Reallocation, Misallocation and Domestic Flying Geese -- A Perspective of TFP Decomposition

Despite the remarkable growth rate in the past three decades, China has been also experiencing serious misallocation, which gradually manifests its severe impediment for further development of China's economy. By introducing the index of unit factor cost, we construct a new framework of productivity decomposition, and for the first time derive a “pure” reallocation effect. Empirical evidence suggests that reallocation effect in a given economic structure has been almost deployed fully, while misallocation still remains serious — welfare loss from misallocation accounts for about 30% of manufacturing value added. This indicates that further growth calls for the reform of current economic structure so as to tap more dividends from misallocation alleviation. We then provide the direction for structural reform by calculating the potential of domestic flying geese