Scholarly article on topic 'Grassroots Democracy and Local Governance: Evidence from Rural China'

Grassroots Democracy and Local Governance: Evidence from Rural China Academic research paper on "Political Science"

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Abstract of research paper on Political Science, author of scientific article — Shuna Wang, Yao Yang

Abstract This paper studies the impacts of village elections on the accountability of the village committee, local fiscal sharing, and state taxation in rural China using data of 48 villages for the period of 1986–2002. Elections are found to substantially increase the share of public expenditures in the village budget, but reduce the shares of administrative costs and income handed to the township government. Those findings suggest that elections have enhanced the accountability of the village committee, but weakened local fiscal sharing and the state's grip. No strong evidence is found that state taxation is affected by elections, nor it is found that the role of a more competitive election is different from that of a closed election.

Academic research paper on topic "Grassroots Democracy and Local Governance: Evidence from Rural China"

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Social and Behavioral Sciences

Procedia Social and Behavioral Sciences 2 (2010) 7164-7180

Selected Papers of Beijing Forum 2006

Grassroots Democracy and Local Governance: Evidence from Rural China

Shuna Wang, Yao Yang

Graduate student, Department of Economics, University of Virginia Professor, China Center for Economic Research, Peking University


This paper studies the impacts of village elections on the accountability of the village committee, local fiscal sharing, and state taxation in rural China using data of 48 villages for the period of 1986—2002. Elections are found to substantially increase the share of public expenditures in the village budget, but reduce the shares of administrative costs and income handed to the township government. Those findings suggest that elections have enhanced the accountability of the village committee, but weakened local fiscal sharing and the state's grip. No strong evidence is found that state taxation is affected by elections, nor it is found that the role of a more competitive election is different from that of a closed election.

Keywords: grassroots democracy, local governance, village elections, Asia, China JEL classification Numbers: D31, D72, H41


We thank Mengtao Gao, Yan Shen, Xiaobo Zhang, three anonymous referees, and the participants of workshops in IFPRI, Nanjing Agricultural University, the Singapore National University, and Peking University for their helpful comments. The Research Center for Rural Economy, Ministry of Agriculture, the People's Republic of China provided assistance in data collection. Financial supports from the Chinese Medical Board, the World Bank, and the National 211 Projects, China are gratefully acknowledged.

Does grassroots democracy enhance local governance? In theory, there is no definitive answer to this question. While democracy tends to empower local people and thus, increases the accountability of the local government, the decentralized nature of grassroots democracy may make it easier for local elites to capture the local politics. Democracy does not necessarily lead to a fairer provision of public goods (Bardhan and Mookherjee, 2005). On the other hand, the literature of fiscal decentralization has shown that decentralization may hinder the provision of public goods beyond a jurisdiction (e.g., Besley and Coate, 2000).

China began to experiment with village elections in the mid-1980s and formally introduced it in 1998 through the Organic Law for the Village Committee (OLVC). The initial purpose of the election, as conceived in the early 1980s by Mr. Peng Zhen, the late vice chairman of China's legislative body, the National People's Congress (NPC), was to


1877-0428 © 2010 Beijing Forum. Published by Elsevier Ltd. All rights reserved. doi:10.1016/j.sbspro.2010.05.069

fill the political vacuum left after the fall of the commune system. While stabilizing the party's rule in the countryside was at the top list, Mr. Peng also emphasized elections' role to empower villagers to prevent infringements on their rights by local cadres. (O'Brien and Li, 2000). However, since the inception of the election, controversies have never stopped. Within the village, the authority of the elected village committee is seriously constrained, if not superseded, by the communist party committee; outside the village, the township and county governments still maintain a heavy hand in village affairs. As a result, even if the elected village committee is willing to advance the interests of the villagers, it may not be able to do so. On the other hand, there are concerns by the state that village elections may give the village too much autonomy, thus loosing its control over the grassroots society. For a government that puts paramount priority on social stability, it is frustrating to imagine the village slipping from its grip. Placing the political consideration aside, one still needs to worry about elections' consequences on public goods provision beyond the village boundary, because they may enhance the decentralized nature of local public finance.

Based on survey data collected from 48 villages in eight provinces for the period of 1986—2002, this paper studies the role of village elections in local governance in rural China. Specifically, we study three topics. The first is the election's effect on the accountability of village government. For this purpose, we study the variations in the shares of public expenditures and administrative costs in the village budget. If elections strengthen the village government's accountability, the former should increase and the latter should decrease. The second topic is elections' impact on local fiscal sharing. For this, we study the share of the village revenue handed to the township government, the government unit immediately above the village. The third topic is the impact of village elections on the authority of the state. While the change of local fiscal sharing can be an indicator for the change of state control, we will also study the amount of tax paid in the village to the state. If elections weaken the state's control over the village, the amount of state taxes is likely to fall. In addition to the effects of the first election, we will also study the impacts of the competitiveness of the subsequent elections.

