On Properly Handling the Government-Market Relationship

By: Qiu ShiFrom:English Edition of QiuShi Journal April-June 2018|Vol.10,No.2,Issue No.35 | Updated: 2018-May-16 11:09
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The year 2018 marks the 40th anniversary of the launch of China’s reform and opening up drive. Over these 40 years, reform and opening up has surged forward with tremendous momentum and scored massive successes. Looking back, it is clear that the key to our success has been developing the market economy under the socialist system while constantly rationalizing the relationship between the government and the market. The concept of making the market play the decisive role in resource allocation while giving better play to the role of the government represents a new breakthrough in China’s understanding of the patterns that govern the socialist market economy, as well as an important component of the economic aspects of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.

At the Administrative Examination and Approval Authority in Shijiazhuang City, Hebei Province, a staff member (right) sending information concerning the integration of business licenses and administrative permits to an enterprise PHOTO BY XINHUA REPORTER SHEN HONG

I. Effectively managing the government-market relationship is the core issue of China’s economic reform.

Since China’s adoption of a socialist system, a question of major theoretical and practical significance has been what kind of economic system it should choose. The key to answering this question depends on understanding the relationship between the government and the market.

1. Properly handling the relationship between the government and the market is a focal point in China’s economic reforms.

It is common knowledge that a traditional highly centralized planned economy is characterized by its exclusion of the role of the market. Starting from the Third Plenary Session of the 11th CPC Central Committee in 1978, China began making inquiries into systems and mechanisms for linking planning with the market. In 1992, the 14th CPC National Congress raised the concepts that establishing a socialist market economy should be the goal of reforming China’s economic system, and that the market should be made to play the fundamental role in resource allocation under state macroeconomic control. In more than two decades since the 14th CPC National Congress, China has continuously searched for a new and rational orientation for the government-market relationship through expanded practice and deepened understanding. At its Third Plenary Session in 2013, the 18th CPC Central Committee put forward the idea of enabling the market to play the decisive role in resource allocation while making the government play its role better, representing yet another theoretical and practical breakthrough. The 19th CPC National Congress convened in 2017 brought more answers to major questions, including how to expedite improvement of the socialist market economy and what the priorities of economic reform should be, thereby pointing the direction for further rationalization of the government-market relationship. It is precisely through persistent exploration into the nature of this relationship that China’s economic reform has continued to push forward, which has in turn driven forward reform in other areas.

2. Further rationalization of the government-market relationship is the crux for amplifying reform of economic structures.

Driving economic reform to a deeper level is a systematic project that touches upon a multitude of aspects, including the market system, corporate institutions, macroeconomic management, public and private finance, employment, social security, and the external sector. Among all of these, the government-market relationship occupies the most pivotal position. Historic achievements have been made in China’s reform, opening up, and economic development. However, we must be aware of the fact that China still faces a number of acute problems caused by unbalanced and inadequate development. For instance, the quality and effectiveness of development are still not high enough, capacity for innovation lacks strength, there are still many shortcomings in the realm of public wellbeing, and there remain large disparities between urban and rural development, between development in different regions, and in income distribution. Rationalizing the government-market relationship is the crucial factor for solving the problem of unbalanced and inadequate development, and the key for furthering reform of economic structures.

3. The government-market relationship also serves as the theme of the market economy’s evolution.

Taking a broad look at the history of the market economy’s evolution and development in Western capitalist countries, we can see that the two economic theories of state interventionism and laissez-faireism alternately occupy the position of primacy. In a certain sense, the history of free market economic theory is also the history of contention over the government-market relationship.

II. Enabling the market to play the decisive role in resource allocation is essential for further improving the socialist market economy.

For socialist countries, and especially a large developing socialist country like China, how to properly handle the government-market relationship is a new challenge. The concept of making the market play the decisive role in resource allocation represents a major theoretical breakthrough for the socialist market economy, and reflects China’s constantly deepening understanding of the role of the market.

1. A market economy at its essence is a system in which the market determines resource allocation.

That the market determines resource allocation is the market economy’s general law, and a fundamental requirement for the law of value to play its role. In the market-based allocation of resources, enterprises are the main players, pricing mechanisms are the core, the market system is the foundation, and market order is the guarantee.

2. Letting the market play its role is the most effective way to allocate resources.

First, the market’s ability to effectively process and transmit economic information is an advantage unmatched by other mechanisms. Second, the market is able to automatically coordinate differing interests, bringing the enthusiasm of all participants in all kinds of economic activities into play by balancing their interrelated interests. Third, the market is able to correct imbalances between supply and demand effectively, thus forming a lasting tendency for labor to be proportionally distributed between different branches of production. In addition, the market has the ability to encourage innovation and eliminate inferior businesses through competition, which is conducive to raising the quality and effectiveness of economic development and advancing reforms for better quality, higher efficiency, and more robust growth drivers.

3. Enabling the market to play the decisive role in resource allocation highlights a problem-oriented approach.

Over the past 40 years of reform and opening up, China’s socialist market economy has gone through a process in which it has gradually established and constantly improved itself, but there still exist shortcomings that constrain the dynamism of market entities and inhibit laws of the market and of value from fully exercising their functions. A decisive role for the market in resource allocation is beneficial for increasing the breadth and depth of market reforms, and, by extension, building a modern economic system.

