The Effects of Reforming the Chinese Dual-Track Price System

1 Introduction

In centrally planned economies, such as China prior to 1978, most prices were
set by the government alongside quantity targets. When the need for reform was
accepted, there arose the question of how to move the economy from planning
towards a market-oriented system. In China, reformers chose to keep the existing
planned economy, but gradually to build up a free market system alongside it. This
was the essence of the Dual Track idea, which was initiated by reform of the price
system, through Dual Track Pricing (DTP). This gradualist approach to economic
reform, which was partly due to the unwillingness of China’s political leaders at
the time to take big risks, was to be rolled out gradually across regions and over a
long period, with time for trial and error. Beginning with the agricultural sector,
DTP became a central part of economic reform in the 1980s, soon being applied to
the industrial sector, and in the 1990s it was extended to across the economy and
is still operative, for example, for foreign currency exchange rates and housing.¹

Among the first analyses of DTP in the Western literature are those of Byrd
(1987) and Sicular (1988), who examine the economic background from which
the two-tier system was born and how the two mechanisms of resource allocation

¹ The government still subsidizes the cost of accommodation for the employees of state-owned
firms. In the extended family the young generation may be buying housing at the market price,
but their parents may be employed by state-owned firms and enjoy the ‘plan track’ subsidy. An
intergenerational household may thus be buying housing at both plan-track and market prices.

<<   1   2   3   4   5   6   >>

More intriguing information