High-quality development calls for efforts to further improve government-market synergy and strike a balance between the two. Photo: Chen Mirong/CSST

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High-quality development is a complicated, systematic project. It involves the economic system, economic structure, drivers for development, humanity and nature, politics, and various other elements. The basic requirement of high-quality development is stable, sustainable, and harmonious development. Neither volatile development nor uncoordinated or inharmonious economic and human-nature relations can be considered high-quality development. In the modern market economy, the synergy between the government and the market is a material factor for economic stability, sustainability, and harmony. High-quality development calls for efforts to further improve government-market synergy and strike a balance between the two. 

Theoretical breakthrough 

The relationship between the government and the market is one of the points of dispute among different schools of Western economics and one of the key research projects to advance modern economics. Since the latter half of the 20th century, many new economic concepts, theories, and policy ideas have been generated out of disputes over government-market relations. Schools of neoliberal economics all oppose government intervention, emphasizing that the market economy can stabilize itself and that government actions to stabilize the economy are the root cause of instability. 

In the socialist political economy with Chinese characteristics, the government and the market are not antagonistic, nor are they in a zero-sum relationship. Instead, they interact and coordinate with each other. At the third plenum of the 18th CPC Central Committee held in November 2013, it was stated that the market should play a decisive role in resource allocation, and the government should better play its role. 

When presiding over the 15th group study session of the Political Bureau of the 18th CPC Central Committee in May 2014, General Secretary Xi Jinping proposed making good use of the roles of both the market, the “invisible hand,” and the government, the “visible hand.” “Letting the market play the decisive role in allocating resources and letting the government better play its role are not contradictory. It does not mean that the market can replace the government’s functions, nor vice versa,” Xi said. 

This represents a major breakthrough by the CPC in government-market relations as expounded on in Western economics, as well as a fresh understanding of them. The development of the socialist market economy with Chinese characteristics has raised a major issue for Chinese economists, namely how China should enhance mutual adaptation between the government and the market in order to promote high-quality economic growth. 

In the market economy with Chinese characteristics, the basic economic system in China’s current stage determines the nature of the government-market relationship. In October 2019, the Fourth Plenary Session of the 19th CPC Central Committee reviewed and adopted a decision on major issues concerning how to uphold and improve the system of socialism with Chinese characteristics and advance the modernization of China’s system and capacity for governance. In the decision, “the dominant role of the public sector and common development of economic entities under diverse forms of ownership, and the distribution system whereby distribution according to labor is dominant and a variety of other modes of distribution exist alongside it” are defined as principal features of China’s basic socialist economic system. 

The “two dominants” are the main markers distinguishing the Chinese socialist market economy from other market-based economic systems, establishing the theoretical basis for the government’s status and role in resource allocation and economic activities. The government is indispensable to ensuring the “two dominants” in economic practices. 

High-quality economic development is fundamentally about efficient resource allocation, a reasonable economic structure, and continuous structural upgrades with scientific and technological advances. The market mechanism functions not only to deliver information, provide incentives, and distribute incomes, but also to regulate and optimize economic structure. 

Through pricing and market systems, the market economy coordinates a wide range of individual and corporate activities, automatically addressing problems concerning the production, distribution, and consumption of hundreds of millions of economic entities. Moreover, the incentive mechanism lends momentum to the development of the market economy, while competition drives the optimization and upgrade of the economic structure. This is why we underline “letting the market play the decisive role in resource allocation.” 

However, due to monopolies, incomplete information, external shocks, and lagging or inadequate market regulation, realistic problems such as market failures, economic fluctuations and even crises, inflation, underemployment, and insufficient utilization of production capacity occur from time to time. Distribution according to production factors’ contribution usually leads to income inequality. 

The high-quality development of China’s economy is essentially efficient development. It values fairness, common prosperity, and well-rounded human development, and is inseparable from the government’s role. 

