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Economics 216: The Macroeconomics of Development Lawrence J. Lau, Ph. D. , D. Soc. 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] edu; Web. Pages: http: //www. stanford. edu/~ljlau

Lecture 12 Strategies for Transition from a Planned to a Market Economy Lawrence J. 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] edu; Web. Pages: http: //www. stanford. edu/~ljlau

The Transition from a Centrally Planned Economy to a Market Economy u The meaning The Transition from a Centrally Planned Economy to a Market Economy u The meaning of transition u Replacement of administrative allocation by market allocation u Replacement of administered prices by market prices u Can a transition be achieved without creating losers? Lawrence J. Lau, Stanford University 3

A Centrally Planned Economy u Enterprises and households are assigned rights to and obligations A Centrally Planned Economy u Enterprises and households are assigned rights to and obligations for fixed quantities of commodities at fixed plan prices u The rights and obligations are enterprise- and householdspecific u 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) u The “Plan Track”--the pre-existing The Dual-Track Approach Adopted in the Chinese Transition (1) u The “Plan Track”--the pre-existing central plan remains and its rights and obligations continue to be enforced by the government u The “Market Track”--all markets are instantaneously open, with prices determined by supply and demand u Producers are given autonomy and incentive to plan their production and participate in the market, provided obligations under the plan are fulfilled u Consumers are completely free to plan their consumption and participate in the market, given allocated consumption goods and fulfillment of labor obligations Lawrence J. Lau, Stanford University 5

The Dual-Track Approach Adopted in the Chinese Transition (2) u Planned profits and losses The Dual-Track Approach Adopted in the Chinese Transition (2) u Planned profits and losses (taxes and subsidies) of enterprises remain the same u Differences between plan and market prices make feasible lumpsum transfers u 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 u No one is worse off--“Reform without The Political Economy of the Dual-Track Approach u No one is worse off--“Reform without Losers” u “Grandfathering” of “Vested Interests” u Autonomy and incentive on the margin u Creation of new, reform-oriented “Vested Interests” u Minimizing opposition and maximizing support u But: CAN IT BE EFFICIENT? Lawrence J. Lau, Stanford University 7

A Preview u Theoretical Analysis--under what conditions can the “Dual -Track” approach achieve both A Preview u Theoretical Analysis--under what conditions can the “Dual -Track” approach achieve both efficiency and Paretoimprovement simultaneously? u Partial Equilibrium u General Equilibrium u Empirical Evidence--the Chinese experience Lawrence J. Lau, Stanford University 8

Theoretical Analysis: Partial Equilibrium Theoretical Analysis: Partial Equilibrium

Two Types of Market Liberalization u Limited Market Liberalization (price PM and quantity QM) Two Types of Market Liberalization u Limited Market Liberalization (price PM and quantity QM) u Market resales of plan-allocated goods by either enterprises or households are not permitted u Market purchases by planned suppliers for fulfilling planmandated delivery quotas (e. g. sub-contracting) are not permitted u Full Market Liberalization (price PE and quantity QE) u Market resales and market purchases for redelivery are allowed by a planned supplier or a rationed user, as long as the rights and obligations under the plan are all fulfilled u QP = plan quantity; PP 1 = plan price (below PE); and PP 2 = plan price (above PE) Lawrence J. Lau, Stanford University 10

Interpretation of the Plan-Allocated Delivery Quotas under Full Market Liberalization u. A put option Interpretation of the Plan-Allocated Delivery Quotas under Full Market Liberalization u. A put option on the part of the planned supplier to sell fixed quantities at the plan price to the rationed users u A call option on the part of the rationed user to buy fixed quantities at the plan price from the planned suppliers u Since both options are exercisable at the same fixed plan price, at most one of the options can have positive value at market equilibrium u These options can be “bought and sold” in lieu of the physical deliveries Lawrence J. Lau, Stanford University 11

Assumptions of the Model u. A closed economy u Feasibility of the original plan Assumptions of the Model u. A closed economy u Feasibility of the original plan u Continued enforcement of the plan track u Profit and utility maximization by the economic agents u Full liberalization of the market track Lawrence J. Lau, Stanford University 12