III. A distinct advantage of the socialist market economy is that it gives better play to the role of the government.

The nature of the government-market relationship varies under different social systems and in different countries. China’s socialist market economy gives better play to the role of the government and is able to effectively guard against the deficiencies that plague the capitalist market economy.

1. The effective role played by the government fully embodies the superiority of the socialist system.

While the market plays the decisive role in resource allocation, it is by no means the sole actor. On the one hand, market mechanisms function under certain conditions, including the existence of the legal system, rules of competition, the macroeconomic environment, and social security, which cannot be formed through the market’s own activity. On the other hand, in the market economy there is the extant problem of partial failure as well as deficiencies including blind spontaneity and hysteresis, which can cause problems such as polarization between the rich and the poor and uncertainty due to economic fluctuations. The intrinsic requirements for unlocking the advantages of the socialist market economy are rational macroeconomic control and effective governmental regulation. In China’s socialist market economy, the government’s responsibilities and functions are specifically reflected in the following ways: maintaining macroeconomic stability, improving and optimizing public services, ensuring fair competition, strengthening market oversight, protecting market order, promoting sustainable development, advancing common prosperity, and remedying market failures.

2. The transformation of development principles and government functions is crucial for the government to play its role better.

In order to properly handle the government-market relationship, it is essential that we commit ourselves to transforming development principles and government functions. Government departments at all levels must firmly embrace the new development philosophy, and put the focus of their work on promoting innovative, coordinated, green, open and shared development. Meanwhile, we must ensure that the new development philosophy permeates our efforts at furthering economic reform and actively build a law-based and service-oriented government. Through further streamlining and delegation of its functions, the government should shift its focus to fostering an environment of fair competition in the market, protecting the natural environment, and supporting innovation, in order to boost the momentum and vigor of economic development.

IV. Ensuring better integration between the “visible hand” and the “invisible hand”

On the issue of how best to give expression to the roles of the government and the market, we must continue using the dialectical method and consider both the primary and secondary aspects of the problem, directing our efforts at reaching a state of unity between the roles of the government and the market featuring mutual complementation, coordination, and promotion. We need an “effective market,” but we also need an “effective government.” By ensuring that the strengths of the “visible hand” and the “invisible hand” are both fully brought to bear, we will more clearly reflect the socialist market economy’s unique advantages.

1. The unity between an effective market and an effective government

The two concepts of letting the market play the decisive role in resource allocation and giving better play to the role of the government are not mutually isolated or contradictory, but rather closely integrated and mutually reinforcing. Building an effective market is both a major objective of exerting the role of the government and an important expression of the government’s own effectiveness. An effective government, in turn, provides important backing for the effectiveness of market mechanisms and the dynamism of microeconomic entities, and is indispensable for remedying market failures. The main reason why China’s reform and opening up drive has been so enormously successful is that China has given full play to the role of the market while simultaneously upholding the role of the government, achieving organic integration between the two. That many developing countries have fallen behind with their market economies is shown not only by their feeble market functioning, inadequate market systems, chaotic market order, and distorted price signals, but also by the fact that the role of the government in these countries lacks strength, capacity, effectiveness, and authority.

2. Pressing reform in relevant domains with a focus on government-market unity

We must continue orienting our reforms toward the socialist market economy, endeavoring to develop an economic system with effective market mechanisms, dynamic microeconomic entities, and sensible macroeconomic regulation. On the one hand, we need to further refine the modern market system and inject greater vigor into microeconomic entities by continuing economic reform. On the other hand, we must also use this reform to push forward modernization of China’s governance system and capacity in the economic domain, innovate and improve macroeconomic regulation, and give full play to the role of national development plans in providing strategic guidance. For the government to play its role better, we must make the promotion of social equity and justice and improvement of the people’s wellbeing our constant interest. We must intensify efforts to develop institutions that are vital for safeguarding social equity and justice, ensure that all our people have a stronger sense of benefiting from shared development, and continue to promote well-rounded human development and common prosperity.

3. Laying emphasis on improving the property rights system and ensuring the market-based allocation of factors of production

The 19th CPC National Congress underlined the need for economic reform to focus on improving the property rights system and ensuring the market-based allocation of factors of production. This will enable property rights to act as effective incentives, factors of production to flow freely, and prices to react flexibly, while promoting an environment of fair and orderly competition in which enterprises must vie for survival. Such a focus is crucial at present for straightening out the government-market relationship. Regarding improvement of the property rights system, we must refine systems for managing all types of state assets and revamp the system for government sanctioned utilization of state capital; carry forward reform of state-owned enterprises and develop economic entities under mixed ownership; and hone the property rights protection system, legally protect the property rights of entrepreneurs, and actively guide private businesses to assemble private capital by using the property rights market. As for ensuring the market-based allocation of factors of production, we must boost reform of the business system, break up administrative monopolies, prevent cornering of the market, and expedite market-based pricing reforms for factors of production; further reform investment and financing systems and allow investment to perform its crucial function in optimizing the supply structure; and bolster reform of the financial system, promoting the healthy development of a multilevel capital market.

(Originally appeared in Qiushi Journal, Chinese edition, No. 2, 2018)