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Economics 216: The Macroeconomics of Development Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA 94305-6072, U.S.A. Spring 2000-2001 Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau Lecture 12 Strategies for Transition from a Planned to a Market Economy Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA 94305-6072, U.S.A. Spring 2000-2001 Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau The Transition from a Centrally Planned Economy to a Market Economy The meaning of transition Replacement of administrative allocation by market allocation Replacement of administered prices by market prices Can a transition be achieved without creating losers? Lawrence J. Lau, Stanford University 3 A Centrally Planned Economy Enterprises and households are assigned rights to and obligations for fixed quantities of commodities at fixed plan prices The rights and obligations are enterprise- and householdspecific There are governmental sanctions for failure to fulfil the obligations under the plan Lawrence J. Lau, Stanford University 4 The Dual-Track Approach Adopted in the Chinese Transition (1) “Plan Track”--the pre-existing central plan remains and its rights and obligations continue to be enforced by the government The “Market Track”--all markets are instantaneously open, with prices determined by supply and demand Producers are given autonomy and incentive to plan their production and participate in the market, provided obligations under the plan are fulfilled Consumers are completely free to plan their consumption and participate in the market, given allocated consumption goods and fulfillment of labor obligations The Lawrence J. Lau, Stanford University 5 The Dual-Track Approach Adopted in the Chinese Transition (2) Planned profits and losses (taxes and subsidies) of enterprises remain the same Differences between plan and market prices make feasible lumpsum transfers Continued planned consumer goods deliveries enable the maintenance of the pre-reform standard of living as a floor Lawrence J. Lau, Stanford University 6 The Political Economy of the Dual-Track Approach one is worse off--“Reform without Losers” “Grandfathering” of “Vested Interests” Autonomy and incentive on the margin Creation of new, reform-oriented “Vested Interests” Minimizing opposition and maximizing support But: CAN IT BE EFFICIENT? No Lawrence J. Lau, Stanford University 7 A Preview Theoretical Analysis--under what conditions can the “Dual-Track” approach achieve both efficiency and Paretoimprovement simultaneously? Partial Equilibrium General Equilibrium Empirical Evidence--the Chinese experience Lawrence J. Lau, Stanford University 8 Theoretical Analysis: Partial Equilibrium Two Types of Market Liberalization Limited Market Liberalization (price PM and quantity QM) Market resales of plan-allocated goods by either enterprises or households are not permitted Market purchases by planned suppliers for fulfilling planmandated delivery quotas (e.g. sub-contracting) are not permitted Full Market Liberalization (price PE and quantity QE) Market resales and market purchases for redelivery are all allowed by a planned supplier or a rationed user, as long as the rights and obligations under the plan are all fulfilled QP = plan quantity; PP1 = plan price (below PE); and PP2 = plan price (above PE) Lawrence J. Lau, Stanford University 10 Interpretation of the Plan-Allocated Delivery Quotas under Full Market Liberalization A put option on the part of the planned supplier to sell fixed quantities at the plan price to the rationed users A call option on the part of the rationed user to buy fixed quantities at the plan price from the planned suppliers Since both options are exercisable at the same fixed plan price, at most one of the options can have positive value at market equilibrium These options can be “bought and sold” in lieu of the physical deliveries Lawrence J. Lau, Stanford University 11 Assumptions of the Model A closed economy Feasibility of the original plan Continued enforcement of the plan track Profit and utility maximization by the economic agents Full liberalization of the market track Lawrence J. Lau, Stanford University 12 Two Cases QP, the plan quantity, is less than QE, the market equilibrium quantity QP, the plan quantity, is greater than QE, the market equilibrium quantity Lawrence J. Lau, Stanford University 13 Efficiency in Demand Rationing and Supply Planning Efficient demand rationing implies that the rationed goods are allocated to the