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Criteria of Market Economy

The questions "What is a market economy?" "What is a standard market economy?" or rather "What are the standards for a market economy?" would naturally prop up when people are talking about some countries being market economy countries and some enterprises being market economy enterprises. For if not so, how come the conclusion as to whether a country is or is not a market economy country?

As a matter of fact, the existence of criteria of a market economy is controversial. Each one gets a reason to support his or her own idea. We hereby accept a proposition, i.e., criteria of market economy do exist, put forward due to anti-dumping cases involved in international trade, but also believe that the criteria are established on a relative basis.

Some well-recognized market economy countries, we have discovered, practice various economic systems. It is difficult to say, therefore, that certain country is a standard market economy country, while any other country not exactly the same cannot be regarded as a market economy country. Due to different traditions and development phases, countries inevitably differ in the form, even the contents of their market economy to a certain extent. The existence of differences does not mean there are no market economy criteria, however, and it is unacceptable to deny the existence of market economy criteria due to such differences. As an economic system in human history, the market economy came into being in modern times and is flourishing nowadays. It differs from either historical self-sufficient economy or planned economy, and certainly has its intrinsic definition that refers to the commonness of various market economy countries at different development stages. The commonness, being sorted out from various market economy countries, shapes a framework, which will facilitate us to judge a country's status of market economy in anti--dumping cases. While it is reasonable to admit that there are certain criteria of market economy, it is incorrect to rigidly apply such criteria in an arbitrary way. The framework of market economy criteria is a range of fundamental characteristics of market economy, a status section with certain allowable differences and variations, and a varied status section of market economy taking the commonness of different countries' market economy as a dominant factor and supplemented with variations, rather than an absolute concept, a point or a line.

(Ⅰ) Criteria of Market Economy as Defined by Relevant Antidumping Laws of the USA, the EU and Canada

"Non--Market Economy Countries" as referred to by the US Department of Commerce are countries whose operation does not follow market costs or price rules. The department sets six statutory requirements [19U. S. C -- 1677(18)] or specific criteria with regard to a market economy:

(1) the extent to which the currency of the foreign country is convertible into the currency of other countries;

(2) the extent to which wage rates in the foreign country are determined by free bargaining between labor and management;

(3) the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country;

(4) the extent of government ownership or control Of the means of production;

(5) the extent of government control over the allocation of resources and over the price and output decisions of enterprises, requesting that decisions concerning the output and prices of an industry are free of government intervention and that all important product inputs are paid at market prices;

(6) such other factors as the administrating authority considers appropriate.

In addition, the US Department of Commerce is particularly concerned with the export control by the exporting countries: on the one hand, if there is any control by the government with regard to enterprises' export activities by law.

This includes:

(a) Any restrictive regulations concerning business operation and export permits of enterprises;

(b) Any legislation for reduction of control on enterprises;

(c) Any other governmental measures for reduction of control on enterprises.

On the other hand, if there is any control by the government with regard to enterprises' export activities by law. This includes: (a) any restrictive regulations concerning business operation and export permits of enterprises; (b) any legislation for reduction of control on enterprises; (c) any other governmental measures for reduction of control on enterprises. On the other hand with regard to the facts of governmental control on enterprises' export activities, the US Department of Commerce usually considers the following elements:

(a) Whether export prices are determined by the government or subject to government approval;

(b) Whether exporters have right to negotiate contract terms and sign contracts or other agreements;

(c) Whether exporters are free of government restriction in choosing their managing bodies and enjoys full autonomy;

(d) Whether exporters enjoy independent power of decision in distribution of profits and remedying losses.

The EU issued the No 905. 98 Act in 1998, which allows Chinese respondent enterprises to apply for the status of market economy in anti-dumping investigations and stipulates five criteria for determining the status of market economy, namely: (1) prices, costs and inputs etc are determined by market demand and supply; (2) firms have one clear set of basic accounting records which are independently audited in line with international accounting standards and are applied for all purpose. (3) The production costs and financial situation of firms are not subject to significant distortions carried over from the former non-market economy system, in particular in relation to depreciation of assets, other write-offs, barter trade and payment via compensation of debts. (4) The firms concerned are subject to bankruptcy and property laws that guarantee legal certainty and stability for the operation of firms, and, 5, exchange rate conversions are carried out at the market rate.

