Microsoft Word EcRefChina Oct06. doc

collage 
education
and 
vocational training
is asserted to give returns of 10 and 7.3 percent, respectively.
Studies based on production functions rather than wage differences suggest that the return was as high as 
30-40 percent in the 1990s (Giles et al., 2003; and Fleisher and Wang, 2001). These calculations seem to 
have covered the return on the sum of education and on-the-job training. 
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Naturally, specific investment projects in physical assets are likely to have higher returns than specific 
investment in human capital because of misallocations of resources 
within
each of these investment 
categories. 

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explain why the population share in agriculture is still quite large as compared to 
that of countries at about the same level of economic development, although the 
official figure, 50 percent of the population, is likely to be exaggerated.
50
Indeed, 
the ability of non-agriculture sector to absorb the flow of labor from agriculture 
seems even to have diminished over time – partly as a result of the reduced vitality 
of the TVEs, partly as a consequence of the large lay-offs in SOEs from the mid-
1990s. While urban employment increased by about 5.5 percent per year in the 
period 1978-1993, the corresponding figure was 3 percent in the period 1993-2004 
according to Kuijs and Wang (2005). Broadly speaking, we may characterize the 
limited ability of industry to absorb labor during the recent decades, and the related 
high and rising level of unemployment, as a “macroeconomic inefficiency”. 
However, experience from other countries suggests that it is difficult to avoid this 
type of inefficiency during the process of rapid transition from an agricultural 
society to an urban society. 
There are also indications of deficiencies in X-efficiency in individual SOEs in China – 
with production inside the production possibility curves of individual firms. One indicator 
is huge overstaffing combined with large inventories (of intermediary as well as final 
goods) in many SOEs. Another indication is that many production sectors in China use 
several times as much energy and raw materials per output unit as the corresponding 
sectors in Western Europe – although this kind of inefficiency has recently decreased 
(Bugs, 2005; IIE, 2006, Chapt. 2). A broad indicator is that while China’s GDP was about 
4.4 percent of world GDP in 2004, its crude oil and coal consumption was 7.4 percent and 
31 percent of the world total, respectively (People’s Daily, 2005, presenting the revised 
national accounts). An important explanation is that the Chinese authorities do not yet 
apply market principles when setting prices in resource-based industries, where the 
government is the dominant producer.
Moreover, there is a number of reasons to expect that state-owned firms usually are 
less efficient than private ones in China, including the political appointment of 
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Such exaggerations are rather usual in other countries as well, since individuals registered in 
agriculture often also work in other sectors. In China, in particular in coastal areas, some residents who 
work full time in other sectors are, however, also reported to belong to the agriculture population. This 
seems to be the case, in particular, in newly industrialized towns. 

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managers and the direct political intervention in the operations of such firms.
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Various studies in China have also concluded that the incentive-based contracts for 
managers in SOEs have often failed to reward profitability efforts – an indication of 
serious principle-agent problems;
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of course, similar problems can be found in 
other countries. It is often also believed (realistically, I think) that managers of 
privately owned firms are usually more concerned about boosting the work 
efficiency of their employees than are managers of public-sector firms. In fact, this 
observation is a general “folk theorem” as regards services to households, since 
private service providers have a stronger interest than public-sector providers that 
the customer are interested to come back.
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For similar reasons, we would expect 
that TVEs tend to be more effective when privately owned than when owned by 
towns and villages. This may help explain why truly collective TVEs have lost 
ground over time, as compared to private TVEs. 
When judging the efficiency of China’s growth path, it should also be kept in mind 
that GDP statistics represent a 
gross 
measure, since there is no deduction for capital 
depreciation when old buildings, infrastructure and machines are scrapped. On the 
contrary, work on such scrapping (for instance, demolition of houses) is included as 
a positive contribution to GDP. While such measurement issues emerge in all 
countries, they could be expected to be particularly important in China owing to the 
gigantic demolition of old physical structures. The hard wear and tear on the natural 
environment (soil, water and air) in China is another important example of capital 
decumulation that is not recorded in GDP statistics (indeed, not for any country). 
For instance, the depletion of water resources harms not only the quality of life of 
Chinese citizens but also the country’s production capacity in the future. 
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Xu et al.(2005) conclude from an empirical study that the economic efficiency of SOEs is negatively 
affected by more political control. Chang and Wong (2004) found that the profitability performance of 
listed firms in China is negatively associated with the power over decision-making in firms by local