Transient and persistent inefficiency traps in Chinese provinces

Many existing studies on China noted that technical inefficiency varied across Chinese provinces and changed with time. These studies further observe that a province’s inefficiency status varies with time, suggesting a province’s lagging behind status may be transient. Given heterogeneity of provinces in terms of resource endowment, geographical location and so on, the judgement of a province in transient lagging status should be based on the province’s contemporaneous efficiency level compared to its own potential frontier efficiency level. Accordingly, this study distinguishes between persistent and transient inefficiency. It identifies provinces that are respectively caught in the two types of inefficiency traps and explores policy measures to reduce the possibility of a lagging behind province being trapped in the disadvantaged situations. Analysis suggests that the transient inefficiency trap problem can be mitigated by technological progress and education. It is also found that persistent inefficiency trap to a large extent is explained by geographical location, yet location’s hinderance effect can be offset by increases in public and private investment and trade openness.