Resource Curse and Policy Innovation at the Local Level: Evidence from Shanxi Province in China Ping Zhang, Fudan University Yaozu Xue, Shanxi University of Finance and Economics Social Innovation Research Conference (SIRC) Fudan University, China May 21-22, 2015

1. Introduction There have been many studies about the “resource curse” in terms of the low economic growth rate in resource intensive countries and regions Auty (1993) is the first to use the term “resource curse.” There is a sizeable scholarly literature that natural resource abundance increases the likelihood that countries will experience negative economic, political and social outcomes including poor economic performance, low levels of democracy, and even civil war No consensus yet about existence reasons

Controversies Resource curse? existence (Arezki & Van der Ploeg, 2007; Collier & Goderis, 2008; Papyrakis & Gerlagh, 2004; Sachs & Warner, 1995, 2001; Torvik, 2002) nonexistence (Davis, 1995; Lederman, Maloney, Dunning, & Shelton, 2008; Manzano & Rigobon, 2001) conditional existence due to different measurements with regard to methodology (Ding & Field, 2005) types of resources (Sala-i-Martin & Subramanian, 2013) quality of institutions (Robinson, Torvik, & Verdier, 2006; Wen & King, 2004)

Reasons? Various explanations of transmission mechanism from rich resources to lower economic development “center-peripheral” capitalism structure (Prebisch, 1949) deterioration of trade conditions (Sarkar & Singer, 1991) point-source economies and diffuse-source economies (Murshed, 2004) “Dutch disease” with higher currency appropriation, resource concentration and de-industrialization (Corden & Neary, 1982; Nankani, 1979) crowd-out effects in education expenditure, investment and innovation (Papyrakis & Gerlagh, 2004; Sachs & Warner, 2001) political and institutional mechanism (Bhattacharyya & Hodler, 2010; Collier & Hoeffler, 2004; Isham, Woolcock, Pritchett, & Busby, 2005; Leite & Weidmann, 1999)

2. Motivation and Research Questions This paper is to investigate the existence of resource curse at the local government level and possible policy innovations. If resource curse does exist at the local level, we may be able to narrow down the possible transmission mechanism without considering institutional/political reasons. Unlike a large country with a cumbersome resistance, the results can also shed lights on how to better address resource curse from the policy innovation perspective within a certain institution at local government level.

Questions 1.As a country-based phenomenon, do resource curse exist at the local level? 2.In a resource intensive area, while the economic structure is determined on the basis of comparative advantage model, will the fiscal revenue structure be determined correspondingly? 3.Given the revenue structure, are the local governments inclined to support the industries that can produce the most tax revenue?

3. Resource-based economy Shanxi province’s economy have a increasingly high reliance on coal industry In 2014, coal industry as a percentage of GDP is as high as 32.8%! While in 2000, it was 6.3%. In 2014, per capita GDP is around 5,500 dollars range from the lowest city (Xinzhou) at $3,500 to the highest (Taiyuan) at about $9,500 “middle-income range” defined by World Bank: from $3,000 to $12,000

The reliance of coal industry in Shanxi Province

The relationship between GDP growth and industry sector ratio

Resource Curse or Middle-income Trap? During the Asian financial crisis (1998), the economic growth rate of Shanxi drop to third lowest in China in During the recent financial crisis (2008), the economic growth rate of Shanxi drop to the lowest in What about this time (China’s economic slowdown)?

The quarterly growth rate of GDP in Shanxi Province Second lowest in the first quarter of 2015

4. Data & Methodology 11 prefectures in Shanxi province 23 districts 11 county-level cities 85 counties Year Fixed effects (year is also controlled)

Pretest We divide localities into two groups according to levels of resource/coal reliance No statistical difference in terms of GDP size between the two groups Very significant difference in terms of GDP growth rate More resource intensive localities grows more quickly in the past 10 years

5. Results & Conclusion Resource intensive localities have much larger revenue shares from resource taxes and resource related revenue Local governments with more resources are more likely to spend less on education, public health, and other general services More source-intensive localities have lower innovative capacity based on different measurements However, resource intensive localities tend to have lower fluctuations of GDP growth from 2000 to 2012

Implications Implication: Will localities in Shanxi province encounter “resource curse?” How can we carry forward economic structure reform in resource intensive localities? Possible policy innovations Tax policy? Fiscal transfer? Industrial policy? … Next step: incorporate other provinces as well calculate the impacts of resource reliance on economic growth at the local level during the recent economic slowdown

Thank you!