by the finding of substantial differences within this sample of steel mills with measured total factor productivity (TFP) in the most efficient mill exceeding that of the least efficient mill by a factor of **372**

1.6 The magnitude of these differences is, in part, an artifact of central planning, including administered prices, restrictions on the flow of resources from low- return to high-return activities and the lack of market discipline, which protects the least efficient enterprises from the threat of bankruptcy. Such disparate returns to similar factor inputs are costly, since, with the same quantity of inputs, the reallocation of factors from low-return activities to high-return activities can raise total output and national income. One of the objectives of the reform program is to create the conditions--the profit-seeking motive and market mechanisms-that motivate enterprises to improve overall efficiency and permit the owners of individual factors to seek the highest returns.

1.7 Using panel data for 226 industrial enterprises over the period 1980-89, this paper reports evidence that during 1980-1989 returns to labor, capital and materials became more equal among large aid medium-siz **e** nterprises within China's state sector. We also find a significant convergence of technical efficiency. While such patterns of convergence can potentially arise from numerous sources, the consistency of the pattern suggests that even among large and medium-siz **e** nterprises within the core of China's system of state planning, price reform, greater market exposure and stronger profit-seeking behavior associated with the reform program are having the desired effect of motivating gains in efficient production.

# 2. Reform and Industrial Efficiency

2.1 In the late 1970s, with a view toward raising the overall efficiency and rate of productivity growth of its economy, the Chinese govermnent initiated a broad set of reforms. While initially centering on agricultural reform and initiatives to open the economy to international trade and investment, important changes werke also undertaken in the urban industrial sector and considerably expanded during the mid-1A80s.

2.2 The impact of these reforms on state industry's overall efficiency is a matter of some debate. Studies which properly deflate inputs and outputs, however, do yield evidence of significant productivity improvement in the state sector. Among these, JRZ (forthcoming) find that during 1980-88, total factor productivity (TFP) grew at substantial rates within both the state and collective sectors. Their results, shown in Table 1, indicate that within state industry, TFP grew at an average annual rate of 2.40 percent, accounting for 28 percent of total output growth, while within collective industry productiv, -;dvanced at an annual rate of 4.63 percent, accounting for 27 percent of the growth d -*Aat sector. These rates indicate a marked acceleration in productivity growth compLm d with productivity change prior to the reforms.

> **2** Once differences in scale, the age and investment structure of the capital stock, and product mix, including different pricing regimes, have been accounted for, the difference in TFP between the most and least efficient enterprises declines to a factor of eight.

_Assessing_ **_Gains_** _in_ **_Fjciknt_** _Producdon_ **_Among_** _China's Indusroal Enerprises,_ by Gary H. Jcfferson and Xu Wcnyi 2