Redistribution and government tactical behaviour: An analysis of local public expenditure in China after 1994 tax reform

Transcription

1 Ristribution an govrnmnt tactical bhaviour: An analysis of local public xpnitur in China aftr 1994 tax rform Gabril Guggiola Plas consir for publication on th spcial issu of th Journal of Chins Economics an Businss Stuis (JCEBS). Abstract During th last fw cas significant changs has affct Chins public financ. Ristribution has bcom an incrasing concrn for th Chins govrnmnt an in 1994 a major tax rform has bn unrtakn. From a political conomy point of viw ristribution might ntail tactical purposs an coul rprsnt an important goal in orr to ruc issatisfaction in poorr rgions avoiing th mrgnc of social unrst. I will consir a st of structural political an socioconomic variabls in orr to analyz th trminants of local public xpnitur in thirty Chins rgions ovr th prio Th rsults of th conomtric rgrssions rval that ristribution sms not to b a priority for th Chins lars an that thr is littl vinc of som kin of political cycl influncing public xpnitur. JEL Classification: D72; E62; H72 Kywors: Political Procss; Fiscal Policy; Public Expnitur; China 1 Introuction During th last fw cas significant changs has affct Chins public financ. First ristribution has bcom an incrasing concrn for th Chins govrnmnt. China is now on of th major playrs in th worl conomic scn but notwithstaning th xcptional prformanc xprinc in th last yars not all th Chins rgions wr qually involv in th vlopmnt procss. As a rsult som rgions ar still charactriz by xtrm poornss an incom inquality among rgions (Chang 2002; Fan t al. 2002; L 2000) an among Dpartmnt of Economics Univrsity of Insubria via Mont Gnroso Vars Italy; _mail: gabril.guggiola@uninsubria.it. 1

2 social classs (Lu 2002; Xu an Zou 2000) has rais uring th last cas. An analysis of th ynamics of local public xpnitur allows to unrstan whthr th Chins govrnmnt is favoring ristribution an trying to contrast this trn or whthr th stratgy of vloping first som slct aras prvails also in th local public xpnitur allocation mchanisms. Th issu srvs attntion sinc ristribution from a political conomy point of viw might ntail tactical purposs an coul b important in orr to ruc issatisfaction in poorr rgions avoiing th mrgnc of social unrst. Th analysis of govrnmnts tactical bhavior in mocracis is wispra in th litratur whil thr is littl contribution invstigating whthr vinc of tactical bhavior can b foun in a non mocratic institutional nvironmnt. In th papr I will thrfor analyz th bhavior of th Chins govrnmnt also unr this prspctiv in orr to fin possibl vinc of tactical transfrs aiming at maintaining political consnsus. Notic that no political opning has takn plac si by si to conomic opning an th political scnario os not suggst that any significant chang is bhin th cornr. How has th Chins govrnmnt manag to rach high growth rats to incras avrag ucation of Chins citizns an to opn its conomy to forign firms an capitals without laving room for any kin of mocratization procss? Sconly th last two cas srv attntion sinc in 1994 a major tax rform has bn unrtakn by th Chins govrnmnt. As a consqunc of this rform th cntral govrnmnt currntly claims ovr 50% of ovrall bugtary rvnus whil spning a much lowr shar of funs. Thrfor allocation mchanisms btwn cntral an local govrnmnts hav bn stablish laving som room for conitioning rgional xpnitur on bhalf of cntral govrnmnt. I will analyz th structural political an conomic trminants of public xpnitur at a local govrnmnt lvl in th iffrnt Chins rgions. Th analysis as on th litratur in two ways. On on han it offrs an aitional an innovativ intrprtation of th Chins govrnmnt bhavior an of its fforts in facing th growing isparitis obsrv within an among iffrnt rgions. On th othr han it offrs som insights on possibl futur volutions of th Chins political scn that up to now hav shown a vry low gr of political rforms. Th papr procs as follows. Sction 2 survys th rlat litratur whil sction 3 scribs som pculiaritis of th Chins local public xpnitur an of th 1994 tax rform. Th conomtric mol an its rsults ar scrib in sction 4 whil sction 5 conclus. 2 Rlat litratur Th issu of rising incom inquality in China is iscuss among othrs in Chang (2002) Fan t al. (2002) L (2000) Lu (2002) Yang (1999) an Yang an Zhou (1999). Accoring to Chang (2002) rural-urban incom gap is th main sourc of 2

