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

  • Lawrence J. Lau
  • Yingyi Qian
  • Gerard Roland

This paper develops a simple model to analyze the "dual-track" approach to market liberalization 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 roles of enforcement of the plan for achieving Pareto improvement and full liberalization of the market track for achieving efficiency. We examine how the dual-track approach has worked in product and labor market liberalization in China.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 99010.

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Handle: RePEc:wop:stanec:99010
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  1. Yuanzheng Cao & Yingyi Qian & Barry R. Weingast, 1997. "From Federalism, Chinese Style, to Privatization, Chinese Style," Working Papers 97049, Stanford University, Department of Economics.
  2. Blanchard, O & Kremer, M, 1996. "Disorganization," Working papers 96-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  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. 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.
  5. Lin, Justin Yifu, 1992. "Rural Reforms and Agricultural Growth in China," American Economic Review, American Economic Association, vol. 82(1), pages 34-51, March.
  6. Gerard Roland & Thierry Verdier, 1997. "Transition and the Output Fall," William Davidson Institute Working Papers Series 37, William Davidson Institute at the University of Michigan.
  7. Lau, Lawrence J & Qian, Yingyi & Roland, Gérard, 1997. "Pareto-Improving Economic Reforms through Dual-Track Liberalization," CEPR Discussion Papers 1595, C.E.P.R. Discussion Papers.
  8. 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.
  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. 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.
  11. Wei Li, 1999. "A Tale of Two Reforms," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 120-136, Spring.
  12. 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.
  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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