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Library Demystifying China’s Fiscal Stimulus

Demystifying China’s Fiscal Stimulus

Demystifying China’s Fiscal Stimulus

Resource information

Date of publication
January 2013
Resource Language
ISBN / Resource ID

China's government economic
stimulus package in 2008-09 appears to have worked well. It
seems to have been about the right size, included a number
of appropriate components, and was well timed. Its
subnational component was designed to maximize the impact of
the stimulus package on the economy and minimize the
potential procyclical elements that are usually built into
subnational fiscal mechanisms in federal countries.
Moreover, China's massive fiscal stimulus played an
important role in the overall recovery of the global
economy. Using a simple analytical framework, this paper
focuses on two key factors behind the success of the
stimulus: investments in bottleneck-easing infrastructure
projects and countercyclical nature of subnational spending
based on the assumption that well-chosen infrastructure
projects could improve business climate and thereby crowd in
the private investment. The paper concludes that the
expansionary subnational government spending played a key
role in strengthening the overall impact of the stimulus and
sustaining growth. It also highlights the importance of
public investment quality and cautions about the
sustainability of local government financing through the
domestic banking system and increases in local governments
off balance sheet or contingent liabilities. These lessons
may be of particular relevance today for China, as well as
other countries, in formulating policy response to another
global economic slowdown or crisis, possibly as a result of
the Eurozone turmoil. For China, investing in urban
infrastructure and green economy, as well as in higher
quality and better targeted social services, will be crucial
for improving income inequality and inducing a more
inclusive growth path.

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Authors and Publishers

Author(s), editor(s), contributor(s)

Fardoust, Shahrokh
Lin, Justin Yifu
Luo, Xubei

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