The Political Economy of China's Growth Model and its Implications for Other Developing Countries

Transcription

1 The Political Economy of China's Growth Model and its Implications for Other Developing Countries By Tao Ran Professor, School of Economics Remin University of China

2 China s Growth Model Political economists -local governments played an extremely active role in China s development process. Local officials helped to constructed pro-business and pro-growth environments by building infrastructures, offering tax incentives, and simplifying administrative and regulatory rules in their jurisdictions.

3 China s Growth Model before the mid 1990s In the 1980s and the early, local government got directly involved in business in the 1980s and the early 1990s. local gov owned-tves and SOEs Much of the literature on the causes of China s high growth in the 1980s and the early 1990s has emphasized the importance of fiscal decentralization in providing revenue incentives for local authorities Some went further to market-preserving federalism with Chinese characteristics

4 Puzzle One However, with a fiscal centralization since the middle 1990s, it seems that local incentives to develop local economy have not faded. In many ways, they have become more aggressive in pursuing industrialization and urbanization. Why did this happen?

5 China s Growth Model after the mid 1990s Since the late 1990s, fervor of industrial parks, development zones, as well as residential complex building --large scale land requisition(taking) in urbanization lead to over 40 million dispossessed farmers Local governments in China set up various industrial zones and parks across countries. The total number of industrial parks reached 3,837 by By 2006, the figure further jumped to 6,015 (Zhai and Xiang, 2007)

6 Puzzle Two Local government requisitioned land from farmers and lease land out for non-agricultural usage. However, very different strategies in land leasing Land leasing by negotiation for manufacturing land users (subsidized land and infrastructure, relaxing regulations on labor and environment) versus land leasing by more competitive auction (pai mai), public tender (zhao biao), et al for commercial and residential land users. Why?

7 An County level Industrial Park In North China

8 A District Level Industrial Park in East China

9 High density Residential Building

10 High Density Commercial Building

11 Migrants living in Jiangsu urban villages

12 Urban Villages in Beijing

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15 The second puzzle first: Why leasing most of land by negotiation? One easy answer : corruption and officials maximization of individual incomes: one on one negotiations afford officials the opportunity to exact bribes and line their own pockets. Public auctions dissipate the rent. While certainly reasonable and common,it cannot be the whole story and it defies systematic analysis.

16 Alternative Explanation Local governments revenue maximization within the constraint of regional competition. Different Leasing strategies are local governments responses to industrial attributes of the investments local officials want to attract.

17 Type of investments Industrial attributes Local leasing strategy Impacts on extrabudgetary revenues Impacts on budgetary revenues (taxes) Manufacturing Location nonspecificity One on one negotiation Low to zero leasing fees 1. VAT and enterprise income (+ but with delay) 2.Spillover effect on services and business taxes Commercial/ Residential Location specificity Auction/public tender High leasing fees Business taxes (+ but short lived)

18 Some Empirical Evidence Table 1. Land Leasing Activities in China, 2003 Total Area Leasing Revenue Leasing Price (hectares) % (100 million RMB) % (10,000 RMB/ha) % Total 193,604 5, All Types Manufacturing 99, , Commercial 39, , Residential 43, , Others 11, By Negotiation Subtotal 139, , Manufacturing 94, , Commercial 19, Residential 17, Others 7, By Auction Subtotal 54, , Manufacturing 4, Commercial 19, Residential 25, , Others 4, Source: National Bureau of Statistics (2004).

19 Table 2. Land Leasing in Prefecture level Cities in China, Year Average Cases By Negotiation % By Auction % Source: China Land and Resource Statistical Yearbook, various years.

20 Table 3. Budgetary Revenues of Prefecture level Cities in China, (100 million yuan) Year Business % VAT % Enterprise % Total Tax Income Tax Revenues , , , , , , , , , , , ,416 Source: China Land and Resources Statistical Yearbook, ; Chinese Prefecture, City and County Level Statistical Yearbook,

21 Table 4. Summary Statistics of Variables in the Analysis Variables No. Mean Standard Deviation Minimum Maximum Enterprise income tax 1,340 25,896 61,302 28, ,843 Business tax 1,340 51, ,563 2,507 2,153,876 VAT 1,340 39,394 72,039 1, ,392 Other taxes 1,340 94, ,203 5,919 1,563,662 Total local taxes 1, , ,086 13,251 4,803,983 Lease through negotiation 1, ,264 Lease through auctions 1, ,802 GDP per capita (yuan) 1,340 38,598 30,567 1, ,814 Urbanization ratio 1, Secondary industry ratio 1, Tertiary industry ratio 1, Source: our data set. Note: The units for all taxes are in 100 million yuan.

