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]). …