Opening Up The Process Of Factor Market Distortions And Macroeconomic Imbalances

The thesis seeks to explain the imbalance of China's macro-economy in the perspective of factor markets. For the last 30 years, comparing to the production market price reform, the market-oriented reform of production factor in China has been severely lagged behind. Segmentations of factor market exist among industries and regions. The ability to obtain and make use of factors varies significantly between SEOs and non-SEOs. The remnant of planned-economy mechanism still hinders the proper function of factor market. As a result, production resources fail to be allocated sufficiently, which leads to an overall imbalance in macro-economy. For example, in labor market, the differences between urban and rural household registration system limits free flow of rural surplus labors, and the discriminative education and health care service further worsen the situation. Large amount of surplus labors under this situation often failed to obtain reasonable payment, even includes those intellects. Thus, the distortion of labor market, which causes unreasonable payment of labors, hinders the growth of household income, which in turn results in continuously low demands in consumption. In order to sustain economic growth under this situation, investment and export have to be increased significantly, which would lead to internal and external imbalances respectively.Imbalance of macro economy is one of the most important issues faced by China's economy. It appears at external level as long-standing"double surplus", and at internal level as disproportion between consumption and investment and insufficient internal demand. Internal imbalance is the main cause of overall imbalance, while external imbalance is the chief reflection of the internal. They are interrelated and mutual checks. When China's economy encountered negative impacts from outside, problems caused by economic imbalance would outbreak. Economic imbalances, both internal and external, are the main obstacle of China's economic development, and it may last for a considerable period of time.This thesis believes that the main cause of China's economic imbalance is the under development of factor market. The distortion of factor market is the key cause of internal and external imbalance. This thesis will seek to explain this in micro-level.Firstly, we will construct a theoretical analytic frame based on literature review and practical situation in China. For the past 30 years, China's factor market has changed dramatically. In order to capture all key factors that affect China's factor market, this analytic frame will follow guidelines below. First is accordance to micro-economic law. Distortion is a status that dispatch from the ideal equilibrium. When MRS L1 K≠MRSL2K, factor market would in fact, become distorted. Second is analysis of macro imbalance. We will take from macro angle, and analyze how market distortion affects income distribution, insufficient demand, over-investment and"double surplus". Third is reflection of China's open-up process. On the one hand, we will consider that how China could take full advantage of its factor endowment and obtain comparative interests. On the other hand, we would draw up affects from opening-up. Fourth is reflection of development characteristics. Comparing to developed countries, developing countries have different factor endowments– rich labor, poor capital. In the strong pursuit of faster economic growth, developing countries often accidently distort factor market by their own hands. Fifth, we would discuss how macro-economy can achieve equilibrium under open-up condition, based on the Mundell-Fleming Model.Secondly, we will analyze changes of China's factor market and its distortion effects. For the past 30 years, both China's economy and its society have changed dramatically. The evolvement of China's factor market, on the one hand, has to accord to market-economic law, and on the other has to deal with effects of opening-up and economic transition. Therefore, in this chapter, we will first analyze background of China's factor market development. Then, we will illustrate changes and current status of labor market, capital market and land market. Finally, we will apply Stochastic Frontier Analysis to test degree of the distortion.Thirdly, we will illustration the relationship between factor market distortion and macro-economic imbalance. First, some basic characteristics of China's macro-economic imbalance will be pointed out, such as over-investment, insufficient demand, co-existence of high growth and low employment, and"double surplus". Then, we will analyze these characteristics respectively. Finally, we will testify factor market and macro imbalance in quantitative methods.Fourthly, we will consider ways to perfect factor market. First, we believe, labor market reform should be targeted to improvement of labor capital efficiency and overall economic development, and to be carried towards improvement of free flow of labor and labor resource allocation. Beginning with institutional reform, reform should gradually eliminate geographical boundaries, household registration boundaries, and industrial boundaries, weaken property ownerships, get rid of man-made market segmentations and distraction by adjusting regional development policy, industrial policy, ownership structure policy, urbanization policy, to achieve ideal efficiency of labor market. Second, we will focus on down side of China's short term compulsory capital market institutional changes, and seek to provide ideas to further carry on capital market reform and opening-up, perfect capital market structure, fasten interest market reform, eliminate market distortion and finally build a more justice, transparent and efficient capital market. Third, we will base on China's practical conditions, seek to provide ways to clarify stakeholder's lawful right and interest in land market sufficiently restrain local governments'behavior and lower their probabilities of illegal actions, and finally build a transparent and open land market..This thesis takes China's transition period as background, applies modern economic theory and mechanism to systematically analyze the economic effects of factor market distortion. We aim to improve understandings of production factor market distortion under transition economy, and provide strategies to improve China's factor resource allocation and overall economic efficiency.