3 th high Chins isparitis. Th causs may b trac back to iffrncs in marginal prouctivity to rstrictions to intr rgional mobility (Yang an Zhou 1999) or to incras urban subsiis (Yang 1999). Morovr always accoring to Chang (2002) although th isparity may not furthr grow it is likly to rmain at a high lvl an thr is no ffctiv way to ruc it a part from acclrating urbanization in th short-run an to promot th growth of th morn urban sctor in th long run. L (2000) prform a composition analysis showing that th ominant sourcs of ovrall rgional inquality in output hav shift from intra-provincial to intr-provincial inquality an from isparity within th coast to btwn th coast an th intrior. Lu (2002) fins svral intrsting rsults: urban-rural consumption ratio incras in th 1990s an provincs with highr pr capita incom us to hav mor qual urban rural consumption lvls. Fan t al. (2002) invstigat povrty an inquality in th citis uring th prio of rapi urban rforms showing that whil th incinc of urban povrty clin from 1992 to 1995 this trn was rvrt 1996 to 1998 whn major urban rforms wr launch. Morovr th wstrn rgions hav th highst concntration of urban povrty an th incom gap btwn ths rgions an rst of China has bn wining ovr tim. Tactical aspcts of ristribution in a mocratic contxt hav bn wily stui. Caniats propos transfr schuls (or pork barrl projcts) in orr to maximiz th xpct shar of vots or th probability of winning th lction favoring ithr thir supportrs (Dixit an Lonrgan 1996) or th swing votrs (Cox an McCubbins 1986). Tough autocratic govrnmnts o not n to gain ay by ay support thy still n to rly on a basis of consnsus to maintain th powr an not to incur in srious rvolutionary thrats; th mchanisms to gain this support may wll b similar or at last comparabl to thos known in morn mocracis. As Wintrob (1990) notic a ictator provis iniviuals or intrst groups with public srvics or patronag in xchang for support an it appars that rgim supportrs gnrally rciv a goo tratmnt (for an mpirical analysis of Chins cas s Dickson an Rost Rubl 2000 an Li t al. 2007). Accoring to Acmoglu an Robinson ( an 2006) significant thrats of rvolution can contribut to political rforms inucing th lit in powr to incras ristribution or in xtrm cass to opt for mocratization. If incom inquality is too high ristribution may not b sufficint sinc th lit lacks of commitmnt tchnology for futur prios an th isnfranchis may prfr a rvolution to a on shot ristribution. Accoring to thir mol incom inquality usually rachs its top in th yars bfor th bginning of a mocratization procss. This is probably not th cas in China but incom inquality has risn in th last ca insta of crasing along with conomic growth an a crtain gr of ristribution might b ncssary in orr to avoi issatisfaction among poor citizns. Chins public financ an th ffcts of th 1994 tax rform hav bn analyz in svral paprs. Among thmzhang an Zou (1998) al with th issu of cntralization an cntral-local rlationships whil Zhang an Zou (2001) invstigat th rlationship btwn fiscal cntralization an growth an provi an application to China an Inia. Th structur of local public 3

4 Figur 1: Public rvnu an xpnitur in China (as a % of GDP) l l l l l l l l l l l l l l l l l > > xpnitur in China is stui in Zhang an Chn (2007). 3 Local public xpnitur in China an th 1994 tax rform As it can b sn in Figur 1 cntral govrnmnt rvnu has bn constantly crasing in th prio an this trn was not compnsat by an incras in local govrnmnt rvnu lacking appropriat incntivs to promot tax collction at a local lvl. In 1994 a comprhnsiv packag of fiscal masurs has bn unrtakn in orr to provi aquat rsourcs to th iffrnt lvls of govrnmnt liminat istortionary lmnts of th tax structur an rvamp cntral-local sharing arrangmnts. Aftr th 1994 tax rform both local an cntral rvnu hav bgun to incras. Unr th Tax Sharing Systm (TSS) introuc by th rform taxs has bn rassign to th iffrnt lvls of govrnmnt istinguishing btwn cntral local an shar taxs. In principl th nw TSS rprsnt an automatic an objctiv mchanisms to allocat rsourcs. In practic rgional rvnu has bn ruc whil local govrnmnt ar suppos to shoulr an incrasing burn in th provision of public srvics. As a consqunc local public xpnitur has incras sinc th mi of th Nintis. In 2007 it account for th 77% of total public xpnitur whil local rvnu account for only th 45% of total rvnus. Givn th clar mismatch btwn rvnu an xpnitur at th rgional lvl a cntral-local transfr mchanism n to b nact an thr main catgoris of fiscal transfrs hav bn implmnt: tax rturns financial capacity subsiis an spcial (targt) subsiis. Ths transfr schms lav som room for th cntral govrnmnt to influnc gographical an sctoral allocation of rsourcs. Rgional xpnitur xhibits a high gr of variability within rgions both as a shar of GRP an in pr-capita trms. As a shar of GRP local public xpnitur oscillats btwn an 86% in Shanong to an 80% in Tibt (or 36% in Qinghai). In pr-capita trms it oscillats btwn valus blow 200 Yuan to th highr valus (aroun Yuan) obsrv in th mtropolitan 4

