Factor Market Distortions Across Time, Space and Sectors in China

HKIMR Working Paper No.26/2012

55 Pages Posted: 27 Nov 2012

See all articles by Loren Brandt

Loren Brandt

University of Toronto - Department of Economics; IZA Institute of Labor Economics

Trevor Tombe

University of Calgary

Xiaodong Zhu

University of Toronto - Department of Economics

Date Written: November 27, 2012

Abstract

In this paper, we measure TFP losses in China's non-agricultural economy associated with labor and capital mis-allocation across provinces and sectors between 1985 and 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, mis-allocation 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 mis-allocation of capital between state and non-state sectors within provinces, while losses from between province mis-allocation 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.

Keywords: China, factor market, distortion, productivity

Suggested Citation

Brandt, Loren and Tombe, Trevor and Zhu, Xiaodong, Factor Market Distortions Across Time, Space and Sectors in China (November 27, 2012). HKIMR Working Paper No.26/2012. Available at SSRN: https://ssrn.com/abstract=2181339 or http://dx.doi.org/10.2139/ssrn.2181339

Loren Brandt

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-4442 (Phone)
416-978-6713 (Fax)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Trevor Tombe

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Xiaodong Zhu (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416-978-6713 (Fax)

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