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Dual Track Reforms: With and Without Losers

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  • Jiahua Che

    (Hong Kong University of Science Technology and William Davidson Institute)

  • Giovanni Facchini

    (University of Illinois and University of Milan)

Abstract

The dual track approach to market liberalization has been widely recognized as the key to the success of the Chinese economic reform. In this paper we study the effectiveness of this strategy in economic environments where the status quo government control is incomplete. We show that in a dynamic context intertemporal arbitrage will emerge, potentially resulting in efficiency losses and/or adverse distributional effects. Only when the status quo involves both price and quantity interventions by the government can dual track liberalization maintain its appeal. Our analysis thus suggests some caution as for the broader applicability of this reform mechanism.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 204.

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Date of creation: 15 Jun 2005
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Handle: RePEc:csl:devewp:204

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Keywords: Dual Track Liberalization; Intertemporal Arbitrage; Pareto Improving Reforms; China;

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  1. Lau, Lawrence J. & Qian, Yingyi & Roland, Gerard, 1997. "Pareto-improving economic reforms through dual-track liberalization," Economics Letters, Elsevier, vol. 55(2), pages 285-292, August.
  2. Jiahua Che & Giovanni Facchini, 2004. "Dual Track Liberalization: With and without losers," Econometric Society 2004 Latin American Meetings 123, Econometric Society.
  3. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1992. "The Transition to a Market Economy: Pitfalls of Partial Reform," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 889-906, August.
  4. Joseph Stiglitz, 1998. "Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 3-22, Spring.
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