Empirical Research On The Relationship Between Government Spending And Economic Growth In China

In the mid-1990s, because of the Asian financial crisis, there were obviously changes in domestic and international economic situation, the effective social demand were insufficient. The Government had repeatedly lowered the interest rates during 1996 to 1998, but the result was ineffective. In such circumstances, the government implemented proactive fiscal policy to intervene in the economy. During 1998 to 2002, financial expenditure increased to 2.20117 trillion Yuan from 1.079818 trillion Yuan. Had the Government spending, especially the proactive fiscal policy that consecutive implement for years, promoted economic growth? What role of the Government spending played? How much the Government spending contributes to the economic growth? Clearly, it is necessary to conduct a research to reveal the relationship between government spending and economic growth in China. For this purpose, we will research this relationship in this paper.This paper empirically examines the relationship between government spending and economic growth in China. In this paper, divide the structure of government spending by two ways. First, we divided the government spending to two groups--expenditure of purchasing and transfer payment. Another kind is divided to four groups according to the function nature of the expenditure--economic construction costs, social cultural and educational fees, defense spending, and administrative costs. With the method of unit root examine, cointegration test, error correction and pulse respond function, we reveal the relationship between each part of government spending and economic growth.Chapter one is the introduction part of this text. I introduced the significance and the background of this topic, and the status quo and Literature Review of the research about the relationship between domestic and foreign government spending and economic growth. When I gave the presentation about the status quo and Literature Review, I firstly introduced the concept of economic growth and the main differences between the different schools of thought, and then stated the status quo and literature review from two aspects: theoretical study and empirical research.In chapter two, I introduce various related theories and models. How to gain long term economic growth is always a problem that people study on. Economic growth is a significant concept in modern economics. Economic growth means total economic growth, mainly refers to the growth of GDP or other indicators of a country or a region. In modern economics, economic growth is not only seen as the expansion of total economic output, but also considered as a comprehensive social phenomenon. It reflects the growth of the total economy, it is also reflects the optimizing industrial structure, the improving economic efficiency and the rational use of resources as well as environmental and pollution-cutting issues and so on. I introduced there classic economic growth theories, include: Harrod-Domar model, The Solow model, New growth theory. In this chapter, I also gave some concepts and related subjects about the government spending, which include the definition and functions of the government and the source of government Intervention, also the structure of fiscal spending of China.Chapter three introduce the theories of unit root examine, cointegration test, error correction model, Granger causality tests and pulse respond function briefly.Chapter four is the empirical study part. At the beginning of this chapter, I showed the dynamical relationship between the GDP growth and the different parts (include: expenditure of purchasing and transfer payment; economic construction costs, social cultural and educational fees, defense spending, and administrative costs) of the government spending during 1978-2005.Then establish empirical models: ln gdp =α+β1 ln g1 +β2 ln g 2 +β3lnex+εln gdp =α+β1 lnec +β2 lnse +β3 ln mi +β4 lnoa +β5lnex+εAmong them, gdp denotes the total economics, g1 denotes the expenditure of purchasing, g2 denotes the transfer payment, ec denotes the economic construction costs, se denotes the social cultural and educational fees, mi denotes the defense spending, oa denotes the administrative costs. I research the result with the method introduced in chapter there.Chapter five is the conclusion part. In this chapter I gave the conclusion of this article. I analyzed the current economic situation of China and combine the result of calculation that draw in the article, put forward some policy recommendations to face the problem such as fast economic growth, the inflation crisis.Firstly, in the current macroeconomic situation of China, the government should adjust the proportion of the expenditure of purchasing and transfer payment. Set more money to the transfer payment; expand the coverage of social security. To a certain extent, that will promote consumption rather than increasing production capacity for reducing investment growth rate and slow down the rate of economic growth.Secondly, the government should adjust the proportion of different part inside the structure of fiscal spending to change the current situation that fast economic growth, the inflation crisis and so on. Maintain the existing national defense expenditures and economic construction expenses, increase the social cultural and educational expenses, reduce administrative costs.