DP1798 Reform Without Losers: An Interpretation of China's Dual-Track Approach to Transition

Author(s): Lawrence J Lau, Yingyi Qian, Gérard Roland
Publication Date: March 1998
Keyword(s): China, Dual-track price liberalization, Pareto-improving economic reforms, political restraints, Transition
JEL(s): D50, D60, P21, P22, P41
Programme Areas: Transition Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1798

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.