The Effect Of Fiscal Decentralization On The Size Of Local Government

The last decade has witnessed a world trend of fiscal decentralization in the developing countries as an escape from inadequate growth and inefficient governance, but the impact of fiscal decentralization has yet to be tested. Especially, there has been a theoretical controversy over the impact of fiscal decentralization on the government size among schoolors. In order to conduct the empirical research of the impact of fisical decentralization on government size, this dissertation suggests a concept model and proposes several research hypotheses based on a broadly literatures review about this subject. This dissertation also analyses the reform process of China’s fisical decentration system and the basic change path of the local government size. Using two provincial panel data sets of 1997-2012 and 1998-2006, this dissertation examines the impact of fiscal decentralization of China on the size and structure of local government.Based on the literature review, this dissertation proposes a concept model for the empical research, including institutional factors, factors of supply and demand, and social factors. The institutional factors concluds fiscal decentralization, fisical dependence and ethnic factors; factors of supply and demand contains political tournaments, economic development, economies of scale, population growth, population density, public service demanding, urbanization and marketization; social factors are comprised by unemployment rate and rural-urban income gap.This dessertition analyses the evolution of China’s fiscal decentralization system and the changes of the local government size. The development of China’s fisical decentralization system can be devided into three phases:high concentration period, fiscal responsibility and the stage of tax sharing. Vertical imbalance is a distinguishing feature of the fiscal decentralization in China.The local government size experiences a rising trend in the period of tax-sharing.Econometric analysis for the impact of fisical decentralization on the local government size indicates that, fisical decentralization will increase the local government size, which supporting the application of Wallis Hypothesis in China. In Comparation with the west eara, fisical decentralization’s impact on the local government size reduced significantly in the east area, while there is no sigficant difference in the middle erea. Fisical dependence has a positive effect on the local government size, especalliy in the west area, and this effect decreases significantly in the middle eara when compared with the west area, but there was no difference between the east and the west. Government competition would magnify the local government size significantly, which will reduce greatly in the east eara, but thers is no sigficant difference bewteen the middle and the west.Econometric analysis for the impact of fisical decentralization on the capital construction expenditure and education expenditure of local government reveals that, fisical decentralization will reduce the education expenditure while magnify the capital construction expenditure, all of which results in the distortion of fiscal expenditure structure of the local government. And this distortionary effect is weaker in the east eara, but there is no difference between the middle area when compared with the weast area. Forthermore, fiscal dependence imposes a positive effect on the capital expenditure of local government, but has no significant effect on the education expenditure. This effect of fiscal dependenc is weaker in the east eara than in the west eara, but there was no difference between the middle eara and the west area.Based on the studies above, it is recommended that priorities shoud be given to the rationalization of the central-local relationship and the optimization of local government functions in future fiscal reform. It also needs to reduce the fisical dependence of local government to the central government, and achieve the banance of local government powers in the revenues and expenditure. Meanwhile, the transfer payment system should be more regulated in order to enhance the local government responsibility. It is important to tighter the budget institution of the local government, and constrain the fiscal behaviors of the local government. Furthermore, improving the civil servant’s performance evaluation system and paying more attention to the public service functions of the local government are also meaningful.