The productivity effects of decentralized reforms - an analysis of the Chinese industrial reforms

The empirical literature on the effects of ownership has not distinguished between the effects of ownership and the effects of control. It has also generally ignored the dynamic effects of various ownership and control rights. Using a rich set of panel data about changes in China's state-owned enterprises, the author examines the static and dynamic effects of decentralizing ownership and control rights. He finds that productivity and growth rates improved significantly when reform improved the incentives for managers and employees to learn and to work hard - for example by decentralizing the rights to control wages, make production decisions, and appoint new managers. Increasing profit-retention rates and adopting performance contracts - conventionally viewed as the most important reforms for China's state enterprises - did not improve productivity much. Overall, decentralization accounted for a least 42 percent of productivity growth in Chinese state enterprises in the 1980s. Much of that gain came from improvements in the growth rate of productivity rather than in improved levels of productivity.Labor Policies,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Public Health Promotion,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Health Monitoring&Evaluation,Municipal Financial Management

The effects of business environments on development : surveying new firm-level evidence

In the past decade, the World Bank has promoted improving business environments as a key strategy for development, which has resulted in a significant amount of investment in collecting firm-level investment climate surveys across countries. What lessons have emerged from the papers using these new data? The key finding is that the effects of business environments are heterogeneous and depend crucially on industry, initial conditions, and complementary institutions. Some elements of the business environment, such as labor flexibility, low entry and exit barriers, and a reasonable protection from the"grabbing hands"of the government, seem to matter a great deal for most economies. Other elements, such as infrastructure and contracting institutions (courts and access to finance), hinge on their initial status and the size of the market.Environmental Economics&Policies,Labor Policies,Debt Markets,Emerging Markets,Access to Finance

How China's government and state enterprises partitioned property and control rights

In 1980, China's government owned and controlled its state enterprises, which were managed (inefficiently) by bureaucrats. During the 1980s, the government experimented with decentralizing state enterprises to boost productivity. By decade's end, China's state enterprises had become more market-oriented, and the structure of enterprise property rights had changed dramatically. The author examines how China's government and state enterprises partitioned property rights -how the government and enterprises decided about incentives, financial arrangements, and control rights. The author assumes that the government is risk-neutral and the enterprise manager is risk-averse; that the government's goal is to increase revenue (or profitability), to retain control of the firms (by bailing outfirms in financial trouble and collective heavier taxes on high-performing firms). The enterprise manager and employees, on the other hand, have an informational advantage over the government that allows them to earn a rent; that advantage leads to suboptimal efforts. Among the author's findings: (1) The ways the government and enterprises partitioned property rights were consistent with the prediction of the principal-agent model based on the above assumption. (2) Many of the changes in property rights reflected the government's attempt to cope with managerial informational advantage. (3) The government, in striving for equality, rewards inefficient firms while penalizing efficient ones (the so-called ratchet effect). Efficient firms are unwilling to reveal their true efficiency. They pretend to be inefficient by slacking, so they can get more transfers. So, there are inherent conflicts between two of the government's goals: profitability and equality. And the government's desire to control state enterprises prevents many of them from becoming decentralized and improving their productivity.Labor Policies,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,International Terrorism&Counterterrorism,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,National Governance,Municipal Financial Management

Explaining the Changes of Income Distribution in China

China has experienced one of the most remarkable increase in inequality over the last decade: the Gini coefficient increasing from 25.7 in 1984 to 37.8 in 1992. Using the recent developments in the theory of income distribution (Benerjee and Newman, 1993; Galor and Zeira, 1993) and a new panel data set about Chinese provincial-urban-level income inequality, this paper finds that inequality increased with the reduction of the share of state-owned enterprises in GDP, high inflation, growth, and (less significantly) the increasing exposure to foreign trade. We also find some evidence for the Director¡¯s Law: income redistribution tends to shift resources from the rich and the poor to the middle class. We do not find schooling and urbanization to be a significant explanatory factor.

