Local Government Debt, Resource Allocation And Its Economic Effect

The global financial crisis in 2008 profoundly changed the trajectory and driving force of China’s economy.The economic growth rate of that year has dropped to a lowest level since 2001 due to the sharp contraction in international trade.Against the backdrop of continued sluggish business investment and exports,government-led infrastructure investment has undergone rapid growth and become the main strategy to stabiliz growth and promote people’s livelihood.Although large-scale investment in infrastructure construction has driven the expansion of upstream manufacturing capacity in the short term,it has also improved infrastructure conditions such as roads and electricity in many places.But this demand-driven stimulus policy did not exit in time after the end of crsis,and the post-crisis macro investment rate increased from 41%in 2008 to 47% in 2015,which was much higher than the world average level of 25%.Moreover,since 2016,the amount of newly added infrastructure investment in China has exceeded 14 trillion yuan every year.At the same time,the scale of local government debt to finance infrastructure is also rising.According to the audit report on national government debt released by National Audit Office in 2013,the average annual growth rate of local government debt from 2008 to 2013 was as high as 25.86%.As marginal returns to capital is diminishing,the economic growth effect of local government debt is rapidly declining,and the return on debt investment as well as debt repayment risks have also diverged significantly between regions.In order to take the lead in the GDP growth tournament,some regions with poor economic potential have blindly made infrastructure investments far beyond their own development stage and debt capacity,accumulating heavy debt burdens and greater debt risks.The report of the 19 th National Congress of the Communist Party of China listed the prevention and resolution of major risks as the first task of the three critical battles,and the management of local government debt risks is one of the key contents,which is also an inevitable requirement of "coordinating development and security”.The implementation of this task is inseparable from a deep understanding of the economic impact of local government debt.In addition,under the background of economic downturn and weak growth in fiscal and tax revenue,local government debt will also play an important role in "stabilizing growth,making up for shortcomings,and promoting people’s livelihood".How to improve the quality and efficiency of local government debt funds under the background of promoting high-quality economic development also requires further exploration of the micro-economic impact of local government debt.Existing research on the economic effect of local government debt mainly focuses on the impact on macroeconomic growth,and the analysis at the firm level also focuses on the crowding-out effect on investment and financing of manufacturing firms.The existing research lacks the analysis of different economic sectors such as the service industry,and systematically analyzes the impact mechanism of local government debt on the development of the real economy from the perspective of resource allocation.As China’s economy enters into a new normal,the traditional growth driven by low-cost factors and the expansion of industrial investment has become increasingly difficult to maintain.As the foundation of a country’s economy,the growth of the real economy and the rationalization of its structure are the keys to determining whether China’s economy can successfully realize the transformation to the new path and maintain sustainable growth.Since the 18 th National Congress of the Communist Party of China,the Central Committee of the Communist Party of China has emphasized that revitalization of the real economy is the focus of current economic work,which requires not only the in-depth integration of advanced manufacturing and modern service industries,but also the development of the private economy.As the three most basic production factors,the continuous rising price of land,labor and capital has become the main obstacle to the upgrading of the real economy in recent years,which cannot be soly explained by the tighter supply of these factors since they are also affected by the inefficient allocation of resources.Especially in the context of the slow progress on the reform of the market-based allocation of production factors,the path dependence of government debt investment after the financial crisis has caused local governments to continuously allocate resources such as labor,land,and credit funds to infrastructure investment projects with low rates of return.The increasing cost of real economy along with the reduction of profitability have brought greater pressure to firms’ survival and growth.Under the circumstance of diminishing investment returns on debt itself,the macro-economy has not grown synchronously with the expansion of local government debt.Therefore,it is necessary to understand the transmission mechanism and heterogeneous impact of local government debt from the perspective of resource allocation to reduce the cost of real economy and promote high-quality economic development.Based on the above background and the deficiencies of the existing literature,this paper systematically examines the impact of local government debt on the manufacturing and service industries from the allocation of the three most important resources,namely land,labor and credit funds,through detailed micro-empirical research.Specifically,the empirical work in this paper mainly includes the following three parts:First,from the perspective of land resource allocation,service industry enterprises,which serve as the important support for the development of the manufacturing industry and the real economy,have long faced high land use costs in the land leasing market dominated by local governments.After the financial crisis,the path dependence of debt investment led by local governments allocate a large amount of new construction land to the field of infrastructure,and in order to maintain land prices,the supply share of commercial land was correspondingly reduced,which caused the mismatch between supply and demand of service land.This has resulted in a rapid rise in land and rental costs,which increases the operational risks of service industry enterprises.This paper uses the service industry enterprises micro-data in the 2008-2012 national tax survey,the land parcel transaction data of China Land Market Network,and the urban economic panel data to empirically investigate the impact of infrastructure investment dependence represented by local government debt on