Assessing gains in efficient production among China's industrial enterprises

A central objective of economic reform is to reduce the productive inefficiency that arose under regimes in which markets and material incentives played a limited role. Applying an approach for measuring gains in productive efficiency, the authors evaluate the progress between 1980 and 1989 among China's large and medium-size state-owned enterprises in equalizing factor productivity across enterprises. In the early stages of reform, returns on factor investments varied greatly. Total factor productivity in the most efficient mill was 37 times greater than in the least efficient mill. The differences were partly the result of central planning, including administered prices, restrictions on the flow of resources from low-return to high-return activities, and the lack of market discipline, which protects the least efficient enterprises from bankruptcy. One objective of economic return is to create the conditions that motivate enterprises to improve efficiency and that permit the owners of individual factors to seek the highest returns. Using panel data for 226 industrial enterprises, the authors report evidence that returns on investments in labor, capital and materials became more equal between 1980 and 1989. Such a pattern of convergence can be the product of different factors, but the consistency of the pattern suggests that great exposure to markets and stronger profit-seeking behavior are motivating gains in productive efficiency.