most deserving users, that is, those whose willingness to pay is the highest (marginal utility or marginal productivity is the highest) The demand curve is the aggregation of the willingness to pay of the potential users Efficient supply planning implies that the production is assigned to the most efficient producers, that is, those whose marginal costs are the lowest The supply curve is the aggregation of the marginal costs of the potential producers Lawrence J. Lau, Stanford University 14 Efficient Rationed Demand and Efficient Planned Supply Figure 1: Efficient Rationed Demand and Efficient Planned Supply Price A Rationed Demand Total Supply B, H P2 P C' G' E E P C G Total Demand P1 P D, I Planned Supply F P Q Q E Lawrence J. Lau, Stanford University Quantity 15 Inefficient Rationed Demand and Efficient Planned Supply Figure 2: Inefficient Rationed Demand and Efficient Planned Supply Price A Total Supply Rationed Demand B P2 P G' C' E E P G C Total Demand P1 P D, I Planned Supply F H Q P Q E Lawrence J. Lau, Stanford University Quantity 16 Inefficient Rationed Demand and Efficient Planned Supply: Limited Market Liberalization Price Figure 3: Residual Demand and Supply: Inefficient Rationed Demand and Efficient Planned Supply Residual Supply M P Residual Demand Q M Quantity Lawrence J. Lau, Stanford University 17 QP + QM> QE: Over-Production under Limited Liberalization If PM<PE, then every potential user with a willingness to pay greater than or equal to PE is an actual user There may be actual users whose willingness to pay is less than PE Thus, QP + QM> QE If PM>PE, then every potential supplier with a marginal cost less than or equal to PE is an actual supplier There may be actual suppliers whose marginal costs are greater than PE Thus, QP + QM> QE Lawrence J. Lau, Stanford University 18 PM> PE under Efficient Planned Supply Under efficient planned supply, the actual total supply in the economy will be produced by the suppliers with the lowest marginal costs Thus, QP + QM> QE implies PM> PE Lawrence J. Lau, Stanford University 19 Efficient Rationed Demand and Inefficient Planned Supply Figure 4: Efficient Rationed Demand and Inefficient Planned Supply Price A I Rationed Demand Total Supply B, H P2 P G' C' E E P C G Total Demand P1 P D Planned Supply F Q P Q E Lawrence J. Lau, Stanford University Quantity 20 Efficient Rationed Demand and Inefficient Planned Supply: Limited Market Liberalization Price Figure 5: Residual Demand and Supply: Efficient Rationed Demand and Inefficient Planned Supply Residual Supply M P Residual Demand Q M Quantity Lawrence J. Lau, Stanford University 21 QP + QM> QE: Over-Production under Limited Liberalization If PM<PE, then every potential user with a willingness to pay greater than or equal to PE is an actual user There may be actual users whose willingness to pay is less than PE Thus, QP + QM> QE If PM>PE, then every potential supplier with a marginal cost less than or equal to PE is an actual supplier There may be actual suppliers whose marginal costs are greater than PE Thus, QP + QM> QE Lawrence J. Lau, Stanford University 22 PM< PE under Efficient Rationed Demand Under efficient rationed demand, the actual total demand in the economy will be used by the users with the highest willingness to pay Thus, QP + QM> QE implies PM< PE Lawrence J. Lau, Stanford University 23 Inefficient Rationed Demand and Inefficient Planned Supply Figure 6: Inefficient Rationed Demand and Inefficient Planned Supply Price A I Total Supply Rationed Demand B P2 P C' G' E E P C G P1 Total Demand P D Planned Supply H F Q P Q E Lawrence J. Lau, Stanford University Quantity 24 Inefficient Rationed Demand and Inefficient Planned Supply: Limited Market Liberalization Price Figure 7: Residual Demand and Supply: Inefficient Rationed Demand and Inefficient Planned Supply Residual Supply M P Residual Demand Q M Lawrence J. Lau, Stanford University Quantity 25 QP + QM> QE: Over-Production under Limited Liberalization If PM<PE, then every potential user with a willingness to pay greater than or equal to PE is an actual user There may be actual users whose willingness to pay is less than PE Thus, QP + QM> QE If PM>PE, then every potential supplier with a marginal cost less than or equal to PE is an actual supplier There may be actual suppliers whose marginal costs are greater than PE Thus, QP + QM> QE Lawrence J. Lau, Stanford University 26 Plan Quantity < Market Equilibrium Quantity Proposition 1: (1) The combined output of the plan and market tracks under limited liberalization of the