The chasm in the transition: A CGE analysis of Chinese economic reform

Based on the characteristics of the two-tier plan-market system in the current Chinese economic reform, this article presents a Computable General Equilibrium (CGE) model to measure quantitatively the chasm in terms of the changes in sectoral labor demand caused by a shock therapy proposal in the transition process from a centrally planned economy to a market economy. If radical economic reform were implemented, a high unemployment rate would be inevitable. Because the reallocation of labor is expected to be very costly both economically and socially, the pace of economic reform relies on the scale of unemployment caused by the reform and the government's financial situation. The gap in sectoral labor demand between the current economic system and counterfactual equilibrium in the CGE model can be used to measure the pressure of unemployment. In addition, reformers may use the CGE framework to improve their proposals or to find an alternative path should a rapid transition appear to be too dangerous. These findings have numerous implications for those countries currently undergoing economic reform. They can use our model with some modifications to work out their own realistic economic reform plans, radical or moderate.