Economic Change and Restructuring

, Volume 52, Issue 1, pp 19–41 | Cite as

Provincial public expenditure in China: a tale of pro-cyclicality

  • Jean-Louis Combes
  • Mary-Françoise Renard
  • Sampawende J.-A. TapsobaEmail author


This paper examines the cyclicality of provincial expenditure in China during the period 1978–2013. Using panel data for analysis, it assesses whether provincial expenditure has been pro-cyclical. Pro-cyclicality is found to be a regular feature of provincial fiscal policy. This pro-cyclicality occurs both in times of low and high growth rates and has markedly intensified since 1994 with the increased autonomy of provinces. The paper further finds that the pro-cyclicality bias is mitigated when financial constraints are relaxed, the remaining political life of the governor is long, government efficiency is strong, corruption incidence is low, and governments are large.


China Fiscal cyclicality Regional growth 


  1. Aghion P, Marinescu I (2008) Cyclical budgetary policy and economic growth: what do we learn from OECD panel data? In: Acemoglu D, Rogoff K, Woodford M (eds) NBER macroeconomics annual 2007, 22. University of Chicago Press, ChicagoGoogle Scholar
  2. Alesina A, Campante FR, Tabellini G (2008) Why is fiscal policy often pro-cyclical? Journal of the European Economic Association 6(5):1006–1036CrossRefGoogle Scholar
  3. Ambrose B, Deng Y, Wu J (2015) Understanding the risk of China’s local government debts and its linkage with property markets, mimeo, National University of Singapore. Available at
  4. Ang A, Bai J, Zhou H (2016) The great wall of Debt: real estate, political risk, and Chinese local government credit spreads. Columbia Business School Research Paper No. 15–57. Available at SSRN:
  5. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277Google Scholar
  6. Beck N, Katz JN (2011) Modeling dynamics in time-series-cross-section political economy data. Annu Rev Polit Sci 14:331–352CrossRefGoogle Scholar
  7. Birney M (2014) Decentralization and veiled corruption under China’s rule of mandates. World Dev 53:55–67CrossRefGoogle Scholar
  8. Caballero RJ, Krishnamurthy A (2004) Fiscal policy and financial depth. NBER working papers No. 10532, National Bureau of Economic ResearchGoogle Scholar
  9. Calderón C, Duncan R, Schmidt-Hebbel K (2004) Institutions and cyclical properties of macroeconomic policies. Central Bank of Chile Working Paper. 285, Santiago, ChileGoogle Scholar
  10. Calderón C, Duncan R, Schmidt-Hebbel K (2012) Do good institutions promote counter-cyclical macroeconomic policies?. Globalization and Monetary Policy Institute Working Paper 118, Federal Reserve Bank of DallasGoogle Scholar
  11. Carmignani F, Laurenceson JS (2013) Provincial business cycles and fiscal policy in China. Econ Transit 21(2):323–340CrossRefGoogle Scholar
  12. Christiano L, Eichenbaum M, Rebelo S (2011) When is the government spending multiplier large? J Polit Econ 119(1):78–121CrossRefGoogle Scholar
  13. Cole M, Elliott R, Zhang J (2009) Corruption, governance and FDI location in China: a province-level analysis. Journal of Development Studies 45(9):1494–1512CrossRefGoogle Scholar
  14. Eyraud L, Lusinyan L (2013) Vertical fiscal imbalances and fiscal performance in advanced economies. Journal of Monetary Economics 60(5):571–587CrossRefGoogle Scholar
  15. Fan G, Wang X, Zhu H (2010) NERI index of marketization of China’s Provinces—the report on the relative process of marketization of each region in China. Economics Science Press, BeijingGoogle Scholar
  16. Feltenstein A, Iwata S (2005) Decentralization and macroeconomic performance in China: regional autonomy has its costs. J Dev Econ 76(2):481–501CrossRefGoogle Scholar
  17. Frankel JA, Végh CA, Vuletin G (2013) On graduation from fiscal pro-cyclicality. J Dev Econ 100(1):32–47CrossRefGoogle Scholar
  18. Gavin M, Perotti R (1997) Fiscal policy in Latin America. NBER Macroeconomics Annual, vol 12. MIT Press, pp 11–72Google Scholar
  19. Ilzetzki E, Végh CA (2008) Pro-cyclical fiscal policy in developing countries: truth or fiction?. NBER Working Papers No. 14191, National Bureau of Economic ResearchGoogle Scholar
  20. Jia J, Guo Q, Zhang J (2014) Fiscal decentralization and local expenditure policy in China. China Econ Rev 28:107–122CrossRefGoogle Scholar
  21. Kaminsky GL, Reinhart CM, Végh CA (2005) When it rains, it pours: pro-cyclical capital flows and macroeconomic policies. NBER Macroeconomics Annual 19:11–82CrossRefGoogle Scholar
  22. Lane PR (2003) The cyclical behavior of fiscal policy: evidence from the OECD. Journal of Public Economics 87(12):2661–2675CrossRefGoogle Scholar
  23. Li Y, Wu F (2012) The transformation of regional governance in China: the rescaling of statehood. Progress in Planning 78:55–99CrossRefGoogle Scholar
  24. Montinola G, Qian Y, Weingast BR (1995) Federalism, Chinese style: the political basis for economic success in China. World Polit 48:50–81CrossRefGoogle Scholar
  25. Naughton B, Yang DL (2010) Holding China together: introduction. In: Naughton BJ, Yang DL (eds) Holding China together: diversity and national integration in the post-Deng Era. Cambridge University Press, New YorkGoogle Scholar
  26. Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49(6):1417–1426CrossRefGoogle Scholar
  27. Rodden J, Wibbels E (2010) Fiscal decentralization and the business cycle: an empirical study of seven federations. Econ Politics 22:37–67CrossRefGoogle Scholar
  28. Rodrik D (1998) Why do more open economies have bigger governments? J Polit Econ 106(5):997–1032CrossRefGoogle Scholar
  29. Roodman DM (2009) A note on the theme of too many instruments. Oxford Bull Econ Stat 71(1):135–158CrossRefGoogle Scholar
  30. Talvi E, Vegh CA (2005) Tax base variability and pro-cyclical fiscal policy in developing countries. J Dev Econ 78(1):156–190CrossRefGoogle Scholar
  31. Thornton J (2008) explaining pro-cyclical fiscal policy in African countries. Journal of African Economies 17(3):451–464CrossRefGoogle Scholar
  32. Tornell A, Lane PR (1999) The voracity effect. Am Econ Rev 89(1):22–46CrossRefGoogle Scholar
  33. van den Noord P (2000) The size and role of automatic fiscal stabilizers in the 1990s and Beyond. OECD Working Paper 230Google Scholar
  34. Xu C (2011) The fundamental Institutions of China’s Reform and Development. Journal of Economic Literature 49(4):1076–1151CrossRefGoogle Scholar
  35. Zhang YS, Barnett S (2014) Fiscal vulnerabilities and risks from local government finance in China. IMF Working Paper WP 14/4 (Washington: International Monetary Fund)Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  • Jean-Louis Combes
    • 1
  • Mary-Françoise Renard
    • 1
  • Sampawende J.-A. Tapsoba
    • 2
    • 3
    Email author
  1. 1.IDREC-CERDI, Université d’AuvergneClermont-FerrandFrance
  2. 2.Fiscal Affairs DepartmentInternational Monetary FundWashingtonUSA
  3. 3.Fondation pour les Etudes et Recherches sur le Développement International (Ferdi)Clermont-FerrandFrance

Personalised recommendations