Public Service Provision and Urban Stratification in Shanghai

By Huiping Li (Shanghai University of Finance and Economics)

The interaction between public service provision of local governments and housing market can reinforce each other and polarize the socioeconomic space in this global city, Shanghai, even though the governance system is centralized instead of fragmented as in the US. Therefore, how to balance between different types of public expenditure within local governments has significant social and economic implications.

The level of public service accessibility differs by residential locations. The competition among fragmented local governments forces most local jurisdictions to spend more on developmental services to attract more business investments which can directly benefit everyone. Redistributive policies will only be pursued when the community/city can comfortably afford them. Jimenez (2014) found that with competition among fragmented local governments, both poor and wealthy communities across US metropolitan areas are associated with higher developmental and lower redistributive expenditure. Thus, public service provision has reinforced urban stratification through inter-jurisdictional competition under the U.S. fragmented local government system.

These experiences are insightful. However, the theoretical framework cannot be simply applied to the Chinese cities because their centralized governance and fiscal systems do not provide the similar fiscal autonomy and independence as U.S. cities. Numerous U.S. jurisdictions with authorities to levy tax and provide public services reside within a county boundary, including municipalities, townships, school districts and special-purpose districts with overlapping boundaries. The administrative structure in Shanghai is much more hierarchical and centralized. Its centralized governance system is comprised of a municipal government, 17 urban districts with administrative and financial independence and 207 sub-districts functioning as “representative agencies” of urban districts at the residential community level. These sub-districts are not one level of government. It implies that there are no local political jurisdictions associated with each residential community to provide local public services and levy taxes (Wu 2002).

The urban district governments in Shanghai have considerable impacts on the city landscape and public service provision. Revenue for urban districts is mainly from corporate taxes including corporate value-added tax, business operation tax, and corporate income tax. These three business taxes contribute to about 75 percent of revenue for the urban district governments. In order to increase tax revenue, each urban district is motivated to build their own commercial centers and development zones to draw businesses to their jurisdictions.

To understand the relationship between public service provision and housing market in Shanghai, we have considered the hierarchical governance structure and gradually decentralization of the fiscal system, in addition to the dramatically growing housing demands. Using a hedonic framework, we examine the effect of public service provision on housing price in two dimensions, the public expenditure from local governments and the spatial accessibility to public service facilities by local residential communities. We employ a three-level modeling strategy to examine the hierarchical nature of impacts from public service provision on housing prices, since the residential communities (xiaoqu, level-1) are nested in sub-districts (jiedao, level-2), and sub-districts are nested in Urban Districts (shiqu, level-3) in Shanghai Municipality.

We find that the major share of public expenditure from district governments is redistributive instead of developmental. Shanghai is a prosperous to invest on human capital development and quality of life improvement. Further examination of the geographical distribution of the expenditure of the districts reveals that the less-developed suburban districts, Such as Fengxian, Jinshan and Qingpu spend relatively higher percent on developmental services compared with their redistributive expenditure. The well-developed central districts such as Changning, Huangpu, Putuo and Yangpu spend much more on redistributive than developmental services (see the figure below).



Figure: Annual Average Percentage of Redistributive and Developmental Expenditure 2007-2009

Furthermore, communities located in districts with higher redistributive expenditure tend to have higher housing prices, and communities in districts with higher developmental expenditures tend to have lower housing prices. The well-developed central districts shift public investments to human capital development through increasing expenditures on education, health and welfare services. These programs are mainly redistributive and associated with better public service provision. In contrast, the less-developed suburban districts have to spend limited resources on economic development initiatives to build infrastructures like roads, water supply, and sanitation to facilitate economic growth. As a consequence, business friendly policies and industrial environments are associated with insufficient public services for households.

Our study suggests that residents will compete for the opportunity to access the public services through housing prices. When public service accessibility is built into housing prices, public expenditure is then directly linked to the housing markets. Through this mechanism, differences across district governments on public spending of developmental and redistributive services not only lead to uneven distribution of public services, but also ultimately impact housing prices.

The impacts on housing prices from public service provision and public expenditure could possibly reinforce urban polarization between the rich and the poor. The high-income households choose the districts with good public facilities and better redistributive services by paying higher housing prices. The lower-income, who may need redistributive services the most, have to live in the districts that have to spend their limited resource on developmental programs. In this sense, although with centralized governance systems and different fiscal systems from U.S. cities, urban stratification still happens in Shanghai through housing market during the process of public service provision.

With increasingly autonomous administrative and fiscal power, local governments in Chinese cities are in the frantic competition for more resources and opportunities for development within each jurisdictional kingdom. At the same time, privatization of housing markets have relentlessly displaced many residents out of their comfort zones and stratified significantly between the rich and the poor. Interaction between these two forces can further reinforce each other and polarize the socioeconomic space in this global city. Therefore, how to balance between different types of public expenditure within local governments has significant social and economic implications.

Our study supports the place-based policies to alleviate urban stratification within the city. The municipal government should increase investments in the less-developed districts for public infrastructure building. The less-developed districts would have more resources for redistributive services, which then equalizes public services distribution among residents living in different urban districts. It implies that place-based developmental initiatives from higher-level governments might be more effective to mitigate urban stratification than individual-based redistributive policies under the unique governance and fiscal system in Chinese cities.

Read the article here.

Huiping Li is a tenured associated professor of Public Administration at Shanghai University of Finance and Economics. Her research areas include residential segregation, urban/regional development and local government. Funded by National Natural Science Foundation of China, Lincoln Institute of Land Policy, and Shanghai Municipality Government, she has published in journals such as Governance, Urban Studies and Social Forces.


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