The Search for a Stable Mode of Reform

Sheng Hong

Chinese Economy, 1996, vol. 29, issue 2, 39-59

Abstract: Reform is a change in the system. The economic system generally has three functions: incentives, resource allocation, and interest distribution. Systemic change will necessarily alter the efficiency of these three functions. Improving the efficiency of incentives and resource allocation will directly improve the productivity of resources of a given quantity and quality.>sup>1>/sup> However, if, in the course of improving incentives and resource allocation, a disequilibrium in the distribution of interests appears, then it will not only increase the cost of reform but it may well become the major cost. The reasons for this are, first, if, in the course of reform, a group of people suffers losses, it will overtly or covertly adopt an uncooperative or resistant attitude, thus increasing the cost of implementing reform. Second, unfairness in the distribution of interests will directly instigate friction among different interest groups. Losses resulting from such friction will become a direct part of the price of reform. Third, disequilibrium in interest distribution will also lead to behavior that disregards or even disrupts the existing economic order; disruption of economic order itself is a social loss. Fourth, disruption of the existing pattern of interests caused by reform can lead to relatively strong social unrest (such as the panic buying that occurred in 1988). Such social unrest would either deprive people of the expectation of stability or exact a greater price from them to overcome.

Date: 1996
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