In its investigation on the issue of "non-market economy", Canada specified five aspects: (1) is the government's role in formulating economic policies and controlling economic activities interfering the normal performance of the market economy? This includes the percentage and structure of governmental influence in pricing, distribution of products and procedures for making offers; the pricing mechanism of domestic products and services; planning and controlling of production of commodities and provision of services and market restrictions; the control of domestic and international trade; further reforms in the structure and functions of government organizations. (2) how does the government control or govern enterprises in respect of production, sales and procurement? And how is control or governing applied in connection with enterprises' financing? (3) in respect of international trade, the conditions and procedures foreign trade enterprises must comply with the government to allow them to carry out foreign trade businesses; government guidance and control in respect of quotas and prices of import and export products. (4) market-oriented reforms of state-owned enterprises, including the existing types of owner-ship, when and how the ownership system was transformed; in the state-owned enterprises under government control, the mechanism for determining prices of elementary factors such as raw materials, energy, labor cost as well as quantity and prices of their products, the managing of enterprises' funds and performance, the distribution of profits, the relationship between employers and employees and the availability of loans etc. (5) whether there are different interest rates for different enterprises, industries and domestic and international trade departments. Whether exchange rates are determined by the market as far as exporters are concerned and whether enterprises enjoy autonomy in obtaining foreign exchanges and keeping foreign exchanges, etc.

Obviously, the criteria of market economy defined by the European and American countries are based on the factors that may affect fairness of trade in anti-dumping actions, and are precisely related to the issues in question. Naturally there are differences between the criteria of market economy put forward by the USA and those by the EU and Canada, for the USA has directly raised the issue of criteria for a country to be a market economy, while the EU and Canada mainly target on the criteria of market economy of an enterprise and an industry. It is obvious, however, that such differences are only superficial. As far as the contents are concerned, they are the same or similar, and in essence they are exactly the same. These criteria form an integrated system and thus one single criterion should not be applied independently. The European countries and the USA will not make their judgment just according to one criterion. but will sum up the results of investigations in all aspects covered by these criteria in determining whether or not enterprise or the industry has reached the critical point of a market economy so as to reach a conclusion whether the country, the industry or the enterprise in question has achieved the status of a market economy. Of course, in actual treatment of an anti-dumping case, the defending party will have to be prepared in line with the standards of the country that is initiating the anti--dumping action.

(Ⅱ ) Five Major Factors of Market Economy

In view of the actual development of market economy in China and abroad, and taking into consideration of the criteria of market economy formulated by the USA, the EU and Canada for anti-dumping purposes, we are of the opinion that five major aspects are particularly important in defining a market economy country, from which five universally applicable standards can be obtained.

l. The Role of the Government

The European countries and the USA are concerned with the following issues: the governmental possession, allocation and control of natural resources, capital and human resources; the governmental control of and authority over the performance of the national economy; the government's control on production, where the control is manifested in property ownership of enterprises, the distribution of profits and the mechanism for bankruptcy, while the production mainly refers to questions such as who produces, what are produced, how much is to be produced and for whom to produce; the government's control on international and domestic trade and the government's control on intermediary organizations such as chambers of commerce and industrial associations etc. All of these issues, to sum up, are the roles of the government, or, to put it more precisely, are the roles to be played by the government in a market economy and refer to the relations between the government and enterprises. We shall call this the "standardization of governmental behavior".

2. Enterprises' Rights and Behaviors

The US Department of Commerce is concerned with whether there is governmental intervention in enterprises' decision on output quantity and pricing, whether enterprises have independence in their operation and exports, whether they enjoy independent power in choosing their managing bodies, in distribution of profits and in remedying losses, whether they have the independent power in negotiation of contract terms and signing contracts, particularly if these enterprises are in the export businesses. The EU is likewise concerned whether enterprises have the right to take decisions on the prices and quantities of their exports, whether they have basic book-keeping systems in compliance with the international accounting standards, whether they are entitled to obtain financing and to transfer their profits abroad, whether they enjoy full freedom in carrying out business activities. In the case of Canada, the investigation authorities apart from being concerned about the above-mentioned aspects, they are curious about the type of ownership of enterprises and the ownership transformations in state-owned enterprises etc. In essence, whether enterprises are market-oriented or administration-oriented in their production and operation is critical to draw a conclusion In a word, this issue concerns enterprises' rights and behaviors. Here we may call it the "liberalization or economic entities".