market track is greater than or equal to the fully liberalized market equilibrium quantity; and (2) The market equilibrium price under limited liberalization is greater (respectively, less) than or equal to the market equilibrium price under full liberalization of the market track if planned supply (respectively, rationed demand) is efficient. Lawrence J. Lau, Stanford University 27 Plan Quantity < Market Equilibrium Quantity Proposition 2: Independently of the initial conditions concerning the plan price and the degree of efficiency of rationed demand and planned supply: (1) The dual-track approach with either limited or full liberalization of the market track is Pareto-improving; and (2) The dual-track approach with full liberalization of the market track achieves full economic efficiency. Lawrence J. Lau, Stanford University 28 Inefficient Rationed Demand and Inefficient Planned Supply:PlanQuantity>MarketQuantity Figure 8: Inefficient Rationed Demand and Inefficient Planned Supply: The Case of Plan Quantity Greater Than Market Equilibrium Quantity Price A I Rationed Demand Total Supply C' P2 P D G' E E P G B P1 P C Total Demand Planned Supply H F Q E Lawrence J. Lau, Stanford University Q P Quantity 29 Inefficient Rationed Demand and Inefficient Planned Supply:PlanQuantity>MarketQuantity Price Figure 9: Residual Demand and Supply: The Case of Plan Quantity Greater Than Market Equilibrium Quantity Residual Supply M P Residual Demand Q M Quantity Lawrence J. Lau, Stanford University 30 Efficient Rationed Demand and Efficient Planned Supply: Plan Quantity>Market Quantity Figure 10: Efficient Rationed Demand and Efficient Planned Supply: The Case of Plan Quantity Greater Than Market Equilibrium Quantity Price A Rationed Demand Total Supply P2 D, I P G' C' E E P G C B, H P1 P Total Demand Planned Supply F Q E Lawrence J. Lau, Stanford University Q P Quantity 31 Plan Quantity > Market Equilibrium Quantity Proposition 3: Independently of the initial conditions concerning the plan prices and the degree of efficiency of rationed demand and planned supply: (1) The dual-track approach with limited or full liberalization is always Pareto-improving; and (2) The dual-track approach with full liberalization achieves efficiency if the rights and obligations under the plan are enforced in terms of the rents. Lawrence J. Lau, Stanford University 32 Plan Quantity > Market Equilibrium Quantity: Efficiency Achieved through Payment of Rents If PP1 is less than PE, then all planned suppliers with marginal costs above PE will have an incentive to pay off rationed users with willingness to pay below PE with a payment equal to PE-PP1 The potential loss to these planned suppliers from physical delivery exceeds PE-PP1 The potential gain to these rationed users from accepting physical delivery is less than PE-PP1 Thus, the planned suppliers with marginal cost above PE should try to purchase the call options in the market at price PE-PP1; the rationed users with willingness to pay below PE should try to sell their call options in the market at price PE-PP1 Both groups are better off then if physical delivery is effected Lawrence J. Lau, Stanford University 33 Feasibility of the Original Plan (1) The production plan for each producer is feasible; (2) The consumption plan for each consumer is feasible; (3) Material balance holds for the economy as a whole; and (4) The consumption plan for each consumer is affordable at the plan prices. Lawrence J. Lau, Stanford University 34 Continued Enforcement of the Plan Track No different from contract enforcement in a market economy Focus of enforcement shifted from total physical production to inter-enterprise deliveries Pre-existing rents can be protected without the enforcement of physical deliveries Enforcement against consumers may be difficult Credibility of state enforcement is crucial Lawrence J. Lau, Stanford University 35 Full Market Liberalization is Necessary for Full Economic Efficiency Under the “Dual-Track” approach, full market liberalization is necessary at the outset to assure both Pareto-improvement and efficiency A sequential approach of implementing first limited market liberalization and then full market liberalization does not possess the Pareto-improvement property Lawrence J. Lau, Stanford University 36 Applicability to the Chinese Economy Feasibility of the original plan Credibility of continued enforcement “Contract responsibility system” Full market liberalization Lawrence J. Lau, Stanford University 37 Theoretical Analysis: General Equilibrium The