potentially) efficient way of resource allocation, markets can be the key to long-term economic advancement. According to international organisations such as the World Bank, participating in the (global) market is crucial to economic growth and poverty reduction (World Bank, 2002). However, this statement – in particular the Dollar/Kraay study that was supposed to provide the supporting evidence – has been severely criticised. In fact, many developing countries that opened their markets for international trade did not benefit from their policy. It is too easy to state that problems or challenges faced by countries such as China are mainly attributed to weak markets or the absence of market-supporting institutions. There are both internal and external dimensions to this problem, which is not easy to solve. Furthermore, the relevance and appropriateness of institutions (whether market-supporting or not) depend on the timing of their implementation in relation to the development level of a country and to the development strategy adopted. Thus question remains for China – while market mechanisms seems relatively weak and specific market-supporting institutions are still absent, to what extent markets should be further developed without a more balanced view towards the equity versus efficiency trade-off?

In the process of economic transition, China abandoned the central planning model and indeed moved toward a market economy in which markets played a more central role in

32 In 1998, RMB ¥ 270 billion Special Treasury Bond was issued for capital injection to SOCBs. In 1999, four asset management companies were established to accept the NPLs amounted RMB ¥ 1400 billion from four SOCBs respectively.

resource allocation. China’s rapid economic growth and structural transformation coincided with a relatively controlled process of growing liberalisation and a general reduction in the role of the state in economic activities. The function of the government has been largely confined to managing the macro economy, building infrastructure and providing sound environment for economic development.³³ The government does not any more decide upon the prices of most commodities, nor does it directly intervene in the production decisions of most firms. A government structure fit for the function of economic management in the context of a market economy has been preliminarily established. This structure has three main components: the fiscal and taxation system, the financial system and the strategic planning system. In addition to the generally accepted economic functions of the state, such as the production of pubic goods, the redistributive activities and macroeconomic stabilisation, the Chinese government also played a leading role in guiding the process of transition and economic development.

The Chinese model of economic development has become increasingly based upon the central function of markets (albeit with still considerable steering of the government). The transition from central planned to market-oriented economy has provided a major source of economic growth for China. Although there is no credible alternative to pursing this market-based model, as suggested by Woetzel (2003), the sustainability of the Chinese model will under question in two aspects. First, in case too much reliance is put on the functioning of markets, this model lacks support from the ‘social capital’ and intermediary institutions, the importance of which for the proper functioning of societies and markets is elaborated elsewhere (cf. Van Tulder and Van der Zwart, forthcoming). Secondly, ‘market imperfections’ arise in many instances and even extremely market-oriented models cannot function well in case that the market itself cannot function in a reliable manner. Markets will not perform well without supporting institutions (European Bank for Reconstruction and Development, 1999; World Bank, 2002).³⁴ Institutions affect economic performance, for instance, by determining the cost of transaction and production. Markets work if they have rules, enforcement mechanism and organisation to support market transactions. As an effective way of resource allocation, market needs support from institutions. The fundamental forces of incentives, competition, price mechanism, hard budget constraints and decentralised decision-making are embodied in market-supporting institutions. As the rules of the game, the market-supporting institutions give people opportunity and incentives to engage in the fruitful game of market. States and communities can build necessary institutions to support the function of market mechanism and the development of markets (see Table 2-3 for examples of market-supporting institutions).

Table 2-3 Examples of market-supporting institutions

Public Private z Judicial systems

z Competition laws

z Bank supervisory authorities z Disclosure requirement on companies

z Formal land titles and laws governing inheritance

z Chambers of commerce z Credit registries z Money lenders

z Reciprocity among business partners z Land inheritance norms

Source: World Bank (2002).

33 See the ‘Decision on issues concerning the establishment of a socialist market economic system’ issued by the 3rd Plenum of the 14th Congress in 1993.

34 A central lesson in transition is that markets will not function well without supporting institutions, a state that carries through its basic responsibilities and a healthy civil society (EBRD, 1999).

The building of market-supporting institutions in China’s first phase of transition was principally based on transitional arrangements. The transitional institutions were usually based on ‘particularistic contracting’ that were relatively unsustainable and might have serious ‘side effects’ (see Subsection 1.5.2). The balance of benefits and costs of the

‘transitional institutions’ typically inclined towards the negative side as the ‘side effects’

accumulated. Thus a transformation from transitional to best-practice institutions became not only easier to implement as agents became familiar with the general principle of the new ‘rule of the game’, but also urgent to implement as the accumulated ‘side effects’

being increasingly acknowledged. Several typical examples of transitional institutions that have been mentioned earlier are illustrated in Table 2-4, including the dual-track price reform (discussed in Subsection 2.1.1), the ‘contract responsibility system’ (discussed in Subsection 2.1.3) and the ‘fiscal contracting system’ (discussed in Subsection 2.1.4).

Table 2-4 Examples of transitional institutions Transitional

institution (Period)

Basic institutional

objectives Benefits Costs Optimal institution

The transitional institutions realised specific objectives of reform but also produced serious – and often unexpected – ‘side effects’. In the second phase of economic transition, most of these transitional institutions were transformed into new institutional arrangements.

Although the dual-track price reform was proved as efficient Pareto-improving by the general equilibrium analysis (Lau et al., 2000), this approach had serious negative effects.

The large gap between the prices in the plan and market track created opportunities for rent seeking and led to widespread corruption, which contributed significantly to the economic and political unrest in the late 1980s. The contract responsibility system that was implemented in the 1980s for SOE reform was terminated due to the widespread opportunist behaviour of top managers of SOEs in their tenure of contracting. Another serious problem of the contract responsibility system was the informational asymmetry between SOEs and government in negotiation for the terms of contract. Although certain degree of autonomy and managerial incentives was introduced into SOEs by establishing a contractual relationship between SOEs and their governmental supervisory agencies, the fundamental agency problem could not be solved and sometimes even worsened. Based on the same logic of ‘particularistic contracting’, the fiscal contracting system faced similar problems. The division of economic interests between the central and local governments

was largely based on a process of negotiation and bargaining. The provinces with strong bargaining power usually received preferential fiscal treatment, which in turn contributed significantly to their economic development and increasingly led to regional inequalities.