5 Figur 2: Local public xpnitur across Chins rgions (2007) l l l l l l l l l l & : ' E > : ' : D / y z ' E ' Y ' : ' z & ' E : ' : y E > D / Y aras of Bijing an Shanghai (again a high valu is obsrv also in Tibt). Also th variability among th iffrnt itms is rmarkabl as point out in Zhang an Chn (2007). Thrfor th critria that riv th allocation of rsourcs among iffrnt rgions an within ach rgion among iffrnt xpnitur itms ar worthy to b analyz. 4 Th conomtric analysis In this sction I will illustrat an iscuss th rsults of th conomtric analysis prform in orr to xplain th main trminants of public xpnitur at a rgional lvl. Sction 4.1 iscusss th conomtric mol sction 4.2 analyzs ovrall local xpnitur whil sction 4.3 analyzs som slct itms of local xpnitur. 4.1 Dtrminants of xpnitur allocation I will consir a st of structural political an socioconomic variabls in orr to analyz th trminants of local govrnmnts xpnitur in thirty Chins rgions ovr th prio Th aim of th conomtric mol is to analyz th allocation of public funs across th iffrnt rgions so to fin out whthr thr hav bn tactical or ristribution purposs on bhalf of th Chins govrnmnt. Th inpnnt variabls consir will b (log) pr capita GRP 1 (log) rgional population shar of import an xport ovr GRP valu of imports an xports of forign-fun ntrpriss ovr GRP urban-rural consumption ratio shar of primary inustry ovr GRP pnncy ratio illitracy rat an a st of ummy variabls accounting for congrss cycls an th Asian crisis of GRP pr capita ntails both a structural an a political componnt. On on han public xpnitur shoul b highr in poorr rgions for ristribution 1 Gross rgional prouct. 5

6 purposs; on th othr han man for public srvics is structurally highr in high incom rgions. If th govrnmnt follows a ristribution purpos pnncy ratio an illitracy rat shoul b a positiv trminant of local public xpnitur. For what concrns pnncy ratio it shoul b consir that xpnitur on halth srvic is highr for th youngr an th lr an xpnitur on schooling is consistntly trmin by th ratio of young popl with rspct to th total population. Consiring illitracy ratio w shoul obsrv a highr xpnitur in ucation whr illitracy rat ar highr in orr to offst this phnomnon. Th total valu of import-xports by location of importrs/xportrs ovr GRP will b consir in orr to tst whthr th Chins govrnmnt is favoring in th ristribution gam mor opn an vlop rgions with th aim of pushing th growth rats in som clarly intifi aras (th spcial conomic zons) laving for th futur th task of promoting nationwi growth. W also want to chck for possibl scon orr ffcts u to th rlvanc of forign-fun ntrpriss rgaring total tra by allowing for an intraction trm btwn imports an xports of forign-fun ntrpriss an ovrall imports an xports. Sinc urban-rural isparity is among th laing sourcs of incom inquality w want to tst whthr th govrnmnt is trying to countrbalanc this trn by incrasing local public xpnitur in th rgion whr such isparity is mor manifst. Th variabl urban-rural consumption ratio will thrfor b a to th rgrssion. Following Mulligan t al. (2004) I will allow for possibl pool ffcts in public policis 2 by consiring total population within th st of inpnnt variabls. I will also consir th total shar of primary inustry 3 ovr GRP as a proxy for th lvl of vlopmnt an as a sign of th fraction of population that has lss asy accss to iffrnt public programs. A st of ummy variabls will thn b consir to account for congrssional cycls an Asian crisis of China is not a mocracy an so thr is no plac for classical lctoral cycls (with govrnmnts usually spning mor in corrsponnc of an lctoral rac). In any cas Chins political an conomic lif is organiz in fiv yar plans approv uring th prioical congrsss of th Chins Communist Party. Is thr any link btwn th timing of th plans an th xpnitur whn congrss is forthcoming? Coul it b th cas that xpnitur incrass shortly bfor ach congrss whn it is ncssary to rach th plann rsults an to gain political visibility in viw of th imminnt political mting? A spcific ummy intifying th yar prcing ach congrss an congrss yar an a scon ummy for th yar immiatly following ach congrss ar insrt to allow intrcpting ths possibl ffcts. Concrning th Asian crisis I will st up a ummy qual to on for yars 2 Public sctor may xhibit conomis of scal. 3 Agricultur forstry animal husbanry fishry an srvics in support of ths inustris. 6

