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| REGULATORY REFORM IN CHINA |
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Client: OECD
The OECD published in 2002 a report by Scott Jacobs: “An OECD Perspective on Regulatory Reform in China” as Chapter 11 in its major report, China in the World Economy: The Domestic Policy Challenges. In this chapter, Scott Jacobs notes that the Chinese state is in the midst of a far-reaching transformation from owner of production to arms-length regulator of competitive markets. But deregulation and creation of market-based regulatory regimes and administrative capacities are late compared to other market reforms, and this lag increases the risks of costly market failures.
Jacobs suggests that China’s regulatory reforms should focus on international good practices in several areas: |
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- Improving regulatory transparency through more systematic publication, public consultation, and notification procedures is a high priority, since this is where China lags furthest behind good international standards.
- Enhancing the capacities of regulators to choose efficient regulatory solutions consistent with market needs will reduce risks of costly mistakes and market failures in China. In the current transition phase, when markets are changing quickly, the risk of making bad regulatory decisions is very high. Investors in China cite many cases where laws were adopted without clear understanding of market impacts. China's national administration, where most laws are drafted, should design a regulatory impact analysis program for major laws.
- Accession to the WTO opens the door to broader and deeper reforms in China that require longer-term planning, coordinated institutional reforms, and sustained commitment. Improved regulatory planning, coordination, and oversight from the center of the government, and monitoring by the National People's Congress, will help rationalize fragmented regulatory institutions and promote adoption of good regulatory practices against strong resistance. OECD countries offer many examples of how regulatory reform programs can be promoted and coordinated through new institutions at the center of government.
- China is rich in rules, but adopting a rule is easier than implementing it. Application and enforcement of China's laws and other regulations have lagged behind the establishment of national policy reforms, imposing unnecessary costs and uncertainties on the market, and allowing scope for unethical behavior. In many areas, the legal system has been captured by local political and economic interests. In addition, disputes about enforcement are not easily resolved due to weak and poorly-trained judicial and police institutions.
- Opening the internal market in China might create as much or more wealth than opening to external trade. China's internal market is highly fragmented. Regulatory barriers to the movement of goods and services across regional, provincial, county, and even urban jurisdictions create enormous hidden costs by weakening competition, increasing production costs, and reducing quality of products and services. These internal barriers will become even more troublesome as China opens to international trade and investment.
- Building autonomous regulators to oversee increasingly competitive utility sectors is necessary if consumers are to enjoy lower prices and better services, and if China is to benefit from world-class services. The regulatory institutions now in place in these sectors were designed for state-provided services, and will not function well in a complex market environment, due to conflicts of interest, fragmentation, inefficiency, and lack of transparency.
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