Does market-oriented reform make the industrial sector “Greener” in China? Fresh evidence from the perspective of capital-labor-energy market distortions

Abstract

The market-oriented reforms boost economic take-off in China, but the lag of the factor market still leads to many disadvantages where the factor market distortion is a stylized fact. There is rarely direct evidence showing whether market-oriented reform can spur industrial green development (IGD) although the industrial sector is the main battlefield of market-oriented reform. Herein this study integrates labor, capital, and energy into a unified research framework and investigates the impact of market-oriented reforms in different fields on IGD from the perspective of factor market distortion. The results from China's 30 provinces show that the distortions in the capital market and energy market play a significantly negative role in IGD while the impact of labor market distortion on IGD is not statistically significant. Further calculation shows that the growth potential of the national IGD level is 10.117% and 2.291% per year under the ideal condition of eliminating the market distortions of capital and energy, and the growth potential in central and western China is greater than that in eastern China. It is encouraging that increasing investment in R&D and pollution control will weaken the inhibitory effect. Of note, the inhibition effects are significantly heterogeneous and asymmetric across quantiles where capital market distortion shows a relatively weaker inhibitory effect in areas already in the late stage of industrialization. However, an interesting finding is that the negative effect of energy market distortion is the weakest in areas in the mid-industrialization stage, where government regulation should not be completely abandoned. The findings help shed important insights into the ongoing debate regarding the role of market-oriented reform in the high-quality development of the industrial sector in emerging economies.