Transcript Lecture12 - Stanford University

Economics 216:
The Macroeconomics of Development
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic Development
Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
Lecture 12
Strategies for Transition
from a Planned to a Market Economy
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)
Kwoh-Ting Li Professor of Economic Development
Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
Spring 2000-2001
Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau
The Transition from a Centrally Planned
Economy to a Market Economy
 The
meaning of transition
 Replacement
of administrative allocation by market allocation
 Replacement of administered prices by market prices
 Can
a transition be achieved without creating losers?
Lawrence J. Lau, Stanford University
3
A Centrally Planned Economy
 Enterprises
and households are assigned rights to and
obligations for fixed quantities of commodities at fixed
plan prices
 The rights and obligations are enterprise- and householdspecific
 There are governmental sanctions for failure to fulfil the
obligations under the plan
Lawrence J. Lau, Stanford University
4
The Dual-Track Approach
Adopted in the Chinese Transition (1)
“Plan Track”--the pre-existing central plan remains
and its rights and obligations continue to be enforced by
the government
 The “Market Track”--all markets are instantaneously open,
with prices determined by supply and demand
 Producers are given autonomy and incentive to plan their
production and participate in the market, provided
obligations under the plan are fulfilled
 Consumers are completely free to plan their consumption
and participate in the market, given allocated consumption
goods and fulfillment of labor obligations
 The
Lawrence J. Lau, Stanford University
5
The Dual-Track Approach
Adopted in the Chinese Transition (2)
 Planned
profits and losses (taxes and subsidies) of
enterprises remain the same
 Differences between plan and market prices make feasible
lumpsum transfers
 Continued planned consumer goods deliveries enable the
maintenance of the pre-reform standard of living as a floor
Lawrence J. Lau, Stanford University
6
The Political Economy of the
Dual-Track Approach
one is worse off--“Reform without Losers”
 “Grandfathering” of “Vested Interests”
 Autonomy and incentive on the margin
 Creation of new, reform-oriented “Vested Interests”
 Minimizing opposition and maximizing support
 But: CAN IT BE EFFICIENT?
 No
Lawrence J. Lau, Stanford University
7
A Preview
 Theoretical Analysis--under
what conditions can the
“Dual-Track” approach achieve both efficiency and Paretoimprovement simultaneously?
 Partial
Equilibrium
 General Equilibrium
 Empirical
Evidence--the Chinese experience
Lawrence J. Lau, Stanford University
8
Theoretical Analysis:
Partial Equilibrium
Two Types of Market Liberalization
 Limited
Market Liberalization (price PM and quantity
QM)
 Market
resales of plan-allocated goods by either enterprises or
households are not permitted
 Market purchases by planned suppliers for fulfilling planmandated delivery quotas (e.g. sub-contracting) are not permitted
 Full
Market Liberalization (price PE and quantity QE)
 Market
resales and market purchases for redelivery are all
allowed by a planned supplier or a rationed user, as long as the
rights and obligations under the plan are all fulfilled
 QP
= plan quantity; PP1 = plan price (below PE); and PP2
= plan price (above PE)
Lawrence J. Lau, Stanford University
10
Interpretation of the Plan-Allocated Delivery
Quotas under Full Market Liberalization
 A put
option on the part of the planned supplier to sell
fixed quantities at the plan price to the rationed users
 A call option on the part of the rationed user to buy fixed
quantities at the plan price from the planned suppliers
 Since both options are exercisable at the same fixed plan
price, at most one of the options can have positive value at
market equilibrium
 These options can be “bought and sold” in lieu of the
physical deliveries
Lawrence J. Lau, Stanford University
11
Assumptions of the Model
 A closed
economy
 Feasibility of the original plan
 Continued enforcement of the plan track
 Profit and utility maximization by the economic agents
 Full liberalization of the market track
Lawrence J. Lau, Stanford University
12
Two Cases
 QP,
the plan quantity, is less than QE, the market
equilibrium quantity
 QP, the plan quantity, is greater than QE, the market
equilibrium quantity
Lawrence J. Lau, Stanford University
13
Efficiency in Demand Rationing and Supply
Planning
 Efficient
demand rationing implies that the rationed goods
are allocated to the most deserving users, that is, those
whose willingness to pay is the highest (marginal utility or
marginal productivity is the highest)
