Big Bang versus Gradualism in Economic Reforms: an Intertemporal Analysis with an Application to China

This paper analyzes issues concerning the speed of adjustment and sequencing of reforms in a transition economy. It presents a dynamic general equilibrium model parameterized with Chinese data. The model is used to generate different policy simulations that highlight the importance of the policy instruments used during the transition period. The simulations consider privatization, tariff reform, and deval-uation, as well as alternative speeds of introducing these policies. They show that different speeds of adjustment, as well as sequencing of reforms, will have very dif-ferent implications for macroeconomic aggregates. [JEL D58, 21] This paper analyzes the implications of alternative paths of economic reform inthe 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 envis-aged. 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 exam-ines 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 numer-ically, permitting us to carry out simulations for different policies. Finally, we con-clude by drawing some policy conclusions from the simulations