Meanwhile, due to unscientific decision-making procedures, information asymmetry, policy lags, and other reasons, the government may also fail in its role. Government behaviors might also undermine and erode the market’s effectiveness. Therefore, we must ensure the government better plays its role. To achieve high-quality development of the Chinese economy, it is vital to facilitate effective and automatic resource allocation via market mechanisms, while ensuring that the government plays its role fairly and proactively. In other words, it is crucial to enhance the synergy between the government and the market. 

Two-pronged reforms needed

China’s economic system has transitioned from a highly centralized planned economy to a socialist market economy, which suggests dual tasks in improving government-market coordination. On one hand, it is essential to deepen market-oriented reforms, further developing and improving the market system and mechanism alongside its role in resource allocation and economic activities. On the other hand, deeper reforms to political and administrative systems are needed to further align government functions with the intrinsic requirements of the socialist market economy. In other words, we need to carry out market-based and government reforms simultaneously, reconstructing their relationship by building a high-standard socialist market economy system. 

The report to the 19th CPC National Congress pointed the direction for market-based reforms, stating, “we must concentrate on improving the property rights system and ensuring the market-based allocation of factors of production, so that property rights act as effective incentives. We should ensure free flows of factors, flexible prices, fair and orderly competition, and that business survival is determined by competition.” 

Furthermore, the 20th CPC National Congress report highlighted the need to build a unified national market, advance reforms for the market-based allocation of production factors, and put in place a high-standard market system. “We will refine the systems underpinning the market economy, such as those for property rights protection, market access, fair competition, and social credit, in order to improve the business environment,” according to the report. 

It is necessary to advance market-based reforms in light of the two reports, to elevate the market-oriented level of the socialist economy with Chinese characteristics, thus essentially letting the market play the decisive role in resource allocation. 

Since the 18th Party congress, the CPC Central Committee and the State Council have carried out a series of political system and government reforms, such as continuously modernizing China’s system and capacity for governance; promoting the high-quality development philosophy in the national development strategy, development planning, government policymaking and implementation; and law-based governance and government administration. These reforms have substantially intensified the government’s capacities for state governance and economic management.

 

The report to the 20th CPC National Congress further clarified how to let the government better play its role, including improving the macroeconomic governance system, and fully leveraging the strategic guidance of national development plans; deepening structural reform in the financial sector, reinforcing the systems that safeguard financial stability, and ensuring no systemic risks arise; and taking stronger action against monopolies and unfair competition, while conducting law-based regulation and guidance to promote the healthy development of capital.

How could the government and the market be better coordinated? First it is crucial, theoretically, to realize that the government-market relationship in China’s socialist market economy differs from that in Western capitalist market economies. In China, the public sector dominates the ownership of the means of production, which indicates that the Party, the country, and the government share interests with the people. Both government actions and market behaviors aim at improving people’s wellbeing and meeting people’s aspirations for a better life. 

Second, attention should be paid to properly handling, coordinating, and playing the roles of the invisible and visible hands in practice. We should continue to pursue reforms to the socialist market economy, advancing market-based reforms in breadth and depth, reducing the government’s role in directly allocating resources and its direct intervention in microeconomic activities.

 

It is important to accelerate building a unified and open market with orderly competition, and to set fair, open, and transparent market rules to leave economic activities that can be effectively regulated by market mechanisms, as well as affairs that the government shouldn’t interfere with, to the market, allowing the market to play its role fully where appropriate to maximize the benefits and efficiency of resource allocation.

  

Letting the government better play its role requires practically transforming government functions, deepening reforms to administrative systems, innovating administrative models, improving the macro control system, strengthening supervision and regulation over market activities, and enhancing and optimizing public services. This will promote social fairness, justice, and stability, and advance common prosperity. 

Fang Fuqian is a professor from the National Academy of Development and Strategy and the School of Economics at Renmin University of China. 

Edited by CHEN MIRONG