Political Decentralization and Inflation: Sub-National Evidence from China BY 崔文倩 潘晨 李璇 张文学 翟海燕 薛石青 June 8th, 2013
Content Introduction Political decentralization and inflation Political decentralization and sub-national inflation in China Cross-section time-series evidence Conclusion
Introduction BY 薛石青
Background: Cross-national researches on the macroeconomie effect of decentralization Mixed findings on how it works Ambiguity of legal measurement:constitutional federalism what matches? Introduction
Essay horizon: Follow Riker's framework of political decentralization Two partisan dimensions Impact on inflation Suggestion: Variation exists in the degree of political contrlo everted by the central government under single-party rule in China. Introduction
Political decentralization and inflation BY 崔文倩 潘晨
1 Political Decentralization as Constitutional Federalism 'Credible commitment': high inflation is ultimately a problem of excessive money supply created by inlation-prone national-level politicans(centralized, high inflation?) 'Collective action' problem: sub-national governments may adopt irresponsible regional spending policies through deficit financing and reliance on national government bailing them out (decentralized, high inflation?) 'Lock-in' effect and ambivalent relationship Political decentralization and inflation
1 Political Decentralization as Constitutional Federalism Daniel Treisman, 2000, Decentralization and Inflation: Commitment, Collective Action, or Continuity? Political decentralization reduce relative level of inflation Political decentralization lock in inflation rates, high or low 87 countries, 1970s and 1980s Political decentralization: Whether the state is classified by scholars as federal (a dummy variable) Fiscal decentralization the share of subnational governments in total government spending the share of subnational government in total tax revenue Political decentralization and inflation
1 Political Decentralization as Constitutional Federalism Erik Wibbels, 2000, Federalism and the Politics of Macroeconomic Policy and Performance Decentralization has led to larger public sectors, higher inflation, and larger deficits in developing nations. 1979~1995, 46 developing nations A trichotomous variable, fully federal systems are assigned a "2", federal-like systems receive a "1", and unitary systems a "0" China: 1, partly-federal India: 2, fully-federal Political decentralization and inflation
1 Political Decentralization as Constitutional Federalism Mixed findings in cross-national comparative research Limitations of the measure of political decentralization based on constitutional federalism in these studies Political decentralization and inflation
2 Partisan Dimensions A conceptualization of political decentralization Adopted by Riker 2 dimensions: Share of sub-national governments ruled by the political party of the national chief executive Political control exercised by national chief executive s political party over sub-national co-partisans Political decentralization and inflation
2 Partisan Dimensions Fig.1 Riker s partisan dimensions of political decentralization High Political control exercised by national chief executive s political party over sub-national copartisans Low Moderately (de)centralized (2) Most Decentralized (4) Most Centralized (1) Moderately (de)centralized (3) 0% 100% Share of sub-national governments ruled by the political party of the national chief executive (1):one single political party e.g. China (4):US under a Democratic president with 50 Republican governors (2):Mexico PRI 2000 failure on presidency election (3):US under a Republican president with 50 Republican governors Political decentralization and inflation
2 Partisan Dimensions To make empirical study: cross-national data for all possible countries in all possible years Too overwhelming Pioneering research: 1 dimension & selected countries Wibbels: based on the share of sub-national governments ruled by the political party of the national chief executive Political decentralization and inflation
3 A sub-national Approach A theoretical basis Gradually focuses on a specific country that better simplify the problem A little bit loose Huang finds that but Huang does not study provincial inflation per se, although there may be theoretical grounds to link growth in fixed-asset investments with inflation(1980) Political decentralization and inflation
3 A sub-national Approach One single political party - a big step forward Allows us to isolate the share effects 2 crucial conditions needed be met first: The central government exercises varying political control over the different subnational governments The macroeconomic policy preferences of the central government regarding inflation is needed Political decentralization and inflation
Political decentralization and sub-national inflation in China BY 李璇
