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China and Mongolia Department Series Reforming Prices Public Disclosure Authorized the Expenrence of China, Hungary, and Poland Public Disclosure Authorized LA)rPO I~ J Public Disclosure Authorized SL. n+- iAN( World Bank Discussion Papers China and Mongolia Department Series Reforming Prices Public Disclosure Authorized The Expenrence of China, Hungary, and Poland Public Disclosure Authorized Anand Rajaram Public Disclosure Authorized Recent World Bank Discussion Papers No. 90 ImplementingEducational Policies in Zambia. Paul P. W. Achola No. 91 ImplementingEducational Policies in Zimbabwe.0. E. Maravanyika No. 92 InstitutionalReforms in SectorAdjustment Operations: The WorldBank's Experience.Samuel Paul No. 93 Assessmentof the PrivateSector: A Case Study and Its MethodologicalImplications. Samuel Paul No. 94 Reachingthe Poorthrough Rural PublicEmployment: A Suvweyof Theoryand Evidence.Martin Ravallion No. 95 Educationand Development: Evidencefor New Priorities.Wadi D. 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Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of Armerica First printingJanuary 1992 Discussion Papers present results of country analysisor research that is circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibilityfor errors. The findings, interpretations, and conclusions expressedin this paper are entirely those of the authori:s)and should not be attributed in any manner to the World Bank, to its affiliatedorganizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibilitywhatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates,or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permnissionpromptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering informnation)and indexes of subjects, authors, and countries and regions. The latest ediitionis availablefree of charge from the Publications SalesUnit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'1ena, 75116 Paris, France. ISSN: 0259-210X Anand Rajaram is an economist in the Country Operations Division of the World Bank's China and Mongolia Department. Library of Congress Cataloging-in-Publication Data Rajaram, Anand. Reformningprices: the experience of China, Hungary, and Poland / Anand Rajaram. p. cm. - (World Bank discussionpapers; 144) Includes bibliographical references. ISBN 0-8213-1991-4 1. Prices-Govemment policy--China. 2. Prices-Government policy-Hungary. 3. Prices-Government policy-Poland. 4. China- -Economic policy-1976- 5. Hungary-Economic policy-1968-1989. 6. Poland-Economic policy-1981- I. Tide. II. Series. HB236.C55R35 1991 338.5'2-dc2O 91-42926 CIP -v - Foreword This paper by Anand Rajaram is the third in the recently initiated series of China and Mongolia DepartmentWorking Papers. The World Bank's economic and sector work program on China is a very active one ranging over a wide spectrum of topics from macroeconomicsto health and education. Each year we publish a handful of our formal studies, but thus far most of the background papers and informal reports, many of them containingvaluable analysis and information,have remained outside the public domain. Through the China and Mongolia DepartmentWorking Paper Series, we hope to make available to a broad readership among the China watchers and developmentcommunities a few of the papers which can contribute to a better understandingof China's modernization. Price reforms are critical for China's future development. It is in recognitionof their importancethat the Chinese authoritiesare now contemplatinga program of adjustment involvingall real sectors of the economy. Mr. Rajaram's paper reviews China's experience of price reform and counitrastsit with that of several East European economies. The review underlines the need for price reform to be coordinatedwith actions that help to maintain macroeconomicstability, impose hard budget constraintson enterprisesand provide a safety net for workers. Shahid Javed Burki Director China and Mongolia Department Asia Region - vi - CURRENCY EQUIVALENTS Currency unit = Yuan (Y) Up to December 15, 1989 $1.00 = Y 3.72 Y 1.00 = $0.27 Up to November 29, 1990: $1.00 = Y 4.72 Y 1.00 = $0.21 Effective November 30, 1990 $1.00 = Y 5.22 Y 1.00 = $0.19 FISCAL YEAR ABBRE'VIATIONS AND ACRONYMS USED CMEA - Council of Mutual Economic Assistance CRP - Chinese Relative Price EBRD - European Bank fEor Reconstruction and Development ERDI - Exchange Rate Deviation Index FEACs - Foreign Exchange Adjustment Centers GDP - Gross Domestic Product IBRD - International Bank for Reconstruction and Development (World Bank) IMF - International Monetary Fund MRS - Marginal Rates of Substitution NEM - New Economic Mechanism OECD - Organization for Economic Cooperation and Development RPE - Reforming Planned Economy TFP - Total Factor Productivity TIP - Tax-Based Incomes Policies TVEs - Town and Village Enterprises WRP - World Relative Prices - vii - SUMMARY i. 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 improvementsin factor productivity. The need for price reform is made particularlyurgent by the increase in the share of price subsidies in the governmentbudget and its implicationsfor development expenditure and macro- economic stabilityin a context of relatively inelastic
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