Two Cases u QP, the plan quantity, is less than QE, the market equilibrium Two Cases u QP, the plan quantity, is less than QE, the market equilibrium quantity u 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 u Efficient demand rationing implies that the Efficiency in Demand Rationing and Supply Planning u Efficient demand rationing implies that the rationed goods are allocated to the most deserving users, that is, those willingness to pay is the highest (marginal utility or marginal productivity is the highest) u The demand curve is the aggregation of the willingness to pay of the potential users u Efficient supply planning implies that the production is assigned to the most efficient producers, that is, those whose marginal costs are the lowest u The supply curve is the aggregation of the marginal costs of the potential producers Lawrence J. Lau, Stanford University 14

Efficient Rationed Demand Efficient Planned Supply Lawrence J. Lau, Stanford University 15 Efficient Rationed Demand Efficient Planned Supply Lawrence J. Lau, Stanford University 15

Inefficient Rationed Demand Efficient Planned Supply Lawrence J. Lau, Stanford University 16 Inefficient Rationed Demand Efficient Planned Supply Lawrence J. Lau, Stanford University 16

Inefficient Rationed Demand Efficient Planned Supply: Limited Market Liberalization Lawrence J. Lau, Stanford University Inefficient Rationed Demand Efficient Planned Supply: Limited Market Liberalization Lawrence J. Lau, Stanford University 17

QP + QM> QE: Over-Production under Limited Liberalization u If PM<PE, then every potential QP + QM> QE: Over-Production under Limited Liberalization u If PM QE u If PM>PE, then every potential supplier with a marginal cost less than or equal to PE is an actual supplier u There may be actual suppliers whose marginal costs are greater than PE u Thus, QP + QM> QE Lawrence J. Lau, Stanford University 18

PM> PE under Efficient Planned Supply u Under efficient planned supply, the actual total PM> PE under Efficient Planned Supply u Under efficient planned supply, the actual total supply in the economy will be produced by the suppliers with the lowest marginal costs u Thus, QP + QM> QE implies PM> PE Lawrence J. Lau, Stanford University 19

Efficient Rationed Demand Inefficient Planned Supply Lawrence J. Lau, Stanford University 20 Efficient Rationed Demand Inefficient Planned Supply Lawrence J. Lau, Stanford University 20

Efficient Rationed Demand Inefficient Planned Supply: Limited Market Liberalization Lawrence J. Lau, Stanford University Efficient Rationed Demand Inefficient Planned Supply: Limited Market Liberalization Lawrence J. Lau, Stanford University 21

QP + QM> QE: Over-Production under Limited Liberalization u If PM<PE, then every potential QP + QM> QE: Over-Production under Limited Liberalization u If PM QE u If PM>PE, then every potential supplier with a marginal cost less than or equal to PE is an actual supplier u There may be actual suppliers whose marginal costs are greater than PE u Thus, QP + QM> QE Lawrence J. Lau, Stanford University 22

PM< PE under Efficient Rationed Demand u Under efficient rationed demand, the actual total PM< PE under Efficient Rationed Demand u Under efficient rationed demand, the actual total demand in the economy will be used by the users with the highest willingness to pay u Thus, QP + QM> QE implies PM< PE Lawrence J. Lau, Stanford University 23

Inefficient Rationed Demand Inefficient Planned Supply Lawrence J. Lau, Stanford University 24 Inefficient Rationed Demand Inefficient Planned Supply Lawrence J. Lau, Stanford University 24

Inefficient Rationed Demand Inefficient Planned Supply: Limited Market Liberalization Lawrence J. Lau, Stanford University Inefficient Rationed Demand Inefficient Planned Supply: Limited Market Liberalization Lawrence J. Lau, Stanford University 25

QP + QM> QE: Over-Production under Limited Liberalization u If PM<PE, then every potential QP + QM> QE: Over-Production under Limited Liberalization u If PM QE u If PM>PE, then every potential supplier with a marginal cost less than or equal to PE is an actual supplier u There may be actual suppliers whose marginal costs are greater than PE u Thus, QP + QM> QE Lawrence J. Lau, Stanford University 26

Plan Quantity < Market Equilibrium Quantity Proposition 1: u (1) The combined output of Plan Quantity < Market Equilibrium Quantity Proposition 1: u (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 u (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: u Independently of the initial conditions Plan Quantity < Market Equilibrium Quantity Proposition 2: u Independently of the initial conditions concerning the plan price and the degree of efficiency of rationed demand planned supply: u (1) The dual-track approach with either limited or full liberalization of the market track is Pareto-improving; and u (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 Inefficient Planned Supply: Plan. Quantity>Market. Quantity Lawrence J. Lau, Stanford University Inefficient Rationed Demand Inefficient Planned Supply: Plan. Quantity>Market. Quantity Lawrence J. Lau, Stanford University 29

