Local governments play a critical role in executing fiscal policies in China. Aside from providing basic public services, they undertook sizable public investment that has contributed to remarkable growth. Much of the large-scale fiscal stimulus since the global financial crisis was carried out through local governments. Along with public infrastructure investment, local governments have also contributed to the real estate boom through land development. In addition, research has attributed competition among prefectural local governments as a significant factor in China’s growth success (Song, Storesletten, and Zilibotti 2011).

Investing in Soft Infrastructure