3. Costs and Prices of Production Factors

The US Department of Commerce is concerned with the extent of control on the allocation of resources by the government, and with whether the inputs in products are paid at market prices; The EU is concerned with whether the market can determine the prices of the input factors and the trustworthiness of enterprises' costs; The Canadian government is concerned with how the decisions are made in respect of the prices of the input factors such as raw materials, energy, labor costs as well as output quantity and pricing in the state-owned enterprises. All in all, the EU and the North American countries are concerned with whether the production factors such as raw materials and labor input by enterprises are paid at market prices. This is understandable as the prices of inputs will affect the costs of the outputs and will directly influence the prices of the products and is therefore in direct connection with the anti-dumping cases. For this reason, any importing country would be particularly concerned with the trustworthiness of the costs and the rules governing the formation of prices of the products from an exporting country. We may call this the "marketization of production factors".

4. Trade Environment

The EU and the American countries are concerned that in trade activities, international and domestic alike, are transactions carried out freely or subject to restrictions. Are well-developed market infrastructure, market legislation and judicial system available? Are market intermediaries independent and what roles are they playing? Do enterprises have autonomy in determining their prices according to the trade policy? How does the government exercise control over exports and exporting enterprises? Can enterprises carry out business activities independently? All these issues are related to trade environment and conditions, we may call them the issues for the "fairness of trade environment".

5. Financial Parameters

The EU and the American countries are especially keen about if the interest rates and exchange rates of the country under anti-dumping investigation are determined by the market. Is the local currency convertible and to what extent is it convertible? Are there different interest rates for different enterprises, departments of domestic and foreign trade and different industries? Is the enterprise's financial status not distorted by the former non-market economy system? Are enterprises free to transfer the profits or capital? Do enterprises enjoy autonomy in swap and deposit of foreign exchanges? In a word, the apprehension is about the way in which the two financial parameters, namely the interest rate and the exchange rate. are formed and the fairness in the application Of them, thereby touching upon the principles underlying the formation of these parameters, i.e. the rationalization of the financial structure. We here-by will call this the "rationalization of financial parameters".

Obviously, the above five key factors are put forward on the basis of our knowledge and understanding of the theory and reality of the modern market economy, having taken into full consideration of the criteria of market economy put forward by the EU, the USA and Canada for anti-dumping purposes, and are closely focused on the matter of fairness in trade. We are of the opinion that as a pragmatic approach, comparisons and discussions on the basis of these five factors as our market economy criteria will facilitate our direct dialogue with the EU, the USA and other countries.

Taking these five key factors as criteria to make judgments duly differs from the classification of market economy or marketization made by domestic academic circles. Some scholars insist that consisting of three major industries, a market economy should be divided into three sectors for measurement; some emphasize that due to its components of seven types of markets, it can be classified into seven segments for measurement; moreover, some pinpoint that the measurement should begin by these three key factors of government, enterprise and market etc. Various classifications are based on relevant grounds. Suppose one was taking apart an elephant. One would first of all be confronted with how to break up it? What would be the special concern, the structure of head, body and legs, the components of respiratory system, nervous system and skeletal & muscular system, or the environment focusing on the classification according to internal and external causes, etc.? Corresponding factor indices may be worked out directly through classification. The key is, we believe, that the classification should be centered on the purpose of the research. For professional study, market specialists naturally lay stress on market classification indices; for theoretical research, on overall condition of market economy; for anti-dumping, however, on requirements of questionnaires and relevant legal indices of countries concerned. Given that our market economy research targets on the practical application to anti-dumping cases, we have concluded these "five key factors" out of standards of major anti-dumping countries concerned, as a basis for discussion. Obviously, there are two distinctive points within the five key factors: first, the emphasis is on the symbol of classification indices, rather than the overall integration of a market economy, i.e., conducting comprehensive analysis by taking the most influential five factors on trade in market economy as the symbolic indices for judgment. Second, the stress is laid on concerned issues related to fair trade to classify and deal with, rather than on logicality of market economy theory to make classification.

