The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

As China moves to the frontier of innovation, its businesses will have to make more mistakes. It will also have to close more of its old smokestack industries. The strength of markets is their ability to deal with mistakes and failure. The desire of the party to stay in control could undermine that strength. THE STATE, MARKETS, AND DEMOCRACY IN CHINA Democracy, as we will see in India’s case, makes it harder for the state to act in some cases. However, it also makes inaction easier. The party in power does not have to take responsibility for everything, and it does not have to maintain a pretense of infallibility since it derives its legitimacy from elections, not perfection. That allows it to deal better with market ups and downs. Certainly, democratic governments also intervene in markets, but every market crash is not a referendum on the government. Democracy therefore creates a separation between the state and markets in yet another way than the one we saw in the Populist and Progressive movements. It allows the state to be more decoupled from markets, and allows each, then, to function better without any cross-linkages undermining their functions. All this assumes that China will continue to have enlightened meritocratic leadership that enjoys the broad support of its people. In the absence of elections, the people have to rely on the internal processes within the party to produce the right candidates. There are important reasons to worry that the internal processes a...

Cost of non democracy in china