Model l goods m producers with production set Yi n consumers with consumption set Xj lth good is leisure; consumers have only leisure endowment Lawrence J. Lau, Stanford University 39 The Status Quo a national production plan v = (v1, ..., vm) a national consumption plan c = (c1, ..., cn) q=(q1, ..., ql) the plan price An economy under central planning is characterized by (v, c, q) Lawrence J. Lau, Stanford University 40 Feasibility of the Original Plan (i) The production plan for each producer is feasible (ii) The consumption plan for each consumer is feasible (iii) Material balance holds in the aggregate; and (iv) The consumption plan for each consumer is affordable at the plan prices Lawrence J. Lau, Stanford University 41 The Big-Bang Strategy The central plan is abolished All markets are instantaneously open Producers are completely free to plan their production Consumers are completely free to plan their consumption Lawrence J. Lau, Stanford University 42 The Openness of All Markets Both the Big-Bang and the Dual-Track strategies require that all markets are open for economic efficiency In particular, market resales of plan-allocated inputs and consumption goods, and market purchases of outputs for re-delivery are allowed There are two prices for each good, PP, the plan price and PE, the market price Lawrence J. Lau, Stanford University 43 Efficiency of a Dual-Track Equilibrium A Dual-Track Competitive Equilibrium is Efficient Lawrence J. Lau, Stanford University 44 Physical Implementability What happens if the equilibrium aggregate gross output is less than the plan aggregate gross output for at least one good? Simultaneous physical delivery then becomes impossible Recycling through the market with (infinite) subdivisions of the plan period provides a solution Lawrence J. Lau, Stanford University 45 Pareto-Superiority of a Dual-Track Equilibrium A Dual-Track Competitive Equilibrium is ParetoImproving, by construction Lawrence J. Lau, Stanford University 46 The Dual-Track Strategy Combines plan and market “Contract Responsibility” system Autonomy and incentive on the margin Efficiency achieved immediately Reliance on existing institutions and Information Lawrence J. Lau, Stanford University 47 Is Chinese Economic Reform Gradualist? No! Efficiency is instantaneously achieved as if under a “Big Bang” reform Efficiency is achieved because both the prices and quantities of goods allocated within the plan are fixed Chinese economic reform appears gradualist because the population is protected from shock (pain) Lawrence J. Lau, Stanford University 48 The Importance of the Physical Implementability Constraint A “shortage” economy under the Plan implies that equilibrium aggregate gross output is likely to exceed plan aggregate gross output Economic growth is also likely to increase the equilibrium aggregate gross output through its effects on the intermediate and consumption demands over time Lawrence J. Lau, Stanford University 49 The Role of State Power Enforcement of contracts Credibility of the state, and expectations thereof, affect enterprise (and household) behavior, and hence compliance with the State Plan (post reform) Multiple equilibria (outcomes) possible, depending on credibility of the state Lawrence J. Lau, Stanford University 50 Desirable Features of the “Dual-Track” Approach: Pareto-Improvement The “Dual-Track” approach minimizes political opposition to reform ex ante and maximizes political opposition to reversal of reform ex post Lawrence J. Lau, Stanford University 51 Desirable Features: Minimal Additional Informational and Institutional Requirements “Dual-Track” approach utilizes the existing information contained in the original plan and does not require new information for the implementation of the implicit compensatory scheme The “Dual-Track” approach can be implemented by enforcing the original plan through existing institutions (e.g., the state planning commission). No new institutions (e.g., a national revenue service, or a social welfare agency) are necessary The Lawrence J. Lau, Stanford University 52 The Chinese Experience The Chinese Economy Today (1) East Asia is the fastest-growing region in the world over the past two decades, the East Asian currency crisis of 1997-1998 notwithstanding China is the fastest growing country in East Asia—10% p.a. since beginning of economic reform (1979) China survived the East Asian currency crisis relatively unscathed China is one of the very few socialist countries that have made a successful economic transition from a centrally planned to a market economy--the rate of interest (the price of money) and the exchange rate are the only prices that are still administratively determined The private (non-state) sector accounts for more than 60% of GDP in 2000 China is no longer a “shortage” economy--insufficient aggregate Lawrence J. Lau, Stanford University 54 demand is a real possibility The Chinese Economy Today (2) 1979 2000 US$ (2000 prices) Real GDP 176 bill. 1.08 trill. Real GDP per capita182860 Lawrence J. Lau, Stanford University 55 The Chinese Economy Today (3) U.S. China US$ (current prices) 2000 GDP 9.962 trill. 