Incremental Changes and Dual-Track Transition: Understanding the Case of China

Dual-track transition in China Fan Gang This paper explains why China has taken the ‘incremental approach’ to economic reform, while others have taken a ‘radical approach’; why China has been successful in its gradual transition in the 1980s, while others had failed in the 1970s; and why and how the reform ‘objective model’ has evolved over time in China. When comparing China with the former socialist economies which are undertaking reforms, the paper gives particular attention to the following two factors. First, the initial economic situations, especially the growth of real incomes during the pre-reform period. This first factor determines what approach to reform would be politically ‘acceptable’. The second factor is the economic structures inherited from the previous regime. Specifically, did there exist a repressed sector which could serve as a source from which the new system could emerge and develop? This second factor determines what approach is economically ‘feasible’. Different approaches are therefore rationalized as ‘conditional optimum’ in different circumstances. The paper also investigates the special problems and difficulties for an incremental ‘dual-track’ transition, such as delayed ownership reform in the state sector, distorted allocation of resources between the state and non-state sectors, and macroeconomic instability during the transition. A better formulation of reform strategies and stabilization policies is recommended, although it is recognized that incremental reform is, in many ways, a spontaneous, ‘bottom-up’, process.