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Economic Effects of Misallocation and Industrial Structure Imbalance

Author: LouDongWei
Tutor: CaoYuShu; JinXiangRong
School: Zhejiang University
Course: Political Economics
Keywords: misallocation misallocation indices industrial structure imbalance economic transition
CLC: F062.9
Type: PhD thesis
Year: 2013
Downloads: 131
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The inefficiency of economic growth caused by the resource misallocation exists everywhere in the real economy, not only includes the microcosmic factor allocation efficiency and the meso-level industrial organization efficiency, but also involves in the macro-level demand structure change, technological progress status and quality of economic growth.The formation of the concept of the misallocation and studies in this aera start from Hsieh and Klenow (2007). The researches in this field got a lot of attention at home and abroad in recent6years for the reason of providing a new analytical perspective on the quality of economic growth, especially in TFP growth research.Prior to this, the traditional distortion theories hold that the allocation of inputs is inefficient in the sense that marginal outputs of factors deviate from its competitive market-clearing price. And as a matter of fact, the marginal revenue of factors are unable to effectively measure in the perfect competition condition.So that distortion theories always have many difficulties in measuring the degree of distortions.while the resource misallocation theory formed a systematic theoretical basis from micro to macro,and the measure of misallocation can bypass the calculation of marginal incomes under the perfect competitive condition.But most of these studies finally boils down to the measurement of decline of TFP growth which caused by misallocation, rarely discussed other aspects of the impact effects.Besides, they always pay more attention to the results of misallocation, less discussion about the process and the cause of misallocation (Assuming it already exists in advance). Which not only affects their explanatory power on the real economy, but also affects the integrity and the systematicness of the theory.In view of this, to construct and reveal a mechanism and the theoretical framework among misallocation, industrial structure imbalance and the quality of economic growth,will have a very important theoretical and practical significance to the crucial period of economic transition in China.This paper firstly analyzes the relevance of the misallocation and some special economic problems which appeared during the China’s economic transition period.Then,we revise and expand the traditional non-equilibrium growth theory through introducing the misallocation index into the multi-sectoral growth model, which build up an systematic theoretical framework on misallocation, structural imbalance and unbalanced growth.Based on the above analysis framework,we also carry out a detailed empirical tests in two dimensions, mainly analyze the economic effects that caused by misallocation from the perspective of closed and open economy,which explore the statistical correlation between misallocation and industrial structure, demand structure, the structure of output, income distribution and regional differences.In addition,we attempt to introduce endogenous thought of misallocation into theoretical model under the condition of opening up In chapter7. And we discuss the continuous influences of misallocation and its causation at the end of the article. From the above point of view, we get the following significant conclusions:(1)"Kaldor facts" and the "Kuznets facts" does not have broad applicability during the transition period of China, and the problems that arise in this period have extensive and close contact with misallocation.Through analysing the decline in domestic demand, excessive investment, industrial structural imbalances, widening income gap and other emerging stylized facts in China,we find that not only the capital-labor ratio has a long-term unstable growth characteristic(contrary to the "Kaldor facts"),and China’s current factor allocation between industries are totally contrary to the law of industrial change.(ie, the allocation and mobility direction of factors between secondary and tertiary industry are opposite to the natural technology level of industries,that is not comply with the "Kuznets facts"). so we believe that the current China’s transformation and upgrading of industrial structure does not yet have the technology base.(2) Misallocation and industrial structure imbalance are two different kinds of non-efficiency states, but they are both interrelated and interacting.After decomposing the misallocation index into intra-industry absolute misallocation index, factor price misallocation index and the relative misallocation index between industries,we calculate and analyze the misallocation indices on different industries, different regions and different ownership sectors,then we find that:Three industry misallocation index and China’s economic structure has the same movement trend, which shows changes in the state of resource allocation and changes of economic structure has very strong correlation.secondly,The calculation results of industry misallocation index shows that the resource allocation state of China’s industries has formed two extremes:one is about tobacco industry,water, gas supply industry and ore mining industry,which have natural monopoly characteristic. The other is highly competitive, low value-added,low-tech and labor-intensive industries such as textiles clothing, furniture, stationery and sporting goods industry and the timber industry. Both of which exist serious misallocation.In addition, from the estimates we also find that eastern region has the highest efficiency of resource allocation in China’s three main regions(3) The special economic problems (including excessive investment, insufficient domestic demand, state-owned capital crowding-out of private capital, the shortage of migrant workers and so on) that appear in China’s transition period have a very significant statistical correlation with misallocation.If we can eliminate the misallocation factores, China’s economic growth will be able to make a qualitative improvement.And through further decomposition of economic growth we find that if we can eliminate all "wedges" in the misallocation years, China’s GDP growth rate can raise0.90percentage points averagely in these mismatch years. In chapter6,the paper analyzes the statistical correlation between misallocation, final demand structure and industrial structure,the results show that if the level of misallocation is reduced one unit,then we can make the consumer demand increased by an average of0.62percentage points, alleviate excessive investment demand by6.8%,and further more,can enhance the proportion of tertiary industry output nearly2.16percentage points.(4) In the short term, the difference technical advantages in different departments will exacerbate inefficient allocation of resources between industries,and the technology spillovers through international trade will not always lead to a result of balanced and efficient development among departments as well.Based on the analysis of35industrial sectors’panel data,we find that technology spillover has diametrically opposite effect on the allocation of resources among industries when we trade with different countries that have heterogeneous technical levels,the reason mainly lies in trading with technology leading countries will weaken the pro-competition effect between industries,and will also expand some industry’s technology advantage over other industries at the same time.So the result will exacerbate the degree of misallocation and uneven flow of resources among sectors as we mentioned above.(5) The economic effects of the misallocation have systematic and persistent features while government intervention is an important reason for misallocation.After classifying and analyzing the factors that cause misallocation by statistical ways,we find that government’s institutional intervention can not only help the state-owned enterprises to obtain low-cost input factors, but also encourages the excessive capital formation of monopoly sectors with the combination of monopoly privileges.And thus,it will form a crowding-out effect on private capital during a very long period of time.We then conduct an empirical analysis on the economic effects of misallocation,the results show that capital and labor misallocation have a lasting impact on the structural imbalance,and as a response to1unit shock of misallocation,the economic system will take8-10time period to gradually converge at last.Based on the above analysis, the paper puts forward several suggestions:for example, increase and broaden the private capital access field, reducing the sector and industrial monopolies; accelerating factor market reforms to reduce barriers to factor mobility; strengthen and encourage innovation and creativity, accelerate the reduction, replacement and elimination of outdated energy-consuming industries; accelerate institutional innovation and economic reform, reducing the inefficient allocation of factors among industries; accelerate the reform of income distribution in order to reducing the widening factor income gap; strengthen regional coordination and interaction, reducing regional and inter-regional blockade and homogeneous competition between regions.

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