State Capacity and China's Economic Performance

Asian Meeting of Econometric Society Working Paper, 2017

53 Pages Posted: 5 Oct 2017

See all articles by Hua Cheng

Hua Cheng

Nankai University - School of Finance; University of Texas at Austin

Kishore Gawande

University of Texas at Austin

Date Written: August 31, 2017

Abstract

This study attempts a first causal examination of the role of state capacity in China’s economic performance. Effective state capacity connotes not just ability to extract tax from citizens but also the ability to convert taxes into public investment. Equally importantly, these capacities must be combined with the ability to induce citizens and firms to make private investment that complement government’s public investment in the production of economic output. State capacity therefore combines extractive, productive and incentive-provision abilities. We use historical variation to identify the effect of state capacity at the level of county governments in modern China. Our estimates indicate that state capacity significantly impacts economic output. A mediation analysis indicates the public investment channels that deliver this impact. We also find that bureaucratic capacity measured by the number of public employees does not necessarily deliver better economic outcomes in China. We suggest that social stability objectives, rather than economic growth, drive public sector over-staffing.

Keywords: State Capacity, Fiscal Capacity, Public Employee, Public Goods Provision, War

JEL Classification: H41, H54, P27, P48, N40, N95, O12, O43

Suggested Citation

Cheng, Hua and Gawande, Kishore, State Capacity and China's Economic Performance (August 31, 2017). Asian Meeting of Econometric Society Working Paper, 2017, Available at SSRN: https://ssrn.com/abstract=3048130 or http://dx.doi.org/10.2139/ssrn.3048130

Hua Cheng (Contact Author)

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Kishore Gawande

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

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