From Nash to Pareto in a Market-Leninist Economy: How to Deepen Reforms of Large State-Owned Enterprises in China

Abstract

This paper establishes a simple model for a Market-Leninist economy where factor prices are deliberately distorted for rent-seeking purposes as well as due to certain “socialist commitment” (often called “state policy burden”). Meanwhile, ever since Deng Xiaoping’s reforms commencing in the 1980s, how to improve efficiency of state-owned enterprises has been on the government agenda. Progress has been made but more slowly than one expects in the past three decades. But why?Our findings confirm a “Nash equilibrium” in China’s market-Leninism, because of the prisoner dilemma, which prevents continuous reforms towards a Pareto optimum despite the prevailing sub-optimal performance of these enterprises. Such a problem has been spotted by various authors. However, there is a lack of accurate measure of the gap between the Nash equilibrium and the Pareto optimum. This study takes one step forward by identifying what can be realistically achieved by China’s state-owned industrial conglomerates, or mega-SOEs.A Pareto optimum in mind, we establish reform-performance optimal points which can be called as Coase Property Right Points (CPRP) to gauge efficiency gains from (1) removal of extra-economic policy burdens and (2) deepening reforms from state-private joint stock to full privatisation in either a perfectly or imperfectly competitive market.