Factor price distortion among regions in China and its influence on China’s economic growth

Abstract

Factor price distortions and resource misallocation are important sources of productivity differences between regions. Promoting the free flow of factors of production is conducive to giving full play to the decisive role of the market in allocating resources, which is crucial to helping a country’s economy develop in a high-quality and sustainable manner. This paper proposes a new approach to measuring factor market distortions and establishes the relationship between factor price distortions and a country’s economic growth. This paper examines the resource misallocation and efficiency loss of 31 provinces in China from 2004 to 2020, and proposes an analytical framework for resource misallocation among regions, with which the Total Factor Productivity (TFP) and the factor price distortion of provinces in China are calculated. The calculation results indicate that the TFP of China’s provinces gradually declines from the eastern coast to the western inland. The resource allocation efficiency in the eastern and central areas is higher than that in the western areas, so is the factor price, and its distortion causes nearly 6% of loss of output value in China. China’s economic growth is still reliant on the increase of factor input and technological development and the improvement of resource allocation efficiency has no significant effect on growth.