Market Liberalization Policies in a Reforming Socialist Economy

This paper presents a model of a socialist economy, incorporating bargaining over wages and employment in the socialized sector, efficiency wages in the non-socialized sector, and shortages which are reflected in the black market. The model is used to analyze the implications of liberalization policies, including trade liberalization, an administered price increase, and permission for increased direct foreign investment. The results suggest, among other things, that reforms may have different effects under different trade regimes; that small price reforms may have perverse effects; and that foreign investment in a shortage economy may be immiserizing