The World Bank Economic Review Advance Access published online on March 23, 2007
The World Bank Economic Review, doi:10.1093/wber/lhm002
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Incremental Reform and Distortions in China's Product and Factor Markets
Correspondence: kytan{at}ntu.edu.sg
JEL Code: D33, D61, D63, O11, O53, P23
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.
Kong-Yam Tan (corresponding author), formerly a senior economist at the World Bank Beijing Office, is a professor at Nanyang Technological University, Singapore; his email address is kytan{at}ntu.edu.sg. Xiaobo Zhang is a senior research fellow at the International Food Policy Research Institute and a visiting professor at Zhejiang University, China; his email address is x.zhang{at}cgiar.org. A supplemental appendix to this article is available at http://wber.oxfordjournals.org/.