The Effects of Reforming the Chinese Dual-Track Price System

trade excess output at market prices; but food was still allocated to urban res-
idents at a low price by the plan-track system. This contributed, during the
first half of 1980s, to an enormous increase in the government’s budget deficit.¹¹
To alleviate this problem, in 1985 the procurement system was switched from a
mandatory purchase quota system to a voluntary contract procurement system (in
effect reducing x), with the aim of encouraging farmers to sell more products in
the free market. This switch led to substantial inflation of the average food price
P, and consumer price inflation rose steadily from 8.8% in 1985 to 17.8% in 1989
(State Statistical Bureau, 2003, p. 313).¹²

2.3 Welfare

We have seen how a change in the plan-track price affects the market equilibrium
and CPI. The CPI is the price that should be used for calculating the various
price indices in the economy, and hence the rate of inflation. However, as argued
in Bennett and Dixon (1995, 1996), if we are interested in household behaviour
the most relevant price is the marginal price, which under DTP is the market price
p. Furthermore, using the indirect utility function, it plays an important role in
¹¹According to Gang (1994) the budget deficit grew by 100%, 99.1% and 284.3% in 1983,
1985 and 1988 respectively. As economic reform in urban areas only began in 1986, this increase
in the government deficit was mainly from the rise in procurement price and investment in rural
areas.

¹²By 1990, a national trading centre for grains was established and agricultural wholesale
markets were developed throughout the country, symbolically ending the dual track system for
agricultural products in China (Jaggi et al., 1996).

15

<<   14   15   16   17   18   19   20   >>

More intriguing information