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SOURCES OF ECONOMIC EFFICIENCY FOR CHINA'S TOWNSHIP AND VILLAGE ENTERPRISES

Volume 5, Issue 14 , April 2003, , Pages 83-112

Abstract

There is a tension between energy efficiency of the State Owned Enterprise (SOE) sector versus the economic efficiency of the Township and Village Enterprise (TVE) Sector in China. Research has shown that the cokemaking sector in Shanxi Province exhibits contradictory features of having greater overall ... Read More There is a tension between energy efficiency of the State Owned Enterprise (SOE) sector versus the economic efficiency of the Township and Village Enterprise (TVE) Sector in China. Research has shown that the cokemaking sector in Shanxi Province exhibits contradictory features of having greater overall factor productivity than the SOE cokemaking sector, while at the same time being less energy efficient. In my current research I have shown that this is not a unique feature of the TVE cokemaking sector in Shanxi Province, but that the same paradoxical behavior is exhibited by an overwhelming majority of industrial and service sectors, in addition to the agricultural sector, in Shanxi Province and China as a whole.Virtually, all productivity studies of state-owned and township and village enterprises in China during the 1980s and 1990s concluded that the growth of productivity in the TVE sector has outpaced that of the NTVE sector. In this paper, I show some of the reasons behind the economic efficiency of the TVE sector as compared to the NTVE sector, despite the fact that my analysis also shows that they are less energy efficient. Using Structural Decomposition Analysis, I show that 28 out of 29 TVE sectors in China are less energy efficient than their NTVE counterparts. This, despite the fact that TVEs in China have enjoyed far better economic performance than NTVEs, particularly SOEs, with among other things total factor productivity being three times as great as that of NTVEs. In order to reconcile this paradox, I examine the direct and indirect labor inputs between the TVE and NTVE sectors in China. It is apparent from the analysis that TVEs direct and indirect labor inputs are much lower than that of NTVEs, which offsets the differences in direct and indirect energy inputs. In order to explain the above differences in economic, energy and labor productivity between TVEs and NTVEs, I have extended previous studies on institutional theories of property and ownership, showing the contribution of many institutional factors to TVEs economic performance. Among the most important of these factors are financing of investment, security of property rights, transaction costs, urban proximity, collective heritage, government revenue, non-farm employment, and per capita income. In this paper, I examine the paradox in the energy and economic efficiencies between China's Township and Village Enterprise (TVEs) and Non-TVE (NTVEs), the majority of which are State Owned Enterprises (SOEs). Many analysts (e.g. Jefferson 1999, Steinfeld 1998, Lardy 1997, Liew 1997, Fewsmith 1994) have tried to explain the superior economic efficiency of TVEs and their rapid growth since the beginning of the reform process, in 1979. These analysts laud the TVEs economic efficiency as an example of how the privatization process in China is making the entire economy more efficient; however, they overlook two important facts. First, TVEs are not mainly privately owned firms, and, second, even those that are, do not have the basic features of traditional private enterprises.At the same time, the success of TVEs has been used to criticize the supposedly bloated SOE sector, which constitutes the majority of industries in the NTVE sector and its inefficient and unproductive industries. Although SOEs may be economically inefficient, most analysts neglect to note that SOEs engage in many social functions other than profit maximization and improving productivity. The purpose here is to add another element into the debate between the SOE and TVE sectors, namely, although most TVEs are more economically efficient, SOEs are more energy efficient. I show that the primary reason behind this paradox is the fact that ambiguous property rights in the TVE sector allow these industries to establish informal relationships that often result in lower input and labor costs than in the NTVE sector.This paper is divided into three parts. In the first part, I give an overview of the differences between TVEs and NTVEs. In the second part, I examine the underlying energy and economic efficiency differences between TVEs and NTVEs by structural decomposition analysis. Finally, based on the results of the first two parts of this research, I give a theoretical basis for the observed paradox, focusing on the issues of property relations in the TVE sector.

Iranian Journal of Economic Research

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