“Marketization and the Sources of Growth and Regional Disparities in China”

Kang Hua Cao, Hong Kong Baptist University

Yuk-shing Cheng, Hong Kong Baptist University 

We examine sources of labor productivity growth in China during 1998-2009 by incorporating marketization reforms in a nonparametric production-frontier framework. We find that marketization alone drove up labor productivity by 2.5% annually, which was a significant proportion of the overall growth of 9.3%. Failure to take into account the impact of marketization overstates the contribution of capital deepening and technological progress. Our results also suggest that physical capital accumulation remains the dominating factor in determining growth in labor productivity in China, and combined with marketization progress, it tends to reduce regional disparities. On the other hand, technological advancement contributes more to growth in the coastal areas than the inland areas and drives the dispersion in labor productivity among different regions.