Recasting the Iron Rice Bowl: the Reform of China's State Owned Enterprises
Abstract: The profitability of China's state owned enterprises (SOEs) sharply increased following the enactment of reforms in the mid-1990s. Rapid growth in profitability could indicate that SOEs restructured; however, it might also indicate that the state used its standard tools including product market protections, input subsidies and financial bailouts for its SOEs that in fact enable SOEs to avoid restructuring (Kornai, 1990; and 1992, Part III). This paper shows that SOE profitability grew for two reasons. First, the elasticity of substitution between capital and labor in 136 3-digit Chinese manufacturing sectors is generally estimated at above unity: thus, as the cost of capital for SOEs fell, the capital-intensity and profitability of SOEs dramatically increased. Second, our estimates show that over time SOEs were under less political pressure to hire excess labor. While the productivity of SOEs improved due to the policy of "grasping" the big ones and "letting go" of the small ones, it still lagged foreign and private firms. Overall, our results indicate that SOE restructuring was limited.
