THE IMPACT OF GOVERNMENT SIZE ON ECONOMIC GROWTH IN CHINESE PREFECTURE-LEVEL CITIES: DOES FISCAL TRANSPARENCY MATTER?
DOI:
https://doi.org/10.33736/ijbs.9561.2025Keywords:
Economic growth, fiscal transparency, government size, Chinese prefecture-level citiesAbstract
Recent studies have examined how institutions influence the relationship between government size and economic growth. However, they have largely overlooked the significance of fiscal transparency, which can help bridge the information gap between governments and citizens. Furthermore, these studies typically concentrate on national or state levels, neglecting local governments that are primarily responsible for delivering public goods. This study investigates the impact of local government size on economic growth in Chinese prefecture-level cities, emphasizing the moderating role of fiscal transparency. We employ a dynamic panel model with two-way fixed effects and the Generalized Method of Moments (GMM) for estimation. The data encompasses 283 cities from 2013 to 2022. The main findings are as follows: In the absence of fiscal transparency, local government size positively influences economic growth; however, fiscal transparency negatively moderates this relationship. Moreover, as fiscal transparency increases, the positive effect diminishes and becomes statistically insignificant once it exceeds a certain threshold. Robustness checks using alternative measures and estimation techniques validate the results. The primary originality of this study lies in quantifying the moderating role of fiscal transparency in the relationship between government size and growth. These findings challenge the New Institutional Theory, which asserts that institutions directly drive growth, and provide a novel perspective on the interplay between government size and economic performance, offering valuable insights for policymakers aiming to balance government size and transparency for sustainable development.
References
Akram, V., & Rath, B. N. (2020). Optimum government size and economic growth in the case of Indian states: Evidence from panel threshold model. Economic Modelling, 88, 151-162.
https://doi.org/10.1016/j.econmod.2019.09.015
Andrews, D. W., & Lu, B. (2001). Consistent model and moment selection procedures for GMM estimation with application to dynamic panel data models. Journal of Econometrics, 101(1), 123-164.
https://doi.org/10.1016/S0304-4076(00)00077-4
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277-297.
https://doi.org/10.2307/2297968
Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51.
https://doi.org/10.1016/0304-4076(94)01642-D
Armey, D. (1995). The Freedom Revolution. Rogney Publishing Co.
Asimakopoulos, S., & Karavias, Y. (2016). The impact of government size on economic growth: A threshold analysis. Economics Letters, 139, 65-68. Awolaja, O. G., Onakoya, A. B., Ojutiku, T. O., & Aroyewun-Khostly, B. (2021). Government size and economic growth: Evidence of the Barro curve in Nigeria. Caleb International Journal of Development Studies, 4(1), 6-34.
https://doi.org/10.1016/j.econlet.2015.12.010
Aydin, C., & Esen, Ö. (2019). Does too much government spending depress the economic development of transition economies? Evidence from dynamic panel threshold analysis. Applied Economics, 51(15), 1666-1678.
https://doi.org/10.1080/00036846.2018.1528335
Aznan, M. S. B. M., Goh, H. H., Koong, S. S., & Tan, S. H. (2022). Nonlinear threshold approach for asymmetric effects of government size on economic growth in an emerging Asian economy: The Malaysian experience. Heliyon, 8(9), e10534.
https://doi.org/10.1016/j.heliyon.2022.e10524
Bajrami, R., Gashi, A., Ukshini, K., & Rexha, D. (2022). Impact of government size on economic growth in the Western Balkan countries. Journal of Governance and Regulation, 11(1), 55-63.
https://doi.org/10.22495/jgrv11i1art6
Balli, H. O., & Sørensen, B. E. (2013). Interaction effects in econometrics. Empirical Economics, 45, 583-603.
https://doi.org/10.1007/s00181-012-0604-2
Barro, R. J. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), 103-125.
https://doi.org/10.1086/261726
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.
https://doi.org/10.1016/S0304-4076(98)00009-8
Chekouri, S. M., Chibi, A., & Benbouziane, M. (2022). The impact of government size on economic growth in Algeria: A threshold analysis. Les Cahiers du CREAD, 38(3), 357-378.
https://doi.org/10.4314/cread.v38i3.13
Chen, J. (2020). Research on the relationship between government size and economic growth. Modern Economy, 11(2), 209-219.
https://doi.org/10.4236/me.2020.112018
Christie, T. (2014). The effect of government spending on economic growth: Testing the non-linear hypothesis. Bulletin of Economic Research, 66(2), 183-204.
https://doi.org/10.1111/j.1467-8586.2012.00438.x
Cifuentes‐Faura, J. (2024). Government transparency and corruption in a turbulent setting: The case of foreign aid to Ukraine. Governance, 37(2), 659-670.
https://doi.org/10.1111/gove.12835
Colombier, C. (2024). How does government size affect economic growth? New results from a historical dataset (No. 24-1). University of Cologne, FiFo Institute for Public Economics.
Craig, M. J., & Kopits, M. G. (1998). Transparency in Government Operations. International Monetary Fund.
Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57-74.
https://doi.org/10.2307/258191
El Husseiny, I. A. (2019). The optimal size of government in Egypt: An empirical investigation. The Journal of North African Studies, 24(2), 271-299.
https://doi.org/10.1080/13629387.2018.1428798
Gavazza, A., & Lizzeri, A. (2009). Transparency and economic policy. The Review of Economic Studies, 76(3), 1023-1048.
https://doi.org/10.1111/j.1467-937X.2009.00547.x
Goh, H. H., & Aznan, M. S. B. M. (2023). The optimal government size and economic growth: A comparative study between Malaysia and South Korea. Heliyon, 9(12), e22834.
https://doi.org/10.1016/j.heliyon.2023.e22834
Hajamini, M., & Falahi, M. A. (2018). Economic growth and government size in developed European countries: A panel threshold approach. Economic Analysis and Policy, 58, 1-13.
https://doi.org/10.1016/j.eap.2017.12.002
Heald, D. (2006). Varieties of Transparency. Oxford University Press.
https://doi.org/10.5871/bacad/9780197263839.003.0002
Jabeen, S., & Malik, W. S. (2021). An empirical relationship between government size and economic growth of Pakistan in the presence of different budget uncertainty measures. Journal of Development and Social Sciences, 2(4), 24-38.
https://doi.org/10.47205/jdss.2021(2-IV)03
Jensen, M. C., & Meckling, W. H. (2019). Theory of the firm: Managerial behaviour, agency costs and ownership structure. In Corporate governance (pp. 77-132). Gower.Keynes, J. M. (1937). The general theory of employment. The Quarterly Journal of Economics, 51(2), 209-223.
Kiviet, J. F. (2020). Microeconometric dynamic panel data methods: Model specification and selection issues. Econometrics and Statistics, 13, 16-45.
https://doi.org/10.1016/j.ecosta.2019.08.003
Kripfganz, S. (2019). Generalized method of moments estimation of linear dynamic panel data models. Paper presented at the Stata Conference, London, United Kingdom
Li, M., & Yang, J. (2024). Can digital economy mitigate vertical fiscal imbalances in Chinese local government? The role of fiscal transparency. International Review of Financial Analysis, 96, 103713.
https://doi.org/10.1016/j.irfa.2024.103713
Macek, R., & Janků, J. (2015). The impact of fiscal policy on economic growth depending on institutional conditions. Acta Academica Karviniensia, 15(2), 95-107.
https://doi.org/10.25142/aak.2015.021
Ministry of Finance of the People's Republic of China. (2012). Measures for central-to-local equalization transfer payments. https://www.mof.gov.cn/gp/xxgkml/yss/201211/t20121125_2498058.htm
Ministry of Finance of the People's Republic of China. (2024a). Local government bond issuance and debt balance as of September 2024. https://www.nbd.com.cn/rss/zaker/articles/3615984.html
Ministry of Finance of the People's Republic of China. (2024b). Special inspection report on the disclosure 0f the 2022 budget and final accounts. http://paper.people.com.cn/rmrbwap/html/2024-04/03/nw.D110000renmrb_20240403_5-04.htm
Moe, T. M. (1984). The new economics of organization. American Journal of Political Science, 28(4), 739-777.
https://doi.org/10.2307/2110997
National Bureau of Statistics of the People's Republic of China. (2023). China City Statistical Yearbooks. China Statistics Press.
National People's Congress of the People's Republic of China. (2018). Organization Law of China. https://www.yhrd.cn/47/f3/c2943a346099/page.htm
Nirola, N., & Sahu, S. (2019). The interactive impact of government size and quality of institutions on economic growth: Evidence from the states of India. Heliyon, 5(3), e01352.
https://doi.org/10.1016/j.heliyon.2019.e01352
Niskanen, J. (2017). Bureaucracy and Representative Government. Routledge.
https://doi.org/10.4324/9781315081878
North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press.
https://doi.org/10.1017/CBO9780511808678
Ram, R. (1986). Government size and economic growth: A new framework and some evidence from cross-section and time-series data. The American Economic Review, 76(1), 191-203.
Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98(5), S71-S102.
https://doi.org/10.1086/261725
Samuelson, P. A. (1948). International trade and the equalisation of factor prices. The Economic Journal, 58(230), 163-184.
https://doi.org/10.2307/2225933
Schaltegger, C. A., & Torgler, B. (2006). Growth effects of public expenditure on the state and local level: Evidence from a sample of rich governments. Applied Economics, 38(10), 1181-1192.
https://doi.org/10.1080/00036840500392334
Sibt-e-Ali, M., Shah, S. Z. A., Mazhar, F., Khan, I. H., & Parveen, S. (2021). Optimal government size and economic growth. International Journal of Management, 12(12), 106-122.
Smith, A. (1937). The wealth of nations: An inquiry into the nature and causes. New York: Modern Library. State Council of the People's Republic of China. (1993). Decision of the State Council on implementing the tax-sharing fiscal management system. https://www.guizhou.gov.cn/zwgk/zfgb/gzszfgb/199312/t19931215_70517751.html
State Council of the People's Republic of China. (2007). Regulations of the People's Republic of China on open government information. https://www.gov.cn/zhengce/node_327.htm
State Council of the People's Republic of China. (2016). Opinions on fully promoting government transparency. https://www.gov.cn/gongbao/content/2016/content_5051216.htm
Sun, S., & Andrews, R. (2020). The determinants of fiscal transparency in Chinese city-level governments. Local Government Studies, 46(1), 44-67.
https://doi.org/10.1080/03003930.2019.1608828
Tkacova, A., Gavurova, B., & Maslisova, M. (2023). The size of government and economic growth in EU countries. Administratie si Management Public, (40), 7-22.
https://doi.org/10.24818/amp/2023.40-01
Tsinghua University. (2023). Chinese prefecture-level fiscal transparency reports. https://www.sppm.tsinghua.edu.cn/xycbw/yjbg.htm
United Nations. (2015). Transforming our world: The 2030 agenda for sustainable development. https://sdgs.un.org/2030agenda
Williams, A. (2011). Shining a light on the resource curse: An empirical analysis of the relationship between natural resources, transparency, and economic growth. World Development, 39(4), 490-505.
https://doi.org/10.1016/j.worlddev.2010.08.015
Yao, H. (2024). Study of the impact of fiscal transparency on local government debt. Journal of Innovation and Development, 6(1), 1-4.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 UNIMAS Publisher
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
