Michael Spence: Reforming China’s Commanding Heights
Monday 17 November 2014
Chinese President Xi Jinping’s massive anti-corruption campaign has advanced a number of key objectives: It has gone a long way toward restoring confidence in the Communist Party’s commitment to a merit-based system; countered a decades-old pattern of public-sector domination; reduced the power of vested interests to block reform; and bolstered Xi’s popularity among private-sector actors, if far less so with the bureaucracy. In short, Xi’s effort to root out corruption has empowered both the Party and the reformers. The question is how far they will take their reform ambitions.

Xi is certainly not finished yet, having outlined a set of legal reforms at last month’s Fourth Plenum of the Communist Party aimed at creating a more level playing field for the public and private sectors. If implemented properly, the reforms will create a more efficient system for the creation and enforcement of contracts, ease the path for market entrants, and strengthen the application of China’s competition laws.

Greater fidelity to the rule of law will also lead to the creation of a legal and financial infrastructure that reduces fraud in the private sector, including in financial reporting. That, together with increased access to capital, will help to accelerate the development of the services sector, which is needed to create urban employment.

Better management of China’s considerable public assets – which include $3.5-4 trillion of foreign-exchange reserves, substantial land holdings, and majority ownership of the state-owned enterprises that dominate the economy – would complement these efforts. Indeed, it could help to boost competition, encourage innovation, strengthen the financial system, and expand access to capital.

The question is how China could achieve this. As it stands, China’s economy follows, to some extent, the old Leninist “commanding heights” model, with the Party holding all political power and controlling major enterprises and sectors, even as the burgeoning private sector drives growth and employment. In this context, the kind of “meritocratic professionalism” that China is pursuing is important; but it is no substitute for genuine competition in the public or private sector – at least not if innovation and structural change are the goals

Read the full article on Project Syndicate