Local Governance and Public Goods Provision in Rural China

1. Local Governance and Public Goods Provision in Rural China Xiaobo Zhang and Shenggen Fan, IFPRI Linxiu Zhang and Jikun Huang, CCAP

2. The largest grassroots democracy in history • Nearly one billion people live in rural areas • Village is the basic unit for providing public services: school, road, water … • Most villages in rural China have held elections since the 1980s • Evaluation? Few

3. A brief history • Commune system before the early 1980s. • Appointed party secretary and village head • Village managed production activities and public goods service such as “barefoot” doctor. • Extremely low efficiency in production due to incentive problem.

4. A brief history • Since the early 1980s. • Granted households user rights to cultivate land • Village affairs neglected • But, villages still need to carry out state policies, i.e. family planning, grain quota, collecting taxes

5. Extension of franchise (democracy) • The threat of revolution (Acemoglu and Robinson, 2001) • Demand for more public goods provision (Lizzeri and Persico, 2003), which suggests a change in expenditure patterns after elections.

6. On the revenue side • Median voter theory • Reducing tax burden • More efficient public goods provision (less corruption) • Political economy (von Braun and Grote, 2002) • Capture and lobby by interest groups • Private enterprise owners are strong elites.

7. Democracy and public goods provision • Transaction cost of taxation • Time consuming to collect taxes from door to door. Also a lot resentment and violence • Elections may affect the structure of taxation

8. Data and reality • Survey on 60 villages in Jiangsu Province from 1985 to 1999. • Public finance, basic economic information • Governance mode • Three rich counties and three poor counties

9. Villages holding elections over years

10. Governance mode

11. Comparisons between villages with and without elections

12. Model I • Fiscal outcome is a function of • Election dummy • Fixed effects: village or/and year

13. Results for Model I (fixed effects)

14. Model II • Fiscal outcome is a function of • Village-specific information (replacing village dummies) • Election dummy • But, we have to deal with the endogeneity of elections and understand the PROCESS.

15. The Process • Pilot experiment (from the early 1980s to late 1980s) • Two of our sample counties • Implementation (most since 1992) • Pilot experiment: representative, no conflict, … • Widespread implementation • The county played a larger role than villages

16. Model II: first step • Predict the occurrence and timing of elections: • A set of exogenous village-level variables (also used in the second step) • County dummies • Year dummies • The proportion of the largest surname households and its squared term • Years in office

17. Predicting governance mode to control for endogeneity • The fraction of households with the most frequent surname and its squared term. These two variables have little to do with fiscal outcomes but they do have predictive power on the mode of governance. Our field interview revealed that civil conflict was one of the major concerns in screening pilot villages. In rural China, most conflict is related to clashes between family clans.

18. Predicting governance mode to control for endogeneity • The years in office are a good indicator for predicting when to change management teams as the length of terms often ranges from three to five years. When one reaches its term, the likelihood of being replaced reaches the highest unless he is reappointed or reelected to a second term. • The correlation coefficient between the predicted governance mode and actual one is 0.71. The instruments have significant explanatory power.

19. Model II: second step • Regress fiscal outcome on: • A set of village-level variables • Village size • Income and income2 • Presence of rural enterprises • Privatization • County dummies • Predicted governance mode • “Treatreg” also adjusts covariance

20. The effect of election on total revenue and direct taxation

21. Estimation on the share of direct taxation

22. Major results from model II • Election does not significantly affect the level of total taxation (direct + indirect). • However, it is negatively related to the share of direct taxation (less direct tax burden)

23. Major results from model II • When enterprise in presence, the direct taxation is lower. • More revenue base and lower transaction cost • However, privatization has made it harder to extract taxes and fees from enterprises • Strong interest group lobby and better-defined property right.

24. Share of public investment in total expenditures under current administration

25. Major results from model II • Elections improve the allocation of public expenditures. • When decision-making power is shared, the share of public investment is even higher.

26. Implications • Vote (participation) is just one dimension of democracy. • How to ensure power sharing (checks and balances) is also important.

27. Implications • If extending elections to the township or higher level, the above issue may be more serious • Electing party secretary directly: experiment in Guangdong and Shangxi • Within-party democracy • Power balance between appointed party secretary and elected village head

28. Ongoing work • Better understand the process (field work and qualitative analysis) • Three rounds of local governance survey in Guizhou and Gansu Provinces, two poorest provinces, to examine the long-run effect on economic and social welfare. • Within-village public goods allocation