URBAN INFRASTRUCTURE FINANCING AND ECONOMIC PERFORMANCE IN CHINA

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1 URBAN INFRASTRUCTURE FINANCING AND ECONOMIC PERFORMANCE IN CHINA Weiping Wu, Professor Urban and Environmental Policy and Planning Tufts University December 2010

2 Content Research context Urban infrastructure in China Expanding mechanisms of financing Regional disparity Infrastructure investment and economic performance Urban infrastructure public utilities (water supply and drainage, residential gas and heating supply, and public transportation), municipal works (roads, bridges, tunnels, and sewerage), parks, sanitation and waste management, and flood control.

3 Research context Role of infrastructure unpaid factor of production positive to output increase householdsʹ real income and quality of life Increasing public investment in infrastructure greater output respond to unmet demands and needs anticipate future development and stimulate investment in other sectors (more private investment v. crowding effect)

4 Urban infrastructure in China Massive progress Mid 1990s level of infrastructure services already approached that in lower middle income economies Water supply coverage reached more than 90 percent (on par with upper middle income countries ) Doubling of wastewater treatment between 1996 and 2006, from 23.6 to 55.7 percent Per capita paved urban road space increased between 1996 and 2006 from 7.6 to 11 square meters

5 Urban infrastructure in China Disparity across region and city size Noticeable differences in nearly all available indicators urban infrastructure services across three broad regions (eastern, central and western) Cities in eastern region uniformly enjoy higher levels of service in all sectors, with markedly higher access to piped water and rate of wastewater treatment As city size increases, levels of service tend to increase

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7 Urban infrastructure in China Fiscal decentralization as backdrop mismatch between expenditures and revenues between levels of government local governments have neither adequate tax resources nor authority to borrow externally fiscal gap for local governments revenue rich regions keep more (as result of 1994 tax reform) sharp rise in interregional disparities in fiscal spending

8 Urban infrastructure in China Mismatch between local revenues and expenditures (source: Wong 2007)

9 Infrastructure financing In industrialized countries borrowing a key method local taxes (average 40 percent share) Developing countries varies substantially local property taxes loan financing

10 Infrastructure financing General sources of revenue for China s urban infrastructure budgetary allocation from central and local governments local fiscal revenue non fiscal sources primarily fees and user charges borrowing from both domestic and foreign sources self raised funds Local fiscal revenue account for declining share Importance of borrowing is rising Increasing importance of extra budgetary funds

11 Infrastructure financing Percent Budgetary allocation Local taxes Fees and user charges Borrowing Self-raised funds Other sources

12 Infrastructure financing (%) Budgetary allocation Central budgetary allocation Local budgetary allocation Local taxes Maintenance and construction tax Public utility surcharge Fees and user charges Water resource fee Infrastructure connection fee User charges a Land transfer fee Borrowing Domestic loans Foreign capital b Bonds Stock financing Self-raised funds Other sources c Total

13 Regional disparity in financing Regional disparity in overall level of infrastructure financing Western region relies more on budgetary allocation and borrowing and has less an ability to raise funds from extra budgetary sources Regional disparity also exists in per capita urban infrastructure revenues

14 Regional disparity 100% 80% 60% 40% 20% 0% All cities Eastern region Central region Western region Other sources Self-raised funds Borrow ing Fees and user charges Local taxes Budgetary allocation

15 Regional disparity By index of per capita urban infrastructure revenues

16 Regression analysis Dependent variable growth in per capita GDP ( GDP pooled for 2004 and 2005) Predictors per capita urban maintenance and construction revenues per capita investment in education per capita FDI (proxy of openness and private investment) share of private sector in total employment (proxy of reform progress) share of manufacturing sector in total employment, unemployment rate regional location (dummy)

17 Regression analysis Data: prefecture level cities Chinese version of metropolitan area (total of 283 in 2008) Lagged variables for infrastructure and education investment short term: 2 year pooled for 2002 & 2003 (w. migrants) medium term: 5 year pooled for 1999 & 2000 (w/out migrants)

18 Mean Std. Dev. 2-year lag model a GDP per capita (2-year, RMB) Per capita investment in education (2-year prior, RMB) Per capita urban maintenance and construction revenues (2-year prior, RMB) Per capita foreign direct investment (US$) Share of private sector in employment (percent) Share of manufacturing sector in employment (percent) Unemployment rate (percent) Eastern region 0.40 Central region 0.39 N=551 5-year lag model b GDP per capita (5-year, RMB) Per capita investment in education (5-year prior, RMB) Per capita urban maintenance and construction revenues (5-year prior, RMB) Per capita foreign direct investment (US$) Share of private sector in employment (percent) Share of manufacturing sector in employment (percent) Unemployment rate (percent) Eastern region 0.43 Central region 0.39 N=482

19 Regression analysis Standardized t-value Significance Tolerance Coefficient 2-year lag model a Constant Per capita investment in education (2-year prior) Per capita urban maintenance and construction revenues (2-year prior) Per capita foreign direct investment Share of private sector in employment Share of manufacturing sector in employment Unemployment rate Eastern region Central region Adjusted R

20 Regression analysis Standardized t-value Significance Tolerance Coefficient 5-year lag model b Constant Per capita investment in education (5-year prior) Per capita urban maintenance and construction revenues (5-year prior) Per capita foreign direct investment Share of private sector in employment Share of manufacturing sector in employment Unemployment rate Eastern region Central region Adjusted R

21 Regression analysis Purpose of OLS models is to estimate and compare effects of predictors, and not meant to fully account for the variations in GDP growth per capita infrastructure revenues statistically significant most important in short run per capital investment in education not significant contributor per capita foreign direct investment significant share of manufacturing employment significant

22 Conclusion Spatial implications of fiscal reform heightened regional disparities Levels of infrastructure service differ substantially across cities in three broad regions, so are their methods and abilities to finance public facilities Public infrastructure investment is justified in both responding to unmet demands and paving way for future economic growth