THE DUAL-ECONOMY STRUCTURE : A MICRO-FOUNDATION OF CHINA'S MACROECONOMIC POLICY DILEMMA (1978-1993)

Abstract

Writing a thesis on China's economy is a difficult task, not only because both Chinese microeconomy, and macroeconomy are in a rapid transition, but also because the relationship between them has been constantly changing since the late l 970s. As such, an interactive model, represented by the Dual-Economy structure approach, is appropriate. In this model, based on observations of China's complicated transition process during the period of 1979-1993, China's economic transition from a centrally-planned economy (CPE) to a market economy (ME) is analyzed as a process in which micro foundation change results in a macro policy dilemma. Two themes are addressed in this thesis. First, China's economic transition has evolved into a type of Dual-Economy with the state sector (SS) and the non-state sector (NSS) coexisting. This microeconomic transformation is better understood from the perspective of resource mobility between the two sectors. Second, the evolution of the Dual-Economy structure has profound implications for macroeconomic management. While, it has propelled the reform of macroeconomic policy in response to this transformation of microeconomic foundation, the structural problems endogenous in the micro-foundation have accentuated the macro-policy dilemma and consequently impaired the ineffectiveness of macroeconomic policy as a tool to finetune the economy. The emphasis of this study is on providing theoretical framework for analyzing the transitional economy rather than a quantitative analysis. The time frame of this study focuses on the 1979 - 1993 period, but the developments since then will also be briefly examined.