Government Expenditure, Financial Development And Environmental Performance In China

In recent decades, China has tried to establish a high-quality legal framework for pursuing sustainable development and environmental progress. Nevertheless, the destruction of the environment is still one of the serious challenges China faces at present because of its rapid urbanization and economic growth. To formulate effective policies, the factors that influence environmental performance should be well studied. The previous literature has emphasized the importance of income and growth, technology, foreign direct investment, industrial structure, formal and informal regulations. Almost all the previous studies have the implicit premise that government expenditure doesn't impact the environmental performance, and enterprises can get enough financial services to conduct environment-friendly production. Unfortunately, this assumption is challenged by the evidence from developing countries, in which government expenditure and financial development have profoundly changed their economic performance.Theoretically, government expenditure and financial development can facilitate the enterprises'investment, stimulate their R&D activities, constitute a mechanism for long-run growth, and strengthen the effects of environmental policies. They, therefore, have capitalization, technology, income, and regulation effects on the environmental performance of developing countries. Some of the effects are mixed according to the theoretical analysis, and thus the real effects can be either positive or negative.Using the provincial panel data of China, this paper examines the impacts of government expenditure and financial development on the resource use and pollution discharges. The analysis provides convincing evidence of a positive link between government expenditure and energy intensity in China. The expansion of government expenditure since Asian financial crisis has exerted a substantial influence on energy intensity. Further analysis demonstrates that government expenditure has more direct and larger effect on energy intensity in the crisis than that after economic recovery. However, an alteration in economic situation doesn't greatly change such positive effects of government expenditure but just slightly reduces and delays its influence. Furthermore, the empirical results reveal that financial development tends to reduce the pollution intensities, though some of its capitalization effects are detrimental to the environment. In recent years, financial development has played an important role in improving the environmental performance of China. In addition, the environmental regulations are important as well, because they are also found to play a crucial rule in pollution control. If a sound framework of environmental protection comes into operation, the beneficial impacts of government expenditure and financial development on the environment can be strengthened considerably.These results offer new implications for policy makers in developing countries. To reduce the resource and environmental costs of economic growth, optimizing the relative scale and structure of government expenditure seems necessary. For example, the expenditure on science research and environmental protection can be increased to strengthen the beneficial effects of government expenditure. On the other hand, in order to improve the environmental performance of the whole country, policies are still needed to stimulate the financial development in some rural areas. More importantly, these policies can be combined with environmental policies and then yield more benefits to the environment.