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The Emergence of Agricultural Commodity Markets in China

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China Economic Review

January 2007

21641 small china economic review

Although the initial reforms in China and other successful transition nations centered on improvements to property rights and transforming incentives (McMillan, Whalley and Zhu, 1989; Fan, 1991; Lin, 1992), the othe , equally important task of reformers was to create more efficient institutions of exchange (McMillan, 1997).

Markets, whether classic competitive ones or some workable substitute, increase efficiency by facilitating transactions among agents to allow specialization and trade and by providing information through a pricing mechanism to producers and consumers about the relative scarcity of resources . But markets, in order to function efficiently, require supporting institutions to ensure competition, define and enforce contracts, ensure access to credit and finance and provide information. These institutions were either absent in the Communist countries or, if they existed, were inappropriate for a market system. In assessing the determinants of success and failure of 24 transitions during their first decade of reform , Rozelle and Swinnen demonstrate that improved institutions of exchange were absolutely essential for nations to make progress. deBrauw et al. (2004) have shown the positive effect that market development had on the efficiency of China's agricultural producers and their welfare during the 1980s and early 1990s. Continued success of transition nations during the second decade of reform and beyond almost certainly also will depend on continued market development. Somewhat surprisingly, despite the importance of market performance in the reform process there is little empirical work on the success that China (or any other transition nation) has had in building markets.

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