In the literature, evidence suggests that local elections do generally increase the responsiveness of the local government to its constituency. Foster and Rosenzweig (2001) found that village elections in India had led to more investment in road building instead of irrigation facilities. They interpreted this finding as evidence for a pro-poor policy because road building provides jobs to the landless whereas investment in irrigation facilities augments the capacity of the landlords. Using data from a quasi-experiment in India in which a group of randomly selected villages were required to elect a woman village head, Chattopadhyay and Duflo (2004) found that the villages with a women village head tended to provide more women-friendly public services. Zhang, Fan, Zhang, and Huang (2004) found in a sample of China's Jiangsu province that village elections had increased the share of public investment and had no effect on the amount of fees handed over to the township. Kennedy, Rozelle, and Shi (2004) found in a sample from Shaanxi province that compared with elections with government-appointed candidates, more competitive elections, in which candidates were nominated by villagers, produced village leaders that were more accountable to villagers in decisions regarding land reallocations.

Our study is more comprehensive than the above studies. We find that village elections increase the share of public expenditures by 4.21 percentage points, or 22.4% of the sample average, and reduce the share of administrative costs by 3.96 percentage points, which is 17.9% of the sample average. We also find that elections reduce the share of income handed to the township by 4.44 percentage points, or 19.0% of the sample average. This result is still robust when we use a smaller sample that excludes 2001 and 2002 when the central government began the tax and fee reform that abolished villages' fiscal sharing with the township government and reduced farmers' tax burdens. These results show that village elections have significantly strengthened the accountability of the village government, but have weakened local fiscal sharing. To the extent that it is part of the state architecture, weakened local fiscal sharing is also a sign for the state's weakened authority in the grassroots society. We also find that elections reduce the amount of state taxes paid by each villager by 57 yuan (2002 yuan) when we use the full sample of 1986—2002. However, this result is not robust when we rerun our regressions on the 1986—2000 sample. Elections' negative effect may only capture the impact of the tax and fee reform. Finally, we find no significant evidence to differentiate more competitive elections from less competitive ones.

The rest of the paper is organized as the follows. Section 1 provides a brief introduction to village elections in China. Section 2 describes the data and provides descriptive results regarding the election and the key dependent variables that will be studied in the next section. Section 3 presents the econometric results for the three research topics. The baseline model is the standard static panel model with village and year fixed effects. A dynamic panel

model is also estimated for the key regressions to check the robustness of the baseline results. Section 4 concludes the paper.

1. A Brief Introduction to Village Elections in China

The origin of village elections in China is the experiment taken by a village in Guangxi province at the end of 1980. To address the social disorder created by the fall of the production brigade, villagers elected their own leaders by popular votes. Inspired by this experiment, the then vice chairman of the NPC, Mr. Peng Zhen, began to promote village elections all over the country (O'Brien and Li, 2000). He believed that village elections would put village cadres under the supervision of the villagers and thus serve as an important tool to stabilize the party's rule over the countryside. Under his leadership, the 1982 Constitution defined the village committee (VC) as a self-governing body of the villagers (Article 111). However, committee members had been appointed rather than elected except in a few localities. Although there were many debates within the government on the merits of village elections, Mr. Peng Zhen had successfully pushed the NPC to pass a tentative version of the OLVC in 1987. This law triggered the spread of elections in Chinese villages. By 1994, half of the Chinese villages had begun elections. By 1997, 25 of the 31 mainland provinces had adopted a local version of the law, and 80% of the villages had begun elections (Ministry of Civil Affairs, 1998). In 1998, the formal version of the OLVC was passed by the NPC and the election has since spread quickly to all the villages.

The VC is comprised of three to seven members depending on the size of the village. The core members are the chairman, vice chairman, and accountant. The term of the committee is three years but there is no limit for reelections. Before 1998, candidates for the chairman were usually appointed by the township government although popular nomination, a mixture of government appointment and popular nomination, and nomination by villager representatives also existed. The formal version of the OLVC requires that candidates be nominated by villagers. This version of election is popularly called hai-xuan. Since 1998 hai-xuan has become more popular. There can be as many as a hundred nominated candidates for the chairman in hai-xuan, so a common practice is to hold a primary election to reduce the number of candidates to two who then compete with each other in a runoff.

In a typical village, the elected VC faces two major challenges arising from the current Chinese institutional environment. The first is its relationship with the party committee in the village. Despite the fact that the party committee is not popularly elected, the OLVC stipulates that the VC work under the leadership of the party committee, a feature reflecting China's one-party system. Since he/she is appointed by the higher authority, the party secretary often pursues a different agenda than the VC's. Backed by popular votes, however, the VC chairman often defies the direction of the party secretary, but the result of the contest is not always in his/her favor (Guo and Bernstein, 2004). To reconcile the conflicts between the VC chairman and the party secretary, the central government has begun to encourage the latter to run for the position of the VC chairman. While this will ease the tension inside the village (Guo and Bernstein, 2004), the VC still needs to face a second challenge that comes from above. Since village elections operate in an authoritarian institutional environment, where the upper-level governments, the township and county governments in particular, are not elected and often intrude in village elections and other village affairs, its effectiveness to serve the wills of the villagers has been called in doubt. Evidence does show that informed local people tend not to trust the election. For example, in a survey conducted in Fujian province, Zhong and Chen (2002) found that it was these villagers who had low levels of internal efficacy and democratic values that were more likely to participate in an election, and those with higher levels of internal efficacy and democratic orientation stayed away from election due to the institutional constraints placed on it.