(Ⅲ) Further Analysis on "Standardization of Governmental Behavior" and "Liberalization of Economic Entities"

The following paragraphs are to discuss the meanings and essential characteristics of standards by analyzing the two criteria "standardization of governmental behaviors" and "liberalization of economic entities".

"Standardization of governmental behavior" requires that government administrative system meets the requirements of market economy in dealing with the relationship between market and enterprises. In a word, are the resources of a country allocated by governmental administration or the market? The relevant criteria of market economy proposed by European and American countries do not require a theoretical model or a totally competitive market economy to judge other countries, and these countries also admit that there are various patterns and characteristics among market economy countries in the modern world.

In reality, "standardization of governmental behavior" is usually used to describe "government size and extent of intervention" in an approximate way. The concerns are the role and function of government in market economy, i.e., which one is better, a large government or a small government, or a powerful government or a weak government? The pivot is the relationship between government and market. The classic economists represented by Adam Smith preferred small governments emphasizing on the full market competition, while the Keynesian theory was in favor of large governments, claiming that effective demands could be expanded and the coordination of supply and demand could be achieved through government intervention, rather than through full competition. In terms of the modern market economy, Samuelson's neo-classic comprehensive theory has become the mainstream: combining government and market, a government should play a leading role in organizing and guiding on the basis of allocation of resources by market. The reallocation of resources through government intervention hereby is a supplementary way to resources allocation by market. According to Samuelson, the role of a government is: first, to establish a legal system; second, to formulate macro economy stabilization policies; third, to promote economic efficiency through influencing allocation of resources, and; fourth, to introduce a reasonable mechanism affecting income distribution. A government should avoid intervening market and enterprises, but can never abandon the responsibility of providing public goods and seeking for a favorable economic environment. These days, an economic entity practicing a market economy with full competition cannot be found, nor an economic entity practicing market economy completely under a government's shelter. As a result, the common ground is to shrink excessive government intervention, avoid monopoly, promote competition and institute a legal system.

The role of government in economy, however, varies with countries, development phases and economic issues. With respect to well--developed market economy countries, some governments exercise less direct economic intervention, but more indirect influence. Meanwhile, another situation happens: the more the government has state-owned enterprises, the more it depends on industrial policies. For instance, the US and the UK attach more importance to the role of market mechanism than Japan and Nordic countries, while Japan and France share more common grounds in development guidance plan and industrial policy. As for a transitional country like China, although government functions under a planned economy have been adjusted greatly, all round economic intervention has been turned into selective intervention, and more fair treatment has been given to various enterprises with different ownership by consolidating, respecting and safeguarding enterprises' independent management rights in line with legal system. The government is still required to play an important role right now for the purpose of reducing the government's role in the future. The reason is that a market economy system cannot be established without the government's guidance and support. Although a combination of appropriate government intervention and relative free market is widely observed in both well-developed countries and countries in transition, there are differences in the role of the government and the extent of governmental intervention. These differences are normal and a manifestation of the market economy corresponding to various stages.

All government behavior involves controlling. Should government control be beyond a certain limit, market efficiency would be definitely affected, and in the end, under the circumstance of protecting some people's interests and rights, it may lead to harming some other people's interests and rights to a great extent, and on the whole the economic freedom as well. Nevertheless, some control is required, which on the one hand can safeguard interests of social groups and the country, and at the same time push forward social progress and ensure that people freely enjoy their benefits. The rationale to measure market economy standard determines the rational judgment of the range and degree of government intervention in economy and the definition of differential margin when applying to various countries.

"Liberalization of economic entities" requires that in a market economy an enterprise (including entities from other economic sectors hereinafter) should be an independent economic entity de facto and de jure with a clear property right, independently making decisions on management, trading and operation etc. Moreover, in allocation of resources (capital, labor, land, and entrepreneur) and market transaction, where an enterprise considers prices, outputs, profits, and imports and exports etc. and makes relevant decisions in accordance with market rule and market supply and demand, its behavior also can be regarded as market--oriented. The "liberalization of an economic entities" is conducive to the promotion of enterprise's efficiency and the undertaking of risks by enterprises, and the realization of rational resources allocation within the whole society as well. For these reasons, an enterprise's independence and its market-oriented behavior are a criterion to decide if a country practicing market economy or not. In addition, due to these reasons, we make out and agree to various criteria for marketization of enterprises in the respect of European and American countries' market economy criteria.

