How State-owned Enterprises Are A Drag On Economic Growth: Theory And Empirical Evidence From China

This paper aims to explore possible ways in which state-owned enterprises(SOEs) drag on economic growth. In our view, the SOEs'efficiency loss can be divided into two categories:First is the efficiency loss of the SOEs, Second is the further efficiency loss brought about by the SOEs'efficiency loss itself. Traditional view stresses the first efficiency loss of SOEs and ignores the second one. On the basis of the survive predicament of the SOEs, this paper introduces a new concept of "Economic growth cumbrance" to investigate the SOEs'efficiency loss again.We believe that the old definition of SOEs'efficiency loss not only limits people's knowledge, but also makes it difficult to answer the causes of many phenomena in the reform. The intention of this paper is to redefine the meaning of SOEs'efficiency loss, and explore possible ways how SOEs damage the economic growth. We provide logical explanations for many phenomena and correct some misunderstandings in the reform process.The feature of low efficiency of SOEs relative to other ownership of enterprises has been confirmed by literature. In order to safeguard the survival of inefficient SOEs, the government has been providing a wide range measures of protection and assistance. The protection and assistance measures have a variety of negative effects on the economic growth. The main objective of this paper, is to answer this problem: How the SOEs drag on economic growth?Based on practical observation, we have found that there are five main ways: First, the soft budget constraints of SOEs lead to moral hazard and inefficiencies, and crowd out the taxation and public services, so that the private enterprise development is dragged, and ultimately undermine the overall economic development; Second, in order to provide hidden subsidies to inefficient SOEs, Chinese goverments take the policies of financial repression and bank discrimination, which is damage to economic growth; Third, in the process of economic transformation, market segmentation plays the role of a kind of hidden subsidy to SOEs. The state-owned share of a region determines the extent of implicit subsidies, and further determines the degree of market segmentation; Fourth, SOEs in the factor market charge the product market enterprises an implicit tax through factor monopoly, so that the SOEs' profit is equivalent to a kind of hidden financial subsidies; Fifth, in the process of transition to the market, regions with high proportion of initial state-owned economy may lock into "historical lock-in effect", while regions with low proportion of initial state-owned economy may grow rapidly. There will lead to a polarization effect among regional competition and widening regional disparities.Through a series of studies, we show that the ownership structure plays a very important role in the entire national economy. Inefficient SOEs hurt the development of private enterprises and overall economic growth through various ways. Our policy meaning is very clear:in order to achieve healthy and fast economic development, we must unswervingly carry out reform of SOEs. Moreover, from our point of view, the SOEs reform is not just to highlight the enterprises'efficiency, but also create favorable conditions for financial deregulation, elimination of market segmentation, weaken factor market monopoly, and balanced regional economic development. The direction we indicate is that:If China wants to achieve a smooth transition to mature market economies, it is necessary to take SOEs reform as the center to spur the overall economic reform and development.