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Factor Market Distortions Across Time, Space and Sectors in China

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  • Xiaodong Zhu

    (University of Toronto)

  • Trevor Tombe

    (University of Toronto)

  • Loren Brandt

    (University of Toronto)

Abstract

In this paper we measure the distortions in the allocation of labor and capital across provinces and sectors in China for the period 1985-2007. Most existing studies have measured factor market distortions by using some index of dispersion in individual factor returns. However, the map between these dispersion measures and the efficiency loss due to distortions is not clear, especially when there is more than one factor. In this paper, we follow Hsieh and Klenow (2009)'s strategy by measuring the factor market distortions as the reduction in aggregate TFP due to distortions. We extend their analysis by decomposing the overall distortions into between-province and within-province inter-sectoral distortions. We find: (1) For the period between 1985 and 2007, the distortions in factor allocation reduced aggregate TFP by about 31% on average, with the within-province distortions accounting for more than half of the reduction; (2) the measure of between-province distortions was relatively constant over the period; (3) the measure of within-province distortions declined between 1985 and 1997, contributing to 0.96% TFP growth per year, but then increased significantly in the last ten years, reducing the aggregate TFP growth rate by 1.41% a year; and (4) almost all of the within-province distortions can be accounted for by the misallocation of capital between the state and the non-state sectors.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1301.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1301

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  1. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
  2. Genevieve Boyreau-Debray & Shang-Jin Wei, 2005. "Pitfalls of a State-Dominated Financial System: The Case of China," NBER Working Papers 11214, National Bureau of Economic Research, Inc.
  3. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2008. "Plant-Size Distribution and Cross-Country Income Differences," NBER Working Papers 14060, National Bureau of Economic Research, Inc.
  4. Gasper A. Garofalo & Steven Yamarik, 2002. "Regional Convergence: Evidence From A New State-By-State Capital Stock Series," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 316-323, May.
  5. Richard Rogerson & Diego Restuccia, 2004. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," 2004 Meeting Papers 69, Society for Economic Dynamics.
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  7. Guner, Nezih & Ventura, Gustavo & Xu, Yi, 2007. "Macroeconomic Implications of Size-Dependent Policies," CEPR Discussion Papers 6138, C.E.P.R. Discussion Papers.
  8. Diego Restuccia & Dennis Tao Yang & Xiaodong Zhu, 2007. "Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis," Working Papers e07-3, Virginia Polytechnic Institute and State University, Department of Economics.
  9. Vollrath, Dietrich, 2009. "How important are dual economy effects for aggregate productivity?," Journal of Development Economics, Elsevier, vol. 88(2), pages 325-334, March.
  10. Poncet, Sandra, 2003. "Measuring Chinese domestic and international integration," China Economic Review, Elsevier, vol. 14(1), pages 1-21.
  11. Kjetil Storesletten & Fabrizio Zilibotti & Zheng Song, 2009. "Growing like China," 2009 Meeting Papers 912, Society for Economic Dynamics.
  12. Brandt, Loren & Holz, Carsten A, 2006. "Spatial Price Differences in China: Estimates and Implications," Economic Development and Cultural Change, University of Chicago Press, vol. 55(1), pages 43-86, October.
  13. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, vol. 103(1), pages 305-34, February.
  14. Tasso Adamopoulos & Diego Restuccia, 2011. "The Size Distribution of Farms and International Productivity Differences," Working Papers tecipa-441, University of Toronto, Department of Economics.
  15. Fariha Kamal & Mary E. Lovely, 2013. "Labor Allocation in China: Implicit Taxation of the Heterogeneous Non-State Sector," CESifo Economic Studies, CESifo, vol. 59(4), pages 731-758, December.
  16. Carsten A. Holz, 2009. "No Razor's Edge: Reexamining Alwyn Young's Evidence for Increasing Interprovincial Trade Barriers in China," The Review of Economics and Statistics, MIT Press, vol. 91(3), pages 599-616, August.
  17. Kim J. Ruhl, 2008. "The International Elasticity Puzzle," Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.
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Cited by:
  1. Diego Restuccia, 2013. "factor misallocation and development," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  2. Loren Brandt & Johannes Van Biesebroeck & Yifan Zhang, 2009. "Creative Accounting or Creative Destruction? Firm-level Productivity Growth in Chinese Manufacturing," NBER Working Papers 15152, National Bureau of Economic Research, Inc.
  3. Holger Breinlich & Gianmarco I. P. Ottaviano & Jonathan R. W. Temple, 2013. "Regional Growth and Regional Decline," CEP Discussion Papers dp1232, Centre for Economic Performance, LSE.
  4. Ge, Suqin & Yang, Dennis T., 2012. "Changes in China's Wage Structure," IZA Discussion Papers 6492, Institute for the Study of Labor (IZA).
  5. Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.
  6. Trevor Tombe & Jennifer Winter, 2014. "Environmental Policy and Misallocation: The Productivity Effect of Intensity Standards," Working Papers 2013-29, Department of Economics, University of Calgary, revised 21 Feb 2014.
  7. Yong Wang & Xuewen Liu & Xi Li, 2013. "A Model of China's State Capitalism," 2013 Meeting Papers 853, Society for Economic Dynamics.
  8. Carsten A Holz & Aaron Mehrotra, 2013. "Wage and price dynamics in a large emerging economy: The case of China," BIS Working Papers 409, Bank for International Settlements.
  9. Xiaodong Zhu, 2012. "Understanding China's Growth: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, vol. 26(4), pages 103-24, Fall.
  10. Chadwick Curtis, 2013. "Economic Reforms and the Evolution of China's TFP," 2013 Meeting Papers 1023, Society for Economic Dynamics.
  11. Zheng (Michael) Song & Guiying (Laura) Wu, 2013. "A Structural Estimation on Capital Market Distortions in Chinese Manufacturing," Economic Growth centre Working Paper Series 1306, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
  12. Ma, Shuzhong & Feng, Han, 2013. "Will the decline of efficiency in China's agriculture come to an end? An analysis based on opening and convergence," China Economic Review, Elsevier, vol. 27(C), pages 179-190.

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