Misallocation And Total Factor Productivity Of China

Total factor productivity differences can, to a large extent, account forcross-country income differences. Recent studies show that allocational efficiency ofresources across heterogeneous firms and industries can affect aggregate TFP. Thisdissertation reviews the latest literature on misallocation and related applications,investigates misallocation in China across firms and industries with firm-level databetween1998~2007, describes its patterns overtime, and then identifies several possiblecauses of misallocation. The main findings are as follows:Misallocation across industries averages19%in China, double that in richcountries. TFP losses generated by capital misallocation are10times larger than labormisallocation. Misallocation in mining and manufacturing sector alleviates significantlyover the years, but it remains about the same in utilities sector. Regression analysisshows that industries are more likely to be overinvested with lower concentration ratio,larger SOE shares, lower entry and exit barriers, and higher mid-west area shares;industries with higher job reallocation rate tend to hire too much labor.Many studies have pointed out the role of borrowing constraints in misallocation,but the results are mixed. This dissertation finds out indicators like external finance toGDP ratios or interest spread fail to explain the TFP losses in China. I argue that creditmisallocation on firm level could matter a lot in China. Since interest rates in thebanking sector have not been market-oriented, bank loans are much cheaper thanborrowing through informal channels. Therefore, firms with better access to loans tendto overinvest. This shows that previous studies might have underplayed the role offinancial distortions in developing countries, and China could gain a lot through interestrate marketization.I recalculate the contribution of TFP to economic growth based on existingresearches, finding that TFP growth contributes25%~50%to growth of China and EastAsian Tigers, which is about the same as World average, and higher than countries likeU.S. From the growth accounting and cross-country comparison perspective, the growthof China and East Asia is healthy and sustainable, and is not an analog of the Sovietmodel.