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| Allocative Efficiency in China's Manufacturing Sector After the Global Financial Crisis: A Production Network Approach |
| HANG Jing, SHEN Guangjun
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| Lingnan College, Sun Yat-sen University |
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Abstract Modern economic growth is driven mainly by improved production efficiency, which may be due to technical changes or improved resource allocation. The latter has attracted the attention of economists in recent years, resulting in a large volume of literature on resource misallocation. Such research echoes China's call for “high-quality development,” of which improved efficiency of resource allocation is a key component.
However, the literature on China's allocative efficiency suffers from two problems, substantially reducing its value in terms of informing policy making in China. First, most studies do not cover periods after 2008 and thus do not address important recent changes in the Chinese economy. Second, the literature neglects the interplay between industries in the production network, which might bias estimates of allocative efficiency in China. This paper helps to fill both gaps by (1) developing a misallocation accounting framework that extends the value-added framework of Hsieh and Klenow (2009) by incorporating domestic and foreign input linkages, and (2) applying this framework to a new dataset covering the years 2009-2015, enabling an assessment of allocative efficiency in more recent years than was previously available.
Our findings suggest that during 2009-2015, allocative efficiency initially fluctuated but began to improve in 2012. Over the longer term, these changes reversed the trend of worsening allocative efficiency that had begun in 2004. These findings are robust to various alternative specifications. The improvement in allocative efficiency since 2012 is probably attributable to the Chinese government's efforts to allow market forces to play a larger role in resource allocation, as well as wiser design of economic policies. When we decompose aggregate productivity growth into different components, however, we find that improved allocative efficiency plays a minor role in productivity growth, suggesting room for future improvement.
Methodologically, our analysis shows that the estimation results differ between the value-added model, which does not consider intersectoral linkages, and the gross-output model, which allows for a full-fledged production network. As argued by Hang et al. (2020), ignoring the production network when measuring misallocation introduces biases. Our empirical findings thus caution against the future use of the value-added model. Fortunately, our analysis shows that with a few minor changes, the gross-output model is as easy to implement as the value-added model.
We draw a few implications from our study. First, we find that the Chinese economy is still far from efficient. The potential output is less than 50% of the efficient level. Continued improvements in allocative efficiency will require substantial effort. On a more positive note, however, this finding demonstrates potential of the Chinese economy for fast economic growth in the near future. Second, the Chinese economy is experiencing important structural changes. Academic studies must be up to date to inform policy decisions. Therefore, Chinese economists have a responsibility to study new economic trends in a timely fashion. Third, our study emphasizes the importance of intersectoral and foreign linkages. This emphasis echoes the new developmental paradigm, which features dual circulation. Studies in this area could help build a foundation for current developmental policy making.
Still, future studies can improve on our work in several ways. First, and most obviously, the data can be expanded to more recent years to further update the research. To obtain a full picture of the Chinese economy, future studies should also look beyond the manufacturing sector and examine other sectors, especially the services sector, which is becoming increasingly important. Second, our study mainly focuses on resource allocation within industries. While the production network still plays an important role in magnifying the effects of within-industry misallocation, between-industry misallocation is an important issue and should not be ignored. Studying between-industry misallocation would elucidate the role of the production network in magnifying within-industry effects, providing very valuable information for the new developmental paradigm featuring dual circulation. Third, due to data limitations, we cannot study the misallocation of individual intermediate inputs but must take all intermediate inputs as a whole. This approach introduces an upward bias in the estimates of allocative efficiency. That is, our estimates of allocative efficiency should be considered as an upper bound. Future studies could use better data and new methods to improve our estimates.
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Received: 16 October 2023
Published: 17 July 2024
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