Journal Article

Incremental Reform and Distortions in China's Product and Factor Markets

Xiaobo Zhang and Kong-Yam Tan

in The World Bank Economic Review

Volume 21, issue 2, pages 279-299
Published in print June 2007 | ISSN: 0258-6770
Published online March 2007 | e-ISSN: 1564-698X | DOI: https://dx.doi.org/10.1093/wber/lhm002
Incremental Reform and Distortions in China's Product and Factor Markets

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  • Microeconomics
  • Welfare Economics
  • Economic Development
  • Economywide Country Studies
  • Socialist Systems and Transitional Economies

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The purpose of economic reform is to reduce distortions and enhance efficiency. However, when reforms are partial and incremental, individuals and local governments are often able to capture the rent inherent in the gradual transition process. Young (2000) warned that such rent-seeking behavior might lead to increasing market fragmentation. Empirical studies have shown the opposite in the product market. This article argues that as the rent from China's product market has been squeezed out due to deepening reforms, rent-seeking behavior may have shifted to the capital market. Further reforms are needed in the capital market to squeeze out these rent-seeking opportunities, just as those from the product and labor markets were squeezed out earlier.

Keywords: D33; D61; D63; O11; O53; P23

Journal Article.  7669 words.  Illustrated.

Subjects: Microeconomics ; Welfare Economics ; Economic Development ; Economywide Country Studies ; Socialist Systems and Transitional Economies

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