The above two challenges raise the question as to whether elections would enhance the village government's accountability to the local population. This question is compounded by the possibility of elite capture inside the village. Bardhan and Mookherjee (2005) found in India that decentralization could lead to elite capture at the local level if the financing of public goods provision is not properly designed. In the context of a Chinese village, rising business elites have been frequently found to dominate the village election (Liu, Wang, and Yao, 2001). Although there are not a priori reasons to believe that business elites would necessarily steer the VC to adopt pro-rich policies, this belief lingers within the Chinese academic and policy communities. It is thus up to empirical research to find out whether elections enhance or damage the village government's accountability to the whole constituency.

Related to the second challenge, i.e., the constraints imposed by China's institutional settings, but from a quite different political stance, is the opinion articulated by the conservatives that the government is losing control of the

Chinese grassroots society because of village self-governance. Central and local governments rely on the VC to implement governmental tasks, among which family planning, taxation, and land acquisition are the three most important. The VC is then caught in a dilemma between fulfilling its obligations to the higher-level governments and its loyalty to the villagers who have elected it. There is widespread suspicion that the VC would defy the higher authorities, resulting in the government losing control of the grassroots society (He and Tong, 2002). In the Chinese one-party system, this argument appeals to the current ruling elites and thus, poses the biggest threat to the continuity of village elections. Leaving political considerations aside, however, elections may impede the provision of public goods beyond the village boundary as well as the implementation of the central government's policies. There are anecdotal stories that village elections have led to villages' refusal to hand over revenues to the township government (He and Tong, 2002; Pan, 2003). However, statistical studies are needed to provide concrete answers.

2. Data and Descriptive Analysis

(a) The survey

The survey that our data draw from was conducted in the spring of 2003 on 48 villages in eight Chinese provinces. From south to north, these provinces are Guangdong (seven villages), Hunan (seven villages), Zhejiang (nine villages), Henan (three villages), Sichuan (seven villages), Gansu (five villages), Shanxi (seven villages), and Jilin (three villages). The sample was drawn from the sample frame of the National Fixed-point Survey (NFS) maintained by the Research Center of Rural Economy, Ministry of Agriculture. The NFS started in 1986 and covers more than 300 villages and about 24,000 households in all the Chinese mainland provinces. It uses a stratified random sampling strategy to draw its sample. There is a panel structure in the survey, but it is not explicitly recorded/ Since one purpose of the 2003 survey was to study households' capabilities to deal with risks, we used household characteristics to match households in order to build an explicit panel. Villages with a small number of matched households were then dropped in the survey. As attritions were likely to be random, we treat the remaining 48 villages as a random sample.

The NFS provides aggregate and household data for the sample villages, and the 2003 survey extracted information about village elections for the period 1986—2002. Questions were asked regarding the starting year and frequency of the election, the method used in each election, as well as the composition of the VC in each election. In this paper, we will study the effects of the adoption of the first election and the role of the competitiveness of each subsequent election.

(b) Elections in the sample villages

Some of our sample villages are among the first in the nation to introduce the election. Twelve of them began the election in 1987. As Figure 1 shows, elections spread to the other villages quickly. By 1990, more than 50% of the villages had at least one election; and by 2002, only one village had not begun election (it is a remote village in Gansu province).

The introduction of elections had a clear regional pattern; villages in the same province tended to introduce elections around the same year when the province adopted the OLVC.11 Table 1 shows the year for each sample province to adopt the OLVC, as well as the median and standard deviation of the year of the introduction of the election in its villages. Except Guangdong, all other provinces adopted the OLVC in the period 1988—1992.111 The median year of election was close to the year when the province adopted the OLVC, and the standard deviation was small in all provinces except three: Henan, Gansu, and Shanxi, which had large standard deviations." The median year and the adoption year were actually quite close in Henan and Shanxi, but far apart from each other in Gansu (election was much behind the adoption of OLVC). Oi and Rozelle (2000) found that the adoption of the election was quicker in pure agricultural villages whose residents were depend on land to generate income and in industrializing villages that had a large stock of village assets. In our sample, the timing of the election is mixed among affluent and poorer villages. For example, both villages in Zhejiang province (an affluent province) and those in Sichuan (a poorer province) began to have elections in 1987 whereas villages in Guangdong province (again, an affluent province) only began elections in 1998. This shows that the introduction of election was independent of income but more dependent on the decision of the province. Therefore, it was likely to be an exogenous event for a village to begin the election. Nevertheless, we will estimate the panel model with village and year fixed effects in our econometric analysis to take care of possible remaining endogeneities.

Most of the sample villages had an election every three years after the election was first introduced. In some periods, though, some villages had an elapse of up to five years between two consecutive elections and some held another election before the elected VC fulfilled its term.v In the literature, the procedure to nominate the candidates for the VC chairman is emphasized, and a more open procedure is believed to enhance the accountability of the elected VC (Kennedy et al., 2004). Our survey recorded four types of procedures: government appointment, nomination by villager representatives, popular nomination (haixuan), and government appointment plus popular nomination ("mixed nomination" in subsequent text). In the survey period, 48 villages had 197 elections. Figure 2 shows the distribution of the four nomination procedures by year. Although there were very large variations, some patterns were still evident. Before 1998, when the OLVC was formally introduced, the use of the four procedures was mixed although the mixed nomination had a more prominent presence. Since 1998, pure government nomination disappeared (although there was one case in 2002), and the percentage of the mixed nomination decreased. In contrast, the incidence of popular nomination increased. The incidence of nomination by villager representatives remained about the same in the whole sample period.

