June 2004 The Success and Failure of Reforms in Transition Economies Stephen L. Parente* and José-Víctor Ríos-Rull Abstract. This paper argues that an important reason why Russia’s performance and China’s performance under capitalism have differed dramatically is that different arrangements governing the determination of prices and work practices evolved during the transition process. In Russia, the arrangement, which conferred monopoly rights to industry groups left over from socialism, prevented the adoption of better technology. In China, the arrangement that evolved contained no such monopoly elements. The key factor in determining which arrangement evolved was the strength of the central government at the start of the transition. We put forth a model that implements these ideas and provide evidence in support of this theory. JEL Classification: L16, O3, O5, P2 Keywords: Economic Transition; monopoly; competition; China; Russia *Parente: Department of Economics, University of Illinois, 1206 S. Sixth Street, Champaign, IL 61820. Ríos-Rull: Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia PA 19104-6297. This paper has benefited from conversations with Lee Alston, James Bang, Daniel Berkowitz, Joseph Berliner, Anita Chan, Jiuhua Che, Tatyana Dubyokov, Guido Freibel, Barry Ickes, Per Krussell, Martin Spechler, Jan Svejnar, and Rui Zhao. The usual disclaimer applies.