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Fang Ning: Viewing the Government-Market Relationship Through the Lens of Institutional Economics

DATE: 2022-04-26

    At the Fourth Annual Conference of Government and Economics, held virtually on April 26, 2022, Fang Ning gave a lecture on the changing nature of the relationship between the government and the market in China from an institutional perspective. What follows is a transcript of his lecture that has been translated from Chinese into English and lightly edited for clarity. Fang Ning is a Former Director and Researcher of the Institute of Political Science at the Chinese Academy of Social Sciences (CASS) and a Chair Professor at Sichuan University.

    It is a great honor to be invited to participate in the Fourth Annual Conference of Government and Economics. I am pleased to share with you my experience and understanding of the relationship between the contemporary Chinese government, Chinese institutions, and the market economy, which I have gained from my research.

    China began to implement economic, social, and political reforms oriented toward a market economy more than 40 years ago. The market economy in China has been grown from scratch—from small to large, and from weak to strong. This has been accompanied by the formation, development, and evolution of the relationship between the government and the market, government agencies and officials, and enterprises and entrepreneurs. The development of China's market economy has been similar to that of Western industrialized countries, but it has also been different. The similarities lie in the liberalization, deregulation, and freedom given to society, thus mobilizing the initiative for private production and innovation. The difference is that China's market economy is so closely tied to the government that it can be argued that the Chinese market economy is largely a product of government construction, especially at the beginning of reform and opening up.

    Yiwu, a small city in central Zhejiang Province, China, can be said to be a microcosm of the development of China's market economy. In the spring of 1984, on my first visit to Yiwu, it was still a poor and backward small city in the mountains. However, at the time, radical change and development were brewing. In 1982, Yiwu developed a new policy, the famous “Four Allowances.” This policy allowed farmers to do business, allowed for long-distance transport, allowed the liberalization of urban and rural markets, and allowed multi-channel competition. The core of this policy was to give farmers the freedom and right to operate their own production. In the ten years that followed, Yiwu underwent amazing changes, leaping to become a world-renowned center for the production and trade of small commodities. There have been two Zhejiang Provincial Party Committee Secretaries who have commented on the small coastal province’s “magical” development, noting Zhejiang’s insufficient natural resource endowment. They said: “Zhejiang has simply risen out of nothing, it’s inexplicable.” Of course, we know that the government deregulated and gave freedom to society. In China, this magical effect of the policy of deregulation, expanding freedom, and guaranteeing people's rights is called “the institutional dividend.” This process is universal—China's reform and opening up was very similar to Japan's Meiji Restoration, and the 'Four Allowances' of Yiwu were the same as the “Five Charter Oath” of Japan's Meiji era.

    The development of China's market economy has been very different from the West due to the role of government and institutions in the construction of the market economy. China's market economy is largely the result of the government and its countless officials building, supporting, and nurturing it. In 1984, a township chief in Yuhuan County, Zhejiang Province, heard about a business opportunity in Guizhou, southwest China. He passed this information on to a self-employed boss in the township and suggested that he try it out, but the boss was a bit hesitant. The township chief actually accompanied the small boss to Guizhou. First, they took a day-long bumpy long-distance bus to the provincial capital of Hangzhou. But when they arrived in Hangzhou they had not purchased train tickets, so the two of them had to buy standing tickets for the 30+ hour journey, all the way to Guizhou. This was the relationship between the government and enterprises at the beginning of reform and opening up! In my research over the years, I have found that behind almost every successful private entrepreneur in China, there are government officials at all levels who have helped them along the way to make China's market economy what it is today.

    To summarize, the Chinese government and the Chinese system have constructed and supported the market economy in four main ways.

    First, through policy adjustments to raise initial capital. Decades ago, China was a poor country, and the people were even poorer, so where did the initial capital for industrialization come from? At the beginning of reform and opening up, some capital was obtained from abroad through opening up to the outside world. The first initiatives in this regard were the four special economic zones established in 1979, namely Shenzhen, Zhuhai, Shantou, and Xiamen. Then after the 1990s, capital was obtained through land development. This policy measure is represented by the development of Pudong in Shanghai.

    Second, by building infrastructure. The construction of centralized industrial processing zones and economic development zones by the government has been an important measure to promote industrialization in China. The construction of industrial zones and development zones is a common global experience in industrialization, but perhaps it could be said that China has done the best job in recent decades. From the 'three connections and one leveling' to the 'seven connections and one leveling' and so on, China's policies have helped industry to achieve intensive and efficient development. Of course, there are other factors at play such as transportation, energy, and other infrastructure construction. In this regard, Chinese governments at all levels are known as “government that works.”

