Governance, Local Leaders And Public Spending In China

How to explain China's remarkable economic growth over last past three decades is a big puzzle for researchers, because Chinese miracle of economic growth is achieved without some good conditions that are emphasized by main-stream economic theories. As a transition economy, market is less mature, financial system is less developed in China. Among economists and policy makers, a general consensus is agreed that there is a set of institutions to be in place to make markets function well, which must be in Chinese style. Recently, Leadership and governance are regarded as the key factors to understand trajectory of China's reforms, reform strategies, outcomes, achievements and problems (Xu,2011).The most important character of Chinese economic and political institution is the combination of political centralization and economic decentralization. Unfortunately, almost all the empirical papers in the literature look at only the links between local officials and growth, the mechanism through which local officials influence economic performance is still not well known.The promotion of a local leader is based on his performance in governing the local economy. To achieve a rapid economic growth becomes a career goal as well as a political tool for local leaders to acquire promotion. As a crucial aspect of public policy, do local leaders manipulate public spending to achieve their pro-business goals? If so, the change of public spending must be according with adaption of local leaders'political incentives.In this dissertation, firstly we use Chinese provincial data to test whether local leaders matter for the variations in the composition of government expenditure and whether they manipulate public spending to achieve their pro-business goals. Then, employing Chinese county-level data and difference-in-difference approach, we examine how local governments response to strategy adjustment of central government. The main empirical results are as follows:Firstly, local leaders are appointed and promoted according to their economic performance that creates an incentive structure for local leaders to manipulate public spending to increase their probability of promotion. Secondly, difference types of local leaders have quiet different effects on public spending. For example, only the replacement of the party secretary, who comes from the central ministries, is associated with significant changes in the composition of government expenditure in the long run. In the4th year of his tenure, party secretary manipulates all kinds of education spending. However, executive chief is likely to manipulate non-budgetary expenditure on education in the short run, and to expend budgetary education spending in the long run.Finally, the appointment and promotion of local leaders serve as powerful instruments for the national government to induce local officials to follow their plans. Taking the western development strategy as an example, we find that, as western development strategy was implemented, the size of government in western China had expanded sharply.