7 1997 th yar in which th crisis in far-ast Asian countris xplo an for th only two yars ovr th whol consir prio in which Chins GDP grw at a rat lowr than 8%. Th ummy aims at intrcpting possibl consquncs of th crisis on th Chins govrnmnt bugt policis. 4.2 Ovrall rgional public xpnitur Tabl 1 isplays th rsults of th rgrssion consiring rgional govrnmnt xpnitur. A pool last squar tchniqu with fix ffcts (accounting for rgional unobsrv variabls) is us in th rgrssion an th rsults ar shown in th first four columns. Both a mol with contmporanous ffcts (columns 125 an 6) an a mol with lagg inpnnt variabls 4 (columns 347 an 8) ar consir. A tim trn is account for in vn columns. In orr to tst for th robustnss of th stimats fasibl GLS assuming cross-sction htroskasticity ar also trmin (column 5 to 8). Data is mainly from China Statistical Yarbook (various issus) 5 provi by th National Burau of Statistics of China. Th stimat mol is: y it = β 0 + β 1 log(grp pr capita it ) + β 2 log(p OP it ) + β 3 IMP EXP it + β 4 IMP EXP it F F E it + β 5 URCONS it + β 6 I SECT it + β 7 P RECONG t + β 8 P OST CONG t + β 9 ILL it + β 10 DEP it + β 11 ASCRIS t + ϕ i + ϵ it whr y it rprsnts (log) local pr capita public xpnitur in rgion i at tim t whil ϕ i rprsnt rgion i spcific fix ffcts 6. Local govrnmnt xpnitur is positivly corrlat with GRP pr capita import an xport shar ovr GRP an urban-rural consumption ratio. Th cofficints ar significant ovr almost all th conomtric spcifications noting th robustnss of th stimat. GRP pr capita positivly influncs public xpnitur showing that th man ffct (highr incom citizns man mor public srvics) prvails ovr th ristribution purposs. Mor conomically opn rgions ar favor in th ristribution gam whil on th othr si positiv cofficints on urban-rural consumption ratio rval som kin of ristribution purpos aiming at solving th isparity that accoring to Chang (2002) is bcoming th most rlvant in trmining inquality ris in China an risks to thratn political stability. Local xpnitur is lowr th highr th shar of primary inustry an illitracy rat noting a low intrst towars lss vlop an rural rgions. Spcially th formr rlation is vry strong: rural zons rciv inaquat public srvics an this confirm a scarc intrst in pursuing ristribution policis. Spning as notic is highr in intrnationally mor opn rgions but thr is a non linar rlation: govrnmnt invst mor political rsourcs on mor conomically opn rgions but thn holing this variabl fix mor rsourcs ar allocat whr omstic (prhaps stat own) firms ar laing. 4 With xclusion of yar spcific ummis. 5 A tail scription of th ata us in th rgrssion is provi in Appnix I. 6 All montary valus us ar in 2000 constant valus. 7

8 Tabl 1: Govrnmnt xpnitur by rgion (pr capita) Variabls Pool LS (1) Pool EGLS (1) (2) (3) GRP pr capita (log) 1146*** (0067) 0519*** (0101) 1165*** (0096) 0474*** (0132) 1123*** (0050) 0384*** (0063) 1156*** (0049) 0289*** (0061) Population (log) (0212) -0509*** (0192) (0181) -0349* (0206) (0186) -0585*** (0199) 0011 (0248) -0305** (0155) Imp+Exp (ovr GRP) 0524*** (0098) 0380*** (0064) 0591*** (0125) 0467*** (0069) 0442*** (0064) 0434*** (0062) 0479*** (0095) 0476*** (0044) FFE*(Imp+Exp) (ovr GRP) -0268*** (0071) -0202*** (0051) -0352*** (0084) -0289*** (0048) -0226*** (0047) -0207*** (0043) -0291*** (0067) -0280*** (0023) Urban-rural consumption ratio 0053*** (0017) 0044*** (0016) 0023 (0018) 0025 (0015) 0055*** (0015) 0043*** (0012) 0030*** (0009) 0031*** (0008) Primary inustry (shar of GRP) -1455*** (0527) -0976*** (0234) -1471*** (0576) -0965** (0373) -2173*** (0334) -1298*** (0165) -2223*** (0323) -1204*** (0192) Pr-congrss 0034 (0037) 0034 (0022) (0025) 0015 (0017) 0021 (0027) 0021 (0015) (0016) 0021** (0010) Post-congrss 0038 (0035) 0018 (0022) (0027) (0017) 0022 (0025) 337E-05 (0015) (0019) (0010) Illitracy rat -0881** (0383) (0257) -1678*** (0389) -1011*** (0181) -0931*** (0315) (0210) -1478*** (0233) -0765*** (0100) Dpnncy ratio (0171) 0142 (0209) 0122 (0181) 0459** (0207) (0163) 0210 (0182) 0116 (0103) 0399 (0071) Dummy Asian crisis (0058) (0035) -0069* (0041) -0033* (0019) (0039) (0022) -0044* (0026) (0009) Tim trn No Ys No Ys No Ys No Ys Lagg pnnt variabls No No Ys Ys No No Ys Ys N obsrvations Aj. R sq Log liklihoo F-Statistic 37821*** 52585*** 32478*** 46200*** (1) Whit cross-sction stanar rrors (.f. corrct) (2) Bol typ stimats ar significant also unr cross-sction ranom ffcts hypothsis at a minimum lvl of significanc of 10% (3) Cross-sction wights Lv. Of sign.: (***)=1% (**)=5% (*)=1% Rgional fix ffcts always inclu in th stimations. 8

