Regional differences and rural public expenditure cyclicality: evidence from transitory and persistent shocks in China

Abstract

This paper focuses on the cyclicality of rural public expenditure in China. We employed two types of instrumental variables to estimate the effects of fluctuations in GDP on rural public expenditure based on China’s provincial/municipal panel data during 2000–2016. The results show that once the corresponding endogeneity is controlled, whether in the long or short term, China’s rural public expenditure is characterized by procyclical behaviors. However, when regional differences are taken into account, the procyclicality of China’s rural public expenditure is related to the degree of economic development in the region. Specifically, through grouping regression of population density, public service provision per capita and central transfer payment per capita, in the short term, lower economic development usually leads to more obvious procyclicality; in the long term, in the areas with economic development above the median, rural public expenditure is acyclical. This study provides empirical evidence for the procyclical rural public expenditure in developing countries.