Do political connections help or hinder urban economic growth?

Evidence from 1,400 industrial parks in China

Over a period of more than three decades, the Chinese government has created more than 1,400 new industrial parks, which have played a key role in creating manufacturing jobs and in attracting foreign direct investment, both nationally and locally. Provincial leaders who choose the location of such parks have political career incentives to select sites that increase regional economic growth, but also to select sites that reward city officials with whom they have connections. By exploiting plausibly exogenous changes in political connections, we document that city officials with connections to key provincial decision-makers are more likely to win parks. We estimate the heterogeneous urban growth effects of attracting such place-based investments. We find that industrial park sites chosen largely as a result of favorable political connections generate lower economic benefits than those chosen largely based on their economic fundamentals.

Conclusions

1. Our findings suggest that political favoritism plays a role in determining where investment resources go.

2. We  empirically examine the impact of parks on subsequent urban economic growth. Our results show that when the initial location decision is mainly driven by politicaln connections, the creation of an industrial park generates lower levels of economic growth than is evidenced in cities that were selected in spite of a lack of political connections.

The birth of Edge Cities in China

This paper tests for the effects of new industrial parks on local production activity and consumer behavior in close proximity to the new parks.

The Revealed Preference of the Chinese Communist Party Leadership

In the previous paper, we documented that 30% of parks failed to generate local agglomeration benefits. The fact that we observe very different returns raises a question about the initial site selection problem.

Why do some Chinese leaders choose the “wrong” city to site expensive place-based investments (industrial parks)?

This paper presents a revealed preference analysis of Chinese leaders’ priorities. We assume that each provincial leader has the same objective function defined over three attributes: economic growth (value added GDP), expected inequality reduction (within-province city-level Gini coefficient based on GDP/capita),  and rewarding social connection (whether there are social connections between provincial leaders and city leaders).

In this project, we constructed three unique and comprehensive datasets.

3. Dataset of city attributes

A data innovation in this project is our creation of a detailed social networks database that allows us to track the long term connections between provincial leaders and city leaders at different points in time. 

To build these social connections, we construct a dataset on the city and provincial leaders between 1980 and 2010 in China by undertaking a large-scale data collection from Duxiu, a local Scholar Search Engine with millions of digitized literatures, newspapers, journalists and books in Chinese provided by China’s CNKI. This data set enables us to construct four measures of connection based on information on workplace, birthplace, alumni networks, and political factions.

​

We reconstruct the choice set of possible locations to build a new park and we observe where the park is actually built.

The graph below demonstrates the results of our choice model:

Estimated GDP increase and Gini coefficient change attributed to a real or a hypothetical park in a city

We find that a provincial leader is willing to sacrifice 1.6% of the province’s annual GDP for helping a connected subordinate. Although Chinese Communist Party may be willing to bear some cost to achieve social stability by reducing income inequality, the misallocation cost triggered by rewarding social connections is a pure loss of social welfare.