What It Takes to Be a Market Economy

Massive government intervention to support national economies has brought the role of the state in the economy to the center of attention. When can an economy be considered capitalist, and when socialist? What scope should the state have in sustaining development? Constitutions in market economies do not provide valid guides for such purposes. Generally, ample margins are left to policymakers, in order to prevent the collapse of the economic system: nationalizations, government aid, "controlled" insolvencies and protectionist measures. So it might be surprising to discover that both EU and US statutes formulate explicit criteria for China and Vietnam, the only two non-market economies that are members of the WTO, to be one day acknowledged as market economies. In fact, the market economy status matters only for the eventuality of antidumping and other restrictive measures imposed by importing countries.

The EU states that five criteria are to be met for a country to be formally considered a market economy. Firstly, the actual influence of the government in allocating resources and over business decisions is measured. The second criterion calls for the country under consideration not to distort production costs or financial conditions of companies that are in the process of being or have already been privatized. Third, national laws must impose commercial obligations that induce proper corporate governance (actual proof of implementation is required) and the application of international accounting standards. Fourth, property and bankruptcy laws must be stringent enough to warrant against arbitrary state regulation. Finally, the national currency must be convertible at the market rate (the absence of a parallel "black market").

According to recent assessments, China and Vietnam do not meet the second and third criteria. In these countries, there is a massive presence of state-owned enterprises, which benefit from special legislative and fiscal treatment (state companies have easier access to credit than private companies, in spite of the fact that the latter outperform the former). In addition, the price of land and the prices of raw materials in the two countries are fixed by the government, and there is no proper accounting in most of the firms. But how many OECD economies would be found without fault according the five above-listed criteria?