51 better chance of getting bank loans. Better functioning financial markets would, however, also require new instructions to public-sector banks (not to discriminate private firms) and an improved regulatory framework for financial institutions in general. More private banks through entry and privatization would also help remove the discrimination of private firms, and hence boost the efficiency in the banking system as a whole.<sup>101</sup> The hypothesis that such reforms would make GDP growth more intensive (less resource-demanding) is supported by the fact that the level of total factor productivity is lower in SOEs and collectively owned TVEs than in “comparable” private firms (basically firms of the same size and type of industry), including foreign firms.<sup>102</sup> A number of recent studies also suggest that economic efficiency has tended to increase in firms after being privatized.<sup>103</sup> From a social point of view, the _distribution_ of factor income, and not just its level, is naturally crucial. This makes a strong case for combining general growth-promoting policies with _targeted_ interventions to boost productivity growth in low-income regions, as well as among low-income groups of citizens regardless of where they live.<sup>104</sup> As compared to many other types of redistributional interventions, policy measures specially designed to boost factor income among low-income groups through higher productivity have the advantage of enhancing rather than harming economic efficiency.<sup>105</sup> Indeed, empirical studies in China indicate that targeted infrastructure investment in poor

> 101 A McKinsey report on China (2006, p. 88) argues that a more efficient allocation of financial funds, in the form of a shift of lending from SOEs to private firms, could increase GDP byUS$ 259 billion, or 13 percent, alternatively keep the same growth rate with US$ 259 billion less investment each year – resources that could then be used for other purposes. Clearly, all such calculations are highly uncertain.

> 102 See, for instance, empirical studies that compare SOEs and private firms by Anming et al. (2003); Xu et al. (2005) and McKinsey (2006).

> 103 Phillips and Kunrong (2005) find that growth rates are higher in geographical areas with a smaller share of SOEs – other factors held constant. Some support for the hypothesis that collectively owned TVEs are less productive than privately owned TVEs is found in a study by Chang et al. (2003), according to which privately owned TVEs tend to generate a higher return on their assets than collectively owned TVEs, even when the latter have incentive-oriented contracts for managers. 104 An example of such policy measures is the poverty reduction programs coordinated by the State Council’s Leading Group for Poverty Reduction (LGPR), established in 1986.

According to Hussain (2003), the incidence of absolute poverty (less than one dollar per day) varies from 0.68 to 13.5 across cities.

105 There is, however, a risk that targeted infrastructure investment will result in serious waste, since the authorities may be tempted to neglect efficiency concerns when distributional aspects become important for investment decisions. Indeed, there are many striking examples of such consequences from other countries. The heavy government investment in infrastructure in southern Italy during many decades is a well known example.