Diagnosing development bottlenecks : China and India

Although it had a a lower income level than India in 1980, China's 2006 per capita gross domestic product stands more than twice that of India's. This paper investigates the role of the business environment in explaining China's productivity advantage using recent firm-level survey data. The analysis finds that China has better infrastructure, more skilled workers, and more labor-hiring flexibility than India, but a worse access to finance and higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labor flexibility. Labor flexibility is also likely a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for India's disadvantage in productivity, and the complementarity of proxies of labor flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China. The empirical analysis suggests that it is important to consider country-specific growth bottlenecks and the indirect effects of policy reforms.Environmental Economics&Policies,Labor Policies,Labor Markets,Banks&Banking Reform,E-Business

Formal finance and trade credit during China's transition

Using a large panel dataset of Chinese industrial firms, the authors examine the determinants of access to loans from formal financial intermediaries and extension of trade credit. Poorly performing state-owned enterprises were more likely to redistribute credit to firms with less privileged access to loans through trade credit, a pattern consistent with some of the extension of trade credit being involuntary. By contrast, profitable private domestic firms were more likely to extend trade credit than unprofitable ones. Trade credit likely provided a substitute for loans for these private firms'customers that were shut out of formal credit markets. As biases in lending became less severe, the amount of trade credit extended by private firms declined.Investment and Investment Climate,Economic Theory&Research,Banks&Banking Reform,Financial Crisis Management&Restructuring,Financial Intermediation

Health Shocks, Village Elections, and Long-Term Income: Evidence from Rural China

Using a sample of households in 48 Chinese villages for the period 1986-2002, this paper studies the dynamic effects of major health shocks on household income and the role played by village elections in mitigating these effects. Our results show that in the first 15 years after a shock, a shock-hit household on average falls short of its normal income trajectory by 11.8% and its recovery would take 19 years. Based on the premise that shock-hit families impose negative externalities on richer families by borrowing from them, our political economy model predicts that the outcome of village elections would differ from that of a standard median voter model in that the elected village leaders tend to adopt pro-poor policies. Our empirical study finds that villages are more likely to establish a healthcare plan after the election is introduced. In addition, village elections reduce the probability of a household to borrow by 16.7% when one of its working adults is seriously sick. As a result, they reduce more than half of the negative effect of a health shock on household income.

Foreign direct investment under weak rule of law : theory and evidence from China

This paper develops a self-enforcing contract model to show that better economic fundamentals can help when there is weak rule of law -- but with order -- to attract foreign direct investment, whereas lowering taxes does not necessarily help. Using a cross-region Chinese dataset, the analysis finds evidence consistent with the theoretical analysis. Regional variations in tax rates and the perceived quality of formal contracting institutions are not correlated with regional inflows of foreign direct investment, but leadership characteristics are. Most conventional economic factors have the predicted effects on foreign direct investment. The finding that foreign direct investment is lower in locations where domestic private firms have better access to finance and where the air quality is poor is new to the literature.Debt Markets,Emerging Markets,Investment and Investment Climate,Bankruptcy and Resolution of Financial Distress,Access to Finance

Local elections and consumption insurance : evidence from Chinese villages

While the literature on consumption insurance is growing fast, little research has been conducted on how rural consumption insurance is affected by democracy. In this paper the authors examine how consumption insurance of Chinese rural residents is affected if the local leader is democratically elected. Exploring a unique panel data set of 1,400 households from 1987 to 2002, they find that consumption insurance is more complete when the households are in villages with elected village leaders. Furthermore, democracy improves consumption insurance only for the poor and middle-income farmers, but not for the rich. These findings underline the importance of democratic governance for ensuring better rural consumption insurance and poverty reduction.Rural Poverty Reduction,Consumption,Inequality,Services&Transfers to Poor,Economic Theory&Research

Eat, Drink, Firms and Government: An Investigation of Corruption from Entertainment and Travel Costs of Chinese Firms

Entertainment and Travel Costs (ETC) is a standard expenditure item for Chinese firms with an annual amount equal to about 20 percent of total wage bills. We use this objective accounting measure as a basis to analyze the composition of ETC and the effect of ETC on firm performance. We rely on the predictions from a simple but plausible model of managerial decision-making to identify components of ETC by examining how the total ETC responds to different environmental variables. In our empirical analysis we find strong evidence that firms. ETC consists of a mix that includes bribery to government officials both as %u201Cgrease money%u201D and %u201Cprotection money,%u201D expenditures to build relational capital with suppliers and clients, and managerial excesses. ETC overall has a significantly negative effect on firm performance, but its negative effect is much less pronounced for those firms located in cities with low quality government service, those who are subject to severe government expropriation, and those who do not have strong relationship with suppliers and clients. Our findings have important implications on how to effectively curb corruption.