Reflections on the Role of Institutions on the Chinese Road to a Market Economy

At the onset of transformation there has been a close to consensus view that the market system has no alternative. While this insight has found its place in the current mainstream on development economics, the so-called Washington consensus or post-Washington consensus (Kolodko, 2000, pp.119-141 andpp. 348-356; and Williamson, J, 2000, Srinivasan, T.N.,2000), very few would venture to repeat in an academic writing the once famous dictum of Vaclav Klaus: the third road leads to the third world. Much of western Europe has remained within the framework of the welfare state, despite its obvious limitations. Also in the transforming economies, the rollback of the state has proven to be much less than the tough normative language adopted by early reformers would have indicated. Actually, it is the structure rather than the size of public spending in these countries that may be a source of social and economic strains by providing less than optimal conditions for sustaining economic growth. And even in the United States the Clinton period has not produced an era of `unbridled capitalism. Thus the `do what I say, not what I do` policy advice stemming from the international agencies and much of the academe has lost its original appeal. Last but not at all least, the return of the Right in the US and in most of Europe by the first half of the first decade of the 21 century has not produced a free market backlash either in core Atlantic economies or in the transforming countries. Besides creating macroeconomic disequilibria by a combination of tax cuts and expenditure increases, conservative governments of Berlusconi, Bush and Chirac have retained the salient features of the mixed economy models that shape all modern economies of the globe (more on that in Bornstein, ed, 1994; and Bara and Szabo ,eds, 2000). Last but not at all least we are faced with the `Chinese miracle`, with the GDP of China growing by a staggering rate of ten/!/ per cent in the l990-2001 period, with merchandise exports reaching 262 bn $ in 2001. This is equivalent, by and large, to that of Canada, and outpaces imports by nearly 20 bn, making China one of the few trade surplus countries in the world. Moreover, with net private capital inflow, close to 60 bn$ in 2001, it makes the country, with 52 per cent of GDP originating from industry very unlike any model of a developing country (sources for all data: World Development Report 2003, World Bank, Washington, 2003, p.234, 238,240). Let us note that the slowdown in 2002-2003 still leaves China with a growth rate of 8 per cent, a surplus country and also one ruled by an unreconstructed Communist party (not reformed in the sense of western European Communist or eastern European post-communist parties). In a typical vein, the German weekly Wirtschaftswoche, normally close to the business community, devoted a special edition in no.40 (2003) to China, describing it as the largest economy and largest market by the year 2020, outpacing even the USA.