On Decentralization Between Central Government And Local Governments: Law And Economics Approach

The issue of decentralization between central government and local governments is of great magnitude to national legal system, both in theoretics and practices. If the relationship between the central government and local governments and the decentralization are both harmonious, the nation will be more flourishing, more democratic and more powerful. In this relationship, the central government has the initiative; it is the key factor accordingly. With a expansive perspective, scientific and positive approach, Law and Economics, a crossing discipline, has considerable comparative advantages on this issue, including the power of explanation to reality and the power of institutional construction.Law and Economics mainly wields economic approach to study legal issues, and the paradigm of rational choice is its hardcore paradigm. The paradigm means the behavior pattern of the main body's maximization of benefit and utility, with the restriction of resources rarity and limited information. In the maximization, the benefit (utility) equals to the remaining sum that income subtracted from cost. So it has two requirements: the maximization of income and the minimization of cost. In decentralization issue, the institutional design and arrangement should pursue both the maximization and minimization inevitably, in order to realize the maximization of benefit in decentralization. On one hand, the relationship between the central government and local governments in unitary states is a kind of Principal-Agent relationship. On another hand, it is not in federal states. In China, the Principal-Agent relationship in decentralization between the central government and local governments includes four main bodies and two Principal-Agent relationships. The four main bodies are National People's Congress, central government, localPeople's Congress and local government. The two Principal-Agent relationships include relationship between the People's Congress and government in the same layer, and relationship between the central government and local governments. A rational Principal-Agent relationship should be designed to promote harmonious decentralization. The game between the central government and local governments can be divided to cooperative game and non cooperative game. The latter has many disadvantages, so a scientific and rational game pattern should be constructed to turn the latter to the former.As China is in a pivotal period of rapid institutional change, the institutional construction is a crucial factor to decentralization. In this process, the legal institution regulating decentralization should urge the minimization of transaction cost in decentralization and cost of public goods simultaneity, in order to promote the efficiency and optimization of decentralization. Two factors must be considered: the transaction cost of institution in decentralization and the cost and income of observation or transgressing the law. At present, the cost of negotiation, execution and supervision in decentralization institution are exorbitant. As a solution, the rent-seeking opportunities of local governments should be eliminated, and the supervision of National and local People's Congress should be enhanced, the organizations and supers in central government and local governments should be reduced, the supervision efficiency of central government and local People's Congresses to the local governments should be promoted. The main problems in formal institution of decentralization include shortage of institutional supply, lack of harmony and maneuverability, should be resolved by legislation and legal modification. As far as the informal institution, conventions exist in provincial chief executive's selection that the central government determines the candidates, and then the local People's Congresses recognize the selection by "election". It is going to distort the Principal-Agent relationship between the local People's Congresses and local governments,result in administrative officer's preference to central government rather than the people, obstruct the veracious and unhindered expression of citizen's preference, and make against the legal interest of local people. The central government's examination and approval to local governments should be put in order in accordance with law, we ought to embody and intensify related legal institution, in addition, reduce the rent-seeking possibility of central government's officers. The externality in decentralization mainly means the externality of governmental behavior. On account of no compensation to acting parties that induced the positive externality, their enthusiasm will be influenced, so promotion and adjustment are requisite. The central government should design related legal institution to prompt local governmental behavior that induced the positive externality. Otherwise, the central government can subsidize the local governments by special financial transfer or reduction and exemption of taxes. There are many resorts to govern the negative externality in decentralization. First, the central government ought to punish the acting parties that engendered the negative externality by law, so the sufferers can be compensated; secondly, taxation can be a countermeasure to market subjects that engendered the negative externality; thirdly, the governments should standardize their behavior, and draw a reasonable borderline of its power.The pattern of decentralization must adapt for the situation of our country, it should be optimized necessarily and scientifically. The former path-dependence (rule of men) must get a breakthrough, and turn it to a higher path-dependence (rule of law). That requests constructing a reasonable, comparatively steady and highly transparent legal institution to adjust and regulate the pattern. The principle of combination with unity and adaptability means that the authority of central authorities must be established and maintained in one hand, in another, the local government's initiative and enthusiasm must be mobilized. Centralization and decentralization must lead to equilibrium, anappropriate and a balanced point should be sought to achieve the dynamic equilibrium in distribution of powers. In Law and Economics perspective, this point should be located in the position that marginal income of decentralization equals to marginal cost of decentralization, namely, marginal income of centralization equals to marginal cost of centralization. The transparency of decentralization mode must be considerably high, the design and operation should be public to citizens and governments, for the sake of decrease their information cost. We must insist on the principle of efficiency, minimize the cost of public power's operation, at the same time, maximize the supply of public goods. In the institutional innovation of decentralization mode, an expressive and balanced mechanism of local interest must be constructed; moreover, the harmonious mechanism of interaction between the central government and local governments should be consummated. The financial power is the kernel of decentralization system; it should be optimized by reforming the system of tax division, based on the further definitude of administrative responsibility divide between the central government and local governments. As regards the legal guarantee, the abuses including non-definitude, oversimplification and less-maneuverability should be surmounted; furthermore, a more scientific, unambiguous and exhaustive legal system should be designed to regulate decentralization.The problem of regulations on the exercise of autonomy in provincial autonomous regions is a representative individual case on decentralization in China. China's five provincial autonomous regions have no regulations on the exercise of autonomy up to the present; their drafts have not got adoption. It reflects that there are problems in decentralization pattern between the central government and local provincial governments in autonomous regions. The 116th clause of the Constitution and 19th clause of the Law of Regional National Autonomy stipulated the institution of report to higher authorities for examination and approval, it deprives the executing power from legislative power ofautonomous minority areas, affects the enthusiasm and enthusiasm of local legislative, leads to dissipation of legislative resources. The non-legal procedure in the namely "consultation" is a preliminary examination virtually, whereupon the relationship between the National People's Congress and ministries and commissions of the State Department is a kind of informal Principal-Agent relationship, thereby there are potential problems such as adverse selections and moral hazards. It should be terminated, moreover, the National People's Congress ought to regain the authorization power of regulations on the exercise of autonomy, exercises its functions and powers according to the Constitution and the Law of Regional National Autonomy.