Dual Track Reforms: With and Without Losers



6 Conclusions

The remarkable success of China’s transition from a centrally planned to a market economy
raises the question of the extent to which the lessons from the Chinese experience can be
applied elsewhere. In this paper, we have addressed this issue by examining the broader
implementability of the dual-track approach to market liberalization. We begin our analysis
with a careful definition of “elsewhere”, that is economies where policy interventions do not
completely dictate prices and quantities and market signals continue to play a role. In this
setting we have argued that a dynamic perspective should be taken to evaluate the welfare
implications of a dual-track liberalization.

Extending the static analysis carried out by Lau, Qian, and Roland (2000) to a simple
two-period model, we have shown that a dual-track liberalization can remain both efficiency-
enhancing and Pareto-improving from a dynamic perspective when the initial intervention
involves both price-setting as well as quantity restrictions. We have also learned that, when
the original policy involves a single intervention, dual track liberalization loses its appeal
and might even lead to the exacerbation of the inefficiencies present in the status quo. Thus,
our analysis offers some important lessons to policy makers interested in reforms without
losers. A dual track approach can be effective as long as the policy change is implemented
as a surprise.
9

When this is not possible and the status quo does not involve the government’s control
of both prices and quantities, a policy maker will need to credibly commit himself to not
implementing a dual track reform.

It is worth highlighting that our analysis does not contradict the conclusion of Lau, Qian,
and Roland (2000). In fact, our discussion allows us to identify one of the key factors in
the success of the Chinese reforms. That is, China began as a centrally planned economy,
where the planning authority completely controlled prices and quantities, thus eliminating
any possibility for agents to react to the forthcoming reform. Accounting for this response
becomes instead crucial when a dual track reform is carried out in a market economy.

9Equivalently, the dual track approach could also be effective if the contract to be enforced is one signed
in the distant past, so that agents are not able to strategically react to the announced policy change. Of
course, enforcing old contracts presents additional difficulties - i.e. transactions records may not be readily
available - and at the same time transactions carried out in the distant past may not reflect agents’ current
preferences or cost conditions.

15



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