China has the right govt size

For developing countries, the government, from the outset, was designated a primary role in development because of the imperfection of the market and the lack of capital, technology and basic infrastructure in the initial phases of economic development. This has been the case particularly with East and Southeast Asian economies (Japan, South Korea, Singapore, and Taiwan). These economies started with export-oriented development strategies, and (except for the laissez-faire Hong Kong under colonial rule) were heavily engaged in promoting exports.

After their successful industrial takeoff, these economies were still actively involved in their industrial upgrade from labor-intensive to more capital-intensive and higher value-added activities. The governments' main role was in promoting human resource development through education and training.

But as these economies developed and became mature, the governments started retreating gradually in favor of the market, and moved in the direction of high-income economies in the West, with most economic activities being basically market driven.

It is often argued that China's post-reform economic development pattern shares a great deal of structural characteristics with the "East Asian model", especially in terms of state-market relations. As far as the size of government is concerned, China is clearly not a case of "big government" overriding the market, as predicted by Wagner's Law (Industrialization and development inevitably leads to a larger public sector).

In 2008, the Chinese government's final consumption expenditure was 14 percent of GDP, exactly the average ratio for the world's middle-income economies, but less than that of South Korea and Japan. China thus seems to have got the right mix of state and market.

Looking forward, it would be hard for China to further reduce its government size, because its coming economic restructuring and higher social development priority will require greater, not less, government involvement and participation.

At the present stage of development, it is far more important for China to improve or fine-tune the "qualitative aspects" of its state-market relationship. There are several obvious priorities, though.

First, China's economy will gain more from better governance and higher public sector efficiency than enlarging government size. Second, China needs to reassess and review the conduct and performance of large government-owned enterprises, many of which operate under near-monopoly conditions. Third, it is time for Beijing to review its existing central-local government economic relationship in order to reduce local inefficiencies and wastage.

The author is research director of East Asian Institute, National University of Singapore.

(China Daily 05/14/2011 page5)