The Razor's Edge: Distortions and Incremental Reform in the People's Republic of China

59 Pages Posted: 8 Mar 2010 Last revised: 23 Nov 2022

See all articles by Alwyn Young

Alwyn Young

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Date Written: August 2000

Abstract

In a partially reformed economy, distortions beget distortions. Segments of the economy which are freed from centralized control respond to the rent seeking opportunities implicit in the remaining distortions of the economy. The battle to capture, and then protect, these rents leads to the creation of new distortions, even as the reform process tries to move forward. In this paper I illustrate this idea with a study of the People's Republic of China. Under the plan, prices were skewed so as to concentrate profits, and hence revenue, in industry. As control over factor allocations was loosened, local governments throughout the economy sought to capture these rents by developing high margin industries. Continued reform, and growing interregional competition between duplicative industries, threatened the profitability of these industrial structures, leading local governments to impose a variety of interregional barriers to trade. Thus, the reform process led to the fragmentation of the domestic market and the distortion of regional production away from patterns of comparative advantage.

Suggested Citation

Young, Alwyn, The Razor's Edge: Distortions and Incremental Reform in the People's Republic of China (August 2000). NBER Working Paper No. w7828, Available at SSRN: https://ssrn.com/abstract=1565230

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