Manufacturing productivity in China and India: The role of institutional changes

In this paper we undertake a comparative study of productivity in the manufacturing sector for China and India using data from survey of manufacturing industries for the two countries. We find that productivity of manufacturing industries in China relative to that in India improved substantially over the 1998-2003 period. Specifically, the average total factor productivity (TFP) growth for the manufacturing sector over this period was about 11% higher in China than in India. We document two substantial changes in government policies in China that were not witnessed in India. First, the late 1990s saw an enormous wave of ownership restructuring due to the formal endorsement of private property rights by the Chinese central government. Second, in 1997 a large scale labour retrenchment program was launched to address the long standing problem of labour redundancy in the public sector. Using data from the Chinese survey of manufacturing industries, we quantify the impact of these large scale institutional changes on TFP of Chinese manufacturing industries. We find that these policy changes can explain about 30% of the growth in TFP of manufacturing industries. Hence we conclude that these institutional changes in China can account for a significant part of the gains in productivity of manufacturing industries in China relative to that in India over the 1998-2003 period.