Contrary to one of our hypotheses, we have found no evidence that reformed profit distribution methods have a significant impact on output and productivity in the Chinese paper industry. Further investigation of this puzzle awaits data on additional industries and perhaps more precise details on the methods of surplus allocation than we have gathered. Consistent with our hypothesis, however, we have found evidence that productivity is higher when the level of enterprise ownership is lower. We attribute this correlation to the incentive effects of profit retention at the municipal level, compared to the lack of incentives inherent in remitting surpluses to authorities at higher levels. Probably the most significant and important result of this study is the likelihood that there is a very high marginal social rate of return to adding more educated personnel, especially engineers and managers, to the labor force of enterprises in the Chinese paper industry. We believe that this result carries over to the industrial sector of the Chinese economy at large. We suspect that the deficiency of educated workers is in part attributable to insufficient government support of higher education and to market wages in government-owned industrial enterprises that are far below opportunity wages in the burgeoning private and semiprivate sector of the Chinese economy. Our results imply a tremendous potential for economic growth in China. But to realize this potential it is essential that China devote a larger share of its current national income to the schooling of its present and future labor force.
