Is Mainland China Evolving into a Market Economy?

Abstract

An assumption has often been made that when the economic transformation of the People’s Republic of China (PRC) and other former command economies is complete, a market economy will be the end result. This article explores the validity of this assumption. While the transition process in the PRC has not yet reached a stable equilibrium, the evidence to date suggests that a set of institutional arrangements may be evolving which characterize an economy based on “licensing and regulation” rather than market forces. Economies based on licensing and regulation are characterized by endemic corruption, poorly defined property rights, and high transaction costs. Over time, high transaction costs stifle economic growth while vested interests in corruption act to prevent further progress toward a market economy. Unless these new vested interests in the PRC can be induced to further liberalize the economy and improve property rights protection, the level of economic development may fall far short of its potential.