Privatisation or competition?

Market competition is essential for any economy to be efficient. In order t o develop competition in a transition economy, it is conventionally thought that privatisation should take place first. This wisdom has been challenge d by the Chinese reform experience of the last two decades, which modified the incentive structure of state enterprises and created markets and market competition in the absence of large scale privatisation. China's experienc e, however, raises the question of whether its chosen type of reform is suf ficient to promote competition in a market dominated by public firms. To an swer this, we need to know what kind of markets were created - regional mar kets closed to trade or unified markets with easy access - and whether or n ot improved incentives for state firms have led to competition. This paper investigates these questions on the basis of a survey of both theory and em pirical evidence; and finds that the Chinese reform policies did succeed in stimulating competition among state firms.