An Economic Analysis Of Chinese Fiscal Decentralization Reform

The third Plenary Session of the18th CPC Central Committee declares that "public finance is the basis and important pillar of governmental administration" and this is quite similar to the statement that "public finance is the mother of society politics". The lifting of public finance from the component of the economic system reform to the component of the country’s governmental administration system establishes the position of the financial reform as one of national strategies.Fiscal decentralization is a trend of financial system arrangement throughout the world. China’s fiscal reform has entered a new stage. In the new round of fiscal reform, in accordance with the existing situation of our country, aiming at promoting the modernization of national governmental administration, guided by fiscal decentralization theories, based on the objective evaluation effect of fiscal decentralization reform from the three dimensions of government, market and society, how to further deepen the reform of fiscal decentralization and set up a modern financial system characteristic of the unity of finance rights and administration rights, the match of financial resources and expenditure responsibility, the equalization of basic public services, is of theoretical and practical significance, and therefore has become the focus of the present study.The present dissertation, based on a scientific definition of fiscal decentralization, unfolds along the logical line of the necessity of fiscal decentralization, the affecting factors of fiscal decentralization, the evaluation of the effect of fiscal decentralization reform, and the deepening of Chinese fiscal decentralization reform. The author, after reviewing the relevant theoretical literature on fiscal decentralization, through a comparative analysis of fiscal decentralization practices in such countries as the United States, France and India, by summarizing the lessons gained in Chinese fiscal decentralization reform, points out the main affecting factors in fiscal decentralization, including level of economic development, adopted political system, degree of democracy legalization, level of urbanization, geographical coverage, population density and ethnic diversity. What is crucial to fiscal decentralization reform is to choose a proper decentralization model and decide a reasonable decentralization scale. The appropriateness of fiscal decentralization is dependent on whether the rights and responsibilities at all levels of government are equally distributed, whether the operations of governmental functions at all levels are improved, whether the allocation of financial rights and financial resources between government and market, between government and society, between different levels of government helps improve the performance of financial resources so as to provide quality and efficient public goods and services, promote economic and social development and improve people’s living standards. This dissertation proposes the establishment of an effect evaluation model of fiscal decentralization reform aiming at advancing the modernization of national governmental administration, guided by fiscal decentralization theories, based on the three dimensions of government, market and society, in an attempt to analyze, within the same temporal and spatial space, the influences of fiscal decentralization on all aspects of economic and social life.The present research, by embedding fiscal decentralization into the environment of the unique Chinese system, describes and analyzes the practices and characteristics of Chinese fiscal decentralization reform. The focus is an economic perspective on such issues as land finance existing in Chinese fiscal decentralization reform, the imbalance in regional economic development. This study also chooses as examples, Yunnan, a western province, and Zhejiang, an eastern province, to explore in depth local fiscal decentralization reform below the provincial level, including "county-under-direct-control-of-province" fiscal decentralization practices.The achievements and innovations of this research are as follows:Firstly, a theoretical framework of fiscal decentralization reform is proposed. The necessity of fiscal decentralization can be expounded from the multiple perspectives of economics, constitutional government and management science, but the focus of fiscal decentralization studies mainly lies on the factors affecting fiscal decentralization, the determination of the optimum degree of fiscal decentralization, the evaluation of the effect of fiscal decentralization. This dissertation proposes that the aim of fiscal decentralization reform should shift from a single economic development objective to an integrated social equality objective, from a traditional control model to a modern governance model, from the construction of public finance system to the legalization of public property. Secondly, factors affecting the degree of fiscal decentralization are pointed out. An important indication of the modernization of a country’s governance system is that government, society and market have their respective places, perform their respective duties, get what they deserve. The basic criterion of a reasonable and appropriate fiscal decentralization is whether it can handle properly the allocation of financial rights and financial resources between government and market, between government and society, and between all levels of government, thus ensuring all levels of government have the necessary financial rights and sufficient financial resources to better fulfill their functions, to provide quality and efficient public goods and services, to promote social and economic development, and to improve people’s welfare. Thirdly, an evaluation system measuring the effect of fiscal decentralization reform is established. The effect of fiscal decentralization reform should be placed in the three-dimensional coordinate system of government, market and society, and should be measured in terms of a "Pareto improvement". In the government dimension, the focus is on whether the relationship between all levels of government is straightened out through the reform; in the market dimension, the focus is on the change of gains, losses and market efficiency through the reform; in the society dimension, the focus is on whether people’s living standards, social welfare and democracy are improved. Through the construction of the effect evaluation system of fiscal decentralization reform, the effect of fiscal decentralization reform at all levels of government can be quantitatively evaluated, and the matching scale between financial rights and powers, and the degree or level of fiscal decentralization can be quantitatively measured, with the final aim of providing theoretical guidance for advancing China’s fiscal decentralization reform and establishing a modern financial system. Fourthly, based on "rational government trap hypothesis" and through the application of commissioned-agent theory and game theory, practical issues in fiscal decentralization are analyzed and suggestions in the deepening of fiscal decentralization reform are put forward, for example speeding up financial system legalization reform, improving financial monitoring mechanism, strengthening transfer payment balance and its incentive, and coordinately advancing the reform of fiscal decentralization supporting system.