(c) Village spending and taxation

Public goods provision in rural China is based on a joint effort between various levels of government and the village. For major projects that involve several villages (such as road building), it is usually the case that one or several levels of government provide part of the fund and the targeted villages provide the rest. For smaller projects within a village, the village budget is usually fully responsible to pay, although governments also provide some

funds (Song, 2004). Before 2004, villages obtained their revenues from fees, profits of collective firms, and rents of village properties. Fees were surcharges (the so-called san-ti-wu-tong in Chinese documents) designated specifically for local public goods provision and were shared with the township government. The village's share was called ti-liu, or public reserves, which was intended to pay for village public projects, the VC's operational costs, and village reserves for future purposes. The township's share was called tong-chou, or centralized funds, and was used by the township government to pay for road maintenance, local schools, military trainings, family planning, and welfare subsidies.

Seven types of village spending are recorded in the NFS: investment in village businesses, public expenditures, office maintenance, salaries of the VC members, revenue handed to the township government, other spending, and surplus/deficit. We are concerned with public expenditures, office maintenance and VC salaries, and revenue shared with the township government." Public expenditures include transfers to households and spending on public projects such as local roads, village schools, irrigation systems, and healthcare facilities, so they are likely to ubiquitously benefit the majority of the villagers. In contrast, office maintenance costs are spent on the village government's daily operation and can easily become the prey of the VC members. Together with VC salaries, maintenance costs have exactly the opposite implication of public expenditures for the VC's accountability. Consequently, we will add them together and call them "administrative costs". We will study public expenditures and administrative costs for elections' impacts on the VC's accountability.

We will also study the amount of tong-chou, that is, income handed to the township government. This will serve two purposes. The first is to discover elections' impacts on public goods provision beyond the village, and the second is to find evidence for elections' impacts on the state's control over the grassroots society. Although they get budget allocations from the county government, township governments, especially those in underdeveloped regions, rely on tong-chou to finance key public goods in their jurisdiction. Local fiscal sharing is an important component of China's fiscal system, and for that matter, it is part of the state architecture. Therefore, it is a sign of weakened state control if elections do reduce the revenues handed to the township government.

In addition to fiscal sharing, we will also study the amount of taxes paid by the village to the government to further explore elections' impacts on state control. Taxes are different from fees in terms of both sources and usages. They include agriculture tax, slaughter tax, special agricultural tax, and the regular business taxes (value-added tax and corporate income tax in particular) levied on any business operating in the village. They are collected by the county branch of the provincial or national tax bureau and belong to the budgets of governments at various levels.™ If the amount of taxes paid by a village decreases due to the introduction of the election, we then find evidence to support the claim that the election hinders the state's power of grassroots governance.

Share of public exp —■—Share of"adm cost5 share at" income handed to township

Figure 3 Shares of public expenditures, administrative costs and income handed lo township

y uiui 300

^ # ^ ^ ^ ^ ^ ^ ^ ^

Figure 4- Mole: Taxes are in 2002 yuan using ihe rural tonsil mer price index published in NDS (2003).

To summarize, we will study four indicators in our econometric analysis: the shares of public expenditures, administrative costs, and income handed to the township in total village spending, and per-capita tax (converted into 2002 yuan using the rural consumer price index). The first two are for the study of the VC's accountability, the third for local fiscal sharing, and the last for the state's control of the grassroots society. Figure 3 presents the time trends of the first three indicators, and Figure 4 presents the trend of the last. As Figure 3 shows, the share of public expenditures in village spending was remarkably stable over the sample period. Being just below 20%, it was also the lowest among the three shares in most of the years. In contrast, the share of administrative costs increased dramatically since 1993. By 2002, 43% of total village spending was used to operate the village government, whereas the share was less than 20% before 1993. These two time trends have an important implication for our tests of the election's role. If we find that elections increase the share of public expenditures but reduce the share of administrative costs, then we will obtain strong evidence to support the proposition that elections enhance the VC's accountability because the effects of elections are against the time trends. Figure 3 also shows that the share of income handed to the township increased before 1996 but has declined since then. Since most villages had introduced elections in the early 1990s, this suggests that elections might not have reduced cross-village fiscal sharing in public goods provision. In the case that we do find that elections reduce income sharing, then the finding is a strong one because, again, it is against the time trend. Finally, we find no clear trend for per-capita tax in Figure 4. In most years, it fluctuated between 150 yuan and 250 yuan.

It is noteworthy that there was an important policy change happening in June 2000. In that month, the central government issued a directive to start the tax and fee reform.™1 The main component of the reform was to abolish the slaughter tax and township tong-chou and adjust the special agricultural tax and village ti-liu. The result was a drastic reduction of the farmers' burden of taxes and fees. Since the coverage of our data reaches 2002, our analysis may be affected. Although the per-capita tax (Figure 4) actually increased in 2001 and 2002, the share of income handed to the township government (Figure 3) declined in those two years. Therefore, we will check our results using data before 2001 (the implementation of the reform started in 2001 in most provinces).

