Fiscal Decentralization, Policy Hold-up, and Rural Labor Mobility: An analysis of Chinese rural governments’ incentives to promote “inter-provincial Undocumented labor mobility ” Yiu Por (Vincent) CHEN DePaul university For WISE, Xiamen University 2006

Outline of the presentation: Establishing the relationship between fiscal decentralization and undocumented labor mobility Measuring of variables Estimation of a gravity model: 1. Fiscal needs at different level of government => inward looking behavior 2. Rural economic development => undocumented labor migration

Focus of the paper: Political Economy of Labor Mobility What is the impact of fiscal decentralization on factor mobility? Qian versus Young. Under What condition(s), fiscal decentralization may foster market development?

What is Fiscal Decentralization? Delegation of taxation rights and governance in the upper levels of government. Usually reduced to simple principal-to-agent type central-to-provincial analysis. (Oates, 1972; Qian and Weingast, 1996; Qian and Roland, 1998; Ma, 1999; Lin and Liu, 2000; Young, 2001)

What is “Policy hold-up”? A rent-seeking behavior from local level government that distort the implementation of certain policy from the central government for their own interest.

The conditions of “policy hold-up” Local economic development: Townships and Villages Enterprises development. Fiscal needs: local governments’ number=> operation cost of local government.

Market development and factor mobility under macro-institutional rigidity: –Hukou system=>labor immobile. –Local capital was not mobile.

Hypotheses: Fiscal Decentralization create “policy Hold-up” -From Central Planning to Fiscal Decentralization => local economic development. -Fiscal Need => self-interest behavior. E.g opt out outsider at receiving area (young, 2001). –Fiscal incentives of rural governments to promote labor mobility/blockage are strongest at the lowest (village) level and weakens as the level moves up.

Data: 5 % random sample of 1 % 1987 China population census. China statistics from various years: complied by the China Center for Economics Research (CCER). China City Yearbooks

Measuring Variables

Measuring Local Economic Development and Fiscal Needs at the rural levels governments: Local Economic Development: Township and Village Enterprises’ Output Fiscal Needs at rural levels: number of villages per Town in a province. number of Township governments per province. E.g. opening a branch office vs. opening a new company.

Measuring provincial level government incentives: Marginal Retention Rate (MRR) From 23.5% to 100% Sharing Scheme a = remitting a share of the local revenues; b = remitting a share of local revenue in the case year and the total remittance increases at a predetermined rate in the subsequent years; c = remitting a fixed amount of the revenues to the central government; d = remitting a fixed amount in the base year and the total remittance increases at a predetermined rate in subsequent years; e =receiving a fixed amount of subsidy from the central government; and f = receiving a fixed amount of subsidy in the base year and the total subsidy increases at a predetermined rate in subsequent years; Political Decentralization index 1-4, the higher number means the closer to the central govt. (Huang)

Method: A Gravity Model: captures the reduced form supply and demand of undocumented rural-rural migration. Mij t = Di (t-1) (local economic development + number of rural govt. + institutional variables + other control variables) + Sj (t-1) (local economic development + number of rural govt. + institutional variables + other control variables)

Dependent variable: Mij = ln(Inter-provincial illegal rural-rural labor migrant) Construction of pseudo-panel data: 28 X 28 matrix of 5 years (from 1982 to 1987) Of undocumented labor flow

Other Lagged Independent Variables Output of township and village enterprises’ Household Responsibility System (% of production Team turn to Household farming) Moving Cost: ln(road density per sq km) other control variables: gdp per capita, foreign direct investment per capita, log( agricultural output), log (agricultural population).

Results: Lowest (village) level has strongest coefficient, and weakens as the level moves up Both labor sending (supply) and labor receiving (demand) provinces has expected sign. Position yourself!!

Evaluating the incentives of provincial level government:

Robustness Checking 1: (sub-sample of the data) Eliminating the subsidy provinces. Dropping provincial level institutional variables (Hausman test).

Robustness Check 2: Deal with missing data using “endogenous selection problem”: 3645 observations versus 221 observation Decomposes TVE output by a production function argument to see TVE’s investment effect to labor migration. Validate the claim of fiscal need by regressing provincial level expenditure on number of rural govts.

Selection regression model with endogenous selection Model1 lrumijreceivingsending Coef. log(TVE labor)-0.39*0.15 (0.23)(0.22) log(TVE investment )0.44*-0.45* (0.25)(0.26) log(land) (0.13)(0.12) Predicted Rural Govt. Expenditure-0.99*1.24*** (0.52)(0.45) party index ** (0.06)(0.07) Household Respon. Farm Ratio0.00 (0.)(0.01)

first stage (decision) model on both sides: gdp per capitayes log(road density per sq. km)yes log(village per Town)yes log(# of Town)yes party indexyes (MRR X scheme a)yes (MRR X scheme c)yes (MRR X scheme e)yes (MRR X scheme f)yes No. of observation Prob.>F0.00 R-square0.30

Conclusion: Local economic development promote labor mobility Fiscal needs create incentive of promote labor mobility at labor sending provinces. But labor blockage for labor receiving provinces. Pressure from the lower level governments is highest because they are more connected their interest with TVEs’ development.

What is the policy implication? Observations for non-Hukou migrant figures in 1 % 1990 Population census.

Thank you!! Your comments are always welcome!