Transcript roland2009l4

Lecture 4. Dual-track
liberalization and its properties.
1. Introduction.
• Price liberalization in China followed a “dualtrack”.
• Plan track: production and prices are frozen at
defined preexisting level (last year’s plan)
• Market track: liberalization at the margin for all
goods with fully free transactions once the plan
obligations are fulfilled. Producers are full
residual claimants of market track.
1. Introduction.
• Dual-track liberalization has particularly
interesting properties as Eastern European
countries did not implement it.
• Can theoretically achieve the same efficiency as
full liberalization if secondary markets (resale)
are allowed.
• Has interesting political economy property not to
create losers but only winners (!)
• Prevents output fall that was associated to price
liberalization.
1. Introduction.
• Household responsibility system was first form of
application of dual-track approach. A fixed quantity of
grain was to be sold to the state procurement agency at
planned prices, a certain quantity of inputs (mainly
chemical fertilizers) at planned prices. Once these
obligations fulfilled, farmers were free to produce, buy
and sell what they wanted.
• Dual-track price liberalization introduced in all industry in
1984.
• For consumers, basic necessities assigned by rationing
before 1979. After liberalization, coupon system still
available until 1979.
• State procurement remained stable over
time despite the increase in total
production (exception of 1983-1984 where
market prices were below state prices).
The dual-track under efficient supply and rationing
P
S
P p'
A
PE
B
C
Pp
D
QP
QE
Q
A case of efficient supply and inefficient rationing
S
S’
P
PL
PE
PP
D’
Q
P
Q
P
D
Q
A case of efficient supply and inefficient rationing
S’
S
S”
P
PL
PE
PP
D’
Q
P
Q
P
D
Q
A case of efficient supply and inefficient rationing
S’
S
S”
P
PL
PE
PP
D’
Q
P
Q
P
D
Q
A case of efficient rationing but inefficient supply
P
S’
S
s
P
E
PL
PP
D’
D
Q
P
Q
P
Q
A case of efficient rationing but inefficient supply
P
S’
S
s
P
E
PL
PP
D’
D
Q
P
Q
P
Q
A case of efficient rationing but inefficient supply
P
S’
S
s
P
E
PL
PP
D’
D
Q
P
Q
P
Q
• Consider the more general case where QP is not
necessarily allocated between users with highest
willingness to pay and producers with lowest marginal
costs.
• Consider first the case of limited liberalization (without
secondary market). Intuitively, if consumers with
willingness to pay below PE were served under the plan,
higher than efficient demand will drive the market price
upward bringing in inefficient producers. If producers
with marginal cost above PE served the plan, there are
more efficient producers available competing at lower
costs to serve residual demand. This will drive the price
downward which will attract more demand.
• Inefficient rationing and inefficient supply under limited
liberalization will not generally lead to efficiency because
inefficient allocation of planning is not undone and
distorts market allocation.
• Under full liberalization, all inefficient trades of
the plan can be undone. Those who receive
planned goods and have willingness to pay
lower than PE will benefit from reselling the
goods at market price, thereby undoing the
inefficient allocation. Similarly, producers with
marginal costs higher than PE can benefit from
not producing and purchasing the goods at
market price thereby undoing the inefficient
allocation. The rents accruing to those benefiting
from these secondary transactions can seem
morally unjust but they satisfy the Pareto
criterion.
Properties of dual track
liberalization
• Dual track liberalization is a way to enforce
efficient reform without creating losers.
• It has no special informational requirements (no
new informational asymmetry problem to be
solved)
• It does not require new institutions but uses the
existing institutions of the plan.
• Can be seen as a transitional institution itself
designed to disappear as the importance of the
plan fades away.
Dual track liberalization and the
output fall.
• Models of the output fall (Blanchard and Kremer,
1997, Roland and Verdier, 2000) emphasize a
similar mechanism: new trades from
liberalization do not compensate disorganization
related to breakdown of existing production
chains.
• Dual track liberalization is an institutional means
to prevent disorganization. Enterprises are given
freedom to search for new business partners but
cannot abandon their contractual obligations
under the plan.
Wider applications of dual-track
liberalization.
• Outside the context of China or even
transition, the same idea can be applied in
other contexts.
• Pension reform…
• Labor markets ….
• North Korea?