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Reform without Losers: An Interpretation of China's Dual-Track Approach to Transition

  • Lawrence J. Lau
  • Yingyi Qian
  • Gerard Roland

We develop a simple model to analyse the ‘dual-track’ approach to transition to a market economy as a mechanism for implementing efficient Pareto-improving economic reform, that is, reform achieving efficiency without creating losers. The approach, based on the continued enforcement of the existing plan while simultaneously liberalizing the market, can be understood as a method for making implicit lump-sum transfers to compensate potential losers of the reform. The model highlights the critical role of enforcement of the plan and full liberalization of the market track. We examine how the dual-track approach has worked in product and labour markets in China’s economic reform in practice.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 108 (2000)
Issue (Month): 1 (February)
Pages: 120-143

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Handle: RePEc:ucp:jpolec:v:108:y:2001:i:1:p:120-143
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  1. Sachs, J.D. & Woo, W.T., 1994. "Structural Factors in the Economic Reforms of China, Eastern Europe and the Former Soviet Union," Papers 94-01, California Davis - Institute of Governmental Affairs.
  2. Gérard Roland & Thierry Verdier, 1999. "Transition and the output fall," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 1-28, March.
  3. Olivier Blanchard & Michael Kremer, 1997. "Disorganization," William Davidson Institute Working Papers Series 38, William Davidson Institute at the University of Michigan.
  4. McMillan, John & Naughton, Barry, 1992. "How to Reform a Planned Economy: Lessons from China," Oxford Review of Economic Policy, Oxford University Press, vol. 8(1), pages 130-43, Spring.
  5. 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.
  6. Wei Li, 1999. "A Tale of Two Reforms," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 120-136, Spring.
  7. Yuanzheng Cao & Yingyi Qian & Barry R. Weingast, 1999. "From federalism, Chinese style to privatization, Chinese style," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 103-131, March.
  8. Sicular, Terry, 1988. "Plan and Market in China's Agricultural Commerce," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 283-307, April.
  9. Groves, Theodore, et al, 1994. "Autonomy and Incentives in Chinese State Enterprises," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 183-209, February.
  10. 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.
  11. Lin, Justin Yifu, 1992. "Rural Reforms and Agricultural Growth in China," American Economic Review, American Economic Association, vol. 82(1), pages 34-51, March.
  12. Jinglian, Wu & Renwei, Zhao, 1987. "The dual pricing system in China's industry," Journal of Comparative Economics, Elsevier, vol. 11(3), pages 309-318, September.
  13. Justin Yifu Lin, Fang Cai, and Zhou Li, 1996. "The Lessons of China's Transition to a Market Economy," Cato Journal, Cato Journal, Cato Institute, vol. 16(2), pages 201-231, Fall.
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