Democratic participation, fiscal reform and local governance: Empirical evidence on Chinese villages

China's rural village elections have been acclaimed as a crucial step in China's democratization and a success in improving villagers' welfare and self-governance. Around 2002 the central government implemented another influential reform: the Tax-for-Fee reform. Using a unique two-year panel of village data from rural China covering more villages than the previous literature and spanning over these two reforms, our dual-goal in this paper is, first to evaluate the impact of village election on local governance, and second to examine the potential interplay between the Tax-for-Fee reform and the village election. We show empirically that village elections do bring about positive consequences, including the enhancement of public expenditure and the improvement in efficiency in public administration, through the check and balances provided by the villagers' representatives meetings. However, the improvement in administrative efficiency has been partly unexpectedly attenuated by the Tax-for-Fee reform. We argue that this conflict is possibly due to the Tax-for-Fee reform's tightening up the villages' budget and that with sticky administration costs, the reduction of administrative share in total expenditure has been weakened. Therefore the tax reform undermines the functioning of village democracy.

Research Highlights► China's village election increased the share of expenditures on public projects. ► China's village election improved administrative efficiency. ► China's Tax-for-Fee reform attenuated the positive effects of village election.