Yiu Por (Vincent) CHEN DePaul university For WISE, Xiamen University 2006

1. Fiscal Decentralization, Policy Hold-up, and Rural Labor Mobility:An analysis of Chinese rural governments’ incentives to promote “inter-provincial Undocumented labor mobility” Yiu Por (Vincent) CHEN DePaul university For WISE, Xiamen University 2006

2. Outline of the presentation: • Establishing the relationship between fiscal decentralization and undocumented labor mobility • Measuring of variables • Estimation of a gravity model: 1. Fiscal needs at different level of government => inward looking behavior 2. Rural economic development => undocumented labor migration

3. Focus of the paper: Political Economy of Labor Mobility • What is the impact of fiscal decentralization on factor mobility? Qian versus Young. • Under What condition(s), fiscal decentralization may foster market development?

4. What is Fiscal Decentralization? • Delegation of taxation rights and governance in the upper levels of government. • Usually reduced to simple principal-to-agent type central-to-provincial analysis. (Oates, 1972; Qian and Weingast, 1996; Qian and Roland, 1998; Ma, 1999; Lin and Liu, 2000; Young, 2001)

5. What is “Policy hold-up”? • A rent-seeking behavior from local level government that distort the implementation of certain policy from the central government for their own interest.

6. The conditions of “policy hold-up” • Local economic development: Townships and Villages Enterprises development. • Fiscal needs: local governments’ number=> operation cost of local government.

7. Market development and factor mobility under macro-institutional rigidity: • Hukou system=>labor immobile. • Local capital was not mobile.

10. Hypotheses: Fiscal Decentralization create “policy Hold-up” -From Central Planning to Fiscal Decentralization => local economic development. -Fiscal Need => self-interest behavior. E.g opt out outsider at receiving area (young, 2001). • Fiscal incentives of rural governments to promote labor mobility/blockage are strongest at the lowest (village) level and weakens as the level moves up.

11. Data: • 5 % random sample of 1 % 1987 China population census. • China statistics from various years: complied by the China Center for Economics Research (CCER). • China City Yearbooks

12. Measuring Variables

13. Measuring Local Economic Development and Fiscal Needs at the rural levels governments: Local Economic Development: • Township and Village Enterprises’ Output Fiscal Needs at rural levels: • number of villages per Town in a province. • number of Township governments per province. • E.g. opening a branch office vs. opening a new company.

16. Measuring provincial level government incentives: • Marginal Retention Rate (MRR) • From 23.5% to 100% • Sharing Scheme • a = remitting a share of the local revenues; • b = remitting a share of local revenue in the case year and the • total remittance increases at a predetermined rate in the subsequent years; • c = remitting a fixed amount of the revenues to the central government; • d = remitting a fixed amount in the base year and the total • remittance increases at a predetermined rate in subsequent years; • e =receiving a fixed amount of subsidy from the central government; and • f = receiving a fixed amount of subsidy in the base year and the total • subsidy increases at a predetermined rate in subsequent years; • Political Decentralization index • 1-4, the higher number means the closer to the central govt. (Huang)

19. Method: • A Gravity Model: captures the reduced form supply and demand of undocumented rural-rural migration. • Mijt = Di (t-1) (local economic development + number of rural govt. + institutional variables + other control variables) + Sj (t-1) (local economic development + number of rural govt. + institutional variables + other control variables)

20. Dependent variable: • Mij = ln(Inter-provincial illegal rural-rural labor migrant) • Construction of pseudo-panel data: 28 X 28 matrix of 5 years (from 1982 to 1987) Of undocumented labor flow

21. Other Lagged Independent Variables • Output of township and village enterprises’ • Household Responsibility System (% of production Team turn to Household farming) • Moving Cost: ln(road density per sq km) • other control variables:gdp per capita, foreign direct investment per capita, log( agricultural output), log (agricultural population).

24. Results: • Lowest (village) level has strongest coefficient, and weakens as the level moves up • Both labor sending (supply) and labor receiving (demand) provinces has expected sign. Position yourself!!

26. Evaluating the incentives of provincial level government:

28. Robustness Checking 1:(sub-sample of the data) • Eliminating the subsidy provinces. • Dropping provincial level institutional variables (Hausman test).

30. Robustness Check 2: • Deal with missing data using “endogenous selection problem”: 3645 observations versus 221 observation • Decomposes TVE output by a production function argument to see TVE’s investment effect to labor migration. • Validate the claim of fiscal need by regressing provincial level expenditure on number of rural govts.

33. Conclusion: • Local economic development promote labor mobility • Fiscal needs create incentive of promote labor mobility at labor sending provinces. But labor blockage for labor receiving provinces. • Pressure from the lower level governments is highest because they are more connected their interest with TVEs’ development.

34. What is the policy implication? Observations for non-Hukou migrant figures in 1 % 1990 Population census.

36. Thank you!!Your comments are always welcome! ychen16@depaul.edu