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Demystifying China's fiscal stimulus

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Author Info

  • Fardoust, Shahrokh
  • Lin, Justin Yifu
  • Luo, Xubei

Abstract

China's government economic stimulus package in 2008-09 appears to have worked well. It seems to have been about the right size, included a number of appropriate components, and was well timed. Its subnational component was designed to maximize the impact of the stimulus package on the economy and minimize the potential procyclical elements that are usually built into subnational fiscal mechanisms in federal countries. Moreover, China's massive fiscal stimulus played an important role in the overall recovery of the global economy. Using a simple analytical framework, this paper focuses on two key factors behind the success of the stimulus: investments in bottleneck-easing infrastructure projects and countercyclical nature of subnational spending based on the assumption that well-chosen infrastructure projects could improve business climate and thereby crowd in the private investment. The paper concludes that the expansionary subnational government spending played a key role in strengthening the overall impact of the stimulus and sustaining growth. It also highlights the importance of public investment quality and cautions about the sustainability of local government financing through the domestic banking system and increases in local governments off balance sheet or contingent liabilities. These lessons may be of particular relevance today for China, as well as other countries, in formulating policy response to another global economic slowdown or crisis, possibly as a result of the Eurozone turmoil. For China, investing in urban infrastructure and green economy, as well as in higher quality and better targeted social services, will be crucial for improving income inequality and inducing a more inclusive growth path.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6221.

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Date of creation: 01 Oct 2012
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Handle: RePEc:wbk:wbrwps:6221

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Related research

Keywords: Debt Markets; Subnational Economic Development; Banks&Banking Reform; Economic Theory&Research; Emerging Markets;

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References

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  1. Pietro Cova & Massimiliano Pisani & Alessandro Rebucci, 2010. "Macroeconomic Effects of China’s Fiscal Stimulus," Research Department Publications 4689, Inter-American Development Bank, Research Department.
  2. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
  3. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
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  8. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  9. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  10. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
  11. Deng, Yongheng & Morck, Randall & Wu, Jing & Yeung, Bernard, 2011. "Monetary and Fiscal Stimuli, Ownership Structure, and China's Housing Market," Ratio Working Papers 173, The Ratio Institute.
  12. Gonzalez, Christian Y. & Rosenblatt, David & Webb, Steven B., 2002. "Stabilizing intergovernmental transfers in Latin America : a complement to national/subnational fiscal rules?," Policy Research Working Paper Series 2869, The World Bank.
  13. Roy Bahl & Jorge Martinez-Vazquez, 2003. "Fiscal Federalism and Economic Reform in China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0313, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  14. Clemens, Jeffrey & Miran, Stephen, 2010. "The effects of state budget cuts on employment and income," MPRA Paper 38715, University Library of Munich, Germany.
  15. Jing Jin & Chunli Shen & Qian Wang & Heng-fu Zou, 2012. "Decentralization in China," CEMA Working Papers 546, China Economics and Management Academy, Central University of Finance and Economics.
  16. Geoffrey Ducanes & Marie Anne Cagas & Duo Qin & Pilipinas Quising & Mohammad Abdur Razzaque, 2006. "Macroeconomic Effects of Fiscal Policies: Empirical Evidence from Bangladesh, China, Indonesia and the Philippines," Working Papers 564, Queen Mary, University of London, School of Economics and Finance.
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Cited by:
  1. Dethier, Jean-Jacques, 2013. "Coping with urban fiscal stress around the world," Policy Research Working Paper Series 6693, The World Bank.

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