3. Econometric Results

This section presents the econometric results for the study of the three key issues, i.e., the accountability of the VC, fiscal sharing with the township, and taxation. The baseline model that we will estimate is the standard panel

model with village and year fixed effects. Village effects serve to control unobserved village characteristics that may simultaneously determine the dependent variables and the explanatory variables. This is particularly important for obtaining unbiased estimates for the effects of election as the introduction of election might be correlated with unobserved village characteristics. The year fixed effects are introduced to control unobserved time trends that are common to all the sample villages, among which government policy changes are a prominent component. In the rest of this section, we will first describe the variables and then present the empirical results.

Table 1 Adoption of Ihe OLVC in sample provinces

(i uangdong Hnnan Zhi'jianf* Henan Sichuan Gensu Shanxi Jiiin

Year adopting

1998 1989 1988 1992 1991 1989 199] 1991

Median vtiar of

1999 1988 1989 1991 1989 1995 1993 1989


St. dev. of vear

0. 5 1.7 9 4.6 I. T 6.8 4.6 2. 7

of election

So U r ee; survey data.

(a) Variables

The main explanatory variable is a dummy variable indicating the introduction of election into a village; that is, it takes the value one if a village has held at least one election, and takes the value zero if it has not held any. In addition to this dummy variable, we also create four dummy variables for the four procedures to nominate candidates in elections after the first election was introduced in a village. They take the value one for years of the term of a VC elected by the respective procedure, and take the value zero otherwise. They are meant to capture the degree of competitiveness of each election. Naturally, government appointment is the most closed form of nomination, mixed nomination follows, nomination by villager representatives the third, and popular nomination the most open.

The control variables include village population, per-capita net income, the share of collective income in total village income, per-capita land territory, Gini coefficient of per-capita income, unemployment rate, and share of migrant workers who work outside the county. Village population (entering the regressions in logarithm term) controls the village size. A larger population may make public decisions more difficult so it would tend to have a negative effect on village governance. Per-capita net income (converted into 2002 yuan and entering the regressions in logarithm term) controls the level of economic development of a village, and the share of collective income in total village income controls the relative size of the collective economy. Studies frequently find that people in villages of higher income with a larger collective economy are more likely to participate in village elections, presumably because stakes are high in these villages (Oi and Rozelle, 2000; Hu, 2005).

Per-capita land territory is introduced to represent the amount of resources that a village possesses. Land resource is particularly important in the coastal provinces, as fast growth of the local industry has significantly raised the demand for land. Recently literature suggests that natural resources can be a curse for a country, as they tend to lead to easier elite capture (Hoff and Stiglitz, 2004). It is thus interesting to see whether a larger territory reduces village government's accountability in our case.

Finally, the Gini coefficient, unemployment rate, and share of emigrant workers are introduced to control for population fragmentation and configuration of interest groups within the village. The Gini coefficient is calculated based on per-capita household net income and has been adjusted with household size (i.e., each member of a household enters the calculation separately, but with identical income). The NFS counts 300 days of unemployment as one unemployed person and unemployment rate is defined as the share of unemployed persons in the total number of laborers in a village. An emigrant worker is one who works more than six months outside his own

county. A larger Gini coefficient implies that the village is more divided in economic terms, so elections should be more competitive, and the share of public expenditures should be higher.K A higher unemployment rate may play a similar role. Finally, when a village has more emigrant workers, the political will to monitor the village leaders is weakened as people are more dependent on income outside the village (Oi and Rozelle, 2000).

Table 2 presents the descriptive statistics of the above control variables, as well as the four dependent variables.

Table 2 Descriptive statistics of I he variables

Variables Mean St. Dev. Min. Max.

Dependent variables

Share of public expenditures ( /0 ) CjC If» 4» 1!). 20 0,00 95. 27

Share of administrative costs (%) 22. 15 1 9. 00 0.00 100.00

Share of income handed to township (%) 23. -12 25. 23 0.00 100. 00

Per capita lax ( 100 yuan) 1. 65 4. 4 2 0,00 38, 27

Election variables

Election dummy 0, 66 0. 4 7 0,00 1.00

Government appointment 0, OS 0. 27 0,00 1.00

Mixed nomination 0. 31 0. 46 0.00 1. 00

Nomination by villager representatives 0, 19 0, 4 0 0,00 1,00

Popular nomination 0, 10 0. 30 0,00 00

Control variables

Population 4. 64 2. 06 0.15 39. 07

Per capita income (1000 yuan) 14 58 1062 235 5247

Share of collective income in total income ( :''h ) 6. 80 15. 38 0 100

Per capita land area (mil) 7. 55 14. 76 0. 37 119. 78

Gini coefficient

Unemployment rate (.%) 46. 18 28. 58 0 99. 69

Share of migrant workers (%) 14.4 4 13. 86 0 96, 4 1

(b) Elections and VC's accountability

As we indicated before, the two indicators that we study for VC's accountability are the share of public expenditures and the share of administrative costs in total village spending. We conduct two regressions for each indicator, one without and one with the control variables. Elections may change village characteristics, including those represented by the control variables which, in turn, could push the elected VC to act in certain ways; part of elections' effect on the dependent variables is thus channeled through the control variables. By excluding the control variables, the first regression then estimates the total effect of election. In contrast, by including the control variables, the second regression estimates the direct effect of election, that is, its effect that comes from the elected VC's own desire to change the village spending structure.