 The demand curve is the aggregation of the willingness to
pay of the potential users
 Efficient supply planning implies that the production is
assigned to the most efficient producers, that is, those
whose marginal costs are the lowest
 The supply curve is the aggregation of the marginal costs
of the potential producers
Lawrence J. Lau, Stanford University
14
Efficient Rationed Demand and
Efficient Planned Supply
Figure 1: Efficient Rationed Demand and Efficient Planned Supply
Price
A
Rationed Demand
Total Supply
B, H
P2
P
C'
G'
E
E
P
C
G
Total Demand
P1
P
D, I
Planned Supply
F
Q
P
Q
E
Lawrence J. Lau, Stanford University
Quantity
15
Inefficient Rationed Demand and
Efficient Planned Supply
Figure 2: Inefficient Rationed Demand and Efficient Planned Supply
Price
A
Total Supply
Rationed Demand
B
P2
P
G'
C'
E
E
P
G
C
Total Demand
P1
P
D, I
Planned Supply
F
H
Q
P
Q
E
Lawrence J. Lau, Stanford University
Quantity
16
Inefficient Rationed Demand and Efficient
Planned Supply: Limited Market Liberalization
Price
Figure 3: Residual Demand and Supply:
Inefficient Rationed Demand and Efficient Planned Supply
Residual Supply
M
P
Residual Demand
Q
M
Quantity
Lawrence J. Lau, Stanford University
17
QP + QM> QE:
Over-Production under Limited Liberalization
 If
PM<PE, then every potential user with a willingness to
pay greater than or equal to PE is an actual user
 There may be actual users whose willingness to pay is less
than PE
 Thus, QP + QM> QE
 If PM>PE, then every potential supplier with a marginal
cost less than or equal to PE is an actual supplier
 There may be actual suppliers whose marginal costs are
greater than PE
 Thus, QP + QM> QE
Lawrence J. Lau, Stanford University
18
PM> PE under Efficient Planned Supply
 Under
efficient planned supply, the actual total supply in
the economy will be produced by the suppliers with the
lowest marginal costs
 Thus, QP + QM> QE implies PM> PE
Lawrence J. Lau, Stanford University
19
Efficient Rationed Demand and
Inefficient Planned Supply
Figure 4: Efficient Rationed Demand and Inefficient Planned Supply
Price
A
I
Rationed Demand
Total Supply
B, H
P2
P
G'
C'
E
E
P
C
G
Total Demand
P1
P
D
Planned Supply
F
Q
P
Q
E
Lawrence J. Lau, Stanford University
Quantity
20
Efficient Rationed Demand and Inefficient
Planned Supply: Limited Market Liberalization
Price
Figure 5: Residual Demand and Supply:
Efficient Rationed Demand and Inefficient Planned Supply
Residual Supply
M
P
Residual Demand
Q
M
Quantity
Lawrence J. Lau, Stanford University
21
QP + QM> QE:
Over-Production under Limited Liberalization
 If
PM<PE, then every potential user with a willingness to
pay greater than or equal to PE is an actual user
 There may be actual users whose willingness to pay is less
than PE
 Thus, QP + QM> QE
 If PM>PE, then every potential supplier with a marginal
cost less than or equal to PE is an actual supplier
 There may be actual suppliers whose marginal costs are
greater than PE
 Thus, QP + QM> QE
Lawrence J. Lau, Stanford University
22
PM< PE under Efficient Rationed Demand
 Under
efficient rationed demand, the actual total demand
in the economy will be used by the users with the highest
willingness to pay
 Thus, QP + QM> QE implies PM< PE
Lawrence J. Lau, Stanford University
23
Inefficient Rationed Demand and Inefficient
Planned Supply
Figure 6: Inefficient Rationed Demand and Inefficient Planned Supply
Price
A
I
Total Supply
Rationed Demand
B
P2
P
C'
G'
E
E
P
C
G
P1
Total Demand
P
D
Planned Supply
H
F
Q
P
Q
E
Lawrence J. Lau, Stanford University
Quantity
24
Inefficient Rationed Demand and Inefficient
Planned Supply: Limited Market Liberalization
Price
Figure 7: Residual Demand and Supply:
Inefficient Rationed Demand and Inefficient Planned Supply
Residual Supply
M
P
Residual Demand
Q
M
Lawrence J. Lau, Stanford University
Quantity
25
QP + QM> QE:
Over-Production under Limited Liberalization
 If
PM<PE, then every potential user with a willingness to
pay greater than or equal to PE is an actual user
 There may be actual users whose willingness to pay is less
than PE
 Thus, QP + QM> QE
 If PM>PE, then every potential supplier with a marginal
cost less than or equal to PE is an actual supplier
 There may be actual suppliers whose marginal costs are
greater than PE
 Thus, QP + QM> QE
Lawrence J. Lau, Stanford University
26
Plan Quantity < Market Equilibrium Quantity
Proposition 1:
 (1)
The combined output of the plan and market tracks
under limited liberalization of the market track is greater
than or equal to the fully liberalized market equilibrium
quantity; and
 (2) The market equilibrium price under limited
liberalization is greater (respectively, less) than or equal to
the market equilibrium price under full liberalization of the
market track if planned supply (respectively, rationed
demand) is efficient.
