Economic Growth Targets Drive Investment: Evidence from China's Prefecture-level Cities during 2001-2016
LIU Shulin, WANG Xianbin, HUANG Liangxiong
School of Economics and Statistics, Guangzhou University; College of Economics, Jinan University; School of Economics and Commerce, South China University of Technology
Summary:
Since the implementation of the reform and opening up policies, China has experienced unprecedented economic growth. To a large degree, this economic miracle has been driven by the political and financial incentives used by the central and local governments to promote regional economic development. To guide economic development at the district level, each year local governments set clear economic growth targets and launch various supportive policies and guiding plans. Although research has shown that the targets can promote economic growth, few studies have specifically examined how local governments manage their growth targets. In this study, we focus on the mechanisms underlying the relationship between government targets and real economic growth. As investment has always been the main driving force of China's economic growth, we empirically test whether the economic growth targets affect investment. We also explore the heterogeneity of this effect and illustrate the logic behind it. Based on modern economic theory and the related literature, we propose three hypotheses. The first concerns the basic relationship between economic growth targets and investment. Economic growth targets are key indicators for assessing the performance of local officials. To meet the assessment criteria, local government officials introduce measures to achieve the set goals. As investment can have a rapid effect on economic growth, it has become a priority for policy makers. Therefore, we hypothesize that the economic growth targets are positively related to investment. The second hypothesis concerns the temporal heterogeneity of the effect that the economic growth targets have on investment. As the Chinese economy recently shifted from a period of high-speed growth to one of high-quality development, we predict that the positive correlation between the economic growth targets and investment will become weaker over time as local governments adapt to the new trend of economic growth. The third hypothesis concerns the regional heterogeneity of the effect of the economic growth targets on investment. Although investment can help meet the set targets, whether it is effective depends on the strength of the local economy. Thus, we predict that investment will play a more important role in achieving economic growth targets in the eastern provinces than the central and western provinces. Using China's prefecture-level data on the economic growth targets during 2001-2016, we empirically find that the growth targets have a significant positive effect on investment, which is consistent with our theoretical hypothesis. Specifically, a 1% increase in the economic growth targets between 2001 and 2016 leads to an approximately 0.44% increase in regional investment. This finding is robust when using different indicators to measure investment and the economic growth targets, and different regression samples and estimation methods. We then study the heterogeneity of the effect of investment on the economic growth targets. The interaction item of economic growth targets and time shows that investment becomes a less important means of achieving the growth targets in the prefecture-level cities after 2011. Finally, we examine the regional differences in the relationship between the economic growth targets and investment, and find that compared with the central and western provinces, the eastern provinces are more likely and better able to use investment as a means of achieving the growth targets. These heterogeneous results suggest that the effect of the local governments' economic growth targets on investment depends on the external environment, shedding light on how to achieve high-quality development. The main contributions of our study are as follows. First, a large body of related research has highlighted the effect of investment on economic growth. In contrast with these studies, we focus on the effect of economic growth targets on investment. Second, although a large body of literature has explored the economic effects of government institutions and policies, few studies have focused on the local governments' economic planning. We focus on the local governments' economic growth targets, and examine the actual economic effects of the growth targets. Our study contributes to the growing body of public economic and political economic literature on the relationship between planning and the market. Finally, although some recent studies have paid attention to the effect of government targets on economic growth, they have not examined the mechanism by which the targets influence economic performance. Our in-depth empirical analysis based on economic growth theory contributes to the academic and practical understanding of this topic.
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