China’s Private-Owned Enterprises Economic Performance, Political Action & Fiscal Consequence

Abstract

For most transition countries who want to transfer to a market-oriented system from the planned-economy, one of the most important features is to shrink the state-owned enterprises (SOE) and expand the private-owned enterprises(POE), such as had been experienced by the former Soviet Union and the socialist countries in Eastern Europe. The same thing is happening in China. Since China started reform and opening to the outside world in 1979, Private-Owned Enterprises (POE) have grown dramatically and become a significant contributor to China’s economic growth. This paper describes firstly this great economic achievement, and then emphasizes its political consequences. The main conclusions are as follows: the prolonged prosperity of POE in China over two decades proved again that private property rights always generate higher efficiency than the public ownership system in which owners are ambiguous or unspecified. The great improvement of POE’s political status comes from both the state’s rational compromise and the POE’s positive participation due to the pressure of economic development on the government side and the security needs for property and human rights on the POE side. Overall, the political participation by POE is helpful to improve the democratic process of governmental decision making, which has been demonstrated both at local governmental levels and with budgetary issues. However, the risks of collusion between money and power call for formal institutional mechanisms which let all people express and protect their interests transparently and legally.