From Double Creation to Mutual Configuration

The Neoclassical economic approach to government-market relations has a set of implicit assumptions about supporting institutions (e.g., relatively complete markets and a limited and effective government) which are virtually non-existent in most developing and transition economies. In the past decades China has succeeded in getting around the potential traps of neoclassical government-market doctrine (e.g., the Washington Consensus) by taking a programmatic and gradualist reform strategy. More specifically, China started with administrative and fiscal decentralization and reforms inpromotion evaluations for local officials to encourage regional competition for economic growth and create an incentivized local government which in turn was motivated to support non-state sectors and nurture local markets. We call this as the process of “double creation” of both markets and market-friendly local governments which was critical for China to get out of the planned economy in the early stage of economic reforms. When China’s marketization speeded up after the early 2000s, a dual competition model took the full shape: local officials competed for regional economic development in political market and local firms competed in economic markets, which triggered an interesting process of “mutual configuration” of government and market to overcome both market failures and government failures. Chinese central government has played a vital role in correcting the distortions arising from the reform process and shaping a well-functioning relationship between government and market.