Abstract
The rapid decentralization in China in the last decade has dramatically reduced the role of central planning. However, the lack of a capital market has promoted rent seeking and resulted in an investment system trapped by the existing structure. The lack of a labor market has led to wage drift. The lack of reform in the social welfare system has caused distorted consumption demands. Moreover, the enterprise-by-enterprise negotiation under the Two-tier Pricing System and the Contract Management Responsibility System makes it dificult to use indirect policy instruments effectively. This paper presents a model incorporating these specific features in order to mimic the actual operation of the economy. Forecasts and policy simulations are made for the period from 1987 to 1995. The results have produced, for the first time, some empirical evidence for a number of hypotheses put forward by Chinese economists in the last five years.
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