Neighbour Effects in the Provision of Public Goods in a Young Democracy: Evidence from China

• Author: Philip Brown,Xiaobo Zhang,Claudio A. Agostini
• Published date: 01 February 2016
• Date: 01 February 2016
• DOI: http://doi.org/10.1111/1468-0106.12057

NEIGHBOUR EFFECTS IN THE PROVISION

OF PUBLIC GOODS IN A YOUNG DEMOCRACY:

EVIDENCE FROM CHINA

CLAUDIO A. AGOSTINI*Universidad Adolfo Ibañez

PHILIP BROWN GeoSource Capital

XIAOBO ZHANG International Food Policy Research Institute

Abstract. Fiscal mimicking and yardstick competition among neighbouring jurisdictions have been

widely documented in developed countries with long histories of democracy. However, there is very

little empirical evidence concerning these practices in developing countries with young democracies.

Using a primary panel of 86 rural Chinese administrative villages that have undergone transitions to

democracy over the past two decades, we show that the neighbourhood effect also exists in a young

democracy, albeit at a lower magnitude than in a mature democracy. Elected chairs of village

committees who have served more than one term respond positively to the provision of public

projects in neighbouring villages by increasing both the number of public projects and the funding

allocated to undertake them. In contrast, appointed party secretaries with more than 1 year of

service are insensitive to neighbours’ performance. In addition, village leaders are strategic in timing

the arrival of public projects to increase the probability of re-election: in the year preceding elections,

both the number and budget of public projects increase significantly. In this sense, politicians in

young and old democracies behave alike.

1. INTRODUCTION

Prior to the 1980s, local officials in China were appointed by higher-level

authorities and answered primarily to these authorities rather than to villagers

(Fan, 2001). However, massive democratic reforms in Chinese villages over the

past several decades may have shifted the objectives of elected officials toward

providing public goods to constituents because popular elections increase the

accountability of public officials and influence the chance of re-election, which

may influence the allocation of public resources (Besley and Coate, 2003).

Empirical evidence shows that local elections have, in fact, affected the level of

public goods provided in Chinese villages. For example, Rozelle et al. (2009)

find that the provision of public goods increases when village leaders are elected

(as opposed to being appointed) because public projects positively influence the

probability of re-election. Similarly, Zhang et al. (2004) find that village elec-

tions increase the share of village expenditures allocated to investment in public

goods. Finally, Wang and Yao (2007) and Martinez-Bravo et al. (2011) find that

village elections increase the share of public expenditures and reduce the share of

administrative costs in government spending, which is consistent with the notion

that elections significantly strengthen the accountability of village governments.

However, Wang and Yao (2007) also show that elections have diminished fiscal

*Address for Correspondence: Universidad Adolfo Ibañez, Diagonal Las Torres 2640, Santiago,

Chile. E-mail: claudio.agostini@uai.cl.

doi: 10.1111/1468-0106.12057

© 2014 Wiley Publishing Asia Pty Ltd

Pacific Economic Review, 21: 1 (2016) pp. 13–31

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sharing across villages, which may affect the provision of public goods that are

complementary across villages. This result suggests that interactions among

villages may play a particularly important role in the provision of public goods

in China.

The possibility that the fiscal behaviour of a local government is positively

influenced by the fiscal behaviour of neighbouring jurisdictions is well estab-

lished (e.g. Case et al., 1993; Besley and Case, 1995). Although empirical evi-

dence has supported these theoretical predictions, the preponderance of

evidence to date comes exclusively from developed countries with long histories

of democracy, and there are few empirical studies from developing countries and

fewer still from nascent democracies.

We use unique data from a poor Chinese province to provide evidence that

fiscal policy in neighbouring villages does influence the provision of public

goods by local governments. Our results are compelling because in contrast to

several studies undertaken in developed countries (Case et al., 1993; Revelli,

2002; Baicker, 2005; Foucalt et al., 2008), public goods, including projects such

as irrigation, terracing and erosion control, are both fully observable and highly

relevant to the electorate. Moreover, because farmers are usually unable to

undertake such investment privately, these goods are only available when pro-

vided by the government. Finally, due to special institutional features of these

data, it is also possible to investigate different roles in the provision of public

goods played by officials who are elected relative to those who are appointed.

2. INSTITUTIONAL BACKGROUND

2.1. Fiscal federalism in China

China’s governing hierarchy consists of five levels: centre, province, prefecture,

county, and township.1Each township includes a few dozen ‘natural villages’, a

handful of which serve as ‘administrative villages’; that is, designated contact

points between township authorities and villagers. Although these administra-

tive villages are not formally part of China’s governing structure, policies and

other information from higher-level authorities are disseminated through

administrative villages, and leaders of administrative villages are the highest-

level authorities with which most villagers interact.2As such, administrative

villages are the organizing political unit in rural China.

China’s rural fiscal system has undergone four major reforms since the early

1980s. The first reforms focused on the decentralization of the planned economy

in order to incentivize revenue generation at the local level, resulting in signifi-

cantly higher revenues for local governments and lower revenues for the central

government. Facing budget constraints, the central government ‘recentralized’

1Prior to the start of reforms in 1978, People’s Communes represented the primary organizational

unit in rural China. People’s Communes were succeeded by townships at the end of agricultural

collectivization.

2Administrative villages succeeded Production Brigades at the end of collectivization.

C. A. AGOSTINI ET AL.

© 2014 Wiley Publishing Asia Pty Ltd

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