Economic reform and the efficiency of Chinese state enterprises : with special reference to energy utilisation

Abstract

This thesis examines the impact of economic reform on the technical and allocative efficiency of Chinese state enterprises, using survey data for 1980 and for 1984-88. Market-oriented economic reform of state enterprises began in the late 1970s and continued throughout the 1980s. The thesis focuses on two important aspects of reform: the process by which the central planning system was replaced with an open market system; and changes in institutions governing the financial relationship of enterprises and government, the financing of capital and the management of labour. Both aspects were necessary if state enterprises were to operate efficiently in a competitive market environment. The primary purpose of the thesis is to explore the impact of the reforms on the efficiency with which factor inputs, including energy, are used in a sample of state enterprises in China through the reform period. The reform was seriously flawed, particularly in the area of the financial relationship between enterprises and the govemment and banks. The efficiency of state enterprises is analysed within the framework of Komai's soft budget constraint hypothesis, where the key to improving technical and allocative efficiency is to harden sufficiently the budget constraint of state enterprises. According to Komai, at least three major factors contribute to the soft budget constraint of state enterprises in a centrally planned economy: soft prices, soft tax and soft credit. The thesis investigates in detail institutional change in these areas, assesses its impact on the behaviour of sample enterprises and estimates quantitatively its impact on technical and allocative efficiency. Technical efficiency is defined as the gap between maximum potential output and actual output assessed at a given level of inputs; allocative efficiency is defined as the deviation of input mix from the optimal expansion path assessed at the prevailing relative price of inputs. In estimating technical efficiency, the stochastic production frontier, a relatively new econometric approach, is adopted. As existing models are found to be inappropriate to address the issues in the study, a modified model is used to estimate the level of technical efficiency achieved by each enterprise. This model is also used to estimate allocative efficiency. The analysis indicates that, even after economic reform, the budget constraint of state enterprises was unduly soft. The estimation indicates that both technical and allocative efficiency have improved since 1980. Further estimation suggests that the commodity market and labour management reform were successful, contributing on average over 60 per cent of the improvement found in technical efficiency during the period studied. Due to a continuing soft budget constraint, reform in the areas of taxation and financing of capital did not have a positive impact on technical efficiency. The estimates of allocative efficiency indicate that capital expansion in state enterprises was too rapid to be economically rational — another sign of a soft budget constraint. In this study, I incorporate energy into the stochastic production function as an independent input for estimation. The Chinese economy has been characterised by scarcity and inefficient use of energy resources. The industrial sector has always been China's largest and least efficient consumer of energy. Efficiency in the use of energy therefore deserves attention. The efficiency of energy utilisation in state enterprises is discussed in the framework of Komai's soft budget constraint Based on the empirical results, the thesis discusses the implications of marketoriented reform and institutional distortions for China's long-term economic growth, the fragile natural environment and future reform policies.