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Economic Reforms and the Evolution of China's TFP

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  • Chadwick Curtis

    (University of Richmond)

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    Abstract

    Over the past 20 years, China has experienced one of the most remarkable growth episodes in modern economic history which has been largely fueled by growth in total factor productivity (TFP). This rise followed major economic reforms that reduced barriers to entry on private businesses. China has since transitioned from a predominantly state-run to a mixed economy of both private and state sectors. In this paper, I develop a model to investigate the extent to which economic reforms can quantitatively explain China's TFP growth. I model two sectors whose main difference is access to financial markets: the private sector faces financial frictions while the state sector does not. The model endogenously generates persistently higher TFP in the private sector than in the state sector via a selection mechanism. In the private sector, only the most productive businesses can overcome the financial frictions. In the state sector, businesses at both low and high productivity levels are able to obtain the necessary financing to operate. As a result, differences in the composition of sector-level productivities arise: the private sector has a higher fraction of productive businesses relative to the state sector. Reforms initiate aggregate TFP growth through the reallocation of factor inputs towards the productive private businesses. The quantitative analysis accounts for 25 percent of China's TFP growth since the 1992 economic reforms.

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    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1023.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:1023

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    1. Sandra, PONCET & Walter, STEINGRESS & Hylke, VANDENBUSSCHE, 2008. "Financial constraints in China : firm-level evidence," Discussion Papers (ECON - Département des Sciences Economiques) 2008048, Université catholique de Louvain, Département des Sciences Economiques.
    2. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2008. "Internal Finance and Growth: Microeconometric Evidence on Chinese Firms," IZA Discussion Papers 3808, Institute for the Study of Labor (IZA).
    3. Barry Naughton, 2007. "The Chinese Economy: Transitions and Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640643, December.
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    5. Virgiliu Midrigan & Daniel Yi Xu, 2010. "Finance and Misallocation: Evidence from Plant-level Data," NBER Working Papers 15647, National Bureau of Economic Research, Inc.
    6. 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.
    7. Francisco J. Buera & Yongseok Shin, 2010. "Financial Frictions and the Persistence of History: A Quantitative Exploration," NBER Working Papers 16400, National Bureau of Economic Research, Inc.
    8. Chang-Tai Hsieh & Peter J Klenow, 2008. "Misallocation and Manufacturing TFP in China and India," 2008 Meeting Papers 121, Society for Economic Dynamics.
    9. Xiaodong Zhu & Trevor Tombe & Loren Brandt, 2011. "Factor Market Distortions Across Time, Space and Sectors in China," 2011 Meeting Papers 1301, Society for Economic Dynamics.
    10. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    11. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," NBER Working Papers 12755, National Bureau of Economic Research, Inc.
    12. Galina Hale & Cheryl Long, 2010. "If you try, you’ll get by: Chinese private firms’ efficiency gains from overcoming financial constraints," Working Paper Series 2010-21, Federal Reserve Bank of San Francisco.
    13. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    14. Robert Dekle & Guillaume Vandenbroucke, 2010. "Whither Chinese Growth? A Sectoral Growth Accounting Approach," Review of Development Economics, Wiley Blackwell, vol. 14(s1), pages 487-498, 08.
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