Efficient market, effective govt

The Decision on Major Issues Concerning Comprehensively Deepening Reforms, issued by the Third Plenary Session of the 18th Communist Party of China Central Committee on Nov 15, says "the basic economic system should evolve on the decisive role of the market in resource allocation", for which it is essential to establish a "proper relationship between the government and the market".

The change in the market's status in the economy, from playing a "basic role" to "a decisive role", is important. The Third Plenary Session of the 14th CPC Central Committee had defined the "basic role" of the market in 1993. By redefining the market's role, Chinese leaders have exhibited their determination to deepen all-round reforms.

History tells us that the key to a country's long-term development is better handling of the government-market relationship. After the end of World War II, many economies started pursuing modern development to narrow the gap with developed economies. But most of them failed to realize the goal. Only two succeeded in advancing from low-income to high-income economies; one is Taiwan and the other is the Republic of Korea. Besides, only 13 economies have completed the transition from middle-income to high-income societies since World War II.

In terms of development economics, the economies that failed did not handle the relationship between the government and the market well. The essence of development is constant increase in the average income level, which requires increasing labor productivity led by more advanced technologies. Developed countries benefited from the industrial revolutions and technological advancement with high investment risks and returns. Their income, on average, increases by 2 percent and economic growth by about 3 percent a year.

Developing countries, on the other hand, can use the "latecomer advantage" of low investment risk and high returns. If this advantage is well used, they can have a growth rate double or triple that of the developed countries.

But why have most developing countries failed to use the "latecomer advantage" to boost their modernization drive? Two strategies can be blamed for that. The first is the wide use of structuralism by these countries in the 1950s and 1960s, which made the government's role supreme and ignored the role of the market in resource allocation. As a result, the heavy industries built with government resources performed poorly, further widening the gap between the developing and the advanced economies. The second is the prevalence of neoliberalism in the 1970s and 1980s that overemphasized the market's role and neglected that of the government in resource allocation, creating a far worse crisis.