Efficient market, effective govt

The few economies that realized their development goals have one thing in common: they built an efficient market and an effective government at the same time.

Only an efficient market can establish an efficient price signal, which leads to full and free competition. And only an effective government can improve the infrastructure to promote technological innovation and upgrade industries, which are prerequisites for economic development. In short, the market and the government both play key roles in a country's economic development.

An effective government is extremely important for countries in transition such as China. First, the lifting of preferential policies for enterprises and industries that do not enjoy any comparative advantage could lead to their collapse. And only an effective government will be able to maintain such policies. Second, countries in transition usually invest all their financial resources in advanced capital-intensive industries, which for want of finance and logistics are plagued by poor infrastructure. And only an effective government can coordinate and complete the superstratum system to help the market realize stable and healthy development in the long run.

China's economic development history since the opening-up in the late 1970s proves the importance of the government. In the initial stages, the government applied a dual-track system, providing certain protection measures and subsidies to large State-owned enterprises, and allowing the market (with the help of private capital) to play a key role in labor-intensive and small-scale traditional industries.

Also, the government has made continuous efforts to improve the infrastructure and provide more institutional guarantees. As a result, the Chinese economy has seen an average growth of 9.8 percent in the past 34 years, which is unprecedented in history.

But at the same time, the rapid growth has exacted a heavy price: widening income gap and corruption, making deepening of reforms all the more important.

China is no longer a country of extreme poverty. In 1978, China's per capita income was only $155. But it reached $6,100 in 2012, making China a middle-income country. So the government needs to change some of the preferential policies and encourage more competition. Which means the market should play a more important role in the economy and the government should take stricter measures to protect property rights and the environment, and to solve external issues. If the relationship between an effective government and efficient market can be properly handled, China will enjoy smooth economic development with 8 percent annual growth for another 20 years and enter the high-income group.

The author is the honorary dean of the National School of Development, Peking University, and State Council counselor. The article is an excerpt from his recent speech at Peking University.

(China Daily 12/12/2013 page9)