Policy discontinuity and fiscal efficiency losses: empirical evidence from local officials’ turnover
(2.China Institute of Economic Transformation and Opening, Sun Yat-sen University)
【Abstract】“Chinese-style federalism” and “political tournament” explain China’s development miracle from the perspectives of fiscal decentralization and political promotion, while under either mechanism, local officials’ turnover creates discontinuity in local economic policies, and thus leads to distortion of resource distribution and losses of fiscal efficiency. This paper first establishes an indicator system to evaluate fiscal efficiency, which estimates local fiscal efficiency in 31 provincial areas from 1999 to 2012 by adopting Stochastic Frontier Analysis (SFA). Then it collects resumes of party and government leaders at prefecture level during corresponding periods, and adopts the turnover rate of officials at prefecture level as the proxy variable of policy discontinuity to investigate its impacts on fiscal efficiency. The results show that: (1) policy discontinuity caused by local officials’ turnover significantly reduces local fiscal efficiency, among which mayors’ turnover exerts the greatest impact. Every single replaced mayor leads to a drop of 0.15 percentage points in local fiscal efficiency. (2) The tenure of mayors has a U-shape influence on fiscal efficiency. During the first year of newly appointed mayors, the duration of tenure has negative impacts on fiscal efficiency, because policy discontinuity is most obvious during the transition period and local fiscal efficiency gradually recovers after one year. (3) To rapidly capitalize political performance, new mayors may practice many new policies, resulting in enlarging government expenditures and fiscal deficits as well as losses of fiscal efficiency.
【Keywords】 local officials’ turnover; policy discontinuity; fiscal efficiency;
(Translated by BA Lei)
. ① The data come from China Statistical Yearbook. [^Back]
. ② The data come from Draft Central and Local Budgets for 2014. [^Back]
. ③ Of course, economic policies may also be changed to adapt to public preferences or economic trends, therefore leading to the termination of certain investment or planning, and causing losses of fiscal efficiency. This paper focuses on local policy discontinuity caused by local officials’ “short-sighted” and “self-interest” behaviors, and adopts measures of controlling individual and time effects to eliminate the above-mentioned effect in empirical analysis. [^Back]
. ④ Generally, central and local governments in China draft five-year plans for economic and social development, and the theoretical tenure of local officials is also five years. But the statistics of local officials’ turnover show that the average duration of terms of officials at prefecture level is three years, which has quite a large difference from the theoretical one. Besides, within the existing assessment system, local officials cannot anticipate the actual duration of their terms, so that they will not consider the duration when planning projects and allocating fiscal resources, but care about the immediate effect on GDP when those projects and fiscal resources are deployed. Additionally, the assessment system of officials in China does not involve transition in terms of projects, local debts and fiscal resources between predecessors and successors, and lacks the assessment on fiscal performance of incumbent officials, which lead to the reality that the shorter officials’ tenure is, the greater policy discontinuity will be and thus the greater influence it will have on fiscal efficiency. [^Back]
. ⑤ To reflect officials’ turnover at prefecture level more precisely, this paper includes the turnover of district chiefs and party chiefs in the centrally-administered municipalities of Beijing, Shanghai, Tianjin, and Chongqing. Yang et al. (2014) can be referred to regarding details of official data. [^Back]
. ⑥ Taking officials’ turnover as the proxy of policy discontinuity has been accepted by domestic and foreign scholars (Glazer, 1989; Perrson and Svensson, 1989; Tabellini and Alesina, 1990; Bestley and Coate, 1998; Qian et al., 2011; Chen and Luo, 2012; Cao, 2013; Luo and She, 2015). Though evidences have shown that the “short-sighted behaviors” of newly appointed officials, due to their desire to boost local economies, will cause policy discontinuity, indicators used to measure the discontinuity in existing literature are mostly dummy variables of officials’ turnover. On the one hand, this setting can only qualitatively measure the influencing direction of a policy uncertainty but cannot examine its influencing degree quantitatively. On the other hand, from the perspective of empirical model, too many dummy variables will cause collinearity with “individual effect” in panel model, thus leading