Reform without losers: An interpretation of China's dual-track approach totransition

This paper develops a simple model to analyze the dual-track approach to ma rket liberalization as a mechanism for implementing efficient Pareto-improv ing economic reform, that is, reform achieving efficiency without creating losers. The approach, based on the continued enforcement of the existing pl an while simultaneously liberalizing the market, can be understood as a met hod for making implicit lump-sum transfers to compensate potential losers o f the reform. The model highlights the critical roles of enforcement of the plan for achieving Pareto improvement and full liberalization of the marke t track for achieving efficiency. We examine how the dual-track approach ha s worked in product and labor market liberalization in China.