Download The Relationship between Regional Economy Growth and Local

The Relationship between Regional Economy Growth and Local
Fiscal Expenditure: Empirical Study of Liaoning Province
LIANG Yan, LV Shanglin
Department of Economics, Dalian University of Technology, Dalian, China, 116024
[email protected]
Abstract
Combining the regional economics with public fiscal theory, this paper examines the
relationship between regional economy and local public expenditure based on the empirical analysis of
Liaoning province by using panel data, from the views of provincial and municipal public expenditure.
In particular, this paper constructs two explanatory variables, the financial environment and the degree
of economic openness in the endogenous growth model. Finally, we get the conclusion on the
correlation of short-term and long-term between the regional economy growth and local fiscal
expenditure and give some policy suggestions on optimizing the structure of local public expenditure.
Key words local fiscal expenditure; regional economy growth; panel data
1 Introduction
In 1990s, some scholars have begun to analyze the relationship between the behaviors of local
governments and regional economic growth and done a lot of empirical work recently. Barro (1990) [1]
divides financial expenditure into productive and non-productive expenditure and finds the former plays
a significant negative impact on per capita GDP and the latter plays a positive impact, even both
estimated coefficients’ statistic are not significant. Aschauer and others[2] - [4] indicate that fiscal
expenditure significantly promote local economy and narrow the gap among them. Qu Zhentao and
Zhou Xuliang (2007) [5] estimate the effect of fiscal expenditure in Hei Longjiang Province during
1983-2005 by the multivariate regression method, and point out innovation and promotion funds and
expenditure on CESPH play a great role in promoting regional economy, the former mainly presents
long-term effect on economic growth, while the latter represents short-term one. Zhang Gang and Duan
Che (2006) [6] base on C-D production function use panel data from China 31 provinces divided into
three parts during 1985-2003 to examine the linkage between the China local fiscal expenditure and
regional economic growth, the empirical results show that the composition of financial expenditure have
effects on local economic growth and different ways to optimize financial expenditure structure.
From these above researches, different analytical methods and samples can achieve no consistent
empirical results. However, these studies neglect municipal fiscal expenditure effect on regional
economic growth and take no account of financial environment factor. Hence, this paper studies the
different impact of provincial and municipal expenditure on development of the regional economy based
on the samples covering Liaoning Province and 14 cities and takes financial environment and degree of
openness as one explanatory variable into the empirical model by using panel data which can increase
the freedom of regression. From the view of optimization of local public expenditure structure, this
paper provides new ideas and recommendations for local government which realize the harmonious
development of regional economy and reduce inter-regional disparity.
2 Empirical model and Data
Based on the endogenous growth model input public spending of Barro (1990), the empirical
model in this paper is formalized in a simple growth model following the C-D production function to
examine the impact of public expenditure and its items on economic growth. Apart from considering the
effect of fiscal expenditure, two explanatory variables, financial environment and degree of openness,
are taken into account to study in some regions where distortions and imbalance result in limited
openness and insufficient credit environment, and evaluate public investment and spending effect on
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local economic growth. The regression analysis equation is given by:
(1)
∆ ln yi ,t = α + β i ∆ ln Gi ,t + γ i ∆ ln Oi ,t + θ i ln ∆Fi ,t + ui ,t
In the function 1, where subscript i represents the name of Liaoning Province and its 14
sub-provincial cities in our sample, t denotes the years. ∆ ln yi ,t denotes real GDP per capita growth.
Several papers have found that there is time lag of public expenditure on economic growth, so we take
this lagging effect into account. We estimate the fiscal expenditure and real GDP per capita growth in
the same fiscal year to reveal the short-term effect of public spending. When analyzing long-term
relationship with lagging effect, we use the move average value of real GDP per capita growth rate in
four years as explanatory variables and research on how the fiscal expenditure affect short-term and
long-term regional output. ∆ ln Gi ,t represent the change of share of three specific fiscal expenditure
per capita, obtain the measure of the share by constructing the ratio of these public expenditure over the
total government expenditure. In this paper, we select three specific expenditure items including
infrastructure investment ( g1 ) expenditures on CESPH ( g 2 ) expenditures for social security( g 3 );
、
、
Oi ,t indicates the degree of openness in regional economy by the ratio of gross import and export
volume to GDP; Fi ,t denotes the development of the financial environment by using the ratio of annual
loan balance to GDP. The real value of data in this paper is calculated by using GDP deflator index.
This paper includes a sample including Liaoning Province and its 14 cities, provincial samples span
from 1978-2006, the period after the Reform and Opening up, the samples of 14 cities are the limit to be
the period from 2000-2006. This paper uses the data from “The compilation of statistical information of
China in 50 years ", "China Statistical Yearbook," "China Fiscal Yearbook" and "the Liaoning
Provincial Statistical Yearbook".
3 The empirical result
In the following sections we discuss regression results. They are listed in Tables 1, 2.
3.1 The empirical results from the composition of provincial fiscal expenditure
We start by estimating the relationship between fiscal expenditure and economic growth based on
the data from Liaoning Province, in 29-year periods, from 1978 to 2006, with using OLS estimation
methods. The empirical results are reported in Table 1.
Explanatory
Variables
c
Table 1 The Effect of Provincial Fiscal Expenditure on Economic Growth
Short-term effect model
Long-term effect model
without lagging effect
with lagging effect
（
）
1.42(3.03)
***
（
）
1.83(3.12)
***
g1
-2.73(-0.74)
3.49(0.61)
g2
-1.71(-2.56)**
1.79(1.81)*
g3
-0.60(-1.20)
-0.54(1.37)
O
1.23(2.39)**
1.77(1.71)*
F
1.38(1.12)
1.96(1.29)
R2
74.28%
63.19%
Note: T-statistics of the estimated coefficient in parentheses;***, **,* represent significant at 1%, 5% and 10%
3.2 The empirical results from the composition of municipal fiscal expenditure
In this section, we present the analytical result, where we use the municipal data from 2000 to 2006
including 14cities and formalize panel data by three items of public fiscal investment and expense.