The results of the four regressions are presented in the first four columns (R1-R4) of Table 3. R1 and R2 are for the share of public expenditures, and R3 and R4 for the share of administrative costs. In R1, where no control variable is included, elections are shown to increase the share of public expenditures by 4.21 percentage points, and this effect is significant at the 5% significance level. R2 adds all control variables and shows that the effect of election increases to 4.87 percentage points. The reason that the total effect is smaller than the direct effect is that the effects of some of the control variables may cancel out each other. At any rate, both effects are economically significant as they are 22.4% and 26.4% of the average share of public expenditures in the sample, respectively. The results for the share of administrative costs seem to be weaker. While R3 shows that the total effect of election is to significantly reduce the share by 3.96 percentage points, R4 shows that the direct effect of election is only marginally significant (the t-statistic is 1.58). This means that elections reduce the share of administrative costs primarily by changing the configuration of interests as represented by the control variables. This actually makes sense because reducing administrative costs cuts the VC's own benefits and thus requires the pressures from the villagers. The resulting total effect is substantial, as it is 17.9% of the sample mean of the share of administrative costs.x

Among the control variables, the share of collective income in total income and per-capita land territory are significant. More collective income reduces both the share of public expenditures and the share of administrative costs, and more land territory increase public expenditures and reduces administrative costs. The result that more collective income reduces the share of administrative costs is consistent with the earlier findings that more collective income increases villagers' willingness to participate in elections and monitor village public affairs. However, it is puzzling that more collective income also reduces the share of public expenditures. It might be because villages with a larger collective economy tend to invest more money back into the collective businesses so public expenditures are crowded out. An alternative explanation is that public facilities, especially infrastructures have already been better in these than in other villages, possibly because their larger collective economy has placed such a demand.xi The results for land territory are opposite to the proposition proposed by Hoff and Stiglitz (2004). Perhaps land resource plays the same role as that of the collective economy, which is to intensify the competitiveness of the election. This is possible because land value only increases drastically after land is converted into industrial uses, but the conversion can only be carried out by the village.xii

(c) Elections and revenues handed to the township

The results for the share of income handed to the township are presented in the fifth and sixth columns (R5 and R6) of Table 3. Both the total and direct effects are significant at the 5% significance level and economically substantial. The total effect of election is to reduce the share of income handed to the township by 4.44 percentage points, and the direct effect is to reduce it by 4.31 percentage points. These two effects are 19.0% and 18.4% of the sample average of the share, respectively. These two results confirm the worry that elections reduce local fiscal sharing and the state's control of the village.

There is a possibility that the total amount of village spending increases as a result of elections, and the absolute levels of administrative costs and income handed to the township have not been changed. To study this possibility, we run two more regressions, one for the total effect of election and one for the direct effect of election, on per-capita village spending (100 yuan, measured in 2002 yuan) and the ratio of village spending over the total income of the village, respectively. We do not present the regression results in tables to save space. The key message delivered from the four regressions is that neither the total effect nor the direct effect of election is significant for either dependent variable.™

Another possibility is that our results are a consequence of the tax and fee reform, rather of the introduction of the village election. Since the tax and fee reform only started to be experimented in some provinces in the second half of 2000, we rerun the two regressions for the share of income handed to the township government using data for the period of 1986—2000. Again, we do not present the regression results in tables. The main result is that both the total and direct effects of elections are still statistically and economically significant. The total effect is to reduce the share by 3.77 percentage points (with a statistically significance of 8.77%), and the direct effect is to do so by 3.80 percentage points (with a statistically significance of 8.92%). Therefore, it is a robust result that elections reduce the amount of revenues shared with the township.xiv

(d) Elections and taxation

The last two columns (R7 and R8) of Table 3 present the regression results for per-capita tax. R7 shows that the total effect of election is to reduce per-capita tax by 57 yuan, and the effect is significant at the 10% significance

CJ =1 = i

level. The direct effect of election is smaller and barely significant at the 10% significance level (the t-statistic is 1.60). However, it is possible that the amount of tax has decreased as a result of reduced village income. To study this possibility, we regress the logarithm of per-capita income on the election dummy using the two-way fixed effect model and find that the coefficient of the election dummy is-0.01 and highly insignificant (the t-value is only 0.28). Therefore, the reduction of tax is not a result of reduced income.

Another possibility is that the amount of taxes was reduced not by elections, but by the tax and fee reform. Again, we rerun our regressions with the sample of 1986—2000. This time, both the total and direct effects have turned statistically insignificant. The total effect is estimated at 31.83 yuan, but its statistical significance is only 26.72%. The direct effect is 29.94 yuan, and its statistical significance is only 27.86%. Therefore, it seems that elections' effect to reduce tax payment is a consequence of the correlation between the election dummy and the introduction of the tax and fee reform.

