Local Protectionism, Trade Subsidies And The Efifciency Of Resource Allocation

Resource allocation efficiency plays a key role in developing relevant policies atthe reform and opening-up stage of China. Whether the existing instruments andpolicies that are used to promote economic structural adjustment and transition areefficient have receiving an increasing popularity both in politics and academia. Ourpaper from the perspective of local protection policies and industry subsidies delvesinto the relationships between those policies and the efficiency of resource allocation.The decomposition method is derived from Melitz and Polance(2012) who breakapart a simple formula into four components: within-firm component holding thefirm’s share constant, between-firm component holding the firm’s productivityconstant, entering firm component and exiting firm component. We construct the localprotection index from two different motives that are relationship network andeconomic development. Former local protectionism tends to assign resources to localbusinesses that have relations; while the latter local protectionism tends to assignresources to enterprises with high TFP. At the industry level, we select the amount ofsubsidy as a proxy variable for trade protection, analyzing the efficiency of existingindustrial policies. The descriptive statistics, collected from the annual survey ofChinese industrial firms by National Bureau of Statistics, show that the efficiency ofresource allocation has been declining in China as well as in provincial and industriallevel. Resource allocation efficiency has less importance in contributing the growth ofTFP and declined to-0.031in2007. The within-firm component, accounting for108.6%of the growth of TFP, has received great importance in enhancing the growthof TFP. Empirical analysis shows that local protection distorts the allocation ofresources, and hinders the growth of local enterprises. However, local governmentaimed at local economic development would boost the efficiency of resourceallocation. Subsidy policies can not promote the effective flow of resources from lowproductive firms to high productive firms, and block resource allocation efficiency.Resource allocation within the State-owned enterprises is much efficient than privateenterprises. And the allocation efficiency is higher in eastern regions than in the Central and Western regions. This paper firstly raises the declining phenomenon ofresource allocation efficiency, and explains it from the perspective of protectionismand trade protection policies.It has great significance both in theoretical and practical by enriching theresearch papers of resource allocation and providing a deeper understanding of theeffects of China’s industrial policies,...