Actually, it is a complicated and difficult task to measure "liberalization of economic entities". The market economy criteria on enterprises, we have discovered, varies with times, development phases and historical condition. In terms of property rights, management style and behavior of enterprises, there is no absolutely uniform criteria. Enterprises may differ from each other in pattern of organization and management as well. In particular, state-owned enterprises are quite different, so are the patterns of management of state-owned enterprises adopted by market economy countries. According to the World Bank's statistics, stated-owned enterprises averaged approximate 10 percent of the global GDP, accounting for 35 percent of the global total capital in early 1980s. Following certain criteria, we should make a judgment of the extent of marketization of various enterprises, especially state-owned enterprises, and on this basis measure the extent of the country's market economy. These criteria to be followed should be flexible, scalable, and not too rigid. For example, it may be improper to mention that the UK was a market economy country in the 1990s, but not in the 1970s, an era the Labor Party was in power and a peak-hour of nationalization. It is also improper to mention that the US practices market economy when leasing most government enterprises to private monopolies, while Italy is not a market economy country due to its government's multilevel participation and control over enterprises through national holding companies. As a matter of fact, after the World War Ⅱ, the Western European countries like the UK, France and Italy etc. actively  pushed forward "nationalization" by establishing state-owned enterprises through direct investment, acquisition, confiscation and participation by holding shares etc, so their state-owned economic systems came into being with different sizes and control methods. In 1972, with respect to the percentage of state-owned enterprises to the gross domestic assets, the UK accounted for 29 percent, France 35 percent, Italy 30 percent, the Western Germany 30 percent, and Japan up to about 35 percent in the early 1980s .

(Ⅳ ) Absolutism and Relativity or Market Economy Criterion

Market economy criterion is, we believe, a dialectical unity of absolutism and relativity.

The five key factors, induced from European and American countries' market economy criteria against anti-dumping cases, indicate that we admit there is a market economy criterion, by which we can give our verdict on any country's status of market economy. On the other hand, however, the five-key-factor criterion on the whole is sketchy, scalable, flexible and varied, and in reality a 100 percent market economy country cannot be found.

Some scholars, who hold on absolute standard, argued that despite in reality a pure market economy couldn't be found, in theory only 100 percent could be taken as a criterion of full marketization and only 0 percent as a standard of full planned economy. Otherwise, there would be no uniform criterion to compare different countries, or there would be some trouble when making comparisons with different regions or periods within a single country. On the contrary, some academicians holding on relative standard believed tha t there had never been a 100 percent marketized country in the world, and it might be useless unless the extent of development of marketization was compared and arranged in order on a relative basis.

Ours tends to be a combination of the above two approaches. We believe the full standard, which most domestic specialists regarded as, is an absolute theoretical standard. Absolute values are clear at a glance, but far from the reality. It is feasible to measure the extent of markelization by arranging orders on a relative basis, and relative indicators are easy to conduct and convincing. However, the process of arranging orders actually cannot exist without such processes of measurement as scoring by selecting several indices. In other words, the process of arranging orders is involved in the measurement of absolute values; the result of absolute values may still require comparison on a relative basis. The verdict on absolute values needs to be combined and unified with the arrangement of orders on a relative basis. In a word, an absolute rational standard of marketization never exists, but the mean values in the five key factors of market economy can be considered as a general criterion, which is a practical and relative standard. Some may question: is the five-key-factor criterion based on a scientific classification? Our answer is: this is a symbolic classification derived from practice, and is designed for a special purpose. The aim of our research is how to conduct a fair trade and anti-dumping cases in a proper and impartial way, rather than to achieve the integrity in theory. We strongly believe our measurement will be improved steadily on a scientific basis in the course of reaching a common ground with countries concerned and in the process of pushing forward fair trades.

(China.org.cn November 7, 2003)

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