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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. 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.
  2. Loren Brandt & Carsten Holz, 2005. "Spatial Price Differences in China: Estimates and Implications," Microeconomics, EconWPA 0512001, EconWPA.
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  4. Bartelsman, Eric & Haltiwanger, John C. & Scarpetta, Stefano, 2009. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," IZA Discussion Papers 4578, Institute for the Study of Labor (IZA).
  5. 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.
  6. Tasso Adamopoulos & Diego Restuccia, 2013. "The Size Distribution of Farms and International Productivity Differences," Working Papers, University of Toronto, Department of Economics tecipa-494, University of Toronto, Department of Economics.
  7. 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.
  8. 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.
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  10. Restuccia, Diego & Yang, Dennis Tao & Zhu, Xiaodong, 2008. "Agriculture and aggregate productivity: A quantitative cross-country analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(2), pages 234-250, March.
  11. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2011. "Growing Like China," American Economic Review, American Economic Association, American Economic Association, vol. 101(1), pages 196-233, February.
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  13. Vollrath, Dietrich, 2009. "How important are dual economy effects for aggregate productivity?," Journal of Development Economics, Elsevier, Elsevier, vol. 88(2), pages 325-334, March.
  14. Kong-Yam Tan, 2007. "Incremental Reform and Distortions in China's Product and Factor Markets," World Bank Economic Review, World Bank Group, World Bank Group, vol. 21(2), pages 279-299, March.
  15. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital," IMF Working Papers 07/9, International Monetary Fund.
  16. Laura Alfaro & Andrew Charlton & Fabio Kanczuk, 2009. "Plant-Size Distribution and Cross-Country Income Differences," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER International Seminar on Macroeconomics 2008, pages 243-272 National Bureau of Economic Research, Inc.
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  18. Kim J. Ruhl, 2008. "The International Elasticity Puzzle," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.
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Cited by:
  1. Zheng (Michael) Song & Guiying (Laura) Wu, 2013. "A Structural Estimation on Capital Market Distortions in Chinese Manufacturing," Economic Growth centre Working Paper Series, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre 1306, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
  2. Holger Breinlich & Gianmarco I. P. Ottaviano & Jonathan R. W. Temple, 2013. "Regional Growth and Regional Decline," CEP Discussion Papers, Centre for Economic Performance, LSE dp1232, Centre for Economic Performance, LSE.
  3. Yong Wang & Xuewen Liu & Xi Li, 2013. "A Model of China's State Capitalism," 2013 Meeting Papers, Society for Economic Dynamics 853, Society for Economic Dynamics.
  4. Suqin Ge & Dennis Tao Yang, 2014. "Changes In China'S Wage Structure," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 12(2), pages 300-336, 04.
  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. 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.
  7. repec:clg:wpaper:2013-29 is not listed on IDEAS
  8. Holz , Carsten A. & Mehrotra, Aaron, 2014. "Wage and price dynamics in a large emerging economy: The case of China," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 3/2014, Bank of Finland, Institute for Economies in Transition.
  9. Chadwick Curtis, 2013. "Economic Reforms and the Evolution of China's TFP," 2013 Meeting Papers, Society for Economic Dynamics 1023, Society for Economic Dynamics.
  10. 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, Elsevier, vol. 27(C), pages 179-190.
  11. Diego Restuccia, 2013. "factor misallocation and development," The New Palgrave Dictionary of Economics, Palgrave Macmillan, Palgrave Macmillan.
  12. Xiaodong Zhu, 2012. "Understanding China's Growth: Past, Present, and Future," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 26(4), pages 103-24, Fall.

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