Research On The Effect Of Public Investment In China

Ever since Keynes emphasized the importance of government intervention in the national economy, public investment has become an important tool to regulate economy. However, economists hold different views regarding the function of public investment policy in economy. When proposing the theory of government intervention, Keynes also put emphasis on the importance of capital (material capital) formation and public investment. Unfortunately, his understanding for the importance of capital accumulation was not based on theoretical reasoning, but just an actual judgment. Expansion of Keynes'multiplier theory of investment by the economists of Neoclassical Synthesis School produced another actual judgment, i.e., consumption fiscal expenditure policy outweighs public investment policy in terms of their efficiency in regulating general demand. They pointed out the low efficiency and time-consuming of public projects initiated by the government. In fact, they negated Keynes'judgment using Keynes'multiplier theory. As a result, in a long time after World War II, many western countries chose a fiscal expenditure policy dominated by consumption public expenditure.In reality, the actual economic operation proves that it is much easier to cut the expenditure in capital formation than in consumption expenditure. The economic practice in western countries and in post-reform China both indicates that it is easy to cut the expenditure in infrastructure, education and scientific research than to cut expenditure in public consumption. In order to effectively carry out the public investment policy of the government, it is imperative to testify the importance of public investment in economic growth, regional development and private investment. The thesis is to delve into the effect of public investment.Most of the present research literature both home and abroad concerning public investment, public expenditure and government expenditure focuses on the study of the effect they produce on economic growth or regional output, but for other effects of public investment, for example, pump-priming effect and supply effect, a systematic research is lacking. Chinese researchers in this field put particular emphasis on theoretical research. Those who study the issue using actual cases, mostly focuses on the demand effect rather than the supply effect. Overseas researchers mainly examine the effect of public investment in economic growth and private investment using research methods such as computation, cointegration, VAR, etc. Based on both western economics and public economics, the thesis attempts to conduct a systematic and comprehensive study into the effect of public investment by the Chinese government. The thesis also attempts to combine both quantitative and qualitative analysis, with quantitative analysis as a main tool. Meanwhile, quantitative models are used together with other qualitative analysis methods such as regression, cointegration and TSLS, etc. The main contents of the thesis are as follows:Chapter One is an introduction, which includes the theoretical and realistic significance of the thesis, an overview of Chinese and foreign research literature in this regard, the scope and method of research adopted in the these, as well as the innovative initiatives of the thesis.Chapter Two introduces related theories in public investment. A clear definition of public investment is given and relevant theories are elaborated to prepare for the case study in the following chapters.Chapter Three mainly discusses the demand effect of public investment. Related analytical method, cointegration and Granger testing method are used respectively to case testify the quantum scale demand effect of public investment in China since 1990; impulse response function ( IRF) is used to testify the structure demand effect of public investment in China; Panel Data analytical method is used to testify the regional demand effect of public investment. Meanwhile, two-variable SVAR model is adopted to analyze the interaction between regional public investment and output. The analysis results indicate the following:In quantum scale, public investment and economic growth do balance each other in the long run. Specifically, the impact of public investment on economic growth (0.39) outweigh that of private investment (0.23). Granger cause-effect testing shows that public investment produced obvious demand effect in 1998 after an active fiscal policy was implemented in China.For the structure of public investment, the effects of the investment in infrastructure, public service, education and scientific research, and national defense are all positive, among which the first three have a much bigger influence on the output with a regressive modulus of 0.649, 0.455 and 0.382 respectively. National defense expenditure has a relatively small influence on the output, with a regressive modulus of only 0.184. IRF analysis shows that variables in the structure of public investment all have an obvious impact on GDP.For regional investment, the results of case testing indicates that public investments in each region studied all have a positive influence on the growth of regional economy. The effects on economic growth vary greatly from region to region, among which the effect of public investment in mid-west (0.129) is much lower than that in the east (0.349) and in central China (0.345).Chapter Four attempts to contrast and analyze the quantum supply of our public investment using OLS and TSLS. According to the analysis, whatever methods we use, linear model or logarithmic model, OLS or TSLS, we come to the same conclusion that public investment has an obvious supply effect. However, the overall supply growth of our public investment has been declining on a yearly basis. Also, the allocation of public investment in our country is uneven, with infrastructure being the most emphasized followed by public service and education and scientific research accordingly.Chapter Five mainly explores the relationship between public investment and private investment in our country. The results show that public investment rate and private investment rate are closely related ( r=0.802). Furthermore, existing among public investment and private investment is a long-lasting linear relation. All the capital reserve in each component in public investment contributes to the rewarding rate of private investment. Namely, if there is a 1% annual increase in the capital reserve in public infrastructure, the rewarding rate for private investment also increases by 0.175%, 0.392% and 0.230 respectively.Chapter Six focuses on the social welfare effect of our public investment in infrastructure, education, health, sports, social welfare, culture, radio broadcasting and national defense, etc. Also, much attention are paid to the educational effect and employment effect of public investment. Analysis in the thesis indicates that the investment varies from field to field and accordingly the social welfare effects also vary. Compared with some of the other developing countries, our investment in education is far lagged behind the world average point 4.8%.Chapter Seven and Eight discuss the factors curbing the effect of public investment and methods to enhance the effect of public investment. First some major questions regarding our public investment are raised and then corresponding solutions are proposed in terms of the range, scale, structure, mode and management mechanism of public investment.