Wu and Lin 2012 Determinants of government size evidence from China.pdfVIP

Public Choice (2012) 151:255–270 DOI 10.1007/s11127-010-9746-y Determinants of government size: evidence from China Alfred M. Wu · Mi Lin Received: 10 December 2009 / Accepted: 24 November 2010 / Published online: 8 December 2010 © Springer Science+Business Media, LLC 2010 Abstract This paper investigates the determinants of government size at the provincial level in China. We employ the panel data model as a platform for empirical analysis and control for endogeneity in the study. Our study shows that openness to trade and foreign direct investment (FDI) may curtail government expansion, and that the provincial-level public sector is characterized by economies of scale. This study also documents that Wagner’s law does not hold true for China. Moreover, both expenditure decentralization and revenue decentralization contribute to the expansion of China’s government. Keywords Government size · Wagner’s law · Scale effects · Openness to trade · Fiscal decentralization JEL Classification H11 · H61 1 Introduction The determinants of government size have been an important research area in the litera- ture of economics and political science. After World War II, the size of the public sector expanded in most countries (Cooke 2003; Mueller 2003). Since the 1980s, in the name of new public administration and reinventing government, many countries have attempted to constrain governmental growth even to reduce its size. Since the 1980s, China has also made great efforts to control government expansion. In 1982, Deng (1984: 374), the Chinese supreme leader, stressed that “streamlining organiza- tions is a matter of great importance. In fact, it constitutes a revolution.” Since then, there have been six nationwide downsizing campaigns. A.M. Wu ( ) Department of Public and Social Administration, City University of Hong Kong, Kowloon, Hong Kong e-mail: wumuluan@ M. Lin Department of Economics an