Even if the result that elections reduce tax payment remains valid, it may not be taken as a sign for state's losing control of the village. State taxes are paid in a decentralized manner by individual businesses and households in the village, so it is puzzling that elections would have an effect on tax payments. One explanation is that there were rearrangements in ways that taxes were collected after the election began in a village.xv It is common knowledge that in many localities, some taxes, especially the slaughter tax and Special agricultural tax, were collected on head instead of on real economic activities because it was easier for the government to guarantee a certain amount of tax revenue this way. The introduction of the election might press the VC to abolish this insensible method so the amount of taxes decreased. Interpreted in this way, the reduction of taxes is not a sign for weakened state control, but one for the rectification of state taxation.

Nevertheless, weakened state control is still ubiquitously manifested by our finding of reduced local fiscal sharing, because local fiscal sharing is an important component of China's fiscal system. Our finding deserves further academic and policy attentions.

(e) The competitiveness of elections

To study how the competitiveness of elections affects election outcomes, we repeat the regressions presented in Table 3 by taking into account the methods used to nominate the candidates for the VC chairman. We take government appointment as the reference method and add to the regressions the three dummy variables that represent, respectively, mixed nomination, nomination by villager representatives, and popular nomination. Since the election dummy stays in the regression, its coefficient is now interpreted as the effect of government appointment, and the coefficients of the other three dummy variables are interpreted as the differences between the respective methods and the method of government appointment. As before, we study both the total and direct effect of election. The results of the eight regressions are presented in Table 4. The results of the control variables are not shown in order to save space.

There are not many significant results. The election dummy is only significant in R2, popular nomination is only significant in R2, nomination by villager representatives is significant in R4, R5, and R6, and mixed nomination is never significant. The general conclusion drawn from these results is that the competitiveness of elections does not improve their performance. In contrast, more competitive elections may actually hurt performance. One indicator is that popular nomination has a negative and significant coefficient in R1, which means that, compared with a candidate from a government-controlled election, the VC elected in a popular election significantly reduces the share of public expenditures. The other indicator is that an election in which candidates are nominated by villager representatives reduces fiscal sharing with the township significantly more than a government controlled election does.

(f) Dynamic models

One potential problem with the static model we used in the estimation is that it may exaggerate the effects of election because the election dummy may pick up the time persistence component of the dependent variables. To address this issue, we check the above results by using the dynamic panel model. By adding the lagged dependent variable in the regression, this model can handle the persistence issue. We only study the total effect of election.xvi We use the IV method to estimate the model and use the two-period lag of each dependent variable as the instrument for each lagged dependent variable. Table 5 presents the results.

The estimates for the total effect of election are qualitatively the same as those appearing in the static model, but their magnitudes increase in most cases. The lagged dependent variable is significant in all but the regression for the share of public expenditures (R1) and its coefficient is within the interval (0,1), suggesting that the long-run effects

of election are larger than those shown by the point estimates.™ For the competitiveness of election, however, the number of significant results is reduced to just one, which is the estimate of popular nomination in R1. The baseline result—that the competitiveness of election does not improve the VC's performance—is further confirmed.


We have found in this paper that village elections in rural China have increased the share of public expenditures and reduced the share of administrative costs in the village budget. The effects are both statistically and economically significant. It is noteworthy that the result on administrative costs is obtained when its share in village expenditures increased throughout the study period. These results can be taken as strong evidence supporting the proposition that village elections enhance the village government's accountability to the villagers. This result is a strong testimony of the positive role that grassroots democracy can play in a village.

However, our findings are not all good news. While state taxation is likely to be unaffected, we have found consistent evidence that elections have weakened fiscal sharing across villages. Since many public goods and services, such as schools and roads, either directly depend on the township budget or need coordination among villages, reduced fiscal sharing will likely reduce the provision of those goods and services. In addition, it is likely to enlarge the inequality of public goods provision within a geographic region as small as a township. Moreover, it is also a sign of weakened state control of the grassroots society.

The tax and fee reform abolished villages' revenue sharing with the township government. Starting in January 2006, all the state taxes and local fees have been abolished across the country. While this policy change is widely welcomed and hailed as a bold move to end a two thousand year history of state's exploitation of the peasants, evidence does show that it has aggravated the difficulty of local public goods finance (Luo, Zhang, Huang, Rozelle, and Liu, 2006). Viewed against the results of this paper, the abolishment of the taxes and fees will likely to further strengthen the autonomy of the village and may lead to atomistic division in the countryside if no proper action is taken to revert it. In addition, without the authority to collect fees, the village government is required to raise funds for local public goods on a case-by-case basis. How to solve the coordination problem among the households thus becomes a new challenge for village democracy.

Finally, our analysis does not find strong evidence that the competitiveness of elections improves either the accountability of the village committee or the village's relationship with upper-level governments, including fiscal sharing and taxation. Perhaps, even in a closed election, the township government needs to be careful when it appoints the candidates because, after all, the right to elect a candidate rests in the hands of the villagers, and the final result does not differ significantly across different methods used to produce those candidates.