The empirical results are presented in table 2.
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Explanatory
Variables
Table 2 The effect of municipal fiscal expenditure on economic growth
Short-term effect model
Long-term effect model
without lagging effect
with lagging effect
c
（
）
0.14(2.16)
**
（
）
0.05(2.64)
***
g1
-2.35(-1.28)
1.54(1.13)
g2
-1.34(-0.59)
1.79(1.81)*
g3
-0.34 (-2.10)
-0.48(-0.52)
O
1.75(1.59)*
2.10(2.37)**
F
1.48(1.33)
1.94(0.78)
R2
76.92%
66.46%
Note: T-statistics of the estimated coefficient in parentheses;***, **,* represent significant at 1%, 5% and 10%
4 Empirical Results
4.1 Fiscal expenditure and economic growth: short-term model without lagging effect
The short-term model for provincial date is presented in the column 1 of Table 1, which goodness
of fit is 74.28%. According to this indicator, this model was demonstrated to be effective one.
From the short-term perspective, three components of fiscal expenditure are all estimated. As can
be seen, the coefficient of infrastructure investment is negatively but not significantly. The investment in
infrastructure cannot play a significant crowding-out effect on private capital, thereby economic growth
in the region would not be promoted by this expenditure in short-term. However, the effect of this
variable will appear in a few years later with lagging effect.
Expenditure on CESPH is negatively related to growth and statistically significant because of time
lag. Taking education as an example, local governments increase expense on education, improve the
level of human capital in regional economies. And finally, the expense will play significantly positive
effect on the economies, yet the expense cannot impact economies in short term.
Expenditure for social security is negative but not significant. The targets of payment for social
security are to help the vulnerable groups and communities with limited contribution on the output.
Local governments use this expense to maintain social stability and promote the development of
harmonious society. Therefore, the increase in this composition is no positive impact on output.
We also use the municipal data including 14 sub-provincial cities to estimate the impact of three
items on regional economies which results are reported in Table 2. The results are similar with the
provincial ones, due to the limited space, the analysis and explanation s are not listed in this paper.
4.2 Fiscal expenditure and economic growth: long-term model with lagging effect
In column 2 of Table 1, as we can see, the goodness-of-fit is 66.46% which significantly indicate
long-term model is effective.
Comparing with the results in the short-term perspective, infrastructure investment in the long-term
model which takes lagging effect into account plays a positive influence on regional economic growth.
After the completion of infrastructure facilities, they will provide a better environment and boost private
investment from in- and out-side of this region, consequently, the positively change in this item would
be beneficial to regional economic development.
CESPH expenditure shows a significant positive correlation with economic growth, increasing
expenditure elevate the human capital of labor, raise the long-term economic development. We can see
that the increasing expense of education in Liaoning, especially the basic education spending, would
help increase local economic development.
In the long term, social security expenditure is positively related to economic growth. Welfare and
security system help improve social stability which contribute to the sustainable economic development.
Stability and harmony will cause spillover effect on growth despite of the effect is limited
We also use the municipal data including 14 sub-provincial cities to estimate the impact of three
items on regional economies which results are reported in Table 2. The results are similar with the
provincial ones, due to the limited space, the analysis and explanation s are not listed in this paper.
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4.3 Other variables and economic growth
From the results we obtain by using the rate of openness and financial environment, the degree of
openness and financial environment, especially the credit environment are positively closely related to
the regional output, no matter the short-term or the long-term. Since the Reform and Opening up,
Liaoning Province, the increasing total amount of import and export and much more frequently financial
activities increase the productivity of capital and labor employed by competitive firm. For example, if
the breadth and depth of local financial activities were sufficiently magnify, they will effectively
accelerate the flow of physical capital resources in the region, remarkable increase the productivity of
capital and contribute to local economic development.
5 Conclusion
Local fiscal expenditure is one of the fundamental factors impact on local economic growth, not
only the total amount, but also the structure of fiscal expenditure also have a different impact. This
paper estimate the growth implications of the composition of public expenditure and the degree of
opening and financial environment used to be explanatory variables, in a time series of Liaoning
government expenditure from 1978-2006 and a panel of 14 municipal economies in Liaoning Province
over 2000-2006. The conclusions and policy recommendations are given in following paragraphs:
First, from the view of total expenditure, the effect of local fiscal expenditure on economic growth
in Liaoning Province is positive. Therefore, increasing the amount of fiscal spending can effectively
accelerate economic development in Liaoning Province.
Second, Liaoning Province need to focus on the public expenditure items, which have significant
causal effects with economic growth, such as infrastructure investment and expenditure on CESPH, and
adequately amplify those positive effects to boost economy. While in the process of investment, Local
government should consider the lagging effect existed in public spending, properly optimize the
structure of expenditures, choose the short and long-term target in order to maximize the effect on
regional growth.
Third, expenditures on CESPH, which have the effect of spillover, should be increased, we must
actively rejuvenate our country through science and education strategies by raise human capital in the
way of better education and public health etc. Government expenditure should ensure the financial
arrangements for them and steady growth.
Fourth, we show the degree of opening and the financial environment also can effectively improve
the local economic development. So, when the local governments make the choice of regional growth
policy, the degree of opening and financial environment should be concerned. Local governments need
to establish policy to facilitate the development of export-oriented enterprises, enact measures to
improve the financial organization, especially the environment of credit. Those means finance and
openness can play a complementary role with fiscal expenditure to narrow the gap between the areas.
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