Big Bang Versus Gradualism in Economic Reforms: An Intertemporal Analysis with An Application to China

Abstract

T his paper analyzes the implications of alternative paths of economic reform in the context of an economy with a large public sector that is being transformed to become more market oriented. Two alternative paths to reform can be envisaged. First, the country can move gradually by selectively introducing reforms and spacing them over time. Second, the country can pursue a "big-bang" approach, under which all reforms are immediately and simultaneously introduced.No general consensus has emerged on whether the "big-bang" approach to reform is superior or inferior to a gradualist approach. Further, the order in which reforms should be undertaken has remained a matter of debate. 1 This paper examines the economic setting in China, the country to which the analysis is applied. We develop a dynamic general equilibrium model that is used to analyze the effects of different speeds and sequencing of reforms. The model is solved numerically, permitting us to carry out simulations for different policies. Finally, we conclude by drawing some policy conclusions from the simulations.

High growth and low consumption in East Asia: How to improve welfare while avoiding financial failures

“…The approach is described in Feltenstein and Nsouli (2003). In this section, we describe our estimation procedure for obtaining the FDI elasticities with respect to interest rates, growth and exchange rate movements, which we have used to endogenize FDI in our model (section 3.5).…”

“…This growth in FDI contradicts our simulation outcomes, however we should note that we are imposing a much more rapid revaluation than has actually been used. Feltenstein and Nsouli (2003). There the aim was to derive an effective tax rate for factor inputs at the enterprise level.…”

High Growth and Low Consumption in East Asia: How to Improve Welfare While Avoiding Financial Failures

“…The approach is described in Feltenstein and Nsouli (2003). In this section, we describe our estimation procedure for obtaining the FDI elasticities with respect to interest rates, growth and exchange rate movements, which we have used to endogenize FDI in our model(III.E).…”

Can Good Events Lead to Bad Outcomes? Endogenous Banking Crises and Fiscal Policy Responses

“…We derive indirect taxes from the input-output matrix. In order to derive import coefficients for the input-output matrix, as well as import tariff rates, we take a somewhat involved approach which is described in Feltenstein and Nsouli (2003).…”