A strange phenomenon in China is the concept of Chen Guan, and the controversy surrounding it. From a purely economic point of view, the power and existence of this force stymies the growth of small entrepreneurship in urban areas, which in turn has some serious implications for economic welfare.
The existence of the peddlers and vendors would serve as a cushion for peripheral individuals during the transition period. Utilizing available capital and combining it with some talent and mostly diligence, people without a steady income can maintain a living after income shocks, introduced by such events as massive-layoff during the reforms of state-owned enterprises. The existence of peddlers and vendors in turn assures a cheap market which will further alleviate the economic woes of families confronted with income shocks.
However, abstaining from regulation is not without potential problems. the first concern is the source of the commodities. It has been common for individuals to steal things from the state-owned enterprises and sell them later. However, this concern should not so much an argument against eliminating Chen Guan as an argument for state-owned enterprise's reform.
Second, the concern of the adverse selection. This proposition is odd, concerning the disasters over the food safety regulation in recent years. Food safety regulation is of more importance than the quality control of those small commodities and yet the government has failed to address this problem. The real problem, clearly does not lie in the sales section.
Third, the concern of crowding out "mainstream economic activities". From this point of view, the deregulation of peddlers would lead to an increase in the number of peddlers since the "job" is no longer troubled with risks posed by Chenguan. This change in the relative reward would pose a threat the profitability of shops and department stores. The logic is sound. But whether the possible result pointed out would actually take place depends upon two things 1) the elasticities of the supply of the peddlers 2) the cross elasticities of the peddlers' goods and goods sold in regular stores. Neither of these has available empirical data for us to draw conclusions, though the chances that the worry might come true is indeed good.
Even with this possible consequences, some economists most notably, Prof. Huang in MIT Sloan School of Management argues that the real driving force behind China's development is these small peddlers, instead of those crony capitalists and business tycoons, whose sources of income are questionable at best. he envisions China to be a country of small entrepreneurs. I am not going to analyze his point in detail, but I need to point out that he has put more emphasis upon welfare economics which might not be the preponderant concern of this nation, longing for prosperity. In Clifford Geertz's Peddlers and princes it has been documented that a nation of peddlers can enjoy economic development or near-take-off, but not anything more ambitious. The competitiveness of the nation, might need to be elevated through strategic planning. Once again I am not arguing for the existing government policies, which is inefficient and corrupt. The goals are justified, while the methods needs transformation.
Let me return to the original topic of Chen Guan. I have not reached anything conclusive ,as to whether to eliminate this force, yet. The benefits are clear and desirable and the possible consequences are likely. Even though I do not have enough empirical data to give me a clear calculation result, it is my estimate and intuition that the benefits of curbing this force at least would outweigh the drawbacks, especially when we take non-economic concerns into consideration.
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