1.08 trill. 2000 GDP per capita 36,165 860 Lawrence J. Lau, Stanford University 56 The Chinese Economic Reform (1979-the present) The Open Door International Trade Foreign Direct Investment Marketization Goods Market Labor Market Foreign Exchange Market Housing Market Capital Market Lawrence J. Lau, Stanford University 57 The Chinese Economic Reform (1979-the present) Devolution of Economic Decision-Making Power (The Contract Responsibility System) Empowering Provincial and Local Governments Professional Management of Enterprises Autonomy and Incentive Lawrence J. Lau, Stanford University 58 The Chinese Economic Reform (1979-the present) Creation of New, Non-State-Owned Modes of Organization for Production Agriculture--Abolition of communes; return to a system of individual cultivators with fixed rents and taxes Industry--Emergence of “Township and Village” (T&V) enterprises; (foreign) joint-venture, foreign and private enterprises Lawrence J. Lau, Stanford University 59 Economic Performance: Pre- and Post-Reform Average Annual Rates of Growth of Selected Economic Indicators (%) 1952-1979 1979-1998 Pre-Reform Reform Real GDP 6.20 9.82 Real GDP/Capita 4.14 8.39 Real Gross Value of: Agricultural Production 4.33 8.05 Light Industry 7.83 11.30 Heavy Industry 11.37 11.34 Real Personal Consumption 4.99 8.91 Real Consumption/Capita 2.96 7.51 Real Gross Fixed Capital Formation 11.43 11.10 Capital Stock 5.93 9.77 Employment 2.52 2.91 GDP Deflator 0.59 6.51 Retail Price Index 0.80 7.03 Exports (in current US Dollars) 10.98 14.66 Imports (in current US Dollars) 10.27 12.22 Lawrence J. Lau, Stanford University 60 Marketization: Domestic Prices The prices of all consumer goods and more than 99% of the producer goods are determined in the market (with the exception of within plan outputs of coal, natural gas, and steel) Only three agricultural commodities--grains, cotton, and tobacco--remain under the central plan The price of low-grade grain is controlled (subsidized) The price of energy is at world market levels The prices of oil and gasoline are freely determined in the market China has been taken off the “non-market economies” list of the European Union (12/97) Lawrence J. Lau, Stanford University 61 Marketization: Foreign Exchange Unified exchange rate since 1/94 Interbank market in foreign exchange established 4/94 Current account convertibility since 12/96 Exporters permitted to retain 15% of foreign exchange proceeds as of 10/97 However, full capital account convertibility unlikely in the near future Lawrence J. Lau, Stanford University 62 The Growth of the Non-State Sector-Industry Distribution of Gross Value of Industrial Production by Ownership 1979 1999 Collective 22% Other Types 24% State-owned 78% State-owned 26% Individual 17% Lawrence J. Lau, Stanford University Collective 33% 63 The Growth of Industrial Output by Sector of Ownership The Rate of Growth of Industrial Output by Sector of Ownership 60% Total Industrial Output State-Owned Enterprises 50% Non-State Owned Enterprises 40% 30% 20% 10% 0% 1979 1981 1983 1985 1987 1989 1991 Lawrence J. Lau, Stanford University 1993 1995 1997 1999 64 The Growth of Industrial Output of the NonState Sector 70.0 Non-state Owned Enterprises Township and Village Enterprises 60.0 50.0 Percentage 40.0 30.0 20.0 10.0 0.0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 -10.0 Lawrence J. Lau, Stanford University 65 The Growth of the Non-State Sector (2)-Retail Others Joint-Owned 2.6% 0.0% Individual 0.2% The Distribution of Retail Sales by Ownership 1998 1979 Others 25.2% Collective-Owned 43.1% State-Owned 20.7% Collective-Owned 16.6% State-Owned 54.0% Individual 37.1% Joint-Owned 0.6% Lawrence J. Lau, Stanford University 66 Efficient Utilization of New Resources New enterprises and new activities are responsible for the phenomenal economic growth of China Little or no privatization of existing enterprises Little or no successful restructuring of existing