The State, Market Economy, and Transition

What role should the state play in China's transition to a market economy? On this issue, a consensus seems to have emerged among Chinese economists, that is, the government should leave to the market what can be best handled by the market and only concern itself with what the market cannot accomplish, either inherently or for the time being (Gao, 1993). But the extent of agreement should be exaggerated. Behind seemingly accordant statements, a great deal of room remains for argument over specifically what problems can and cannot be resolved by the market. Accepting the neoclassic assumption of the naturalness, spontaneity, and efficacy of market, and public choice theorists' thesis of the state, some Chinese economists suggest that the role of the state should be restricted to providing defense, defining property rights, enacting and implementing a system of laws, enforcing contracts, and maintaining the value of the currency They believe that if the government leaves economic actors alone, unfettered competitive markets would work better in generating socially desirable outcomes. In what follows, I argue that the state should play an active role in China's transition to a market economy. The argument is built upon three observations. First, even in mature market economies, state interventions are indispensable for remedying market irrationalities and for organizing efficient markets. Second, market institutions cannot be properly installed without the support of the state. Especially, if China is to establish a "socialist market economy," the state has the obligation to mitigate the hardships and the cruelties caused by the market transition. Third, as a giant developing country, China faces many challenges which cannot be settled through voluntary transactions.