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Market economy models di¤er in the degree of the power of the government vis-à-vis the market in the economy. Under the classications set forth by Glaeser and Shleifer (2002, 2003), and Djankov et al. (2003), these market models range from those emphasizing low government intervention in the market (private orderings and private litigation through courts) to those where the state is an active par ticipant (regulatory state).

This paper, using data from a survey of 3,073 private enterprises in China, constructs an index to quantify the power of the government vis-à-vis the market. Regional government power is found to vary considerably across China’s regions. Notably, enterprises located in regions where government exerts more power in the market perform better, suggesting that the regulatory state model of the market economy is appropriate for China.

Dissatisfied with failed experiments in state ownership during the 20th century, developing economies embraced ideals of private ownership and market competition as part of their e¤orts to promote market economies. The means and goals of transition from state ownership to a market economy, however, have varied widely. At one end of the spectrum was the Washington Consen sus, which sought to diminish state intervention in the economy.

Its purpose was to “stabilize, privatize, and liberalize,” i.e. maintain macroeconomic stability, push for domestic liberalization, privatization and openness in in ternational trade, and drastically reduce the role of the state in the economic sphere.1 At the other end of the spectrum were countries like China, where the role of government in the economy has remained constant and significant throughout three decades of economic reform

From State Ownership to Regulatory State

At the end of 1978, China initiated its first wave of economic reforms and began the transformation from a state-ownership-dominated central planning system to a market economy. For Chinese reformers, the target model of private litigation through courts was simply not feasible. Formal judicial institutions had been largely unnecessary under the centrally planned sys tem, and the new judiciary was far from independent (Clarke, Murrell, and Whiting, 2008; Cohen, 2008). Even more important, however, was the fact that laws and national or dinances enacted by the central government tended to be sketchy and incomplete.

Because China is a large country with substantial variations in culture, natural resource endowments and socioeconomic development across regions, it is di¢ cult for the central government to enact unified laws and national ordinances applicable to all regions. On top of this, the central government’s legislative and ordinance-drafting has taken place in a highly dynamic, fast-changing socioeconomic environment. The challenge of making economic legislation of any impact is well exemplified in the twelve-year e¤ort of the National People’s Congress to pass a new Law on Township and Village Enterprises (TVEs). (Clarke, Murrell, and Whiting, 2008). Notable gaps in China’s laws and national ordinances persist

Moreover, China’s courts have trouble keeping up with current circum stances. In contract enforcement, for example, the court necessarily takes a reactive stance, waiting for a plaintiff to bring a case. In contrast, government o¢ cials can avoid court altogether by exercising de facto lawmaking power on the spot. They can adapt rules to specific situations and initiate
enforcement procedures. Thus, o¢ cials can provide many of the remedies courts supply elsewhere; they can proactively enforce contracts, monitor behavior, launch investigations, and enjoin or sanction actions at their own initiative

Author: Julan Du, Yi Lu and Zhigang Tao, Bank of Finland, BOFIT Institute for Economies in Transition


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