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The Institutional Evolution of China

Government vs Market

Fan Zhang

China’s experience over the past decades is not just a story of economic growth, it is also one of institutional change. The current political-economic system is a bureaucratic market system, in which the government and the market both coexist and conflict with each other. This book gives a detailed description of the institutional evolution in China, using large amounts of documents and cases. The book provides a theory explaining the origin of China’s reform, the political and economic forces driving the reform, and the reasoning behind the stagnation and turn-over of reform.
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Chapter 7: Lessons learned and long-term expectations

Fan Zhang


The chapter discusses the roles of government in a bureaucratic-market system, the institutional advantages and defects of Chinese society, and unfinished economic reform. The chapter provides an index of marketisation, which shows that there has been continuous progress in the share of the market with a diminishing annual change, and that the government’s financial power decreased at first, until the mid-1990s, but then has increased. The chapter points out several fatal flaws of China’s reform, including unrestricted government, uncompleted economic reform, and the domination of large state-owned enterprises in certain sectors. Lessons learned from the reform include (i) socioeconomic circumstances determine the means used in reform; (ii) path dependence affects the following steps of the reform once the first step has been chosen; (iii) consensus on reform is lost when the reform is intensified and affects different groups of people; and (iv) checks and balances are crucial in a system in which the government and market coexist. The equilibrium between government and market is not stable because political judgements could follow either the logic of market or the logic of government. In the long run, China should move to an improved bureaucratic-market system, absorbing the advantages of the political systems in other countries as well as learning from the experience of the traditional Chinese political system.

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