Factor Price Distortion and Consequential Adverse Wealth Transfers in China

ZHANG Shuguang and CHENG Lian

1Lingnan College, Sun Yat-sen University, Guangzhou, China;
Institute of Economics, Chinese Academy of Social Sciences, Beijing, China

2 Institute of Finance and Banking, Chinese Academy of Social Sciences, Beijing, China

Abstract:

As critical piece of China’s gradualist economic transition, domestic price reform still faces major challenges. In particular, factor price, which is still tightly-
controlled and not market-based, is lower than market equilibrium price. Factor price distortion not only reduces market efficiency but also affects wealth distribution. Subsequent wealth transfer has, over the past ten to fifteen years, created a powerful vested interests and spawned social resentment, both of which may constitute major hazards in China’s future reform and development. Keeping in mind that China will have to address factor price distortion in its next step of reform, this paper takes stock of China’s journey toward price reform; examines the relationship among factor price distortion, previous economic growth, and policy; and estimates the size of resulting wealth transfer.

Key words: factor price, economic growth, wealth transfer

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