22 Table 5. Land Leasing and Local Public Finance Enterprise Business VAT Other Total Local Income Tax Tax Taxes Taxes M it (0.36) (2.57)** (0.23) (1.90)* (1.84)* M it (0.42) (2.36)** (0.10) (1.63) (1.57) M it (0.76) (1.97)** (0.35) (1.65) (1.68)* M it (0.50) (0.09) (0.53) (0.79) (0.23) N it (0.03) (1.10) (1.53) (2.37)** (1.66)* N it (0.75) (0.58) (1.22) (2.10)** (1.39) N it (0.48) (2.11)** (2.46)** (3.22)*** (2.69)*** N it (2.13)** (2.47)** (3.07)*** (3.55)*** (3.34)*** No. of cases R squared Note: 1. All revenues are deflated using 1999 as the base year. All units are in 10,000 RMB. 2. Absolute value of t statistics in parentheses. 3. * significant at 10%; ** significant at 5%; *** significant at 1%. 4. City and year dummies controlled but not reported in the table.

23 Table 6. Land Lease and Local Public Finance with More Controls Enterprise Business VAT Other Total Local Incomes Tax Taxes Taxes M it (0.38) (2.64)*** (0.24) (2.03)** (1.93)* M it (0.47) (2.31)** (0.26) (1.62) (1.52) M it (0.72) (1.82)* (0.09) (1.40) (1.47) M it (0.63) (0.30) (0.01) (1.36) (0.74) N it (0.19) (0.20) (0.37) (1.25) (0.59) N it (0.50) (0.08) (0.30) (1.28) (0.58) N it (0.26) (1.46) (1.61) (2.46)** (1.92)* N it (1.93)* (1.93)* (2.38)** (2.82)*** (2.68)*** GDP per capita (1.05) (4.16)*** (5.76)*** (5.59)*** (5.22)*** Urbanization ratio ,097.5 (0.32) (0.08) (0.21) (0.07) (0.15) Secondary industry ratio , ,150.1 (0.32) (0.15) (0.10) (0.86) (0.35) Tertiary industry ratio (0.61) (0.34) (0.03) (0.17) (0.11) No. of cases R squared Note: 1. All revenues are deflated using 1999 as the base year. All units are in 10,000 RMB. 2. Absolute value of t statistics in parentheses. 3. * significant at 10%; ** significant at 5%; *** significant at 1%. 4. City and year dummies controlled but not reported in the table.

24 Back to the first puzzle: Why local developmental incentives stronger after fiscal recentralization? change of central-local fiscal arrangement-tss change of state-business relationship from owner of local enterprises to tax collector. Therefore, land as a new source of local extra-budget revenue an increasingly integrated national market leads to intensifying regional competition for manufacturing

25 China s advantages in international competition Cheap labor, and also low labor protection Cheap land and subsidized infrastructure Cheap environment

26 Achievement of Shenzhen

27 Shenzhen Chengzhongcun Remaining challenges: Urban Villages in Shenzhen 北京大学深圳研究生院顾正江

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29 Adverse Implications of China s Growth Model Over-active local governments in China s growth Social instability(under-compensation to dispossessed farmers and ensued social unrest ) Issue of environmental sustainability Distorted economic structure over-capacity in manufacturing crowd out other developing country s opportunities slow reform in exchange rate regime hot money bubble estate market

30 Implications for other developing countries Government is essential in bringing about economic development, in particular in the early stage; Regional competition helps to create a helping hand to business development; However, an over-active government may result in short or even mid-term growth at the costs of long term development.

31 Implications for other developing countries China is an emerging great power, but still a fragile power in the sense that its growth model is unsustainable. Economic adjustment may occur if no reform The catch phrases of Harmonious Society and Peaceful Rising in fact reflect China s serious domestic challenges and international challenges;

32 Thanks,Comments Welcome