partial reform trap / institutional contradiction of transition

Naming and two research lineages

'Partial reform trap' and 'institutional contradiction of transition' denote the same phenomenon: partial reforms in the early transition from a planned to a market economy that stall the transition itself. Two lineages should be distinguished. One is the microeconomic model showing how partial price liberalization can reduce output; the other is the literature explaining the stall as political economy.

The partial price liberalization model (Murphy, Shleifer & Vishny, 1992)

Kevin Murphy, Andrei Shleifer and Robert Vishny modelled a partial reform of a planned economy, "similar to the one that took place in Russia since 1988 and in China earlier." Where only some markets are liberalized, producers may sell to private firms at free prices but must sell to state firms at state prices. Subsidized inputs can then be diverted substantially away from state firms toward private firms, "even when state firms value these inputs more," and the result may be "a reduction of total output." The authors argued this explanation illuminates consequences of the Soviet reform such as the breakdown of coordination of production, increased state policing of delivery quotas, prohibitions of trading cooperatives, and opposition to privatization. The same model was used to explain why partial reform failed in Russia but worked in China.

Political economy of the partial reform equilibrium (Hellman, 1998)

Joel Hellman's 'Winners Take All' (1998) introduced the 'partial reform equilibrium.' Early actors who gained enormous wealth from the market distortions of the early transition used their economic and political clout to preserve those distortions and stall further market reform. Winners have an incentive to maintain the equilibrium when the rent flows lost to further reforms exceed the gains those reforms would create. The concept was subsequently applied to other market-transition countries, China among them. With Daniel Kaufmann, Hellman also developed 'state capture,' defined as political corruption in which actors seek to shape state laws, rules and regulations in their interests by providing private benefits to public officials. Related work argued that it was not the 'losers' but the rent-seeking winners of early reform (state managers turned private owners, new bankers, oligarchs and mafiosi) who froze the transition mid-way.

Specifying the mechanism (IMF, 2000)

Oleh Havrylyshyn and John Odling-Smee, writing in the IMF's Finance & Development in 2000, summarized how rent-seeking vested interests push for partial transition. Where market reforms began early and moved fast, the power of socialist elites was curtailed; elsewhere many former elite members channelled old status and connections into new profit making. Continued subsidization of energy and key raw materials in Moldova, Russia, Ukraine and Uzbekistan, among others, created opportunities to obtain government trade licences and earn large rents by buying primary products cheap. The authors note that vested interests ultimately supported stabilization and privatization but opposed market liberalization and the rule of law, since these reduce the value of their privileged positions and monopolistic power. The result is "an equilibrium (at least temporarily) frozen into an economy with private ownership but without a competitive market."

China application (Pei, 2006) and limits

Minxin Pei applied the framework to China in 'China's Trapped Transition' (2006), describing a transformative phase in which "half-finished reforms have transferred power to new, affluent elites" who perpetuate their privileges, and a hybrid state-centred system that lets the party "tap efficiency gains from limited reforms" while preserving the command economy's core. Pei reports that per capita income rose tenfold and foreign trade exploded from $20bn in 1978 to $1,000bn in 2005, yet reform momentum stalled after de-collectivizing agriculture and privatizing small state-owned enterprises, with the state still owning nearly 60 per cent of fixed assets. The framework highlights that stalled reform may stem from distributive conflict and political interests rather than purely economic design failure. Limits remain: Hellman himself noted that if initial rents are more thoroughly dissipated, winners might find comprehensive reform's efficiency gains more attractive than reduced rent flows, and that the concentration of power is difficult to measure precisely. Critics also argue that rent-seeking contributed only in a qualified way to the conversion of centralized planned budgets into private control, and that the output decline of partial transition was not due solely to the relaxation of political control.