Inefficient Rationed Demand Inefficient Planned Supply: Plan. Quantity>Market. Quantity Lawrence J. Lau, Stanford University Inefficient Rationed Demand Inefficient Planned Supply: Plan. Quantity>Market. Quantity Lawrence J. Lau, Stanford University 30

Efficient Rationed Demand Efficient Planned Supply: Plan Quantity>Market Quantity Lawrence J. Lau, Stanford University Efficient Rationed Demand Efficient Planned Supply: Plan Quantity>Market Quantity Lawrence J. Lau, Stanford University 31

Plan Quantity > Market Equilibrium Quantity Proposition 3: u Independently of the initial conditions Plan Quantity > Market Equilibrium Quantity Proposition 3: u Independently of the initial conditions concerning the plan prices and the degree of efficiency of rationed demand planned supply: u (1) The dual-track approach with limited or full liberalization is always Pareto-improving; and u (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 u If Plan Quantity > Market Equilibrium Quantity: Efficiency Achieved through Payment of Rents u If PP 1 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-PP 1 u u The potential loss to these planned suppliers from physical delivery exceeds PE -PP 1 The potential gain to these rationed users from accepting physical delivery is less than PE-PP 1 Thus, the planned suppliers with marginal cost above PE should try to purchase the call options in the market at price PE-PP 1; the rationed users with willingness to pay below PE should try to sell their call options in the market at price PE-PP 1 Both groups are better off then if physical delivery is effected Lawrence J. Lau, Stanford University 33

Feasibility of the Original Plan u (1) The production plan for each producer is Feasibility of the Original Plan u (1) The production plan for each producer is feasible; u (2) The consumption plan for each consumer is feasible; u (3) Material balance holds for the economy as a whole; and u (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 u No different from contract enforcement in a Continued Enforcement of the Plan Track u No different from contract enforcement in a market economy u Focus of enforcement shifted from total physical production to inter-enterprise deliveries u Pre-existing rents can be protected without the enforcement of physical deliveries u Enforcement against consumers may be difficult u Credibility of state enforcement is crucial Lawrence J. Lau, Stanford University 35

Full Market Liberalization is Necessary for Full Economic Efficiency u Under the “Dual-Track” approach, Full Market Liberalization is Necessary for Full Economic Efficiency u Under the “Dual-Track” approach, full market liberalization is necessary at the outset to assure both Pareto-improvement and efficiency u 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 u Feasibility of the original plan u Credibility of Applicability to the Chinese Economy u Feasibility of the original plan u Credibility of continued enforcement u “Contract responsibility system” u Full market liberalization Lawrence J. Lau, Stanford University 37

Theoretical Analysis: General Equilibrium Theoretical Analysis: General Equilibrium

The Model ul goods u m producers with production set Yi u n consumers The Model ul goods u m producers with production set Yi u n consumers with consumption set Xj u lth good is leisure; consumers have only leisure endowment Lawrence J. Lau, Stanford University 39

The Status Quo ua national production plan v = (v 1, . . . The Status Quo ua national production plan v = (v 1, . . . , vm) u a national consumption plan c = (c 1, . . . , cn) u q=(q 1, . . . , ql) the plan price u An economy under central planning is characterized by (v, c, q) Lawrence J. Lau, Stanford University 40

Feasibility of the Original Plan u (i) The production plan for each producer is Feasibility of the Original Plan u (i) The production plan for each producer is feasible u (ii) The consumption plan for each consumer is feasible u (iii) Material balance holds in the aggregate; and u (iv) The consumption plan for each consumer is affordable at the plan prices Lawrence J. Lau, Stanford University 41

The Big-Bang Strategy u The central plan is abolished u All markets are instantaneously The Big-Bang Strategy u The central plan is abolished u All markets are instantaneously open u Producers are completely free to plan their production u Consumers are completely free to plan their consumption Lawrence J. Lau, Stanford University 42

