Dual track system is an economic system where the government has the full control over the critical sectors of the economy. In this case, the private enterprises are offered limited control over the other minor sectors in the economy. The dual track price system can also be viewed as the intermediary price system which can be found between the free market and control of the price by the State.
Back in 1970s, most prices were set by the government in China. This was set along with the quantity goals. However, later it was agreed that the system be moved from the planned to the market oriented economy. However, the policy makers proposed that there was no need for abrupt changes. They rather proposed that changes should be executed gradually to integrate the prevailing system with the free market system. In the early 1980s, majority of the small enterprises which had completed their quota production were permitted to sell their surplus to the market.
The first implementation of the dual track system can be traced back in China in 1979 under the agricultural reform (Feng 35). This can also be seen as one of the most successfully dual track systems. Under the system, the commune was assigned the responsibility of selling a certain fixed volume of grain produce to the state procurement agency where the prices were predetermined through the prices (Roland 136). Under the system, the commune was supposed to pay a certain fixed amount of tax to the government. However, it was also supposed to receive the necessary inputs applied in the production like the fertilizers at flat prices from the suppliers owned by the government.
On fulfilling these requirements, the commune was free to do other things. For instance, commune was free to produce any kind of produce they considered profitable and also sell the excess in a free market. The free market is the form of economic system where prices are left to the forces of the market to balance in order to adjust the prices. In this case, producers usually get profits on the goods they sell. Therefore, the commune managed to make profits through this system after which they retain the profits.
Later, the track system was introduced in the industry. This started with the oil sector and shortly after with the all other industries (Roland 136). The extension of this system to the industry was in an effort to extend success in the other industry after the success experienced through the agricultural reform. Under these arrangements, enterprises received a frozen level of inputs and compulsory delivery quotas.
Advantages of dual track price system in China
There are several advantages which are associated with the dual track price economy. One of the main advantages of this system is that it is associated with Pareto improving. Pareto efficiency is a situation whereby an economic activity which makes one person better off without making any person worse off. One of the main characteristic of economic resource is scarcity. Therefore, the major problem is the sharing of these resources in the most efficient way.
Through the dual price system, an economy manages to realize the Pareto efficiency in economic activities. However, the Pareto efficiency will continue adding to the economy up to a certain position where Pareto equilibrium is realized. After this position, making one person better off will make the other person worse off (Feng 35). In other words, this system leads to Pareto improving reforms in an economy. For instance, when the market track was introduced, this economic agents who played part in the process were better and also compensation for those who were in the losing side. The resultant outcome, therefore, left nobody hurt.
Another advantage of the dual price system is that it maintains the pre-existing agents in the economy because it is built on the pre-existing institutions (Lin, Cai and Li 45). Therefore, it does not bring about drastic changes in the system. Through this system, the losers are provided with transfers who act as compensation. This helps in the maintenance of the status quo. This reform makes the winners to be better off and leaves the losers neutral.
The dual price system also encouraged the growth of the non-state sectors. According to Marangos, this is so because the state ownership is left unchanged while keeping the state owned keeping state ownership relatively unchanged under dual track system (214).
Disadvantages of dual track price system in China
Despite these advantages associated with the dual track system, there are some disadvantages. One of the disadvantages of this system is based on its failure to meet the intended reasons for its implementation. One of the main reasons for the dual track system was to minimize the intervention in economic activities by the administration. However, it turned out that more government interventions were required in the process in maintaining orderly operation like enforcement of the required quotas (Marangos 214). Therefore, this method failed on the fact that government intervention was increased rather than reduced. As a result, the price distortions resulted. When the government intervention is maximized in the economy, the prices are distorted and, therefore, do not represent the free market price equilibrium. Increased government intervention may result to shortages in an economy because the government may set a price below the equilibrium level.
Discussion
According to Roland, the dual track system is an effective method of implementing price mechanism in a Pareto improving way (136). However, if the whole economy is liberalized as a result of the big bang approach, then these move is not likely to be Pareto improve. However, this outcome can be corrected through the application of the of explicit compensation strategies. However, such mechanisms suffer from the fact that they can be very expensive.
The big bang (approach) attempted to improve the market (Roland 137). When the ban on private enterprises was lifted, a big number of small enterprises rose. Meanwhile, the privatization of the state enterprises continued gradually. This led to an economy with mixed enterprises. This case is similar with what resulted in China through the dual track price system. In other words, both the big bang and the transformation in China led to same results. The only difference is that China did not incur any cost. Under the big bang, production in the state sectors was significantly affected.
Conclusion
In conclusion, this discussion has given a clear understanding of the implication of the concept of the dual track system. This system was implemented in an effort to minimize price distortions. This was aimed to be achieved by coming up with a strategy which minimizes the government intervention. This system, therefore, promotes the operations of the free market.
Works Cited
Feng Xingyuan. Re-Interpreting. The “Chinese Miracle” International Journal on World Peace. 2011. Vol. Xxviii No. 1, pp. 7-40.
Lin Justin Y., Cai Fang, and Li Zhou. “The Lessons of China’s Transition to a Market Economy.” The Cato Journal, Vol. 16 No. 2.
Marangos, John. Alternative economic models of transition. New York: Ashgate Publishing, Ltd., 2004.
Roland, Gérard. Transition and economics: politics, markets, and firms. U.S.A.: MIT Press, 2004.