Working Paper: CEPR ID: DP1798
Authors: Lawrence J. Lau; Yingyi Qian; Gerard Roland
Abstract: 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.
Keywords: dual-track; price liberalization; Pareto-improving economic reforms; political restraints; China transition
JEL Codes: D50; D60; P21; P22; P41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dual-track approach (E63) | efficient Pareto-improving economic reform (D61) |
| enforcement of the plan track (K40) | preservation of rents (R21) |
| plan track (R14) | implicit lump-sum transfers to compensate potential losers (F16) |
| introduction of the market track (D40) | economic agents better off (D89) |
| plan track (R14) | protection for those who might lose from the market liberalization (G18) |
| dual-track approach (E63) | minimizes political opposition to reform (D72) |
| dual-track approach (E63) | maximizes likelihood of successful economic transition (P21) |