Reforming prices

Description

This paper reviews the experience of price reform in China, as well as selected East European countries. Price reform is an essential element of any program that seeks to achieve sustained and rapid economic growth in China via improvements in factor productivity. For price liberalization to generate sustainable growth, reform must occur within a framework that takes into account the interdependencies between the real sector and financial and institutional elements of the economy. The experience of Eastern Europe suggests that cycles of progressively more severe macro-instability can significantly reduce the degrees of freedom available to the authorities, undermine gradual reform attempts and substantially raise the costs of the eventual adjustment. Policy makers in China have demonstrated that they can successfully fashion a national consensus to control inflation. A similar understanding of the need for fiscal and monetary restraint must underpin any program of economic reforms. As China proceeds with price reform, complementary pricing actions will be required so as to maximize the allocative gains. The eventual goal of price reform should be to achieve full price liberalization. Side by side with the liberalization of domestic prices exchange rate adjustment and reform of the trade regime allows for a closer link between domestic relative prices and international relative prices. China has already taken steps to unify the exchange rate and promote trade.

Subjects

Series Statement

• World Bank discussion papers ;
• 144.
• China and Mongolia Department series