Lawrence J. Lau, Stanford University
27
Plan Quantity < Market Equilibrium Quantity
Proposition 2:
 Independently
of the initial conditions concerning the plan
price and the degree of efficiency of rationed demand and
planned supply:
 (1) The dual-track approach with either limited or full
liberalization of the market track is Pareto-improving; and
 (2) The dual-track approach with full liberalization of the
market track achieves full economic efficiency.
Lawrence J. Lau, Stanford University
28
Inefficient Rationed Demand and Inefficient
Planned Supply:PlanQuantity>MarketQuantity
Figure 8: Inefficient Rationed Demand and Inefficient Planned Supply:
The Case of Plan Quantity Greater Than Market Equilibrium Quantity
Price
A
I
Rationed Demand
Total Supply
C'
P2
P
D
G'
E
E
P
G
B
P1
P
C
Total Demand
Planned Supply
H
F
Q
E
Lawrence J. Lau, Stanford University
Q
P
Quantity
29
Inefficient Rationed Demand and Inefficient
Planned Supply:PlanQuantity>MarketQuantity
Price
Figure 9: Residual Demand and Supply:
The Case of Plan Quantity Greater Than Market Equilibrium Quantity
Residual Supply
M
P
Residual Demand
Q
M
Quantity
Lawrence J. Lau, Stanford University
30
Efficient Rationed Demand and Efficient Planned Supply: Plan Quantity>Market Quantity
Figure 10: Efficient Rationed Demand and Efficient Planned Supply:
The Case of Plan Quantity Greater Than Market Equilibrium Quantity
Price
A
Rationed Demand
Total Supply
P2
D, I
P
G'
C'
E
E
P
G
C
B, H
P1
P
Total Demand
Planned Supply
F
Q
E
Lawrence J. Lau, Stanford University
Q
P
Quantity
31
Plan Quantity > Market Equilibrium Quantity
Proposition 3:
 Independently
of the initial conditions concerning the plan
prices and the degree of efficiency of rationed demand and
planned supply:
 (1) The dual-track approach with limited or full
liberalization is always Pareto-improving; and
 (2) The dual-track approach with full liberalization
achieves efficiency if the rights and obligations under the
plan are enforced in terms of the rents.
Lawrence J. Lau, Stanford University
32
Plan Quantity > Market Equilibrium Quantity:
Efficiency Achieved through Payment of Rents

If PP1 is less than PE, then all planned suppliers with marginal costs
above PE will have an incentive to pay off rationed users with
willingness to pay below PE with a payment equal to PE-PP1




The potential loss to these planned suppliers from physical delivery exceeds
PE-PP1
The potential gain to these rationed users from accepting physical delivery is
less than PE-PP1
Thus, the planned suppliers with marginal cost above PE should try
to purchase the call options in the market at price PE-PP1; the
rationed users with willingness to pay below PE should try to sell
their call options in the market at price PE-PP1
Both groups are better off then if physical delivery is effected
Lawrence J. Lau, Stanford University
33
Feasibility of the Original Plan
 (1)
The production plan for each producer is feasible;
 (2) The consumption plan for each consumer is feasible;
 (3) Material balance holds for the economy as a whole; and
 (4) The consumption plan for each consumer is affordable
at the plan prices.
