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Many would say that democracy has been the most important, if not the sole, reason why modern western civilizations become the leaders in politics, economics, military, or social development in general. Free market under democracy has been the engine that generated many benefits for society.
Theoretically, in an autocracy, private goods tend to be concentrated into the pocket of the power-holders due to a lack of accountability mechanism. Thus, poor outcomes are often expected from autocratic countries. However, one historical example posed a counterexample to this theory.
Since the Open Economic Reform in 1978, China, a country with a less democratic political body and a less free market, compared to its western counterpart, has been on the rise that seems unstoppable. This anomaly stirred up a vibrant conversation in academia. Deborah Seligsohn, Assistant Professor at the Department of Political Science of Villanova University, advanced the discussion to a threatening challenge that is faced by the whole world—pollution.
Since 2006, the air pollution situation in China has been improving. To prove that the improvement made was not due to a reduction in production capacity that tends to generate air pollution, we can look at the number of power generation sector in China, which is a major sector that is deemed as a cause for air pollution.
Along with the reduction of Sulphur dioxide emitted, power generation continued to increase to meet the demand of people in China for electricity. The data shows that China has been making ground-breaking improvements in a better industrial standard of power generation. Why? How did China manage to do this with a political system that lacks accountability and an economy without the rule of law?
Professor Seligsohn examined the government-business relation in the power sector for the answer. Essentially, the success has to be accounted to the Chinese government’s encouragement for state-owned enterprises (SOEs) to compete with each other.
In 2002, the State Power Corporation was broken up by the Chinese government and five smaller state-owned enterprises were formed, including China Datang Corporation, China Guodian Corporation, China Huadian Group, China Huaneng Group, and China Power Investment Corporation.
Instead of trying to exploit control over one monopolizing corporation in the power sector, the Chinese government forced the five major SOEs into a competition. A major reason why this would happen is the link between political career development for individual political figures and the autonomy given by the central government to local officials in economic management. The original goal of the government was to improve power generation record with fierce competition and hard-budget constraints for SOEs.
In this process, many SOEs tried to violate the regulations for a competitive advantage of lower production cost. What changed the situation is explained by the Stigler Peltzman Model, which suggest that in the long run, companies that choose to become the one to adhere to government regulation, can gain a competitive edge through a better technological foundation for higher industrial standard when the government enforces and upgrades the regulation.
To earn a competitive edge against the other smaller power generation companies in China, the five SOEs chose to adhere to the regulations of environmental protection and pushed for advances of air pollution standards. Stricter industry standard made it more difficult for small power companies with little scale production to survive. Many mergers happened during the period caused the current situation of many subordinate companies following the five “parent companies”. At the same time, China’s air pollution standard in coal-fired electricity generation became the leader around the globe.
Essentially, what we can learn from this is that the core engine of China’s growth is competition and autonomy in economic development. The element of competition can also be used to analyze China’s economic growth in a broader context. Although the ideal political mechanism is still a democracy and the most effective economic model is still the good old open & free market, the picture in China is promising. Looking at it might shed a light on how we can further incorporate it into the global market.