Post-Reform Industrial Productivity Performance of China: New Evidence from the 1985 Industrial Census Data

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I. INTRODUCTION During the last decade China implemented a series of economic reforms that followed what many observers agreed was a period of stagnation in industrial productivity.(1) The first wave of Chinese economic reforms (1978-79)--following the economic opening to the West under the "Four Modernizations"--began after the Third Plenum of the Eleventh Central Committee of the Communist Party of China announced a new policy of economic modernization in December 1978. A major goal of the new policy was to improve productivity. Toward this end, the Party would (1) allow the formation of private enterprises; (2) permit state-owned and collective enterprises to retain a portion of their profits; (3) devolve a greater degree of decision-making to factory managers and drastically reduce the scope of planning; (4) introduce material incentives such as bonuses to labor; and (5) place increased reliance on markets for inter-industry resource allocation. It is important to note that at this time, in the early 1980s, real reform was limited to the agricultural sector, as discussed in Perkins [1988]. The second wave of reforms occurred in 1983-84 with the announcement of sweeping changes for the urban industrial sector. These reforms included four major measures: (1) a reduction in the number of leadership positions in enterprises; (2) a further expansion of enterprise managers' authority; (3) the substitution of an income tax for remission of profits to the state; and (4) removal of the ceiling on bonuses. Naturally, it is important to know whether or not these reforms improved Chinese industrial productivity. Since the early 1980s both Chinese and Western economists have conducted many empirical studies on China's post- reform economic performance. However, the results from these studies are far from conclusive. For example, the World Bank [1983; 1985], Field [1984], Yeh [1984], Chen [1986], Chen and Sang [1986], Pan [1986], and Tidrick [1986] have reported that input accumulation accounts for nearly all of output increases in industry as a whole in the early 1980s. In particular, Tidrick [1986] found that "China's performance has been extremely disappointing": total factor productivity in the state-owned industrial sector declined at an annual rate ranging from -0.10 percent to -1.20 percent for the period 1978-83. In contrast, more recent studies, such as those by Kuan et al. [1988], and Jefferson [1988], have found that China's post-reform industrial productivity was significantly improved. Most notably, Kuan et al. [1988] found that Chinese industrial productivity in the state-owned sector grew at an average annual rate ranging from 2.7 to 3.1 percent for 1980-84, and from 15.3 to 18.2 percent for 1984-85. This difference in the findings reported in the literature is striking and requires further investigation. One explanation is that the various studies are based on different data sets, time periods, models, and data construction methods. For example, Tidrick [1986] used aggregate time-series data for state-owned industry for the period 1952-83, while Kuan et al. [1988] used aggregate time-series data including only independent accounting units within the state-owned industrial sector for the period 1953-85. Perkins [1988] reviewed China's overall post-reform economic performance using data at the national level. He found that, during 1976-85, total factor productivity in China grew at an annual rate of 3.79 percent, accounting for over 40 percent of China's net material product. He concluded that "reform and productivity growth thus led the way to higher overall growth" and that agriculture and the collectively organized small-scale industrial enterprises "play an important role in the accelerated productivity growth of the reform periods." Perkins, however, hastened to point out that his conclusion is "based on impressionistic evidence and is in no sense definitive" and suggested that disaggregated data on outputs and inputs by sector or individual industries are required to identify those sectors that accounted for most of the rise in productivity (Perkins [1988, 628]). In this study, we use the newest and most comprehensive data available on Chinese industrial activities, the National Industrial Census of China [1988]. This data set contains information on inputs, outputs, and other variables by branch of industry and by type of enterprise for the years 1980, 1984, and 1985, and thereby provides a unique opportunity to conduct a more complete productivity analysis than could be done before. First, as Perkins pointed out, these disaggregated data allow us to identify those industries, sectors, and types of enterprise that contributed most to the overall post- reform economic performance. Second, the three years of cross-sectional data not only permit us to estimate total factor productivity growth for each industry using industry specific weights, but they also allow the estimation of output elasticities based on production functions of various functional forms. This in turn allows us to examine the sensitivity of the estimated productivity growth to the magnitude of the weights, elasticities, functional forms, and other assumptions underlying the competing factor productivity models. Finally, the three years 1980, 1984, and 1985 conveniently encompass the two waves of reform (1978-79 and 1983-84), allowing us to evaluate the performance of each set of reforms. With the new data we estimate total factor productivity growth for thirty- nine individual industries and three types of enterprise (state-owned, collective, and others) for the periods 1980-84 and 1984-85, using both the value-added model and the gross-output model.(2) For each model we estimate six variants and use the results to test for the sensitivity of the estimated productivity growth rates to different specifications. Finally, we use regression analysis to examine factors explaining differences in productivity growth across industries. Several interesting results emerge from the analysis. We find that our growth estimates are strongly affected by output specifications. Specifically, our results show evidence that the value-added model yields biased estimates of productivity growth. For Chinese industries, it substantially overestimates both productivity growth and its decline. The results of the gross-output model appear to be robust and reasonable. Based on these results, we first find that Chinese industries, in particular those in manufacturing, experienced sharp increases in factor productivity growth in the 1984-85 period as compared to the 1980-84 period. This indicates that the economy responded quickly to the 1983-84 reforms. Second, we find that total factor productivity growth is uniformly greater for collective and private enterprises than for state enterprises during 1980-84. Moreover, private enterprises continued to grow at a rapid rate and outperform both state-owned and collective enterprises in 1984-85. Third, our regression results indicate that the proportion of technical employees has significant positive effects on productivity growth in the Chinese industrial sector. Finally, there is evidence that retained profits have a positive impact on productivity growth; however, bonuses to labor appear to have a negative effect. In the next section, we discuss our productivity growth model. A brief discussion of the data and calculations is given in section III. Section IV presents the results. Section V examines the sources of productivity growth across industries and provides evidence on productivity differences by ownership. Section VI offers suggestions for further work. II. MODEL SPECIFICATIONS The Gross-Output Model The conventional methodology to measure factor productivity is based on a production function. For a three-input model, a general production function can be written as(3) (1) Q(t) = A(t)f[K(t),L(t),M(t)], where Q(t), K(t), L(t), M(t) are output, …