Regional differences and rural public expenditure cyclicality: evidence from transitory and persistent shocks in China
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Regional differences and rural public expenditure cyclicality: evidence from transitory and persistent shocks in China Xiang Luo1 · Xinhai Lu1 · Zuo Zhang1 · Yue Pan2 Received: 29 September 2018 / Accepted: 20 February 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract This paper focuses on the cyclicality of rural public expenditure in China. We employed two types of instrumental variables to estimate the effects of fluctuations in GDP on rural public expenditure based on China’s provincial/municipal panel data during 2000–2016. The results show that once the corresponding endogeneity is controlled, whether in the long or short term, China’s rural public expenditure is characterized by procyclical behaviors. However, when regional differences are taken into account, the procyclicality of China’s rural public expenditure is related to the degree of economic development in the region. Specifically, through grouping regression of population density, public service provision per capita and central transfer payment per capita, in the short term, lower economic development usually leads to more obvious procyclicality; in the long term, in the areas with economic development above the median, rural public expenditure is acyclical. This study provides empirical evidence for the procyclical rural public expenditure in developing countries. JEL Classification 62J05 · 91B72
1 Introduction The relationship between economic fluctuations and government public expenditure behaviors has always been one of the key topics of empirical research. One of the basic consensuses is that public expenditure in developing countries is procyclical (Kaminsky et al. 2004; Talvi and Végh 2005; Ilzetzki and Vegh 2008) compared * Zuo Zhang [email protected] 1
College of Public Administration, Central China Normal University, Luoyu Road 152, Wuhan 430079, China
2
School of Resource and Civil Engineering, Wuhan Institute of Technology, Wuhan 430205, China
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with that in developed countries (acyclical or countercyclical). The current literature usually interprets the procyclical behavior of government public expenditure in developing countries from two perspectives: (1) Incomplete financial and credit markets (Gavin and Perotti 1997; Caballero and Krishnamurthy 2004). During recession, it is difficult for developing countries to access capital markets (such as inaccessibility to international lending). Therefore, credit constraints tend to force the governments to refinance or repay their debts, making the implementation of countercyclical fiscal policies impossible. (2) Weak financial management system (Tornell and Lane 1998; Lane and Tornell 1999; Alesina et al. 2008; Ilzetzki and Vegh 2008). In booming times, weak financial supervision could lead to ineffective and erroneous fiscal expenditure (such as fiscal profligacy and/or rent-seeking activities), resulting in insufficient fiscal surplus for the government to cope with the adverse impact of an economic depression.
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