Till ill- S Results nf Iki dyumic iimritl

, Share of income hand

iihare of public- esp. ^hare of arm. costs Per capita tax

i?d to township

Variable s Rl R2 R3 R4 R5 R6 R7 R8

(.'on st am 1 I. 92" " (3. 25 > 17.02" (3.45> 19.25 *"' <2,4<i> 18. 7 2 " "" 20. 48" " ' 20. 36 *" " (2. 50> (3.25) (3.37) 0.94" " " <0. 3D 0. 94""" (0.33)

Lagged dependent 0. 01 ■0.04 0.37 ' ' ' 0. 39" " " 0. 33" " " 0. 33 0.78 " " " 0.78 ' " "

variable (0. I8> (0.19) (0.09) (0. 10) (0. ] 1 > (0. 12) (0. 10) (0.10)

Election dummy 4.43" <2. 4. 15 (3.15 > 5.49"" < 2, Oli > 2,95 5.45*"" 2,83 (2,81) <2, :-! I > (3.24) ■o.63 ■ <0.34) r, 34 <0.47}

Mixed nomination 2.7 3 (3. 26> 2, 14 (2. 94) 2,22 (3. 59 ) 0. 4 5 (0.49)

Nomination by vil- :-:. 4 4 3. 7 1 4.06 0.19

lage representatives (3.39) <2. 95l (3. 36) (0.49)

Popular nomination 8.96" (4. 18) 3. 82 (3. 87 J 2,91 <4, 39 ) 0.34 <0.61}

Adjusted R2 0. 29 0. 30 0.46 0.46 0, 58 0.58 0. 71 0,71

Notes i The model for all the regression;* is the standard dynamic panel model with village and year specific effects and estimated by the IY method using the second order Lags as the instruments. The number "f cases is 7 10. Per capita tan is in 2002 yuan. and the unii is 100 yuan, All the regressions are for the total efftet so none ol the control variables is included. Figures in ihe parent hese s are standard errors. * > * * - and * * * indicate, respeeiively. the ]0 % - 5 "A . and ]% significance levels.


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i NFS aims at surveying the same households over time. However, there have been attritions over the years, and new households have entered the sample. The numbering of households has not been well maintained, so an explicit panel does not exist in the data.

ii When the NPC passes a law that involves government actions, each province enacts a local law that specifies the details of the implementation of the central law. It is noteworthy that most provinces adopted the OLVC even when it was in the experimental stage.

iii Guangdong adopted the OLVC in 1998. Before that year, Guangdong did not treat the village as a self-governing administrative unit, but rather a delegated branch of the township government. That is why it had not adopted the law.

iv Notice that in Hunan, Henan, Sichuan, and Jilin, the median year of election was earlier than the year of adopting the OLVC. It seems that these provinces waited after some experiments to provide the implementation details of the law.

v Presumably the former group of cases happened because villagers did not have enough incentives to elect a new leadership, and the latter group of cases happened because the elected leadership did not live up to the expectations of the villagers (see Liu et al., 2001 for a case study).

vi The implication of investment in village businesses to accountability is unclear. In many cases, village businesses are either pet projects or pork barrels for village leaders. However, they can also benefit the villagers if the VC is relatively clean.

vii Taxes are divided into three groups: central taxes (mainly special consumption tax), central-provincial shared taxes (value-added tax and personal and corporate income taxes), and local taxes (all the other taxes). For governments below the province, the division is not made based on the type of taxes, but on a sharing rule that differs from province to province. Starting in 2004, provinces began to gradually abolish all the agricultural taxes and the surcharges and in the spring of 2006, all provinces had done that. This is a major policy change, but is out of the coverage of our data.

viii The CCP Central Committee and the State Council Directive on Starting the Experiment of the Tax and Fee reform in the Countryside, CCP Central Committee and the State Council, June 24, 2000.

ix The literature observes that inequality leads to more distributive public policies. See, for example, Alesina and Rodrick (1994) and Benabou (1996).

x There may be alternative explanations to this finding. In the last decade, cunwu gongkai (open village accounting) has been promoted in Chinese villages as a mean for villagers to monitor the VC. In addition, village accounting has been centralized to the township government in

many localities to curb irregularities and prevent corruption. Both may have reduced the share of administrative costs in village expenditures. Unfortunately, our data do not allow us to control for centralized accounting (although the year dummies may pick up some of its effects). However, the effect of open accounting is closely related to the village election. Without the election, it is hard to imagine that open accounting would constitute a real constraint on village cadres to refrain from lavish spending.

xi We owe this point to an anonymous referee.

xii The Land Law places severe restrictions on land conversion and requires any conversion be approved at least by the provincial government. However, villages in the coastal region frequently set up their own industrial parks without going through the approval procedure.

xiii The total and direct effects of election for per-capita village spending are estimated at 3.20 and 3.59, respectively, but their standard errors are 2.93 and 2.59, respectively. The total and direct effects are both 0.02 for the ratio of spending over village total income, and the standard errors are both 0.03.

xiv Zhang et al. (2004) found that elections did not reduce the fees handed to the township. One possible explanation is the coverage of the sample. While Zhang et al. (2004) is based on a sample in one advanced province (Jiangsu), our sample covers a much wider range of geographic, economic, and social variations.

xv See Yu (2003) for a case study. We thank an anonymous referee for pointing out this reference.

xvi The direct effect of election is also checked, and the results are not significantly different from the baseline results.

xvii We do not make inferences on the long-run effects because the dynamics in the Chinese village is far from converging to a steady state.