| Decentralization of decision making and international trade liberalization were two major elements of economic reforms in China since the late 1970s. However, state ownership of enterprises and government (mostly local) interventions in microeconomic decisions--particularly those regarding bonuses--remained important features of the economic reality. A theoretical model, developed in this paper along the lines of the ratchet effect literature, suggests that in the presence of these distortions, delegation of decision making power to enterprises may not lead to efficient response to changes in world prices. A unique data base on China's foreign trade is then used to test the predictions of this model by estimating export supply price elasticities. The estimated negative elasticities may suggest that meeting targets, rather than profit maximization, was the dominant goal of managers in China's exporting firms. The results also suggest that the ratchet effect may have important macroeconomic effects in state-owned economies.;The data were also used to study the close relationship between economic reforms and the developments in China's trade. Detailed unit-value data are used for the first time to study China's terms of trade during the reform period and to analyze the ties between domestic production and trade volume.;The price elasticities of imports were very close to minus one at the aggregate level. This may suggest that Chinese importers operated under fixed budget constraints. At the commodity level, however, there were many commodities with price elasticities that differed from minus one. Income elasticities were found to be very high for technology imports. For other commodities a process of import substitution is evident from the data. |
