Nexus between privatization and marketization during transition process: an experimental analysis based on China’s provincial panel data

This paper explores the nexus between privatization and marketization in pursuit of insightful implications about effective privatization/marketization policies, particularly in institutionally underdeveloped countries like China. Our hypothesis is that, given a certain level of institutional development, we can identify causal and dynamic relationships between privatization and marketization. If market expansion facilitates private ownership more easily and rapidly than privatization promotes marketization, transition policy should emphasize market expansion even if the ultimate objective is to privatize the entire economy as extensively as possible. We test this hypothesis with panel data from Chinese provinces to draw implications about a dynamic nexus between privatization and marketization vis-à-vis institutional background. We then develop an illustrative analysis comparing privatization-first versus marketization-first policies to examine their cumulative effects on development of private enterprises and markets in subsequent periods.