the operating risks of service industry enterprises.In the empirical research,the proportion of the regional balance of infrastructure investment bond in GDP is mainly used to measure the region’s dependence on debt investment,so as to avoid the interference effect of local government credit financing.The research finds: first,controlling other possible influencing factors,the expansion of local government debt significantly increases the operational risk of regional service industry enterprises.This conclusion survives a battery of robust tests after excluding the competitive hypothesis and using the predicted local government debt as an instrumental variable.Second,the mechanism test shows that the expansion of local government debt reduces the supply share of urban commercial land,and increases the land price for commercial land,which in turn leads to a rapid increase in the operating risks of service enterprises.Finally,the heterogeneity analysis finds that the rising effect of service industry operating risks caused by debt investment dependence is mainly reflected in companies with strong internal and external capital constraints and weaker cost-shifting capabilities.Second,from the perspective of labor allocation,as the main body of the real economy,although the manufacturing industry faces lowering land costs,the rising compensation that deviates from labor productivity after the financial crisis is constantly eroding its long-standing competitive advantages in labor cost.This paper argues that the expansion of infrastructure investment represented by local government debt has attracted a large number of low-skilled labor from the manufacturing industry to the infrastructure sector.The reduction in labor supply and the increase in prices have increased the labor income share of the manufacturing industry and reduced the enthusiasm of enterprises for firm investment.Based on this logic,this paper uses the2008-2012 national tax survey data,rural fixed observation points data to study the impact of local government debt on the labor income share of manufacturing firms and the transmission mechanism of labor allocation.In order to exclude the impact of local government debt credit crowding out effects,this paper uses the per capita urban investment bond issuance as a proxy.The research conclusions are as follows: first,controlling other possible influencing factors,the increase of urban investment bonds per capita significantly increases the labor income share of regional manufacturing firms.Second,the mechanism test shows that local government debt is mainly through the crowding-out effect formed by the allocation of labor to the infrastructure industry.While pushing up labor costs,it reduces the enthusiasm of enterprises for investment and R&D to increases productivity.The slowdown in the productivity speed eventually led to a rise in the labor share of the manufacturing sector.Finally,the heterogeneity analysis finds that the effect is mainly concentrated in firms with high labor dependence,poor profitability,and located in areas with a high degree of aging and high labor protection.As the performance of local government debt investment decreases,its role in increasing the labor income share is not only unsustainable,and the continued decline in productivity may eventually cause greater damage to the rights and interests of entrepreneurs.Third,from the perspective of credit resource allocation,the growth of private enterprises is not only the microscopic driving force for job creation,tax contribution and economic growth,but also a new force for the real economy.Under the financing system mainly based on indirect financing,financing constraints and expensive financing cost have become the key factors hindering the growth of private firms.This paper believes that the large-scale capital demand formed by government debt investment is an important reason for the increase in financing costs and the decline in growth of private firms after the financial crisis.Using the panel data of private firms in the national tax survey database from 2008 to 2012,this paper studies the impact of local government debt expansion on the growth of private firms and the transmission effect of credit resource allocation.Empirical research results show: First,controlling other possible influencing factors,the increase in the proportion of local government debt significantly inhibits the growth rate of sales revenue of regional private firms.Second,the mechanism analysis shows that the expansion of local government debt reduces the availability of credit for private firms and increases their financing costs.The intensification of financing constraints forces companies to cut commercial credit supply and R&D expenditures,which ultimately leads to the decline in product market performance and stagnant sales revenue growth.Finally,the heterogeneity analysis indicatess that the inhibitory effect of local government debt on the growth of private firms is concentrated in debts funded by indirect financing,small and medium-sized private firms,firms with low capital intensity,and areas with low levels of financial development.The research conclusions of this paper provide important policy implications for managing local government debt risks and ensuring that debt funds can optimize resource allocation and promote high-quality economic development.According to the stage of local economic development and the ability to repay debts,different cities should be given different borrowing quotas,and on the basis of strictly controlling the growth of hidden debts,the management and supervision of the whole process of the use of debt funds shall be strengthened;Second,the investment performance of debt funds shall be continuously improved.This paper believes that too much debt funds invested in traditional infrastructure projects will have a strong crowding-out effect on the development of the real economy.Local governments should be guided to choose debt investment projects reasonably according to the endowment conditions of regional economic and social development,and gradually focus on debt investment to the area of regional business environment construction and new infrastructure construction;Third,deepening the reform of market-based allocation of factors to effectively reduce the cost of real economy.On the basis of correctly handling the relationship between government and market,it is time to further promote the simplification of government administration and decentralization to reduce unreasonable intervention in the factor market.At the same time,the government should build a unified factor market system to ensure the high-quality development of the real economy by increasing the effective supply of resources.