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State-Owned Enterprise Behaviour Responses to Trade Reforms: Some Analytics and Numerical Simulation Results Using Chinese Data

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  • John Whalley
  • Shunming Zhang

Abstract

We note the absence of prior literature on analytical structures to be used for China and other economies with extensive SOEs when evaluating behavioural responses of SOEs to trade policy and other changes. This is despite both the large empirical literature discussing the productivity effects of Chinese SOE enterprise reform, and wider policy discussion of the potential impacts of various reform initiatives. We present two simple analytical formulations of SOE behaviour in response to trade policy change with the aim of investigating how traditional competitive models of enterprise behaviour can mislead when used in policy debate. One formulation centres on SOE managerial control. In this enterprise managers are politically appointed, expect any non performing loans to be recapitalized by state banks andhence capital is centrally allocated by credit rationing. The managers are assured to maximize the size of the enterprise rather than profits since this yields maximal networking benefits to managers. This implies labour is priced at its average rather than its marginal product, and with a competitive non-manufacturing (agricultural) industry free trade is not optimal policy. The other assumes worker control of SOEs and that workers satisfice in their supply of effort to the enterprise given both fixed wage rates and enterprise employment and otherwise shirk or pursue second jobs. In this formulation the enterprise meets their budget constraint and covers costs. With leisure in the preferences of enterprise members, their leisure consumption will be implied by the satisfying behaviour of the enterprise and will be non optimal. In both model variants, implications for trade policy are different from those of a standard competitive model, and computations using models calibrated to 2003 Chinese data suggest the differences can be large.

Suggested Citation

  • John Whalley & Shunming Zhang, 2006. "State-Owned Enterprise Behaviour Responses to Trade Reforms: Some Analytics and Numerical Simulation Results Using Chinese Data," NBER Working Papers 12780, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12780
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    1. Woo Wing Thye & Hai Wen & Jin Yibiao & Fan Gang, 1994. "How Successful Has Chinese Enterprise Reform Been? Pitfalls in Opposite Biases and Focus," Journal of Comparative Economics, Elsevier, vol. 18(3), pages 410-437, June.
    2. Ghosh, Madanmohan & Whalley, John, 2008. "State owned enterprises, shirking and trade liberalization," Economic Modelling, Elsevier, vol. 25(6), pages 1206-1215, November.
    3. Terrie L. Walmsley & Thomas W. Hertel, 2001. "China's Accession to the WTO: Timing is Everything," The World Economy, Wiley Blackwell, vol. 24(8), pages 1019-1049, September.
    4. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, December.
    5. Elena Ianchovichina & Will Martin, 2004. "Impacts of China's Accession to the World Trade Organization," World Bank Economic Review, World Bank Group, vol. 18(1), pages 3-27.
    6. Wang, Zhi, 2003. "The impact of China's WTO accession on patterns of world trade," Journal of Policy Modeling, Elsevier, vol. 25(1), pages 1-41, January.
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    Cited by:

    1. Henrik Barslund Fosse & Pascalis Raimondos‐Møller, 2012. "Reducing Tariffs According to WTO Accession Rules: The Case of Vietnam," Review of Development Economics, Wiley Blackwell, vol. 16(2), pages 331-341, May.
    2. Ji, Jingjing & Ye, Zhiqiang & Zhang, Shunming, 2013. "Welfare analysis on optimal enterprise tax rate in China," Economic Modelling, Elsevier, vol. 33(C), pages 149-158.
    3. Dong Yan & Whalley John, 2011. "Model Structure and the Combined Welfare and Trade Effects of China's Trade Related Policies," Global Economy Journal, De Gruyter, vol. 10(4), pages 1-21, January.

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    More about this item

    JEL classification:

    • F00 - International Economics - - General - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • P2 - Economic Systems - - Socialist Systems and Transition Economies

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