9 Spning is in fact ngativly corrlat with th shar of import an xports of forign-fun ntrpriss ovr GRP. Total population has a ngativ impact on pr capita public xpnitur noting a pool an a scal ffct in th managmnt of public srvics. Ngativ but gnrally not significant is also th ffct rlat to Asian crisis ummy. Though a priori w xpct a ngativ sign Chins public bt forign liabilitis an bt ratio wr always unr control an th conomic ownturn in th ara i not caus major public policy changs. Th incras in public xpnitur bfor a congrss is positiv (but not significant) whil th ffct of post congrss ummy is ambiguous an not significant. Is thr vinc by obsrving ths first rsults of som ristribution purpos in th allocation policis of th Chins govrnmnt? Th answr is basically no. Consiring th rlvant an growing intrargional an intr-rgional isparitis thr is no clar vinc that th Chins govrnmnt is pursuing som kin of srious ristribution policy. Govrnmnt xpnitur is highr in pr capita trm in richr an mor intrnationally opn rgions an in rgions with a mor vlop inustrial an srvic sctor. Som kin of ristribution intntion is tctabl from th positiv cofficint associat with urban-rural consumption ratio for what concrns th xpnitur function an this is snsibl sinc urban-rural isparitis ar among th main sourcs of growing inquality (Chang 2002; L 2000; Lu 2002) an sinc almost all th post-tinanmn political isorrs hav ha as an origin th rural aras of th intrior rgions. In orr to gt som mor in-pth insights on th trminants of local xpnitur policis I will analyz in th following sction som spcific itms of local govrnmnt xpnitur: social an structural xpnitur. 4.3 Social an structural xpnitur Som kins of xpnitur may b mor suit to obtain a mor immiat ristribution ffct; I will call ths social xpnitur. I will analyz as a rprsntativ sampl of social xpnitur spning on ucation public halth wlfar an social scurity. Ths catgoris of xpnitur ar mor irctly obsrvabl by citizns an acquir a spcial importanc in a country lik China whr grat part of th population has still a low lvl of incom an th man for ths basic srvics is high. Intrvntions aiming at obtaining highr growth rats which I will rfr to as structural can bnfit in th long run th whol citiznship. Thrfor spning on ths itms in lss vlop rgions may nhanc long trm convrgnc. I will analyz as rprsntativ sampl of structural xpnitur spning on capital constructions innovation of ntrpriss an lgal systm. In th short run nvrthlss structural intrvntions may b lss ffctiv for ristribution an tactical purposs. Th following sction analyzs th slct social an structural xpnitur on th sam st of inpnnt variabls us in th prvious sctions. 9

10 4.3.1 Social xpnitur Th rason of stuying social xpnitur sparatly is twofol. On on si ths catgory of xpnitur mor irctly contribut to rucing social inqualitis an it is thrfor usful to unrstan how th govrnmnt has manag thm so to vrify if thr has bn a scop for ristribution in th govrnmnt bhavior. Scon thy ar mor targtabl an low incom classs ar quit snsitiv to thir changs. Hnc if th govrnmnt wants to pursu som kin of tactical bhavior it will likly act on ths itms within its bugt. Th conomtric analysis provis with som usful insight on th bhavior of th Chins govrnmnt. Expnitur on ucation an public halth is positivly rlat to incom pr capita whil wlfar an social xpnitur is ngativly rlat to GRP. For th first ons th man ffct prvails an poor citizns also if politically mor snsitiv rciv lss than high maning mil an high incom classs. Consiring ucation an public halth cofficints associat with intrnational opning hav th sam sign as in th rgrssion on total xpnitur: positiv with rspct to import-xport variabls an ngativ with rspct to th prsnc of forign fun ntrpriss. Urban-rural consumption ratio is not positivly corrlat with most of th xpnitur itm consir. Rucing inquality shoul b on of th main goals of ths kins of xpnitur but th govrnmnt is proviing an highr lvl of public srvics in growing urban conglomrat than in th countrysi. Eucation spcially is clarly unvnly istribut btwn urban an rural zons sinc th sign on th primary inustry rgrssor is always ngativ an significant. Asian crisis ummy is significant an ngativly corrlat with wlfar an social scurity xpnitur. Whil mocracis usually xpan wlfar xpnitur whn conomic growth slows th Chins govrnmnt that os not rspon to a continuous political procss control can vic vrsa incras prouctiv xpnitur insta of ristribution itms. An important rsult of th sction is finally th positiv an significant sign (xcpt for what concrns wlfar an social scurity xpnitur) associat with th pr-congrss variabl pointing out som sort of political cycl in this contxt Structural xpnitur I will consir as structural xpnitur thr xampls of spning itms that may nhanc prouctivity: capital xpnitur xpnitur for ntrpriss innovation an tchnical upating an xpnitur for rul of law issus 7. Most of th inpnnt variabls consir in th mol ar far lss significant in xplaining ths spning itms. Th conomtric mol raliz with th aim of capturing tactical bhavior os not fit as wll whn trying to xplain structural xpnitur. 7 Public scurity agncy procuratorial agncy court an juicial agncy. 10