    Third, through the formulation of development planning and industrial policies. China's five-year economic and social development plans are very distinctive. They also include industrial policies and planning to guide and support the “late-stage advantages” of China's market economy, so that China's market economy can build on its strengths and avoid its weaknesses, achieving a certain degree of “smart development.”

    Fourth, by establishing a sound legal system, developing science, education, culture, health, and sports, and providing a good “soft environment” for the development of the market economy. In these areas, the Chinese government has done a great deal to help the development of the market economy. Particularly noteworthy among these is China's vigorous development of basic education, which has provided hundreds of millions of primary educated and skilled laborers, allowing China to become the “factory of the world.” I was extremely impressed by this during my research in the coastal areas of southeast China.

    China's industrialization, modernization, and market economy have been 'strategically developed,' i.e., intensively and efficiently planned, thanks to the construction, support, and assistance of the Chinese government and institutions.

    After 40 years of exploration and development, China has established a market economy system and basically realized the industrialization and urbanization of the country. Now, at least to the east of the “Heihe-Tengchong Line” (also known as the “Hu Line”), China is already industrialized. However, with the development of the market economy, the relationship between the market economy, the government, and institutions is also undergoing new changes, and the relationship between government agencies, government officials, enterprises, and entrepreneurs is undergoing new constructions.

    Due to the development of the market economy and the development and growth of private enterprises under market economy conditions, the relationship between the government and the market, and between officials and enterprises, has undergone new and important changes since the 1990s, especially since the beginning of the new century. In particular, the private economy and private enterprises, which account for most of the Chinese economy, have encountered increasing constraints, controls, and restrictions from institutions, policies, and government in the process of development. I should say that in the past decade or so, we have experienced a period of regulatory regression. I think this is the other side of the relationship between the Chinese government and the market today, which reflects the inherent contradiction of the market economy—enterprises always ask for more freedom, while the government definitely wants to regulate enterprises and the market. This is an ever-present contradiction.

    The relationship between Chinese entrepreneurs—especially private entrepreneurs—and the government, institutions, and regulatory system has changed profoundly. It has gone from mutual support and interaction in the past to a “socially adaptive response” now, i.e., avoiding or even resisting government regulation. It should be said that the relationship between the government and the market, and between officials and entrepreneurs in China has been reconstructed to a certain extent since the beginning of the new century.

    In terms of the relationship between government officials and private entrepreneurs, if in the past you could say “behind every successful private entrepreneur there is a government official,” today you might say, to some extent, “behind many government officials there are private entrepreneurs.” According to my observations and research, I think that there are three important elements to the relationship between government agencies—especially grassroots governments and officials—and private enterprises and entrepreneurs.

    First, attracting investment. Local governments now need private enterprises to invest in local property to support local economic development. Economic development indicators such as GDP growth still hold important weight in local government performance evaluations and official promotion appraisals.

    Secondly, financing daily government operations. Following the 1994 “tax sharing reform,” local governments in China, especially at the city and county levels, have found themselves in a tight financial situation for some time. Many grassroots governments now have insufficient funds to maintain the normal operation of their cities, so in some cases they may need the support of enterprises, especially private enterprises. In addition, some key local government projects often struggle without the support and help of private entrepreneurs.

    Third, the needs of individual officials. In general, the income and treatment of Chinese civil servants, especially grassroots civil servants, are low. In this case, a variety of rent-seeking behavior will inevitably occur. Corruption in China is still a problem that cannot be ignored. Chinese society has not yet surpassed the period of high corruption incidence in the industrialization stage. Due to the history and close relationship between government and business formed during reform and opening up, it is not possible to clarify the relationship between government and business and establish a clean slate overnight. Corruption is a negative factor in the current relationship between the Chinese government, its institutions, and the market economy.

    Looking back at the relationship between the government and the market and between government officials and entrepreneurs since China's reform and opening up, it is clear that construction, promotion, and interaction were the main themes of the early relationship. However, contradictory friction and antagonistic factors in this relationship have been rising in recent years. The new changes in the relationship between the Chinese government, institutions, and market economy, and between government officials and entrepreneurs, reveal new factors and variables in the current and future relationship between the Chinese government and the market. These new factors and variables are new topics for further observation and research in academia.

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