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China and Global Development Seminar Series

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Institute for China and Global Development

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presents

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Factor Market Distortions Across Time, Space and

Sectors in China
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by Xiaodong Zhu

University of Toronto

 

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October 25, 2011 (Tuesday)

11:30 a.m. to 1:00 p.m.

 

Room 910, KKL Building

The University of Hong Kong

Pokfulam Road, Hong Kong

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Remarks:  Non-HKU staff/students who are interested in attending this seminar, please register with Ms. Angelina Hung by sending your full name, affiliation and contact details to info@hiebs.hku.hk.  For enquiries, please call 2547 8472. 

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Abstract

In this paper we measure the distortions in the allocation of labour and capital across provinces and sectors in China for the period 1985-2007. Most existing studies have measured factor market distortions by using some index of dispersion in individual factor returns. However, the map between these dispersion measures and the efficiency loss due to distortions is not clear, especially when there is more than one factor. In this paper, we measure the factor market distortions as the reduction in aggregate TFP due to distortions and decompose the overall distortions into between province and within-province inter-sectoral distortions. For the period between 1985 and 2007, the distortions in factor allocation reduced aggregate TFP by about 30% on average, with the within- and between-province distortions accounting for similar portion of the reduction. Despite the large amount of labour reallocation across provinces, the cost of between-province distortions was relatively constant over the period. The cost of within-province distortions declined between 1985 and 1997, contributing to 0.42% TFP growth per year, but then increased significantly in the last ten years, reducing the aggregate TFP growth rate by 0.73% a year. Almost all of the within province distortions can be accounted for by the misallocation of capital between the state and the non-state sectors. We provide evidence that the recent increase in capital market distortions is related to the government policies that encourage investments in the state sector at the expense of investments in the non-state sector.

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About the Speaker  

Professor Xiaodong Zhu received his Ph.D. from the University of Chicago and is a professor of economics at the Department of Economics, University of Toronto and a special-term professor at the School of Economics and Management, Tsinghua University. He is an editor of the China Journal of Economics and a co-editor of the China Economic Review. He has published many articles on fiscal policy, financial markets and growth in leading economics journals such as Journal of Political Economy, Journal of Monetary Economics, Journal of Economic Theory and Journal of Development Economics.  His current research focuses on understanding the sources of growth and structural changes both in China and across countries. 

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