by Yang Li

Market reform is a kind of institutional reform in which greater market forces and efficiencies are introduced into the country’s economic process while government maintains its role in guiding, monitoring and supervising the transformation. It has been a long-lasting topic about the roles of government and market. In economics, market is believed to be the most effective mechanism to allocate scare resources. In most developing countries, governments are facilitating market reform in a variety of industries to promote economic development.

However, market reform may not be applicable in all fields and needed to achieve the same depth. What are the limits of market reform? Neither market nor government is omnipotent in allocating resources. In the real world, Pareto-optimality that exists in perfect competition market cannot be attained due to a number of reasons, such as incomplete markets, indivisibilities, common property resources, imperfect markets, asymmetric information, externalities, and public goods, etc. We call this poor functioning of markets as market failure which provides theoretical support for government intervention. In 1992, China began its market reform in public sectors such as health care, education, housing and environment. The Chinese government gradually retreated from providing public goods in these areas and introduced market disciplines to allocate resources. However, it becomes evident that government rather than the market that is able to provide citizens with equal access to resources, reasonable wealth distribution mechanism and basic public services. Actually, not a country should completely exploit market forces in health care and education, partly out of political concerns but also it is because government is obliged to assume this responsibility explained by externality theory in economics. In addition, market reform should not be introduced into sensitive industries that hold a security stake in a country, such as electricity and water. In short, it is government’s responsibility to provide basic public services to its citizens and can only introduce market reform in those areas that market forces can produce more efficiency without harming basic human rights.

When governments get too involved in directing economic activity, it may lead to an inefficient allocation of resources or imbalanced supply and demand. Since its establishment in 1949 and until the end of 1978, China maintained a centrally planned or commanded economy in which the government directed and controlled the country’s economic output, the state set production goals, controlled prices and allocated resources throughout most of the economy. Because such a central planning economic system put little emphasis on competition, government actually was unable to produce enough goods to meet people’s demand. There were limited kind of goods and the demand for basic necessities was far greater than the supply. Therefore, the government issued grain coupon, non-staple food coupons for people to buy grain flour, rice, oil, eggs, cloth, and bicycles, etc. With this rationing system, people were given grain coupons with which they could buy a certain amount of grain at a low state-imposed price. Any quantity exceeding the coupon quota would have to be purchased at market price. This too much involvement of Chinese government in economic activity led to inefficient production and huge resource waste.

Usually, there are multiple political dimensions in economic decisions. Technical experts cannot fully understand those political dimensions and even they can it is hard for them to make the right economic decisions on behalf of governments. Furthermore, technical experts evaluate problems by using economic and scientific models, calculations and statistics which are based on many unrealistic assumptions. There are political elements and priorities involved in economic decisions, difficult issues cannot be compared solely on the basis of cost and effectiveness in solving the problem. In this way, economic decisions made by them will not solve problems in reality effectively and even absolutely impotent, so government decisions often cannot be made by technical experts.

Privatization is one kind of market reform and is the process of transferring ownership of public service from the government to the private sector in order to bring back market discipline and efficiency. There are several ideas behind privatization. Above all, government is crucial but frequently a corrupt sector. Public subsidies for essential services such as water may sound like humane policy, but in the real world subsidies benefit the powerful, because they have the resources to manipulate them. Also, any valuable commodity that is provided free eventually gets taken for granted and wasted.

As the conflict happened in Cochabamba, Bolivia, the process of market reform sometimes come with tears and blood. Since corporations are in business to make money, they often increase water rates after they take over the water plant. Some householder’s bills had doubled, and ordinary workers now had water bills that amounted to a quarter of their monthly income. Therefore, they began to join the protests. Access to security water is a basic human right, Bolivian government cannot completely leave this industry to the market forces. Although higher water rates can help to promote conservation in theory, it is government’s obligation to improve efficiency on the premise of ensuring its people’s basic right.