11 Tabl 2: Social xpnitur by rgion (pr capita) Variabls Pool LS (1) Pool EGLS (1) (2) Pool LS (1) Pool EGLS (1) (2) Pool LS (1) GRP pr cap. (log) 0311*** (0050) 0201*** (0563) 0278** (0059) 0140*** (0043) 0577*** (0053) 0469*** (0071) 0602*** (0049) 0502*** (0055) -0274* (0163) -0545** (0219) -0357** (0158) -0570*** (0212) Population (log) -0534*** (0064) -0079*** (0112) -0632*** (0058) (0103) (0240) 0027 (0282) (0208) 0054 (0284) -1916*** (0355) (0640) -1214*** (0220) (0506) Imp+Exp (ovr GRP) 0235** (0097) 0344*** (0106) 0098 (0092) 0226** (0112) 0307*** (0099) 0376*** (0111) 0357*** (0033) 0349*** (0064) -0585* (0351) (0338) -0726** (0293) -0666* (0359) FFE*(Imp+Exp) (ovr GRP) -0202*** (0056) -0352*** (0072) -0116** (0056) -0276*** (0076) -0359*** (0079) -0492*** (0078) -0384*** (0046) -0454*** (0057) 0642*** (0169) 0506*** (0164) 0773*** (0164) 0737*** (0240) Urban-rural cons. ratio 0008 (0006) 0008 (0007) 0006 (0007) 0018** (0008) 0023*** (0007) (0006) 0026*** (0004) -0009* (0005) 0025 (0034) 0046** (0022) 0022 (0021) 0049*** (0016) Prim. inustry (% of GRP) -1151*** (0231) -0834*** (0169) -1179*** (0197) (0190) 0011 (0258) (0283) 0083 (0271) 0015 (0223) -0863* (0492) (0657) -0818* (0488) 0048 (0662) Pr-congrss 0081*** (0021) 0091*** (0027) 0080*** (0016) 0089*** (0022) 0066*** (0014) 0067*** (0018) 0063*** (0008) 0070*** (0011) 0005 (0050) 0001 (0053) 0009 (0031) 0021 (0039) Post-congrss 0000 (0027) (0033) (0024) (0027) 0053*** (0016) 0045** (0018) 0045*** (0015) 0050*** (0018) (0105) (0103) (0073) (0073) Illitracy rat 0265 (0176) (0252) 0339** (0171) 0013 (0212) -0493*** (0151) (0177) -0477*** (0100) 0174** (0073) 0554 (0360) (0506) 0940*** (0217) (0351) Dpnncy ratio 0205** (0090) 0146*** (0046) 0061 (0059) 0057 (0049) 0282 (0180) 0079 (0167) 0502*** (0144) 0104 (0157) (0239) 0240 (0308) (0246) 0114 (0296) Dummy Asian crisis (0039) 0013 (0036) (0033) 0019 (0026) 0104*** (0025) 0095*** (0039) 0084*** (0012) 0062*** (0017) -0458*** (0136) -0354*** (0117) -0403*** (0096) -0310*** (0086) Tim trn Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Lag. in. var. No Ys No Ys No Ys No Ys No Ys No Ys N obs Aj. R sq Log liklihoo F-Statistic 66935*** 56280*** *** 50519*** *** 10553*** (1) Whit cross-sction stanar rrors (.f. corrct) (2) Cross-sction wights Lv. Of sign.: (***)=1% (**)=5% (*)=1% Rgional fix ffcts always inclu in th stimations. 11

