Both the Free Market and Government Supervision Have Limits

By Editorial staff
Published: 2009-02-09

Cover editorial, issue 405 2009-02-09
Original article: [Chinese]

On the one hand, the government should shape economic cycles through fiscal and monetary policies, promote market competitiveness, and redistribute social wealth through tax measures.

And at the same time, the government should not overstep the boundary, as unrestrained state interference is as destructive as excessive market liberalism.

Over the past three decades, China has gained tremendously through market reforms and become the world's fastest growing economy. Despite that, China still has complex, and at times contradicting, feelings towards such a reform agenda.

More often than not, whenever things go wrong, we tend to shift the blame to market-oriented reforms. For instance, medical treatment has become increasingly beyond the reach of ordinary people, and the market economy is to be blamed for surging costs.

But the reality is that the medical sector has never been privatized, and its resources remain in the hands of government. Instead of blaming the market economy, it should be said that the market was not applied properly and there were flaws in supervision. The state monopoly over resources has in fact undermined the market's ability to assert a positive effect on the sector.

Instead of recognizing the problem, we have more often than not viewed state interference as an easy way out. For instance, when the public transport industry was in chaos, we found an answer in nationalized operation with exclusive rights; when the market competitiveness of Chinese firms was sub-par, our solution was to form a "national team" by channeling massive amounts of national resources towards boosting state-owned firms.

It is easy to overlook the fact that while the market could malfunction, so could a government.

This year, the theme for Chinese economic development is to maintain growth through various fiscal measures, such as public investment to stimulate consumptions. These are special counter measures in time of crisis, yet some view it as a signal of China returning to state planned and driven economy.

Unlike back in 1999, when China was still largely a planned economy; today, when the government plans its investment projects, it should consider deploying more market means to raise capital and implement the projects.

Pressuring banks to provide one-stop services to administrative and developmental projects upon governmental approval should have been a thing of the past. The government should realize that only with participation of the private capital could China's economy return to the right path.