The order of marketization in China's economy

Author: Liu Dongxun
Publisher:
Publish Date: 2005-05-01
Features: This book connects the experience and lessons from the economic transition process of former Soviet Eastern European countries, especially during the implementation of the radical "shock therapy," with the successful reform experience of China. Building on existing research by scholars on transition economies, it focuses on the process of liberalizing industrial regulation in transition economies. From the perspective of micro-industrial organization, it studies the order and driving mechanisms of liberalization, attempting to further explain the logic and sequence of China's gradual institutional reform. The book constructs an industrial organization framework for analyzing the order of liberalization and, based on this model, uses the competitive industry of the color TV sector and the natural monopoly industry of the telecommunications sector as case studies to describe the industrial organization driving mechanisms of liberalization. It holds positive academic significance and practical reference value.
China has chosen the path of gradual reform and has successfully navigated over more than two decades of reform. The academic debates over "radical" versus "gradual" reforms, "market" versus "shares," and "property rights" versus "competition" have found preliminary answers through practical exploration during the reform process. The idea of replacing simple privatization with incentive-driven reforms and the belief that competition breeds efficiency have taken root and have been elevated theoretically. This book further elucidates the logic and sequence of gradual reform from the perspective of liberalization. Unlike liberalization in mature market economies, liberalization in transition economies not only includes natural monopoly industries but also competitive industries, and it is, in fact, a process of institutional change.
From the perspective of institutional economics, the economic system is a complex evolutionary system that follows nonlinear evolutionary patterns. The effectiveness of the economic system depends on various institutional rules. The driving force behind the evolution of institutional rules comes from openness and competition, which disrupt the balance between the supply and demand for institutions. Institutional imbalance creates new profit opportunities, prompting profit-maximizing economic agents to continuously innovate and imitate, forming a self-organizing process of the system. In the institutional evolution of liberalization, firm strategies and industrial organization play a significant role.
The theory of the primary stage of socialism advocates increasing labor enthusiasm, while the massive supply gap left by the shortage economy has created significant profit opportunities. Under the constraints of national fiscal investment capacity and the promotion of local decentralization, there has been a surge in the entry of township enterprises, military-owned enterprises, foreign-funded enterprises, and private enterprises. However, excessive decentralization has led to two challenges: excessive investment and entry, and administrative barriers to exit. As a result, after supply and demand reach equilibrium, decentralization becomes one of the targets of reform.
From the perspective of industrial organization, when consumer markets become homogeneous, even with information asymmetry, Bertrand competition and multi-firm Cournot competition demonstrate that price regulation in competitive industries is ineffective. After consumer markets become segmented, the massive R&D investment required for product differentiation, combined with the lower financing costs of large enterprises due to imperfect financial markets, determines the inevitable outcome of industrial restructuring and market concentration.
The technological characteristics of natural monopoly industries are often used as justifications for regulation. However, in reality, regulation often fails. First, the information asymmetry faced by regulators leads to regulatory failure. Second, regulators are often captured by industry interest groups. Third, the scope of regulation is actually much narrower than traditionally believed. Fourth, technological advancements have significantly reduced fixed costs. Fifth, contestable market theory shows that all costs are variable in the long run, making long-term monopoly regulation of natural monopolies unreasonable. Finally, external contract regulation combining access and interconnection standards with quality inspections can replace traditional exclusive monopoly regulation of natural monopolies.
After competitive industries approach supply and demand equilibrium, the bottleneck constraints of natural monopoly industries become increasingly strong, creating significant space and profit opportunities for the development of natural monopolies. As a result, a similar process of liberalization is repeated in natural monopoly industries.
In summary, within the framework of this paper, the path of gradual reform has a solid theoretical foundation. Creating a competitive market environment and accompanying it with corresponding reforms in incentive mechanisms is merely the liberalization of entry regulation, which is just one step in systematic liberalization. After supply and demand reach equilibrium, price regulation no longer plays any role, and the liberalization of price regulation emerges. As product markets gradually develop and mature, product upgrading and technological competition will become the main means of competition, and industrial restructuring and market concentration will require reforms in factor market prices.