Lawrence J. Lau, Stanford University
34
Continued Enforcement of the Plan Track
 No
different from contract enforcement in a market
economy
 Focus of enforcement shifted from total physical
production to inter-enterprise deliveries
 Pre-existing rents can be protected without the
enforcement of physical deliveries
 Enforcement against consumers may be difficult
 Credibility of state enforcement is crucial
Lawrence J. Lau, Stanford University
35
Full Market Liberalization is Necessary for Full
Economic Efficiency
 Under
the “Dual-Track” approach, full market
liberalization is necessary at the outset to assure both
Pareto-improvement and efficiency
 A sequential approach of implementing first limited market
liberalization and then full market liberalization does not
possess the Pareto-improvement property
Lawrence J. Lau, Stanford University
36
Applicability to the Chinese Economy
 Feasibility
of the original plan
 Credibility of continued enforcement
 “Contract responsibility system”
 Full market liberalization
Lawrence J. Lau, Stanford University
37
Theoretical Analysis:
General Equilibrium
The Model
l
goods
 m producers with production set Yi
 n consumers with consumption set Xj
 lth good is leisure; consumers have only leisure
endowment
Lawrence J. Lau, Stanford University
39
The Status Quo
a
national production plan v = (v1, ..., vm)
 a national consumption plan c = (c1, ..., cn)
 q=(q1, ..., ql) the plan price
 An economy under central planning is characterized by (v,
c, q)
Lawrence J. Lau, Stanford University
40
Feasibility of the Original Plan
 (i)
The production plan for each producer is feasible
 (ii) The consumption plan for each consumer is feasible
 (iii) Material balance holds in the aggregate; and
 (iv) The consumption plan for each consumer is affordable
at the plan prices
Lawrence J. Lau, Stanford University
41
The Big-Bang Strategy
 The
central plan is abolished
 All markets are instantaneously open
 Producers are completely free to plan their production
 Consumers are completely free to plan their consumption
Lawrence J. Lau, Stanford University
42
The Openness of All Markets
 Both
the Big-Bang and the Dual-Track strategies require
that all markets are open for economic efficiency
 In particular, market resales of plan-allocated inputs and
consumption goods, and market purchases of outputs for
re-delivery are allowed
 There are two prices for each good, PP, the plan price and
PE, the market price
Lawrence J. Lau, Stanford University
43
Efficiency of a Dual-Track Equilibrium
 A Dual-Track
Competitive Equilibrium is Efficient
Lawrence J. Lau, Stanford University
44
Physical Implementability
 What
happens if the equilibrium aggregate gross output is
less than the plan aggregate gross output for at least one
good?
 Simultaneous physical delivery then becomes impossible
 Recycling through the market with (infinite) subdivisions
of the plan period provides a solution
Lawrence J. Lau, Stanford University
45
Pareto-Superiority of a Dual-Track Equilibrium
 A Dual-Track
Competitive Equilibrium is ParetoImproving, by construction
Lawrence J. Lau, Stanford University
46
The Dual-Track Strategy
 Combines
plan and market
 “Contract Responsibility” system
 Autonomy and incentive on the margin
 Efficiency achieved immediately
 Reliance on existing institutions and Information
Lawrence J. Lau, Stanford University
47
Is Chinese Economic Reform Gradualist?
 No!
