Tradeoff Between Fiscal Decentralization And Centralization, Regional Economic Balanced Growth In China

With reference to the existing literature on the measurement of fiscal decentralization, and observation of co-existence of significant differences among provincial financial resources and a huge gap among regional economic growth in China, from the multi-level, multi-perspective, the relationship between trade-off of China’s fiscal decentralization, centralization and balanced regional economic growth is discussed in this study.China has a huge economic disparities, economic disparities measured by per capita GDP in eastern, central and western provinces as well as has increasing trend, In addition, there is a huge development gap between urban and rural areas, China is a typical economic structure of urban and rural, but also showing the city as the center of the financial landscape. In the process of economic transformation in China, while maintaining a high degree of political stability and control of the central premise, China constantly adjust fiscal relations between central and local governments. China has a top-down political control so that the central government is in a relatively strong position, but local government, in a relatively weak position, basically only continue to adapt to the fiscal relationship between the central government and local government, which the former uses its political control to adjust, Correspondingly, the fiscal relations below the provincial level are constantly adjusted. So showing a change in China’s financial system, its core is constantly tradeoff between fiscal decentralization and centralization because the central government has continued to meet the needs of economic and social development. Specifically, adapting to the planned economy system, the highly centralized financial system has been taken, after reform and opening up to meet the establishment of a socialist market economic system, fiscal decentralization reforms of fiscal contracting system has been carried out, however, it leads to "two proportions" reduced, causing the central financial difficulties, so the 1994 Tax Sharing Reform has emerged, which was tax centralized, according to economic and social development in 2002, a Corporate Income Tax Sharing Reform has also been conducted, followed by the implementation of the "the province directly governing county" financial management reform, however, the reform of the tax sharing system below the provincial level has not been carried out.China continued trade-offs between fiscal decentralization and centralization and changes in the financial district is intended to achieve the goal of equality, but in fact to some extent exacerbated the regional fiscal inequality, tax reform just adjust the financial distribution relationship between central and provincial governments, leading to the financial layers shift farther down the local government level of government, budget gap is bigger with lower governments. Notably, the distribution pattern of financial resources directly affects the level of regional capital accumulation. As the economy continues to develop, the different levels of capital accumulation makes the eastern, central and western provinces obvious differences in the level of financial development, the level of investment, labor, industrial structure, the level of urbanization development, openness, etc., the existence of these differences combining different geographic and natural resources, the result is that an imbalance of regional economic growth. Fiscal decentralization has an important role in transition economies, which also plays a role in two dimensions, leading to growth effects of fiscal decentralization respectively measured by revenue or expenditure has asymmetry, while considering revenue and expenditure, non-linear relationship between financial autonomy and economic growth exists. There is still significant regional heterogeneity about growth effects of fiscal decentralization.Theoretical and empirical studies support the above conclusions. Compared with previous studies, this paper made the following studies:Firstly, we constructed a simple theoretical model, in theory, there may be non-linear relationship between fiscal decentralization and economic growth, that there is an optimal fiscal decentralization, if the constraints of optimal degree of fiscal decentralization exist, the degree of fiscal decentralization is suboptimal. In addition, fiscal decentralization, measured by revenue and expenditure in two dimensions, plays a different role in economic growth, indicating that growth has asymmetric effects. Empirical studies support the conclusion that under conditions of economic and financial constraints in provincial areas, the provincial government is in the presence of suboptimal degree of fiscal decentralization, measured by degree of financial autonomy, we have also estimated that the critical value is 0.545, and found that revenue decentralization and expenditure decentralization does not have optimal or suboptimal degree of fiscal decentralization, the positive growth effects of revenue and expenditure decentralization are asymmetric, it is not by increasing the level of revenue or expense, but by improving the allocation of resources efficiency to promote regional economic growth. So that the Tax Sharing Reforms make revenue decentralization contribute to economic growth in the eastern provinces, spending decentralization contribute to economic growth in the western provinces, which may also partly explain the overall per capita income gap between east, west, and central decreased; tax reform is significantly in favor of eastern provinces with relatively developed manufacturing and services, to a certain extent it can be explained that per capita income of the eastern provinces is much larger than central and western provinces. The growth effects of fiscal decentralization, measured by degree of fiscal autonomy, decentralization of revenue or expenditure has regional heterogeneity, and the mechanisms for revenue and expenditure decentralization play a role in promoting economic growth, are that they enhance economic efficiency, through financial level of development, labor supply increases and increased foreign direct investment, such as to improve the efficiency of resource allocation, thus contributing to economic growth.The next part we will expand research perspective to the county level, select a province,which is the typical pattern among "the province directly governing county", as a case study to examine the impact of the financial system below the provincial level to the county’s economic growth, the finding is similar to the provincial level, under conditions of economic and financial constraints in county region, the suboptimal fiscal decentralization of the county government exists, which is measured by the degree of financial autonomy. In the article we also estimate the critical value range of suboptimal degree of fiscal decentralization of the county government, which is 0.369-0.488, is less than the critical value of the provincial level, which is 0.545. We have also found that expenditure decentralization of the county government is far greater than revenue decentralization, and the economic growth effects of revenue decentralization or expenditure decentralization of the county level also has a non-symmetry. Empirical estimation confirms the logic of the general conclusions of the article.Finally, from the perspective of urban and rural areas, containing government spending, a model of urban and rural economic growth is built, empirical estimates found that the increase of productive government expenditure for countryside and the fast growth of it relative to investment in fixed assets of rural areas in the short term (and urbanization combined effect), in the long term can significantly narrow the income gap, which is one of solutions to insufficient funds of rural development with the rapid urbanization process, also has confirmed the government spending in urban and rural areas with a non-symmetrical effect.Based on the above findings, we put forward policy recommendations to promote balanced regional economic growth and equality of income of urban and rural areas in the article.