Ebook China’s Emerging Market For Property Rights: Theoretical And Empirical Perspectives
In all former socialist economies, reform programs include three broad elements: stabilization, liberalization, and institution building [Fischer and Gelb, 1991]. Because it reflects the particular legacy of each country and is also the most time dependent element of the transition process, institutional reform epitomizes the distinctive experience of the Eastern European economies, Russia, the Newly Independent States, and China. In each country, transition is fundamentally an account of ownership reform, the distinctive process of unbundling the property rights previously controlled by the state and reassigning them to individuals and groups who assume responsibility for managing the nation’s productive assets.
After twenty years of rapid growth under gradual reform policies that sustained the dominant role of public ownership, China enters its third reform decade with a pledge – and critical need – to carry out deep ownership reform. China’s efforts to advance enterprise restructuring confront a dichotomy. Should public officials directly manage enterprise restructuring? Or should government focus on building institutions that allow the market to serve as the central venue for ownership reform?
Our analysis focuses on a series of issues. We develop an analogy between two broad strategies of ownership reform – the state-managed and market-mediated approaches – and the debates between A.C. Pigou and Ronald Coase regarding the appropriate remedy for externalities arising from a common property resource. This contrast between Pigou and Coase, we believe, is particularly useful for examining the choices facing China’s leadership in expanding and completing the reform process.
We see China’s limited capacity for effective monitoring of enterprise assets as a fundamental cause of inefficiency. Chronic weakness in state-owned enterprises (SOEs) creates externalities in the form of crowding out, inflation, low returns to savings, and ultimately, vulnerability to financial crisis – that result from measures to recapitalize the banking system.
Economists have developed two approaches for remedying the distortions arising from externalities. Presuming that government could acquire all necessary information concerning the relevant marginal values, A.C. Pigou [1920] proposed that government directly intervene to eliminate gaps between private and social costs and benefits. Ronald Coase [1960] showed how official efforts to establish suitable market institutions can enable decentralized negotiation of efficiency-enhancing exchanges of rights linked to real or potential common property resources.
Previous research emphasizing the centrality of experimentation, bottom-up initiative, and competitive pressures in China’s reform experience [Jefferson and Rawski, 1995] invites further inquiry into the applicability of Coase’s perspective to the economics of transition. Even though China's circumstances remain distant from the ideal of well-specified property rights and zero transition costs, we find that Coase's analytic perspective can support an integrated analysis of important reform issues.
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