A Natural Experiment in Chinese Villages

The Effects of Democratization on Public Goods and Redistribution: Evidence from China

Monica Martinez-Bravo (Johns Hopkins University) (mmb@jhu.edu)

Gerard Padro i Miquel (STICERD LSE) (g.padro@lse.ac.uk)

Nancy Qian (Yale University) (nancy.qian@yale.edu)

Yang Yao (China Center for Economic Research Peking University) (yyao@ccer.pku.edu.cn)

URL http://d.repec.org/n?u=RePEc:nbr:nberwo:18101&r=his

Abstract
This study investigates the effects of introducing elections on public goods and redistribution in rural China. We collect a large and unique survey to document the history of political reforms and economic policies and exploit the staggered timing of the introduction of elections for causal identification. We find that elections significantly increase public goods expenditure, the increase corresponds to demand and is paralleled by an increase in public goods provision and local taxes. We also find that elections cause significant income redistribution within villages. The results support the basic assumptions of recent theories of democratization (Acemoglu and Robinson, 2000; Lizzeri and Persico, 2004). In addition, we show that the main mechanism underlying the effect of elections is increased leader incentives.

Keywords: China; Democratization and Public Goods

Review by Anna Missiaia

This paper was circulated by NEP-HIS on 2012-05-29. If you have a taste for historical natural experiments, the work of Martinez-Bravo, Padro i Miquel, Qian and Yao is going to be of your interest. This NBER working paper describes the effects of the introduction of elections in Chinese villages on the provision of public goods and on redistribution in rural China starting from the 1980s. Villages are the lowest administrative units in China. They are in charge of the provision of public goods at local level, the allocation of land and also have the power to impose local taxes. The authors exploit the fairly fast and exogenous introduction of elections in villages. This is to study the impact of democratization on decisions over public goods expenditure. The reform started in the early 1980s and was progressively completed over about 15 years. The pace of the reform allows using a difference-in-difference approach, comparing the performance of the democratized villages to the non-democratized ones.

This work represents a significant contribution in terms of data gathering. In particular, the retrospective Village Democracy Survey conducted by the authors on the characteristics of village leaders is new. This was done on the same 217 villages included into the NFS Survey conducted by the Chinese Ministry of Agriculture on villages’ characteristics. The two surveys together allow testing a model that explains a policy outcome using province-year trends, village and year fixed effects and a dummy variable that takes value 1 when the village has experienced an election.

The main result of this paper is that the introduction of elections leads to a substantial increase on public goods expenditure (27%) and to income redistribution. The latter result is not surprising in any transition from a democratic to a non democratic decision system. The former result is more interesting: the authors find that before the reform there was under provision of public goods. The increase in expenditure is essentially financed by an increase in taxes. This result is far from being obvious: a vast literature in political economics shows how elected leaders can fail to provide the policies preferred by the majority. The paper also shows that this increase in public goods expenditure is a response to an actual demand. The increase in a given type of good is different in villages with different characteristic. For example, in villages with more farming, irrigation is increased more; in villages with more school-age children, schooling is increased more.

This study is particularly solid thank to the comprehensive database used and to the various robustness checks and the complementary insights provided to support the results (i.e. the study of the demand for public goods). However, one question that is not fully addressed is what the incentives of the local representatives were before the elections were introduced. The paper proves that they were not concerned with providing the optimal level of public goods to the local population, which turned out to be willing to pay more taxes to receive it. The historical reasons for this mismatch prior the reform are not clear. Also, the results here are very strong in terms of the effect of these particular reform. However, it is not clear how much this result is due to the previous decision mechanism that was in place before. The increase could be very idiosyncratic with respect to the Chinese political experience. Can these results be generalized to other local elections in other parts of the world or to elections at different administrative level? Lastly, the increase in the provision of public goods financed by taxes happened in this case for a given level of per capita income, however the demand for public goods might change at different income levels, leading to different consequences of democratization. To conclude, this paper is an excellent piece of research applying political economics models to a novel dataset for Chinese villages. Hopefully it will stimulate further studies of decision making over public goods provision in China. This might be useful to develop further the historical perspective on this topic.

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