Efficiency is instantaneously achieved as if under a
“Big Bang” reform
 Efficiency is achieved because both the prices and
quantities of goods allocated within the plan are fixed
 Chinese economic reform appears gradualist because the
population is protected from shock (pain)
Lawrence J. Lau, Stanford University
48
The Importance of the Physical
Implementability Constraint
 A “shortage”
economy under the Plan implies that
equilibrium aggregate gross output is likely to exceed plan
aggregate gross output
 Economic growth is also likely to increase the equilibrium
aggregate gross output through its effects on the
intermediate and consumption demands over time
Lawrence J. Lau, Stanford University
49
The Role of State Power
 Enforcement
of contracts
 Credibility of the state, and expectations thereof, affect
enterprise (and household) behavior, and hence compliance
with the State Plan (post reform)
 Multiple equilibria (outcomes) possible, depending on
credibility of the state
Lawrence J. Lau, Stanford University
50
Desirable Features of the “Dual-Track”
Approach: Pareto-Improvement
 The
“Dual-Track” approach minimizes political opposition
to reform ex ante and maximizes political opposition to
reversal of reform ex post
Lawrence J. Lau, Stanford University
51
Desirable Features: Minimal Additional
Informational and Institutional Requirements
“Dual-Track” approach utilizes the existing
information contained in the original plan and does not
require new information for the implementation of the
implicit compensatory scheme
 The “Dual-Track” approach can be implemented by
enforcing the original plan through existing institutions
(e.g., the state planning commission). No new institutions
(e.g., a national revenue service, or a social welfare
agency) are necessary
 The
Lawrence J. Lau, Stanford University
52
The Chinese Experience
The Chinese Economy Today (1)






East Asia is the fastest-growing region in the world over the past two
decades, the East Asian currency crisis of 1997-1998
notwithstanding
China is the fastest growing country in East Asia—10% p.a. since
beginning of economic reform (1979)
China survived the East Asian currency crisis relatively unscathed
China is one of the very few socialist countries that have made a
successful economic transition from a centrally planned to a market
economy--the rate of interest (the price of money) and the exchange
rate are the only prices that are still administratively determined
The private (non-state) sector accounts for more than 60% of GDP in
2000
China is no longer a “shortage” economy--insufficient aggregate
Lawrence J. Lau, Stanford University
54
demand is a real possibility
The Chinese Economy Today (2)
1979
2000
US$ (2000 prices)
Real GDP
176 bill.
1.08 trill.
Real GDP per capita182860
Lawrence J. Lau, Stanford University
55
The Chinese Economy Today (3)
U.S.
China
US$ (current prices)
2000 GDP
9.962 trill. 1.08 trill.
2000 GDP per capita
36,165
860
Lawrence J. Lau, Stanford University
56
The Chinese Economic Reform
(1979-the present)
 The
Open Door
 International Trade
 Foreign
Direct Investment
 Marketization
 Goods
Market
 Labor Market
 Foreign Exchange Market
 Housing Market
 Capital Market
Lawrence J. Lau, Stanford University
57
The Chinese Economic Reform
(1979-the present)
 Devolution
of Economic Decision-Making Power (The
Contract Responsibility System)
 Empowering
Provincial and Local Governments
 Professional Management of Enterprises
 Autonomy and Incentive
Lawrence J. Lau, Stanford University
58
The Chinese Economic Reform
(1979-the present)
 Creation
of New, Non-State-Owned Modes of
Organization for Production
 Agriculture--Abolition
of communes; return to a system of
individual cultivators with fixed rents and taxes
 Industry--Emergence of “Township and Village” (T&V)
