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Market Reform Vital to Efficiency Gains

Sep 08-2022   



Some part of China’s ‘digital economy’ has experienced a decline in efficiency since 2012, and mismatching of capital allocations has deteriorated, according to research by Wu Xiaoying, Research Professor of the NSD, and his team.

 

Such phenomena indicate that enterprises that have low efficiency over the long term have been taking up a disproportionally high share of resources and squeezing out their more efficient counterparts; it is also evident that inappropriate policy interventions have led to distortions in capital markets, which in turn has caused a rise in the transactional costs of economic activities, wrote Prof. Wu in a commentary that makes part of Cheng Ze Observations, a 40-commentary series on the platform economy.

 

Using TFP (total factor productivity) as the core index for the research, Prof. Wu and his team sought to emphasize that efficiency gains of an economy are largely due to institutional improvements and not technological advancement. By ‘institutions’, they refer to both laws and policies on the outside of companies and organization and management on the inside. Prof. Wu cites China’s agricultural reforms in the 1980s as a prime example of ‘institutional dividend’, in the form of efficiency gains against a backdrop of the non-existence of technological progress.

 

From 2001 to 2018, when China’s economy grew at 8% annually, its ‘digital economy sector’ contributed 70% of the economic expansion and was the most efficient of all sectors, chipping in three times the TFP growth of the overall economy. In contrast, low-efficiency sectors caused a TFP loss over 2.5 times that of the TFP growth of the overall economy. The researchers extrapolated that if the low-efficient sectors were to realize zero efficiency loss and other factors were to remain unchanged, China could achieve at least 2% more in annual GDP growth.

 

Throughout the period, capital input accounted for 84% of economic growth, compared to 9% by labor input and merely 7% by TFP. The researchers found that the Chinese economy’s reliance on investment comes at the expense of continuous slide in TFP.

 

Prof. Wu pointed out that relentless pursuit of efficiency stimulates entrepreneurs to engage in creative and innovative activities, which eventually drives technological advancement. As the pressure to improve efficiency comes from market competition, the Chinese economy is in need of a genuine market reform to ameliorate efficiency.

Market Reform Vital to Efficiency Gains

Sep 08-2022   



Some part of China’s ‘digital economy’ has experienced a decline in efficiency since 2012, and mismatching of capital allocations has deteriorated, according to research by Wu Xiaoying, Research Professor of the NSD, and his team.

 

Such phenomena indicate that enterprises that have low efficiency over the long term have been taking up a disproportionally high share of resources and squeezing out their more efficient counterparts; it is also evident that inappropriate policy interventions have led to distortions in capital markets, which in turn has caused a rise in the transactional costs of economic activities, wrote Prof. Wu in a commentary that makes part of Cheng Ze Observations, a 40-commentary series on the platform economy.

 

Using TFP (total factor productivity) as the core index for the research, Prof. Wu and his team sought to emphasize that efficiency gains of an economy are largely due to institutional improvements and not technological advancement. By ‘institutions’, they refer to both laws and policies on the outside of companies and organization and management on the inside. Prof. Wu cites China’s agricultural reforms in the 1980s as a prime example of ‘institutional dividend’, in the form of efficiency gains against a backdrop of the non-existence of technological progress.

 

From 2001 to 2018, when China’s economy grew at 8% annually, its ‘digital economy sector’ contributed 70% of the economic expansion and was the most efficient of all sectors, chipping in three times the TFP growth of the overall economy. In contrast, low-efficiency sectors caused a TFP loss over 2.5 times that of the TFP growth of the overall economy. The researchers extrapolated that if the low-efficient sectors were to realize zero efficiency loss and other factors were to remain unchanged, China could achieve at least 2% more in annual GDP growth.

 

Throughout the period, capital input accounted for 84% of economic growth, compared to 9% by labor input and merely 7% by TFP. The researchers found that the Chinese economy’s reliance on investment comes at the expense of continuous slide in TFP.

 

Prof. Wu pointed out that relentless pursuit of efficiency stimulates entrepreneurs to engage in creative and innovative activities, which eventually drives technological advancement. As the pressure to improve efficiency comes from market competition, the Chinese economy is in need of a genuine market reform to ameliorate efficiency.