Technical efficiency and productivity change of China's iron and steel industry

Abstract

The recent economic reform of China's iron and steel industry has resulted in its rapid expansion to become the largest in the world. However, the resultant increase in the use of energy and other resources has resulted in severe environmental degradation. To further increase output while reducing emissions and waste will require increased productivity. In this paper the technical efficiency and Malmquist productivity indexes of a sample of 88 enterprises producing 72 percent of the industry's output were determined for the period 1989–1997, with the aim of gaining some insights into the policy options likely to achieve this.

Introduction

Since China adopted the policy of economic reform and opening to the outside world in the late 1970s, its iron and steel industry has grown faster than any other in the world [1]. China has progressed from being the world's fifth largest crude steel producer in 1980 to being the largest in 1996. The 114 million tonnes of steel produced in China in 1998 is about three times that produced in 1980, with an average annual growth rate of 6.4 percent.

There has been a price to pay, however. The industry is energy intensive, and its expansion could not have been achieved without a very large increase in energy input, especially in the form of coal. This has resulted in severe environmental problems in the coal mining regions and around the iron and steel producing plants. In addition, China's annual emission of greenhouse gases is now about 14 percent of the world's total, and is increasing rapidly.

The Chinese government has recognized the dangers of these environmental problems, and has made many policy changes over the past 15 or so years to contain them, with particular emphasis on the energy-intensive heavy industries such as the iron and steel industry. As a result, the energy consumption per unit of output (measured by both monetary and physical units) of this industry has declined consistently over the last two decades.¹ Most researchers, for example Sinton et al. [2], Mohanty [3] and Liu et al. [4], have attributed this decline to the energy conservation programs instituted by the government over this period.

However, iron and steel production is a complex procedure, involving several stages with multiple inputs and outputs, and energy is only one of the many inputs. Besides the energy conservation program, which addressed energy use directly, many other factors could also have affected the energy intensity of the sector. Since the late 1970s enterprises have been given greater autonomy, management skills have been improved and the industry has become more market orientated. More advanced production technologies have been adopted and existing equipment has been upgraded. All of these factors could have affected the overall performance of iron and steel enterprises and hence the energy intensity of the industry. (For example, Hogan and Jorgenson [5] have identified productivity growth as an important factor in reducing energy use and hence CO₂ emissions in the US.) If China is to further develop this industry without exacerbating the present severe environmental problems, it will be important to determine the effects of possible policy regimes on productivity improvement.

The aim of this paper is to gain an understanding of such effects. To do this, we examined the overall performance of the industry over this period by determining changes in efficiency and productivity of individual iron and steel enterprises in China between 1989 and 1997.² By grouping the enterprises according to management regime, size and product structure, we aimed to gain some insight into the effects of policy changes before and during this period, and hence determine useful policy directions for the future.

We examined the efficiency of the enterprises using the method of analysis originally proposed by Farrell [6]. The Farrell efficiency measurement consists of two components: technical efficiency, i.e. the ability of a production unit to produce as much output as the inputs allow; and allocative efficiency, which reflects the use of the inputs in optimal proportions for given prices and production technology. We focused on technical efficiency, since it gives a measure of the maximum possible expansion of the output for a given level of the input factors and technology.

However, the insights to be gained from efficiency analysis are limited, because efficiency is a static measure that compares the performance of particular enterprises in the population in a particular year with the performance of the best enterprises in that year. Although this is useful in identifying the factors contributing to good performance in that year, it cannot take into account the improvement in performance with time, including improvements in the productivity of the best performers. To do this, productivity changes were measured using the Malmquist productivity index (MALM), which accounts for both the shift of best practice and the change in relevant position of enterprises along the spectrum of best practice. This method was originally proposed by Färe et al. [7] in an analysis of productivity growth in OECD countries.

Due to our special interest in energy use and the important role of energy input in the iron and steel industry,³ we included energy as a separate input factor in our study of both technical efficiency and productivity.

Our paper begins with an overview of China's iron and steel industry, including its administration and management, production technology and output structure. This is followed by a brief description of a non-parametric approach for the measurement of technical efficiency, namely the data envelopment approach (DEA), and a description of the MALM. The results of analysing China's iron and steel enterprises by these two methods are then presented, and the roles of administrative level, size and product structure of enterprises are discussed. This leads to some speculation on the policy implications of the analyses.