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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. Loren Brandt & Carsten Holz, 2005. "Spatial Price Differences in China: Estimates and Implications," Microeconomics 0512001, EconWPA.
  2. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
  3. Boyreau-Debray, Genevieve & Wei, Shang-Jin, 2004. "Pitfalls of a State-Dominated Financial System: The Case of China," CEPR Discussion Papers 4471, C.E.P.R. Discussion Papers.
  4. Diego Restuccia & Dennis Tao Yang & Xiaodong Zhu, 2003. "Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis," Working Papers diegor-03-01, University of Toronto, Department of Economics.
  5. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1403-1448, November.
  6. Douglas Gollin & Stephen L. Parente & Richard Rogerson, 2004. "Farm Work, Home Work, and International Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 827-850, October.
  7. Eric J. Bartelsman & John C. Haltiwanger & Stefano Scarpetta, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," NBER Working Papers 15490, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Tasso Adamopoulos & Diego Restuccia, 2013. "The Size Distribution of Farms and International Productivity Differences," Working Papers tecipa-494, University of Toronto, Department of Economics.
  11. Vollrath, Dietrich, 2009. "How important are dual economy effects for aggregate productivity?," Journal of Development Economics, Elsevier, vol. 88(2), pages 325-334, March.
  12. 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.
  13. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China," NBER Working Papers 13103, National Bureau of Economic Research, Inc.
  14. Kim J. Ruhl, 2008. "The International Elasticity Puzzle," Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.
  15. Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October.
  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. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital," IMF Working Papers 07/9, International Monetary Fund.
  18. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2011. "Growing Like China," American Economic Review, American Economic Association, vol. 101(1), pages 196-233, February.
  19. Poncet, Sandra, 2003. "Measuring Chinese domestic and international integration," China Economic Review, Elsevier, vol. 14(1), pages 1-21.
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Cited by:
  1. Holger Breinlich & Gianmarco I.P. Ottaviano & Jonathan R.W. Temple, 2013. "Regional growth and regional decline," Economics Discussion Papers 729, University of Essex, Department of Economics.
  2. 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.
  3. 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.
  4. Diego Restuccia, 2013. "Factor Misallocation and Development," Working Papers tecipa-502, University of Toronto, Department of Economics.
  5. 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.
  6. 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.
  7. repec:clg:wpaper:2013-29 is not listed on IDEAS
  8. Ge, Suqin & Yang, Dennis T., 2012. "Changes in China's Wage Structure," IZA Discussion Papers 6492, Institute for the Study of Labor (IZA).
  9. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
  10. Chadwick Curtis, 2013. "Economic Reforms and the Evolution of China's TFP," 2013 Meeting Papers 1023, Society for Economic Dynamics.
  11. Yong Wang & Xuewen Liu & Xi Li, 2013. "A Model of China's State Capitalism," 2013 Meeting Papers 853, Society for Economic Dynamics.
  12. 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.

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