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Factor Market Distortions Across Time, Space, and Sectors in China

Author

Listed:
  • Loren Brandt

    (University of Toronto)

  • Trevor Tombe

    (University of Toronto)

  • Xiadong Zhu

    (University of Toronto)

Abstract

In this paper, we measure TFP losses in China's non-agricultural economy associated with labour and capital misallocation across provinces and sectors between 1985-2007. We also decompose the overall loss into factor market distortions within provinces (between state and non-state sectors) and distortions between provinces (within sectors). Over the entire period, misallocation lowers aggregate non-agricultural TFP by an average of twenty percent. However, after initially declining, these losses increased appreciably beginning in the mid-1990s. This reversal can be attributed almost exclusively to increasing misallocation of capital between state and non-state sectors within provinces, while losses from between province misallocation remained fairly constant. We argue that the recent increase in capital market distortions is related to government policies that encourage investments in the state sector at the expense of investments in the more productive non-state sector. (Copyright: Elsevier)

Suggested Citation

  • Loren Brandt & Trevor Tombe & Xiadong Zhu, 2013. "Factor Market Distortions Across Time, Space, and Sectors in China," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 39-58, January.
  • Handle: RePEc:red:issued:11-95
    DOI: 10.1010/j.red.2012.10.002
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    File URL: http://dx.doi.org/10.1016/j.red.2012.10.002
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    More about this item

    Keywords

    Factor markets; Distortions; Total factor productivity; China;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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