What contributed to China's rapid rural industrial growth during the reform period?
Abstract
This thesis examines the reasons for the dramatic growth of China’s non-agricultural rural industrial sector, or Township and Village Enterprise (TVE) sector, during the period of economic reform. TVE growth largely explained China’s rapid economic growth during this period. The study focuses on the remarkable phenomenon of rapid transfer of rural labor from the agricultural sector to the TVE sector, and on the effect of institutional changes on this transfer.
A two-sector model is established to analyse the effect of institutional change on China’s rural industrial growth. This model explains the reallocation of labor between the two sectors as a result of removing institutional restrictions on labor allocation and on non-agricultural activities. Using provincial level data, the estimation result suggests that institutional restrictions in the pre-reform period resulted in a large gap in the values of the marginal product of labor between the two rural sectors. The MPLs were gradually converging, indicating a reduction of institutional cost. From the estimation, institutional change is found to have contributed six percentage points to the average 21.7 percent TVE growth rate, during the period 1980-92. TFP growth rate was 4.7 on average. These two effects together contributed half of the TVE growth rate. Therefore they were the most important contributors. Resulting from the improvement factor allocation, rural economic growth at the aggregate level is also found to have accelerated.
Although institutional change made a remarkable contribution to rural industrial growth, the tendency of MPL convergence is found to be slow, and the MPL gap was still high in 1992. In investigating the reason, the collective-owned rural enterprises, which were the major components of the TVE sector, are found to be more conservative than private enterprises in admitting new workers from outside the local community. Although the collective enterprises played an important role, and achieved a remarkable performance in rural industrialization, this behaviour led to low labor mobility and a sub-optimum allocation of labor in the short-run, given that the markets for other factors were imperfect. It reduced employment opportunities, and was partially responsible for the MPL gap. The econometric analysis in this thesis shows a significant relationship between the concentration ratio of collective enterprises in the TVE sector and the MPL gap. This implies that the recent TVE ownership structural reform in some regions has the potential to further improve factor allocation in the rural economy, and sustain rapid rural industrial growth for a longer period.
Although various market distortions still exist, in general, the market-orientated TVE sector has achieved great success. Using a two-sector analytical framework, improved form the literature, it is found that the TVE sector not only directly contributed to China’s economic growth, but also made indirect contribution, through its externality on the growth of the state owned enterprise sector. This externality can be explained as the pressure of market competition, which forced the partially market-oriented SOEs to increase their efficiency. Although SOEs have experienced difficulties due to some institutional weaknesses, and loss of monopolistic status, this positive externality at least partially offset these negative effects on their growth. As additional evidence, the above finding is supported by SOEs’ technical indicators, by classifying industrial branches according to the extent of competition.
The above findings suggest that institutional change in the reform period played a very important role in China’s rural industrial growth, and economic growth. They also imply great potential for rapid economic growth in the future as a result of further improvements in the institutional framework. In the long run, when the institutional effect diminishes, sustainable growth will rely more on technical progress and human capital accumulation.