The relationship between the government and the market is the
concern of all countries or regions in the world. The role of the
government is to create a favorable environment of fair competition
for businesses by means of macroeconomic control. But the
government can only play a limited role, and the problem of
government intervention is called the "government failure". Market
competition can effectively reduce the information costs and
supervision costs of market operation, thus saving transaction
costs and realizing effective allocation of resources.
Nevertheless, there are notable drawbacks in the operation of a
market economy, such as monopolization and incompleteness of
information, known as the "market failure". The best way to
overcome "market failure" and "government failure" is to combine
the roles of the government and the market in an appropriate way,
so as to bring the positive aspects of the two into full play.
Compared to the governments of Western countries, the Chinese
government plays an entirely different role in developing a market
economy. On the whole, China's market economy is the result of the
government-orchestrated reform of the traditional planned economy,
and the role played by the government is extremely important in the
whole process. During the marketization process, the Chinese
government not only assumes the basic functions such as providing
public goods, stabilizing the macro-economy, implementing external
administration and formulating rules for the monopolized
industries, but also takes responsibility to reform the system of
the planned economy and perfecting the system of the emerging
market economy. The marketization process of China's economy is
nothing less than a process for the government to gradually change
its functions, to cut down the size of the government. to reform
the economy administration methods and to perfect the market
economy system.
I. Restructuring Process of Government's Administrative
System in Retrospect
In order to adapt to the needs for transforming from a planned
economy to a market economy, a series of reforms have been
introduced in China since l978, such as cutting down the size of
the government, changing the government's economic functions and
administration measures over economy. The restructuring of the
government's administrative system was roughly carried out in three
stages:
(Ⅰ) Initiating the Reforms (1978-1988)
This stage of restructuring is mainly manifested in the
decentralization of powers. Necessary reforms to the administrative
system covering several aspects including planning, investment,
fiscal policy, finance, wages, Prices and government institutions
were initiated.
-- In reforming the planning administration system, the original
centralized planning was split into three forms: mandatory
planning, guidance planning and market regulation. At the same
time, the scope for mandatory planning shrank smaller, while the
scope for guidance planning was expanded.
-- In reforming the investment system, all capital investment
within the state budget that was formerly subject to fiscal
allocation was turned into loans, the examining and approving
powers for capital investment projects were decentralized, and six
specialized investment companies were set up by the government for
this purpose.
-- In reforming the fiscal and taxation systems, state-owned
enterprises were to substitute tax for surrendered profits in two
steps; the government was to implement a new fiscal system with
"separate categories of taxes, designated scope of revenues and
expenditures and responsibility contracts at various levels".
-- In reforming the financial system, the People's Bank of China
got rid of the status of an attachment to the government fiscal
authorities, specialized banks were either restored or newly
established one by one; and the credit fund control system was
reformed so that it is under unified planning with designated
funds, ensuring that loans and deposits are actually realized and
encouraging inter-bank allocation of funds.
-- Concerning the price mechanism, prices of most farm produces
and consumer goods are set free to be determined by the market;
with regard to the means of industrial production, a dual-track
system is implemented, according to which there are two types of
pricing methods: one is within the planned framework and the other
free to fluctuate.
-- In nurturing the market entities, a system of household
production on contractual basis was implemented, so that peasants
are turned into commodity producers responsible for their own
operations and losses and profits; state-owned enterprises tried
out the systems of expanded enterprise autonomy and economic
responsibility, substituted tax payments for profit delivery in two
steps, and implemented the system of "contracted operation
responsibility".
-- In restructuring the government administration, the
government experienced two institutional reforms in 1982 and 1988
in order to change the functions, cut down the institutions, reduce
the number of staff members and improve the efficiency. After the
reforms, the number of the institutions directly under the State
Council was reduced to 66 from the previous 72.
(Ⅱ) Adjusting the Reforms (1989-1991)
During this period, the government's economic administration
system underwent fine-tuning. Under the combined influence of
factors from the new and old systems, the performance of the
economy in 1988 became overheated, bringing about a chaotic order
and intensified inflation. The government took a series of planning
measures and economic measures to streamline the economic
environment and order. At the same time, adjustments were made to
the price administration and macro control measures.
-- With respect to the pricing mechanism, the "bottle-neck"
restrictions caused by distorted prices were relaxed; the
differentials between the dualtrack prices of means of production
were narrowed; the rising of overall level of prices was curbed by
a comprehensive use of economic levers, and widespread target price
responsibility system was applied lo supervising and regulating
prices, forming a preliminary price administration framework mainly
relying on economic and legal measures with administrative measures
playing a secondary role.
-- In macroeconomic control, monetary and fiscal policies based
on demand management were put to use. Monetary and austerity fiscal
policies such as decreasing money supply and raising interest rates
started to play a significant role in controlling the expansion of
aggregate demand. This demonstrates that the government
macroeconomic control administration system has shifted from direct
regulations of economic entities to indirect control
(Ⅲ)Deepening the Reforms (1992-2001)
This is a stage in which the government's economic
administration system was gradually adapted to the requirements of
a market economy. In this stage, focusing on the objective of
establishing a market economy system, reforms in fiscal and
taxation, financing, price administration, foreign exchange
administration and government institutions were enforced and a
framework of macroeconomic control system was preliminarily
established to meet the needs of a market economy.
-- In the reform of fiscal and taxation system, the fiscal
administration system whereby tax revenues are shared by central
and local authorities was implemented, the turnover tax system
consisting mainly of the value added tax (VAT) was promoted, and
the income taxes for domestic funded enterprises and individuals
were unified under the same standards.
-- In reforming the financial system, it is statutorily
determined that the central bank is to implement an independent
monetary policy under the leader-skip of the State Council to
establish a powerful central bank macroeconomic control system. The
specialized banks were managed according to the asset debt ratio,
and were in transition to commercial banks in the real sense. The
China Development Bank, the China Agricultural Development Bank and
the Export-Import Bank of China were established to be specially
engaged in policy credit businesses.
-- With respect to foreign exchange administration system,
interest rates were unified, a uniform and regulated fluctuating
Renminbi exchange rate system was established based on market
supply and demand; inter-bank foreign exchange market was
established, the mechanism of the formation of exchange rates was
improved, and the exchange rate of the renminbi was kept at a
reasonable level and remained relatively stable. Earnings in
foreign exchanges were to subject to a settlement system, while the
regulations on foreign exchange retention, hand-over and quota
administration were abolished. Foreign exchange selling system is
implemented in banks, and the renminbi under current accounts was
to be subject to conditioned convertibility.
-- With regard to pricing, the mechanism of price formation
based on market prices was firmly set up, and was playing a
principal role in the commodity and production factor markets in
China.
-- In transformation of government institutions, the government
underwent two institutional reforms in 1993 and 1998 aimed at
adapting to the needs for establishing a market economy system and
for intensifying the macroeconomic control by the government, so
that the functions of the government would be gradually changed,
and the functions of the government and the enterprises distinctly
separated.
-- In cultivating, standardizing and supervising the market
system, a series of laws, rules and regulations were promulgated
and enforced in order to establish a unitarily open and orderly
competitive market system, so that the government could standardize
and supervise market entities, market organization forms and market
transaction behavior within a more systematic framework.
(China.org.cn November 7, 2003)
