Dual Track Reforms: With and Without Losers



Dual Track Reforms:

With and Without Losers *

Jiahua Che

Hong Kong University of Science and Technology and William Davidson Institute

Giovanni Facchinit

University of Illinois at Urbana Champaign and University of Milan

November 28, 2005

Abstract

The dual track approach to market liberalization has been widely recognized as the
key to the success of the Chinese economic reform. In this paper we study the effec-
tiveness of this strategy in economic environments where the status quo government
control is
incomplete. We show that in a dynamic context intertemporal arbitrage will
emerge, potentially resulting in efficiency losses and/or adverse distributional effects.
Only when the status quo involves both price and quantity interventions by the gov-
ernment can dual track liberalization maintain its appeal. Our analysis thus suggests
some caution as for the broader applicability of this reform mechanism.

JEL classification: H2, P2, F1

Keywords: Dual Track Liberalization, Intertemporal Arbitrage, Pareto Improving Re-
forms, China

*We would like to thank Dan Bernhardt, Hadi Esfahani, Earl Grinols, Eli Katz, Jan Svejnar, Bart
Taub, Cecilia Testa, Weiyin Zhang, Li-An Zhou and seminar participants at the ERWIT CEPR meeting in
Bern, the Midwest International Economics Meetings in Pittsburgh, SAET VI conference in Rhodes, Beijing
University, the University of Illinois and University of Leipzig for useful comments.

tCorresponding author: Department of Economics, University of Illinois at Urbana-Champaign, 484
Wohlers Hall MC-706, 1206 S. Sixth Street, Champaign, IL 61820, United States. Tel: (217) 265-0644, Fax:
(217)-244-6678. E-mail:
[email protected]. Che can be contacted at Department of Economics, Hong Kong
University of Science and Technology, Clear Water Bay, Hong Kong. Email:
[email protected]



More intriguing information

1. The name is absent
2. Fiscal Rules, Fiscal Institutions, and Fiscal Performance
3. Three Policies to Improve Productivity Growth in Canada
4. Evolving robust and specialized car racing skills
5. Categorial Grammar and Discourse
6. fMRI Investigation of Cortical and Subcortical Networks in the Learning of Abstract and Effector-Specific Representations of Motor Sequences
7. Elicited bid functions in (a)symmetric first-price auctions
8. Restricted Export Flexibility and Risk Management with Options and Futures
9. ALTERNATIVE TRADE POLICIES
10. Modeling industrial location decisions in U.S. counties
11. A simple enquiry on heterogeneous lending rates and lending behaviour
12. CGE modelling of the resources boom in Indonesia and Australia using TERM
13. The name is absent
14. Tax Increment Financing for Optimal Open Space Preservation: an Economic Inquiry
15. The name is absent
16. Implementation of Rule Based Algorithm for Sandhi-Vicheda Of Compound Hindi Words
17. National curriculum assessment: how to make it better
18. The name is absent
19. A THEORETICAL FRAMEWORK FOR EVALUATING SOCIAL WELFARE EFFECTS OF NEW AGRICULTURAL TECHNOLOGY
20. On the job rotation problem