Political Consequences of Growth-Enhancing Institutions: Evidence from China

• In Event: Political Regimes and Economic Policies

Abstract

Effective institutions are one of the fundamental causes of economic growth. This paper, however, demonstrates that institutions conducive to economic growth can yield adverse political consequences, potentially jeopardizing the political foundation of persistent economic progress.

This paper studies two growth-supporting institutions: meritocratic promotion and political competition. I focus on the context of China, where the two institutions underpin its economic growth, and investigate local governments’ allocation of residential land. I argue that promotion incentives and political competition drive local leaders to exploit land ownership by raising residential land prices during public land sales. Higher residential land prices stimulate real estate growth, attracting investment and generating employment while contributing to broader economic expansion. Additionally, a prosperous property market increases government revenues, allowing them to invest in infrastructure projects that signal their capabilities. Therefore, local leaders have incentives to increase residential land prices to demonstrate their economic performance and enhance their promotion chances.

Yet, the resulting distributional consequences yield noteworthy political outcomes, potentially jeopardizing the stability and legitimacy of the regime. First, local governments provide insufficient compensation to citizens who lose their land during expropriation despite governments selling land at high prices, leading to substantial rent disparities between governments and citizens. The inadequate compensation increases resentment toward local authorities, leading to conflicts with officials and eroding citizens' trust in government policies. Second, surging residential land prices financially burden younger generations, intensifying concerns about housing affordability and dissatisfaction with government policies. This escalation triggers conflicts with the government and diminishes overall trust and approval. In sum, the negative consequences extend beyond those who lose land.

To empirically test the predictions on land prices, I collected an original dataset that included 600,000 observations on residential land transitions in China from a digital archive. I utilize a regression discontinuity design (RDD) to exploit the sharp decline in the likelihood of promotion for local elites once they surpass the age limit for promotion. I compare two groups of local political leaders: those who are below the age limit for promotion (high promotion incentives) and those who have just crossed the promotion age threshold (low promotion incentives).

I find that when local political leaders' promotion incentives change from low to high, the residential land price increases by $65 per square meter. Furthermore, the impact of promotion incentives is further amplified by growth competition, a one-percentage point increase in the GDP growth gap between closely ranked local leaders results in an additional $12 per square meter increase in residential land prices. Empirical results from a multi-wave nationally representative survey reveal that a one-thousand-unit under-compensation increases conflict likelihood with local officials by 2%. It also decreases trust and local government evaluation by 0.13 and 0.03, respectively. These findings underscore the complex dynamics and trade-offs associated with land price interventions and offer valuable insights into the broader implications for social stability and regime legitimacy.

Author

• Qing Chang, University of Pittsburgh