to biased estimation. The method used in this paper can not only examine whether officials’ turnover may generate influence on fiscal efficiency, but also measure the magnitude of this influence. Besides, referring to the empirical idea of Fatás and Mihov (2013), this paper estimates a panel vector autoregression (VAR) of officials’ turnover rate and the irregular fluctuations of government expenditures. The result shows that officials’ turnover rate has good explanatory power over the irregular fluctuations of government expenditures, and the latter has no explanatory power over the former (results are available on request). Overall, officials’ turnover rate is a relatively proper proxy variable to measure policy discontinuity. [^Back]
. ⑦ Chen and Zhang (2008), Cai and Qian (2011) can be referred to regarding the criteria of data selection adopted by this paper to calculate fiscal efficiency. [^Back]
. ⑧ The ranking of provinces’ fiscal efficiency calculated by SFA in this paper is basically identical with the one calculated by DEA (results are available on request). [^Back]
. ⑨ Policy discontinuity and fiscal efficiency may have a bidirectional causal relationship. Therefore the authors conduct a panel VAR estimation of fiscal efficiency and officials’ turnover rate, and the result shows that officials’ turnover rate is Granger causality of fiscal efficiency while fiscal efficiency is not Granger causality of officials’ turnover rate. Besides, to examine whether there exist phenomena like “after low fiscal efficiency leads to the reallocation of officials, predecessors dedicate to reforming which drags down the efficiency furthermore, and then officials are changed again,” the authors perform a cross match of 25% of the highest value of fiscal efficiency and 25% of the lowest value of officials’ turnover rate. The result does not find that the coefficient of officials’ turnover rate, which is an explanatory variable, displays significant changes in different samples (results are available on request). Overall, it can be assumed with high probability that policy uncertainty and fiscal efficiency do not have a bidirectional causal relationship. [^Back]
. ⑩ The sign and significance of coefficients in random effects model and fixed effects model are the same in Table 2. Though the result of Hausman test supports fixed effects model, the authors keep the result of the random effects estimation for the sake of robust testing, which remains the same in the following sections. [^Back]
. ⑪ Without loss of generality, the authors also consider the influence of governors’ turnover on fiscal efficiency, and the regression results still show that mayors’ turnover significantly lowers fiscal efficiency, and the turnover rate of governors and municipal party chiefs does not have significant effect on fiscal efficiency. The results of control variables coincide with former sections. Results are available on request. [^Back]
. ⑫ According to statistics, one fifth of 662 cities and over 20,000 designated towns in China have political performance projects in the process of construction, like “modern international metropolitan,” “hundred-mile corridor,” funds of which mainly come from government debts. China Youth Daily (中国青年报), (2006–3–8). http://www.people.com.cn/GB/32306/33232/4218374.html [^Back]
(1) Cai, G. & Qian, J. Statistical Research (统计研究), (10) (2011).
(2) Cao, C. Management World (管理世界), (1) (2013).
(3) Chen, S. & Zhang, J. Social Sciences in China (中国社会科学), (4) (2008).
(4) Chen, Y. & Luo, D. Economic Research Journal (经济研究), supplementary issue, (2) (2012).
(5) Fan, Z. & Zhang, J. Management World (管理世界), (7) (2009).
(6) Fang, H. & Zhang, J. Economic Research Journal (经济研究), (12) (2009).
(7) Fu, Y. & Zhang, Y. Management World (管理世界), (3) (2007).
(8) Guo, Q. & Jia, J. Management World (管理世界), (5) (2006).
(9) Li, Y. & Shen, K. Economic Research Journal (经济研究), (5) (2008).
(10) Li, Y. China Economic Quarterly (经济学 (季刊)), (1) (2009).
(11) Liu, Z., Tang, T. & Yang, W. Economic Theory and Business Management (经济理论与经济管理), (7) (2009).
(12) Luo, D. & She, G. Economic Research Journal (经济研究), (6) (2015).
(13) Lyu, B. Economic Research Journal (经济研究), (3) (2011).
(14) Qian, X., Cao, T. & Li, W. Economic Research Journal (经济研究), (12) (2011).
(15) Qiao, B., Fan, J. & Feng, X. Social Sciences in China (中国社会科学), (6) (2005).
(16) Wang, X. & Xu, X. Management World (管理世界), (3) (2008).
(17) Wang, X., Xu, X. & Li, X. China Economic Quarterly (经济学 (季刊)), (4) (2009).
(18) Wang, X., Xu, X. & Zhou, J. China Industrial Economics (中国工业经济), (12) (2010).
(19) Xu, Q. & Li, L. Journal of China Three Gorges University (Humanities & Social Sciences) (三峡大学学报 (人文社会科学版)), (6) (2006).
(20) Xu, X., Wang, X. & Shu, Y. Economic Research Journal (经济研究), (9) (2007).
(21) Xu, Y., Qian, X. & Li, W. Management World (管理世界), (5) (2013).