12 Tabl 3: Structural xpnitur by rgion (pr capita) Variabls Pool LS (1) Pool EGLS (1) (2) Pool LS (1) Pool EGLS (1) (2) Pool LS (1) GRP pr cap. (log) (0314) (0359) (0232) (0238) 0.480** (0208) 0178 (0208) 0452*** (0130) 0033 (0146) 0084 (0067) 0082 (0073) 0073 (0057) 0124* (0068) Population (log) -0765** (0345) (0333) 0681** (0313) -0443* (0263) -0845** (0424) -0970* (0550) (0292) (0446) -0340** (0144) -0192* (0103) -0353** (0137) -0290*** (0085) Imp+Exp (ovr GRP) 0532*** (0186) 0498** (0251) 0426** (0186) 0485*** (0186) 0652*** (0140) 0507 (0364) 0634*** (0113) 0444 (0275) 0576*** (0101) 0598*** (0060) 0473*** (0116) 0486*** (0085) FFE*(Imp+Exp) (ovr GRP) (0120) (0194) (0115) (0138) 0129 (0150) 0146 (0314) 0054 (0065) 0046 (0235) -0287*** (0064) -0327*** (0041) -0228*** (0067) -0238*** (0053) Urban rural cons. ratio 0140** (0060) 0072 (0050) 0177*** (0057) 0082** (0039) 0032 (0043) 0041 (0038) (0041) 0000 (0029) 0006 (0017) -0029** (0015) 0017 (0014) -0017** (0008) Prim. inustry (% of GRP) -5840*** (1182) -5984*** (1500) -6004*** (0853) -5410*** (1252) (0898) 1364* (0707) 0950 (0744) 2565*** (0566) (0324) -0648* (0373) -0696*** (0234) -0886*** (0177) Pr-congrss 0011 (0092) (0077) 0001 (0056) -0087** 0037) 0008 (0035) (0044) 0049 (0036) 964E-05 (0031) 0007 (0028) (0024) 0008 (0020) -0031* (0017) Post-congrss 0037 (0080) (0071) 0000 (0049) -0065** (0032) (0021) (0029) 0009 (0017) (0016) 0039 (0028) 0020 (0020) 0042* (0022) 0020 (0015) Illitracy rat -2303*** (0708) -4491*** (0613) -1999*** (0615) -4639*** (0505) -1563*** (0540) (0812) -1368** (0533) (0866) (0178) -0376** (0164) -0329** (0137) -0433*** (0116) Dpnncy ratio (0770) 0770 (0545) (0739) 0989** (0462) 1744*** (0379) 0469 (0383) 1246** (0505) 0169 (0342) 0445*** (0146) 0565*** (0101) 0568*** (0133) 0559*** (0132) Dummy Asian crisis 0003 (0122) 0036 (0097) 0025 (0073) 0032 (0047) (0018) (0041) (0020) (0031) (0044) (0029) (0032) (0019) Tim trn Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Ys Lag. in. var. No Ys No Ys No Ys No Ys No Ys No Ys N obs Aj. R sq Log liklihoo F-Statistic 10969*** 10896*** *** 8387*** *** 47070*** (1) Whit cross-sction stanar rrors (.f. corrct) (2) Cross-sction wights Lv. Of sign.: (***)=1% (**)=5% (*)=1% Rgional fix ffcts always inclu in th stimations. 12

13 Th ffcts of congrss cycls ar ambiguous an not gnrally significant: lctoral cyclical spning also in mocracis is oftn orint towars mor irctly ristributiv an targtabl catgoris of xpnitur (insta of towars structural ons). Th cofficints rlat to pnncy ratio illitracy rat an surprisingly GRP pr capita ar gnrally non significant. As notic in th analysis on th gnral xpnitur function mor intrnationally opn rgions attract mor public spning: anothr confirmation that th govrnmnt is aiming at invsting in th cration of highly comptitiv zons. Th fact that th scon orr cras in spning in rgions whr forign tra is link to forign fun firms os not hol for capital construction an ntrpris innovation spning furthr supports this viw. Expnitur on capital constructions is amazingly lowr in rural rgions (ngativ cofficint associat with primary inustry variabls) again confirming th aim of th govrnmnt at invsting in infrastructurs in th urbaniz coastal rgions. 5 Concluing rmarks I analyz th trminants of public xpnitur an rvnu at a local govrnmnt lvl in th iffrnt Chins rgions btwn 1995 an Th issu is rlvant for thr rasons. Firstly aftr th 1994 tax rform th allocation of rsourcs btwn cntral an local govrnmnts has bn rorganiz an th volutions of this rform srv to b invstigat. Scon incom inquality is raising an it s bcoming a rlvant issu of morn China: it s important to unrstan whthr th Chins govrnmnt is pursuing som ristribution policy. Finally in spit of th conomic opning xprinc in th last cas thr has bn no political opning uring th sam prio. Th analysis of th Chins govrnmnt policis might rval whthr thr has bn som kin of tactical bhavior in orr to prvnt social unrst. Th rsults of th conomtric rgrssions rval that ristribution sms not to b a priority for Chins lars: govrnmnt xpnitur is gratr in highr incom an mor intrnationally opn rgions. This contrasts with th political conomy tnt accoring to which lowr incom classs ar favor in th ristribution gam. Nvrthlss this bhavior can b asily intrprt: in fast growing urban citis th man for public srvics is highr. Morovr th provision of public srvics in vloping citis is a priority in orr to avoi possibl social unrst. Th only ristribution vinc that mrgs is rlat to th urban-rural consumption ratio variabl. This is not surprising sinc urban-rural isparitis ar incrasing an ar on of th main caus of th rising inquality in morn China. Thr is littl vinc of som kin of political cycl influncing public xpnitur. Only som kin of social xpnitur (ucation an public halth) wr significantly highr in th yars prcing th Chins Communist Party congrsss. 13

