“Structural Efficiency and Interregional Resource Allocation in China” by Yuk-Shing CHENG
Baptist University of Hong Kong
A recent debate has centered around the desirability of China’s decentralization reforms. To some economist, the decentralization of economic power to local governments has given rise to inter-jurisdictional competition that helps to improve efficiency. Others contend that the decentralization has led to regional fragmentation. The debate has triggered a series of empirical studies that evaluate whether China’s markets have become more integrated or not. This paper addresses the issue by examining more directly whether China has improved the efficiencies in allocating inputs and outputs across provinces. We invoke the concept of “structural efficiency” which allows us to decompose the overall inefficiencies of Chinese provinces into three components: (1) the inefficiency due to intra-provincial technical inefficiency, (2) the inefficiency due to inappropriate output mix of the provinces, and (3) the inefficiency due to suboptimal allocation of inputs across provinces. Our results show that the technical efficiency within provinces improved consistently during 1978 to 2000, but the inefficiencies caused by the other two components rose significantly after the mid 1980s and remained at high levels through out the 1990s.