enterprises Lawrence J. Lau, Stanford University 67 The Dual Tracks in the Grain Markets Table 1. The Dual Tracks in the Grain Market (million tons) 1978 State procurement 47.8 at plan price State procurement at market price Domestic 304.8 production Plan procurement/ 0.16 Production 1979 54.0 1980 50.2 1981 52.1 1982 56.2 1983 91.2 1984 1985 102.4 59.6 1986 1987 53.3 56.9 1988 50.5 10.6 17.5 7.6 9.3 32.3 43.8 19.6 42.3 332.1 320.6 325.0 354.5 387.3 407.3 379.1 391.5 403.0 394.1 0.16 0.16 0.16 0.16 0.24 0.25 0.16 Lawrence J. Lau, Stanford University 0.14 0.14 0.13 68 The Dual Tracks in Agricultural Goods Markets Table 2. The Dual Tracks in Agricultural Goods Markets (% of output value) 1978 Transactions at 94.4 plan prices Transactions at 5.6 market prices 1985 37.0 1986 35.0 1987 29.4 1988 24.0 1989 35.5 1990 31.0 63.0 65.0 70.6 76.0 64.5 69.0 Lawrence J. Lau, Stanford University 69 The Dual Tracks in Industrial Goods Markets Table 3. The Dual Tracks in Industrial Goods Markets (% of output value) 1978 1985 1990 Transactions at 100.0 64.0 44.6 plan prices Transactions at 0.0 36.0 55.4 market prices Lawrence J. Lau, Stanford University 70 The Dual Tracks in Retail Sales Table 4. The Dual Tracks in Retail Sales (% of sales) Transactions at plan prices Transactions at market prices 1978 97.0 1985 47.0 1986 35.0 1987 33.7 1988 28.9 1989 31.3 1990 30.0 3.0 53.0 65.0 66.3 71.1 69.7 70.0 Lawrence J. Lau, Stanford University 71 The Dual Tracks in the Labor Market Table 5. The Dual Tracks in Non-Farm Employment in the State and Non-state Sectors (million employees) 1978 1983 1985 1988 1989 1990 1991 1992 1993 State 74.51 87.71 89.90 99.84 101.08 103.46 106.64 108.89 109.20 Permanent 74.51 87.14 86.58 89.76 89.18 89.74 90.75 88.31 85.24 Contract 0.00 0.57 3.32 10.08 11.90 13.72 15.89 20.58 23.96 Non-State 48.90 62.10 107.97 138.28 136.49 152.53 159.49 172.28 195.87 Urban 20.63 29.75 38.18 42.83 42.82 43.84 46.04 47.41 50.45 Rural 28.27 32.35 69.79 95.45 93.67 108.69 113.45 124.87 145.42 State 0.60 0.58 0.44 0.38 0.38 0.35 0.34 0.31 0.28 Permanent/Total Lawrence J. Lau, Stanford University 1994 112.14 83.61 28.53 204.85 56.01 148.84 0.26 72 Examples from the Chinese Experience (1) The agricultural reform (2) The industrial reform (3) The dual-track price system in urban consumer goods and services (4) The foreign exchange reform Lawrence J. Lau, Stanford University 73 Examples from the Chinese Experience Growth of economic activities outside the “Plan” (6) Special economic zones and foreign direct investment (7) The tax reforms (8) The rate of interest on household bank deposits (5) Lawrence J. Lau, Stanford University 74 The Effect of Economic Growth Growing out of the “Plan” New resources from high saving rates of between 35 and 40% The rise of new enterprises Lawrence J. Lau, Stanford University 75 Phasing Out the Plan Track-Agriculture Table 1. Phasing Out the Plan-Track: Agricultural Products (% of output value) 1978 1985 1986 1987 1988 1989 1990 1991 1992 1993 plan price 94.4 37.0 35.0 29.4 24.0 35.5 31.0 22.2 12.5 10.4 guide price 0.0 23.0 21.0 16.8 19.0 24.3 27.0 20.0 5.7 2.1 market price 5.6 40.0 43.7 53.8 57.0 40.4 42.0 57.8 81.8 87.5 Lawrence J. Lau, Stanford University 76 Phasing Out the Plan TrackIndustry Table 3. Phasing Out the Plan-Track: Industrial Goods (% of output value) 1978 1985 plan price 100.0 64.0 guide price 0.0 23.0 market price 0.0 13.0 1986 1987 1988 1989 1990 1991 1992 1993 60.0 44.6 36.0 18.7 13.8 19.0 18.3 7.5 5.1 36.4 45.7 73.8 81.1 40.0 Lawrence J. Lau, Stanford University 77 Phasing Out the Plan TrackRetail Table 5. Phasing Out the Plan-Track: Total Retail Sales (% of sales) plan price guide price market price 1978 97.0 1985 47.0 1986 35.0 1987 33.7 1988 28.9 1989 31.3 1990 30.0 1991 20.9 1992 5.9 1993 4.8 0.0 19.0 25.0 28.0 21.8 23.2 25.0 10.3 1.1 1.4 3.0 34.0 40.0 38.3 49.3 45.5 45.0 68.8 93.0 93.8 Lawrence J. Lau, Stanford University 78 Related Literature Byrd (1987, 1989) Murphy, Shleifer and Vishny (1992) McMillan and Naughton (1992) and Naughton (1995) Lawrence J. Lau, Stanford University 79 Conclusion: There Can Be Reform Without Losers! Reform is distinct from redistribution--new value is created--a positive sum rather than a zero sum game Economic reforms without losers are possible--The “DualTrack” approach allows both economic efficiency and Pareto-improvement to be simultaneously attained Efficiency and equity are compatible Feasibility of the original plan and credibility of state enforcement are essential Lawrence J. Lau, Stanford University 80