1 Inflation in reformeform-era ra China Two inflational spikes Political decentralization and sub-national inflation in China
1 Inflation in reformeform-era ra China Most scholars: the cyclical nature of and the changes in national-level inflation Explanation: 1. Alternations between two opposing policy commitments supporting state-owned enterprises with loans the imperative to contain inflation 2. The changing political fortunes of policy factions the reformist faction the conservative faction Political decentralization and sub-national inflation in China
1 Inflation in reformeform-era ra China MThe author: the substantial variation in provincial inflation Example: RPI in 1994:China 21.7%, Shanghai 15.6% RPI in 1990:Guangdong -4.4%, Heilongjiang 4.9% Political decentralization and sub-national inflation in China
2 Divergence in Inflation Preferences Central government: The country s overall macroeconomic stability Provincial government: Policies cunducive to high inflation Favourable rate of 1990(a year with low inflation): 61.6% of central officials 41.2% of local officials Unfavourable rate of 1991(a year with rising unemployment and falling price levels): 8.3% of central officials 29.4% of local officials Political decentralization and sub-national inflation in China
2 Divergence in Inflation Preferences Explanation: The central government bears the ultimate cost of rampant inflation, not only in economic terms but more importantly in political terms. The central government harbours more encompassing interests in macroeconomic stability. For the provicial government, low inflation is a public good that benefits each locality regardless of whether it pays for its provision. The local government has the incentive to shirk and free-ride. Political decentralization and sub-national inflation in China
2 Divergence in Inflation Preferences Encompassing interests: Whereas roving bandits have only a very narrow stake in the economy they plunder; they bear only a minimal share of the social costs that their plundering causes. Stationary bandits have an encompassing interest, however, in the overall success of the economy (which is why they provide public goods and charge less than 100% in taxes). Political decentralization and sub-national inflation in China
3 Data and Hypothesis Measure of inflation: RPI Period: 1978-1997 Political decentralization and sub-national inflation in China
3 Data and Hypothesis Constant: China under the single-party rule of the CCP Variablie: bureaucratic integration (the extent of central political control over the provincial governments) the ralationship between the top provicial officials and the central government Four types of provincial secretaries: Concurrent centralists Centralists Outsiders Localists Political decentralization and sub-national inflation in China
3 Data and Hypothesis Hypothesis: All else being equal, the degree of political decentralization should be positively correlated with inflation in the Chinese provinces in this period. Those provinces with high scores on Political Decentralization variable should witness higher inflation than those with lower scores, ceteris paribus. Political decentralization and sub-national inflation in China
Cross-section time-series evidence BY 张文学 翟海燕
1 Model specification and estimation issues Empirical Model: province-specific intercept annual year dummy variable disturbance term Cross-section time-series evidence
1 Model specification and estimation issues ( a matrix of economic control variables ) GDP Growth (-) Per Capita GDP (-) Export Fiscal decentralization State Investment (-) Urban Employment (+) Cross-section time-series evidence
2 Granger Causality Analysis Politics Economics Economics!!! Politics??? There are two possibilities! Cross-section time-series evidence
2 Granger Causality Analysis Cross-section time-series evidence
3 Empirical Results Cross-section time-series evidence
3 Empirical Results Cross-section time-series evidence
3 Empirical Results Cross-section time-series evidence
Conclusion BY 薛石青
A greater extent of political decentralization is associated with higher inflation on the provincial level and the association is both statistically significant and economically substantial(based In post-1978 China). Conclusion
Advantages: A sub-national research design(new horizon) The first empirical effort Be good to drawing generalizable inferences normative structure and thorough expression Disadvantages: Unreliability of the researches before Unreliability of the measurement on the degree of political decentralization with number 1,2,3,4 Conformity of the theory in China and in federal countries Methods through which political decentralization affects inflation Unreliability of patisan dimension based on the research on officals led by the central government Comments
THANK YOU ALL BY 崔文倩 潘晨 李璇 张文学 翟海燕 薛石青