The Order of Marketization in China's Economy (Academic Series of Henan University of Economics) ((Academic Series of Henan University of Economics))

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 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 relaxing industrial regulation in transition economies, studying the order and driving mechanisms of deregulation from the perspective of micro-industrial organization. It attempts to further explain the logic and sequence of China's gradual reform of the system. The book constructs an industrial organization dynamic analysis framework for the order of deregulation and, based on this model, uses the competitive industry of the color TV industry and the natural monopoly industry of the telecommunications industry as case studies to describe the industrial organization dynamic mechanisms of deregulation. 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 debates in academia over "radical" versus "gradual," "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 concept that competition brings efficiency have taken root and have been elevated theoretically. From the perspective of deregulation, this book further explains the logic and sequence of gradual reform. Unlike deregulation in mature market economies, deregulation in transition economies not only includes natural monopoly industries but also competitive industries, and 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, and the efficiency 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 deregulation, firm strategies and industrial organization play a significant role.
The theory of the primary stage of socialism advocates increasing labor initiative, while the huge supply gap left by the shortage economy has created substantial profit opportunities. Under the constraints of national fiscal investment capacity and the promotion of local decentralization, there has been a large-scale entry of township enterprises, military-owned enterprises, foreign-invested enterprises, and private enterprises. However, excessive development of the local decentralization system has led to two difficulties: excessive investment and entry, and administrative barriers to exit. Therefore, the local decentralization system has become one of the targets of reform once supply and demand reach equilibrium.
From the perspective of industrial organization, under homogeneous consumer markets, 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 cited as reasons for regulation. However, in reality, regulation often fails. First, 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 not as broad as traditionally believed. Fourth, technological progress has significantly reduced fixed costs. Fifth, contestable market theory shows that all costs are variable in the long run, making long-term exclusive regulation of natural monopolies unreasonable. Finally, external contract regulation combining access and interconnection standards with quality inspections can replace traditional exclusive regulation of natural monopolies.
After competitive industries tend toward supply and demand equilibrium, the bottleneck constraints of natural monopoly industries become increasingly strong, creating significant space and profit opportunities for natural monopoly industries. Thus, a similar process of deregulation 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 first step of relaxing entry regulation, which is part of the systematic reform of deregulation. After supply and demand reach equilibrium, price regulation no longer plays any role, and the relaxation of price regulation emerges accordingly. 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.