The Openness of All Markets u Both the Big-Bang and the Dual-Track strategies require The Openness of All Markets u Both the Big-Bang and the Dual-Track strategies require that all markets are open for economic efficiency u In particular, market resales of plan-allocated inputs and consumption goods, and market purchases of outputs for re -delivery are allowed u 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 u. A Dual-Track Competitive Equilibrium is Efficient Lawrence J. Efficiency of a Dual-Track Equilibrium u. A Dual-Track Competitive Equilibrium is Efficient Lawrence J. Lau, Stanford University 44

Physical Implementability u What happens if the equilibrium aggregate gross output is less than Physical Implementability u What happens if the equilibrium aggregate gross output is less than the plan aggregate gross output for at least one good? u Simultaneous physical delivery then becomes impossible u 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 u. A Dual-Track Competitive Equilibrium is Pareto. Improving, by Pareto-Superiority of a Dual-Track Equilibrium u. A Dual-Track Competitive Equilibrium is Pareto. Improving, by construction Lawrence J. Lau, Stanford University 46

The Dual-Track Strategy u Combines plan and market u “Contract Responsibility” system u Autonomy The Dual-Track Strategy u Combines plan and market u “Contract Responsibility” system u Autonomy and incentive on the margin u Efficiency achieved immediately u Reliance on existing institutions and Information Lawrence J. Lau, Stanford University 47

Is Chinese Economic Reform Gradualist? u No! Efficiency is instantaneously achieved as if under Is Chinese Economic Reform Gradualist? u No! Efficiency is instantaneously achieved as if under a “Big Bang” reform u Efficiency is achieved because both the prices and quantities of goods allocated within the plan are fixed u 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 u. A “shortage” economy under the Plan The Importance of the Physical Implementability Constraint u. A “shortage” economy under the Plan implies that equilibrium aggregate gross output is likely to exceed plan aggregate gross output u 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 u Enforcement of contracts u Credibility of the state, The Role of State Power u Enforcement of contracts u Credibility of the state, and expectations thereof, affect enterprise (and household) behavior, and hence compliance with the State Plan (post reform) u 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 u The “Dual-Track” approach minimizes political opposition Desirable Features of the “Dual-Track” Approach: Pareto-Improvement u 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 u The “Dual-Track” approach utilizes the Desirable Features: Minimal Additional Informational and Institutional Requirements u The “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 u 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 Lawrence J. Lau, Stanford University 52

The Chinese Experience The Chinese Experience

The Chinese Economy Today (1) u u u East Asia is the fastest-growing region The Chinese Economy Today (1) u u u 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 54 demand is a real possibility J. Lau, Stanford University

The Chinese Economy Today (2) 1979 2000 US$ (2000 prices) Real GDP 176 bill. The Chinese Economy Today (2) 1979 2000 US$ (2000 prices) Real GDP 176 bill. Real GDP per capita 182 1. 08 trill. 860 Lawrence J. Lau, Stanford University 55

The Chinese Economy Today (3) U. S. China US$ (current prices) 2000 GDP 9. 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) u The Open Door u International Trade The Chinese Economic Reform (1979 -the present) u The Open Door u International Trade u Foreign Direct Investment u Marketization u Goods Market u Labor Market u Foreign Exchange Market u Housing Market u Capital Market Lawrence J. Lau, Stanford University 57

The Chinese Economic Reform (1979 -the present) u Devolution of Economic Decision-Making Power (The The Chinese Economic Reform (1979 -the present) u Devolution of Economic Decision-Making Power (The Contract Responsibility System) u Empowering Provincial and Local Governments u Professional Management of Enterprises u Autonomy and Incentive Lawrence J. Lau, Stanford University 58

The Chinese Economic Reform (1979 -the present) u Creation of New, Non-State-Owned Modes of The Chinese Economic Reform (1979 -the present) u Creation of New, Non-State-Owned Modes of Organization for Production u Agriculture--Abolition of communes; return to a system of individual cultivators with fixed rents and taxes u 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 Lawrence J. Lau, Stanford University 60 Economic Performance: Pre- and Post-Reform Lawrence J. Lau, Stanford University 60

Marketization: Domestic Prices u The prices of all consumer goods and more than 99% Marketization: Domestic Prices u 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) u Only three agricultural commodities--grains, cotton, and tobacco--remain under the central plan u The price of low-grade grain is controlled (subsidized) u The price of energy is at world market levels u The prices of oil and gasoline are freely determined in the market u 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 u Unified exchange rate since 1/94 u Interbank market in foreign Marketization: Foreign Exchange u Unified exchange rate since 1/94 u Interbank market in foreign exchange established 4/94 u Current account convertibility since 12/96 u Exporters permitted to retain 15% of foreign exchange proceeds as of 10/97 u 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 The Growth of the Non-State Sector-Industry Distribution of Gross Value of Industrial Production by Ownership Lawrence J. Lau, Stanford University 63

