The effects of local government investment on economic growth and employment: evidence from transitional China

Based on the panel data of 28 provinces in the year of 1987-2001, this paper examines the effects of the local government investment on economic growth and employment. The empirical result shows that the local government investment plays a signif icant positive role in economic growth and employment. However, while the proportion of local government investment to GDP had a remarkable rise after 1998, the elasticity of local government investment on economic growth declined, which shows that there is a big room for raising the eff iciency of local government investment. Moreover, the empirical examination shows that although local government investment had positive effect on employment, the elasticity had a decrease after 1994 when the tax-sharing system reform was put into practice. This shows that the positive role of local government investment on employment is also limited. This paper argues that the role of local governments as investors must be weakened, and local governments of different levels should lessen direct economic intervention and concentrate on public regulation.