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A Tale of Two Reforms

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  • Wei Li

    (Duke University)

Abstract

I present a unified theoretical framework that attributes output collapse to price liberalization and decentralization of the formerly integrated monopolistic industrial structure in the former Soviet bloc, and output expansion in China to marginal marketization and intramarginal regulation. In the model economy, all industries are interdependent in that they rely on each other for intermediate inputs. This circular dependence in the presence of imperfect competition creates a pecuniary externality in the sense that a price increase or an output reduction by one industry raises other industries' costs and reduces their intermediate demands. Under central planning, the industries are fully integrated, allowing the state to internalize the externality. Big bang reform decentralizes the state monopolized industrial structure. Price or quantity competition among decentralized, concentrated, and circularly dependent industries leads, in a Nash equilibrium, to reduced output, lower profits, and higher prices. The controlled reform in China, however, regulates enterprises intramarginally by forcing them to fulfill planned output quotas at planned prices, and liberalizes only marginally by allowing them to sell above-the-quota outputs at market prices. While the intramarginal regulation reduces the effect of the externality, the marginal liberalization encourages enterprises to produce beyond the quotas. Enterprise-level panel data from China are used to test the theory.

Suggested Citation

  • Wei Li, 1995. "A Tale of Two Reforms," Development and Comp Systems 9501001, EconWPA.
  • Handle: RePEc:wpa:wuwpdc:9501001
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    References listed on IDEAS

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    1. Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
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    Cited by:

    1. Jan Svejnar, 2006. "Strategies for growth : Central and Eastern Europe," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 205-233.
    2. Lawrence J. Lau & Yingyi Qian & Gerard Roland, 2000. "Reform without Losers: An Interpretation of China's Dual-Track Approach to Transition," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 120-143, February.
    3. da Rocha, Bruno T., 2015. "Let the markets begin: The interplay between free prices and privatisation in early transition," Journal of Comparative Economics, Elsevier, vol. 43(2), pages 350-370.
    4. Jozef Konings & Patrick Van Cayseele & Frederic Warzynski, 2005. "The Effects of Privatization and Competitive Pressure on Firms' Price-Cost Margins: Micro Evidence from Emerging Economies," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 124-134, February.
    5. Acharya Sanjaya & Signorelli Marcello & Vojinovic Borut & Oplotnik Žan Jan, 2013. "Alternative Approach to Economic Restructuring to Benefit the Poor – Sam Multipliers Analysis as Alternative Approach," Scientific Annals of Economics and Business, De Gruyter Open, vol. 60(1), pages 182-201, July.
    6. Jan Svejnar, 2002. "Transition Economies: Performance and Challenges," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 3-28, Winter.
    7. Zhiyong Liu & Yue Qiao, 2012. "Abuse of Market Dominance Under China’s 2007 Anti-monopoly Law: A Preliminary Assessment," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 41(1), pages 77-107, August.
    8. Svejnar, Jan, 2007. "China in Light of the Performance of Central and East European Economies," IZA Discussion Papers 2791, Institute for the Study of Labor (IZA).
    9. Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics.
    10. Nhat Le, 2003. "Contingent and ambiguous property rights: The Case of China's Reform," International and Development Economics Working Papers idec03-4, International and Development Economics.

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    JEL classification:

    • O - Economic Development, Innovation, Technological Change, and Growth
    • P - Economic Systems

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