The Efficiency Impact of the Chinese Industrial Reforms in the 1980’s

A stochastic frontier production function is used to estimate the effect of partial and gradual reforms in the 1980’s in each of seven state-owned manufacturing industries. Reform-induced gains in technical efficiency were significant in all sample industries although not always substantial enough to motivate industry-wide productivity growth. The bonus system had speedy and impressive efficiency effects, but there is no consistent evidence on the effectiveness of other reform measures, including greater output autonomy, partial exposure to market influences, and the possibility of dismissals for malfeasance. Equalization of marginal factor returns across firms was observed in some industries, which may be considered as evidence of improved allocative efficiency in response to the reforms.