Toward a Unified Theory of Economic Reform

49 Pages Posted: 19 Sep 2017 Last revised: 4 Oct 2017

See all articles by Jim Huangnan Shen

Jim Huangnan Shen

Center for International Development, Harvard Kennedy School, Harvard University

Xiaojie Liu

Institut d'Etudes Politiques de Paris (Sciences Po), Department of Economics, Students; Fudan University - Department of Electronic Engineering

Jun Zhang

Fudan University - China Center for Economic Studies (CCES)

Date Written: September 17, 2017

Abstract

The dichotomy in the economics of transition literature with regard to the reform speed (Gradualist vs Radical Approach) and reform strategy (incremental reform vs structural reform) fails to capture the essence of the transitional process of a transitional economy that was ever under the control of planned economic system. In this paper, we construct a system dynamics model to provide a unified theoretical framework to illustrate that reform speed and reform strategy are inherently intertwined. We propose 4 optimal reforming combinations between reform speed and reform strategy to track the transitional trajectories of different transitional economies since 1980s. These 4 optimal reforming combinations are: (1) Incremental reform in radical speed. (2) Incremental reform in gradualist speed. (3) Structural reform in radical speed. (4) Structural reform in gradualist speed. In this paper, we demonstrate that a transitional economy would adopt one of the aforementioned 4 optimal reforming combination if and only if it minimizes the reforming cost incurred during the shock period of radical reform as well as the dual track period of gradualist reforms. Several factors in our model affecting these 4 optimal reforming combinations are also discussed. These factors include the spillover effect (both vertical and horizontal) of a newly established reforming promotion sector on other old sectors in a transitional economy, the endogenous reform damping coefficient determined by one transitional economy’s initial conditions and the reform damping coefficient determined by the dual track system during the gradualist reform process.

Keywords: Keywords: Reform speed; Reform Strategy; Gradualist speed; Radical speed;; Incremental reform; Structural reform; System Dynamics; optimal reforming combination, spillover effect, Damping coefficient

JEL Classification: J41, H53, P26

Suggested Citation

Shen, Jim Huangnan and Liu, Xiaojie and Zhang, Jun, Toward a Unified Theory of Economic Reform (September 17, 2017). Available at SSRN: https://ssrn.com/abstract=3038372 or http://dx.doi.org/10.2139/ssrn.3038372

Jim Huangnan Shen (Contact Author)

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Xiaojie Liu

Institut d'Etudes Politiques de Paris (Sciences Po), Department of Economics, Students ( email )

28 rue des Saints Pères
Paris, 75007
France

Fudan University - Department of Electronic Engineering ( email )

220 Handan Rd
Shanghai Shi, 200433
China

Jun Zhang

Fudan University - China Center for Economic Studies (CCES) ( email )

China

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