Macroeconomic Reform

Abstract

That China’s initial urban reform did not fare well was partly due to the fact that prolonged irrational price structure continued to encourage unfair competition. Many companies which benefited from state-subsidized raw materials made profits while others suffered losses due to state-imposed prices for their products. A debate had occurred in the early 1980s over what strategy should be adopted for price reform. The radical view favoured price liberalization in one go; the conservative approach preferred continuous price adjustments. In 1985 a compromise was reached: a dual price system was to be introduced under which a product could have both a state-fixed price and a market price. As a half-way reform, this approach facilitated a gradual transition to the market price by introducing a market track into the old price structure. Reformers, however, ensured that the market track gradually outgrew the plan track. This approach was crucial for the expansion of the non-state sector in China, for this sector had to purchase inputs outside the state network of factor supply.