14 Th nxt yars will b rlvant for Chins public financ. Th cration of a pnsion systm an of a mor vlop social scurity systm will probably ntail som gr of ristribution. This coul b ncssary also to avoi social unrst an to boost intrnal man. Th analysis of th volution of th Chins govrnmnt transfrs will thrfor rprsnt a funamntal issu for futur rsarch. Rfrncs Acmoglu D. an Robinson J. (2000). Why Di th Wst Extn th Franchis? Dmocracy Inquality an Growth in Historical Prspctiv. Quartrly Journal of Economics 11: Acmoglu D. an Robinson J. (2001). A Thory of Political Transition. Amrican Economic Rviw 91(4): Acmoglu D. an Robinson J. (2006). Economic Origins of Dictatorship an Dmocracy. Cambrig Univrsity Prss Nw York. Chang G. (2002). Th caus an cur of China s wining incom isparity. China Economic Rviw 13: Cox G. an McCubbins M. (1986). Elctoral Politics as a Ristributiv Gam. Journal of Politics 48: Dickson B. an Rost Rubl M. (2000). Mmbrship Has Its Privilgs: th Socioconomics Charactristics of Communist Party Mmbrs in Urban China. Comparativ Political Stuis 33: Dixit A. an Lonrgan J. (1996). Th Dtrminants of Succss of Spcial Intrsts in Ristributiv Politics. Journal of Politics 58: Fan S. Fang C. an Zhang X. (2002). Emrgnc of Urban Povrty an Inquality in China: Evinc from Houshol Survy. China Economic Rviw 13: L J. (2000). Changs in th sourc of China s rgional inquality. China Economic Rviw 11: Li H. Liu P. Zhang J. an Ma N. (2007). Economic Rturns to Communist Party Mmbrship: Evinc from Urban Chins Twins. Economic Journal 117: Lu D. (2002). Rural-urban incom isparity: impact of growth allocativ fficincy an local growth wlfar. China Economic Rviw 13: Mulligan C. Gil R. an i Martin X. S. (2004). Do Dmocracis Hav Diffrnt Public Policis than Nonmocracis. Journal of Economic Prspctivs 18(1):

15 Wintrob R. (1990). Th Tinpot an th Totalitarian: An Economic Thory of Dictatorship. Amrican Political Scinc Rviw 84(3): Xu L. an Zou H.-f. (2000). Explaining th changs of incom istribution in China. China Economic Rviw 11: Yang D. (1999). Urban-Bias Policis an Rising Incom Inquality in China. Amrican Economic Rviw 2(2): Yang D. an Zhou H. (1999). Rural-urban isparity an sctoral labour allocation in china. Journal of Dvlopmnt Stuis 35(3): Zhang H. an Chn X. (2007). Fiscal comptition an th structur of local public xpnitur in china. Frontirs of Economics in China 2(2): Zhang T. an Zou H.-F. (1998). Fiscal cntralization public spning an conomic growth in china. Journal of Public Economics 67: Zhang T. an Zou H.-F. (2001). Th growth impact of intrsctoral an intrgovrnmntal allocation of public xpnitur: With applications to china an inia. China Economic Rviw 12:

16 Appnix I - Variabls finition Figur 3: Databas structur Variabl Dscription Dpnnt variabls (gnral mol) GTEPC Govrnmnt total xpniturs (pr capita) 1 GTRPC Govrnmnt total rvnus (pr capita) 1 Dpnnt variabls (social xpnitur) EDUC Expniturs in ucation (pr capita) 1 PUBHEALTH Expniturs in public halth (pr capita) 1 WELSOC Social wlfar & social scurity programs (pr capita) 1 Dpnnt variabls (structural xpnitur) CAP Expniturs for capital construction (pr capita) 1 INN Expniturs for innovation ntrpriss (pr capita) 1 JUST Inpnnt variabls Expnitur for public scurity agncy procuratorial agncy an court of justic (pr capita) 1 GRP pr capita Gross rgional prouct (pr capita) 1 Population Total rgional population Imp+Exp Import valu of commoitis by plac of stination an xport valu of commoitisby plac of origin in China FFE Valu of Imports an xports of forign-fun ntrpriss by rgion/grp Urban rural consumption ratio Primary inustry Pr-congrss Urban/rural consumption ratio Gross rgional prouct primary sctor (% of GRP) Dummy qual to 1 in th yar of ach congrss an in th prvious yar Post-congrss Illitracy rat Dpnncy ratio Dummy qual to 1 in th yar following ach congrss Illitrat population ag 15 an Ovr Popl ag 0-14 plus populationag 65 an ovr Dummy Asian crisis Dummy qual to 1 for th yars (1) 2000 constant valu Yuan 16