(22) Yang, H., Luo, D. & Chen, S. Management World (管理世界), (5) (2010).
(23) Yang, H., Chen, S., Luo, D. et al. Management World (管理世界), (9) (2014).
(24) Zhang, J. & Gao, Y. Economic Research Journal (经济研究), (11) (2007).
(25) Zhang, Y. & Gong, L. China Economic Quarterly (经济学 (季刊)), (4) (2005).
(26) Zhou, L. Economic Research Journal (经济研究), (6) (2004).
(27) Zhou, L. Economic Research Journal (经济研究), (7) (2007).
(28) Zhou, Y., Feng, X. & Zhao, J. Social Sciences in China (中国社会科学), (1) (2004).
(29) Afonso, A., Fernandes, S., 2008, “Assessing and Explaining the Relative Efficiency of Local Government”, Journal of Socio-Economics, 37, pp. 1946–1979.
(30) Alesina, A., Rodrik, D., 1994, “Distributive Politics and Economic Growth”, The Quarterly Journal of Economics, 109, pp. 465–490.
(31) Balaguer-Coll, M., D. Prior and Tortosa-Ausina, E., 2007, “On the Determinants of Local Government Performance: A Two-Stage Nonparametric Approach”, European Economic Review, 51, pp. 425–451.
(32) Bestley, T. and S. Coate, 1998, “Sources of Inefficiency in A Representative Democracy: A Dynamic Analysis”, American Economic Review, 88, pp. 139–156.
(33) Barro, R. J., 1991, “Economic Growth in a Cross Section of Countries”, The Quarterly Journal of Economics, 106, pp. 407–443.
(34) Coelli, J. T., Rao, D. S. P., Donnell, C. and Battese, E. G., 2005, “An Introduction to Efficiency and Productivity Analysis”, Second Edition, Springer.
(35) De Borger, B. and K. Kerstens, 1996, “Cost Efficiency of Belgian Local Governments: A Comparative Analysis of FDH, DEA, and Econometric Approaches”, Regional Science and Urban Economics, 26, pp. 145–170.
(36) Durnev, A., Enikolopov, R., Petrova, M., Santarosa, V., 2012, “Politics, Instability and International Investment Flows”, Available at SSRN: 1342169.
(37) Fatás, A. and Mihov, I., 2013, “Policy Volatility, Institutions, and Economic Growth”, Review of Economics and Statistics, 95 (2), pp. 362–376.
(38) Geys, B., 2007, “Government Weakness and Electoral Cycles in Local Public Debt: Evidence from Flemish Municipalities”, Local Government Studies, 27 (2), pp. 237–251.
(39) Glazer, A., 1989, “Politics and Choice of Durability”, American Economic Review, 90, pp. 1207–1213.
(40) Jones, B. F., Olken, B. A., 2005, “Do Leaders Matter? National Leadership and Growth since World War II”, The Quarterly Journal of Economics, 120, pp. 835–864.
(41) Julio, B., Yook, Y., 2012, “Political Uncertainty and Corporate Investment Cycles”, The Journal of Finance, 67, pp. 45–83.
(42) Li, H. and L. Zhou, 2005, “Political Turnover and Economic Performance: The Incentive Role of Personnel Control in China”, Journal of Public Economics, 89 (10), pp. 1743–1762.
(43) Liu, T., 2010, “Institutional Investor Protection and Political Uncertainty: Evident from Cycles of Investment and Elections”, Working Paper, Concordia University.
(44) Perrson, T. and L. Svensson, 1989, “Why Stubborn Conservatives Run Deficits: Policy with Time-Inconsistent Preference”, Quarterly Journal of Economics, 85, pp. 325–345.
(45) Qian, Y. and B. Weingast, 1997, “Federalism as a Commitment to Preserving Market Incentives”, Journal of Economic Perspectives, 11 (4), pp. 83–92.
(46) Tabellini, G. and A. Alesina, 1990, “Voting on the Budget Deficit”, American Economic Review, 90, pp. 37–49.
(47) Tao, Y. F., 2003, “The Rationalization of Political Business Cycle in China”, Presented in the International Conference on “The Rise of China Revisited: Perception and Reality”, Institute of International Relations, National Chengchi University.
(48) Weingast, Barry R., 1995, “The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development”, Journal of Law Economics and Organization, 1 (1), pp. 1–31.
(49) Xu, C. G., 2011, “The Fundamental Institutions of China’s Reforms and Development”, Journal of Economic Literature, 49, pp. 1076–1151.