enterprises; (foreign) joint-venture, foreign and private
enterprises
Lawrence J. Lau, Stanford University
59
Economic Performance:
Pre- and Post-Reform
Average Annual Rates of Growth of Selected Economic Indicators (%)
1952-1979
1979-1998
Pre-Reform
Reform
Real GDP
6.20
9.82
Real GDP/Capita
4.14
8.39
Real Gross Value of:
Agricultural Production
4.33
8.05
Light Industry
7.83
11.30
Heavy Industry
11.37
11.34
Real Personal Consumption
4.99
8.91
Real Consumption/Capita
2.96
7.51
Real Gross Fixed Capital Formation
11.43
11.10
Capital Stock
5.93
9.77
Employment
2.52
2.91
GDP Deflator
0.59
6.51
Retail Price Index
0.80
7.03
Exports (in current US Dollars)
10.98
14.66
Imports (in current US Dollars)
10.27
12.22
Lawrence J. Lau, Stanford University
60
Marketization:
Domestic Prices
 The
prices of all consumer goods and more than 99% of
the producer goods are determined in the market (with the
exception of within plan outputs of coal, natural gas, and
steel)
 Only three agricultural commodities--grains, cotton, and
tobacco--remain under the central plan
 The price of low-grade grain is controlled (subsidized)
 The price of energy is at world market levels
 The
prices of oil and gasoline are freely determined in the market
 China
has been taken off the “non-market economies” list
of the European Union (12/97)
Lawrence J. Lau, Stanford University
61
Marketization:
Foreign Exchange
 Unified
exchange rate since 1/94
 Interbank market in foreign exchange established 4/94
 Current account convertibility since 12/96
 Exporters permitted to retain 15% of foreign exchange
proceeds as of 10/97
 However, full capital account convertibility unlikely in the
near future
Lawrence J. Lau, Stanford University
62
The Growth of the Non-State Sector-Industry
Distribution of Gross Value of Industrial Production by Ownership
1979
1999
Collective
22%
Other Types
24%
State-owned
78%
State-owned
26%
Individual
17%
Lawrence J. Lau, Stanford University
Collective
33%
63
The Growth of Industrial Output by Sector of
Ownership
The Rate of Growth of Industrial Output by Sector of Ownership
60%
Total Industrial Output
State-Owned Enterprises
50%
Non-State Owned Enterprises
40%
30%
20%
10%
0%
1979
1981
1983
1985
1987
1989
1991
Lawrence J. Lau, Stanford University
1993
1995
1997
1999
64
The Growth of Industrial Output of the NonState Sector
70.0
Non-state Owned Enterprises
Township and Village Enterprises
60.0
50.0
Percentage
40.0
30.0
20.0
10.0
0.0
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
-10.0
Lawrence J. Lau, Stanford University
65
The Growth of the Non-State Sector (2)-Retail
Others
Joint-Owned 2.6%
0.0%
Individual
0.2%
The Distribution of Retail Sales by Ownership
1998
1979
Others
25.2%
Collective-Owned
43.1%
State-Owned
20.7%
Collective-Owned
16.6%
State-Owned
54.0%
Individual
37.1%
Joint-Owned
0.6%
Lawrence J. Lau, Stanford University
66
Efficient Utilization of
New Resources
 New
enterprises and new activities are responsible for the
phenomenal economic growth of China
 Little or no privatization of existing enterprises
 Little or no successful restructuring of existing enterprises
Lawrence J. Lau, Stanford University
67
The Dual Tracks in the Grain Markets
Table 1. The Dual Tracks in the Grain Market (million tons)
1978
State procurement 47.8
at plan price
State procurement
at market price
Domestic
304.8
production
Plan procurement/ 0.16
Production
1979
54.0
1980
50.2
1981
52.1
1982
56.2
1983
91.2
1984 1985
102.4 59.6
1986 1987
53.3 56.9
1988
50.5
10.6
17.5
7.6
9.3
32.3
43.8
19.6
42.3
332.1 320.6 325.0 354.5 387.3 407.3 379.1 391.5 403.0 394.1
0.16
0.16
0.16
0.16
0.24
0.25
0.16
Lawrence J. Lau, Stanford University
0.14
0.14
0.13
68
The Dual Tracks
in Agricultural Goods Markets
Table 2. The Dual Tracks in Agricultural Goods Markets (% of output value)
1978
Transactions at 94.4
plan prices
Transactions at 5.6