The Growth of Industrial Output by Sector of Ownership Lawrence J. Lau, Stanford University The Growth of Industrial Output by Sector of Ownership Lawrence J. Lau, Stanford University 64

The Growth of Industrial Output of the Non. State Sector Lawrence J. Lau, Stanford The Growth of Industrial Output of the Non. State Sector Lawrence J. Lau, Stanford University 65

The Growth of the Non-State Sector (2)-Retail The Distribution of Retail Sales by Ownership The Growth of the Non-State Sector (2)-Retail The Distribution of Retail Sales by Ownership Lawrence J. Lau, Stanford University 66

Efficient Utilization of New Resources u New enterprises and new activities are responsible for Efficient Utilization of New Resources u New enterprises and new activities are responsible for the phenomenal economic growth of China u Little or no privatization of existing enterprises u Little or no successful restructuring of existing enterprises Lawrence J. Lau, Stanford University 67

The Dual Tracks in the Grain Markets Lawrence J. Lau, Stanford University 68 The Dual Tracks in the Grain Markets Lawrence J. Lau, Stanford University 68

The Dual Tracks in Agricultural Goods Markets Lawrence J. Lau, Stanford University 69 The Dual Tracks in Agricultural Goods Markets Lawrence J. Lau, Stanford University 69

The Dual Tracks in Industrial Goods Markets Lawrence J. Lau, Stanford University 70 The Dual Tracks in Industrial Goods Markets Lawrence J. Lau, Stanford University 70

The Dual Tracks in Retail Sales Lawrence J. Lau, Stanford University 71 The Dual Tracks in Retail Sales Lawrence J. Lau, Stanford University 71

The Dual Tracks in the Labor Market Lawrence J. Lau, Stanford University 72 The Dual Tracks in the Labor Market Lawrence J. Lau, Stanford University 72

Examples from the Chinese Experience u (1) The agricultural reform u (2) The industrial Examples from the Chinese Experience u (1) The agricultural reform u (2) The industrial reform u (3) The dual-track price system in urban consumer goods and services u (4) The foreign exchange reform Lawrence J. Lau, Stanford University 73

Examples from the Chinese Experience u (5) Growth of economic activities outside the “Plan” Examples from the Chinese Experience u (5) Growth of economic activities outside the “Plan” u (6) Special economic zones and foreign direct investment u (7) The tax reforms u (8) The rate of interest on household bank deposits Lawrence J. Lau, Stanford University 74

The Effect of Economic Growth u Growing out of the “Plan” u New resources The Effect of Economic Growth u Growing out of the “Plan” u New resources from high saving rates of between 35 and 40% u The rise of new enterprises Lawrence J. Lau, Stanford University 75

Phasing Out the Plan Track-Agriculture Lawrence J. Lau, Stanford University 76 Phasing Out the Plan Track-Agriculture Lawrence J. Lau, Stanford University 76

Phasing Out the Plan Track. Industry Lawrence J. Lau, Stanford University 77 Phasing Out the Plan Track. Industry Lawrence J. Lau, Stanford University 77

Phasing Out the Plan Track. Retail Lawrence J. Lau, Stanford University 78 Phasing Out the Plan Track. Retail Lawrence J. Lau, Stanford University 78

Related Literature u Byrd (1987, 1989) u Murphy, Shleifer and Vishny (1992) u Mc. Related Literature u Byrd (1987, 1989) u Murphy, Shleifer and Vishny (1992) u Mc. Millan and Naughton (1992) and Naughton (1995) Lawrence J. Lau, Stanford University 79

Conclusion: There Can Be Reform Without Losers! u Reform is distinct from redistribution--new value Conclusion: There Can Be Reform Without Losers! u Reform is distinct from redistribution--new value is created --a positive sum rather than a zero sum game u Economic reforms without losers are possible--The “Dual. Track” approach allows both economic efficiency and Pareto-improvement to be simultaneously attained u Efficiency and equity are compatible u Feasibility of the original plan and credibility of state enforcement are essential Lawrence J. Lau, Stanford University 80