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The Effect of Local Government Debt on Regional Economic Growth in China: A Nonlinear Relationship Approach

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  • Rubo Zhao

    (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China)

  • Yixiang Tian

    (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China)

  • Ao Lei

    (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China)

  • Francis Boadu

    (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China)

  • Ze Ren

    (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China)

Abstract

By drawing on the concept of sustainable economic development, this study advances the research on debt sustainability in the economic literature. We explore the correlation between local government debt and regional economic growth in 30 provinces in China. Previous studies have established that the development of economic growth between regions is not independent and we, therefore, investigate the spatial effect of regional economic growth due to the existence of a spatial spillover effect or spatial expansion among regions. Using Moran’s scatter plot, a Local Indicator of Spatial Association (LISA) map, and a semiparametric spatial model (SE-SDM), our results demonstrate the following: (1) the spatial agglomeration effect has a significant influence on regional economic growth; (2) the relationship between local government debt and regional economic growth presents nonlinear characteristics, rather than having an inverted U-shaped relationship; (3) the semiparametric spatial model more accurately characterizes in the nonlinear relationship between local government debt and regional economic growth compared to a basic regression model and the spatial Durbin model; and (4) when the scale of local government debt exceeds a certain level, economic growth will be suppressed by the crowding-out of private investment and the reduction of public expenditure.

Suggested Citation

  • Rubo Zhao & Yixiang Tian & Ao Lei & Francis Boadu & Ze Ren, 2019. "The Effect of Local Government Debt on Regional Economic Growth in China: A Nonlinear Relationship Approach," Sustainability, MDPI, vol. 11(11), pages 1-22, May.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:11:p:3065-:d:235807
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    3. Hai Xie & Weikun Zhang & Hanyuan Liang, 2023. "Can Local Government Debt Decrease the Pollution Emission of Enterprises?—Evidence from China’s Industrial Enterprises," Sustainability, MDPI, vol. 15(11), pages 1-20, June.
    4. Zhu, Jun & Xu, Haokun & Zhang, Yue, 2022. "Local government debt and firm productivity: Evidence from China," Research in International Business and Finance, Elsevier, vol. 63(C).
    5. Zhang, Man & Brookins, Oscar T. & Huang, Xiaowei, 2022. "The crowding out effect of central versus local government debt: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    6. Xin Han & Zheng Xuelian & Jun Hou & Xianming Kuang, 2023. "The Impact of Haze Pollution on Chinese Local Government Debt," SAGE Open, , vol. 13(4), pages 21582440231, October.
    7. Huang, Shuo, 2022. "The unintended consequence of local government debt: evidence from stock price crash risk," Finance Research Letters, Elsevier, vol. 50(C).
    8. Agnieszka Kozera & Aldona Standar & Łukasz Satoła, 2020. "Managing Rural Areas in the Context of the Growing Debt of Polish Local Government Units," Agriculture, MDPI, vol. 10(9), pages 1-25, August.
    9. Mingyao Cao & Keyi Duan & Haslindar Ibrahim, 2023. "Local Government Debt and Its Impact on Corporate Underinvestment and ESG Performance: Empirical Evidence from China," Sustainability, MDPI, vol. 15(14), pages 1-18, July.
    10. Andi Syah Putra & Guangji Tong & Didit Okta Pribadi, 2020. "Spatial Analysis of Socio-Economic Driving Factors of Food Expenditure Variation between Provinces in Indonesia," Sustainability, MDPI, vol. 12(4), pages 1-18, February.

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