market prices
1985
37.0
1986
35.0
1987
29.4
1988
24.0
1989
35.5
1990
31.0
63.0
65.0
70.6
76.0
64.5
69.0
Lawrence J. Lau, Stanford University
69
The Dual Tracks in Industrial Goods Markets
Table 3. The Dual Tracks in Industrial Goods Markets
(% of output value)
1978
1985
1990
Transactions at
100.0
64.0
44.6
plan prices
Transactions at
0.0
36.0
55.4
market prices
Lawrence J. Lau, Stanford University
70
The Dual Tracks in Retail Sales
Table 4. The Dual Tracks in Retail Sales (% of sales)
Transactions at
plan prices
Transactions at
market prices
1978
97.0
1985
47.0
1986
35.0
1987
33.7
1988
28.9
1989
31.3
1990
30.0
3.0
53.0
65.0
66.3
71.1
69.7
70.0
Lawrence J. Lau, Stanford University
71
The Dual Tracks in the Labor Market
Table 5. The Dual Tracks in Non-Farm Employment in the State and Non-state Sectors
(million employees)
1978 1983 1985
1988
1989
1990
1991
1992
1993
State
74.51 87.71 89.90 99.84 101.08 103.46 106.64 108.89 109.20
Permanent
74.51 87.14 86.58 89.76 89.18 89.74
90.75 88.31 85.24
Contract
0.00
0.57
3.32
10.08 11.90 13.72
15.89 20.58 23.96
Non-State
48.90 62.10 107.97 138.28 136.49 152.53 159.49 172.28 195.87
Urban
20.63 29.75 38.18 42.83 42.82 43.84
46.04 47.41 50.45
Rural
28.27 32.35 69.79 95.45 93.67 108.69 113.45 124.87 145.42
State
0.60
0.58
0.44
0.38
0.38
0.35
0.34
0.31
0.28
Permanent/Total
Lawrence J. Lau, Stanford University
1994
112.14
83.61
28.53
204.85
56.01
148.84
0.26
72
Examples from the Chinese Experience
 (1)
The agricultural reform
 (2) The industrial reform
 (3) The dual-track price system in urban consumer goods
and services
 (4) The foreign exchange reform
Lawrence J. Lau, Stanford University
73
Examples from the Chinese Experience
Growth of economic activities outside the “Plan”
 (6) Special economic zones and foreign direct investment
 (7) The tax reforms
 (8) The rate of interest on household bank deposits
 (5)
Lawrence J. Lau, Stanford University
74
The Effect of Economic Growth
 Growing
out of the “Plan”
 New resources from high saving rates of between 35 and
40%
 The rise of new enterprises
Lawrence J. Lau, Stanford University
75
Phasing Out the Plan Track-Agriculture
Table 1. Phasing Out the Plan-Track: Agricultural Products (% of output value)
1978
1985
1986
1987
1988
1989
1990
1991
1992
1993
plan price
94.4
37.0
35.0
29.4
24.0
35.5
31.0
22.2
12.5
10.4
guide price
0.0
23.0
21.0
16.8
19.0
24.3
27.0
20.0
5.7
2.1
market price
5.6
40.0
43.7
53.8
57.0
40.4
42.0
57.8
81.8
87.5
Lawrence J. Lau, Stanford University
76
Phasing Out the Plan TrackIndustry
Table 3. Phasing Out the Plan-Track: Industrial Goods (% of output value)
1978
1985
plan
price
100.0
64.0
guide
price
0.0
23.0
market
price
0.0
13.0
1986
1987
1988
1989
1990
1991
1992
1993
60.0
44.6
36.0
18.7
13.8
19.0
18.3
7.5
5.1
36.4
45.7
73.8
81.1
40.0
Lawrence J. Lau, Stanford University
77
Phasing Out the Plan TrackRetail
Table 5. Phasing Out the Plan-Track: Total Retail Sales (% of sales)
plan
price
guide
price
market
price
1978
97.0
1985
47.0
1986
35.0
1987
33.7
1988
28.9
1989
31.3
1990
30.0
1991
20.9
1992
5.9
1993
4.8
0.0
19.0
25.0
28.0
21.8
23.2
25.0
10.3
1.1
1.4
3.0
34.0
40.0
38.3
49.3
45.5
45.0
68.8
93.0
93.8
Lawrence J. Lau, Stanford University
78
Related Literature
 Byrd
(1987, 1989)
 Murphy, Shleifer and Vishny (1992)
 McMillan and Naughton (1992) and Naughton (1995)
Lawrence J. Lau, Stanford University
79
Conclusion:
There Can Be Reform Without Losers!
 Reform
is distinct from redistribution--new value is
created--a positive sum rather than a zero sum game
 Economic reforms without losers are possible--The “DualTrack” approach allows both economic efficiency and
Pareto-improvement to be simultaneously attained
 Efficiency and equity are compatible
 Feasibility of the original plan and credibility of state
enforcement are essential
Lawrence J. Lau, Stanford University
80