Fiscal Decentralization, Government Behavior And Economic Growth

The thesis constructs an analytical framework of fiscal decentralization, government behavior and economic growth in which fiscal decentralization is consistent with market system and compatible with political system. Empirically, it tests relationships between fiscal decentralization and economic growth and comes to the conclusion that fiscal decentralized system has contributed to Chinese economic growth as a whole. As a result, the author advises to perfect Decentralization and Competition mechanism to promote economic growth further.Firstly, the thesis constructs an analytical framework of fiscal decentralization, government behavior and economic growth. The relation of fiscal decentralization and economic growth, no matter theoretical or empirical, has not come to an agreement for a long time. The author considers that confused ideas of system and unclear classification of it may be deserved for it since that the relationship of fiscal decentralization and economic growth is identical with that between system and growth in nature. The author, therefore, thinks it very important to have a clear understanding of the relationship of system and growth. Based on this thinking, the author has arranged classical literature of system in economics, logos in economic theory, the system change theory and relationship of system, behavior and growth. Eventually, the analytical idea of logos belief and tradition respect is developed. The author accordingly puts out a classification of system construction and the system evolvements and how the two kinds of systems affect economic growth. The author puts the emphasis on the effects of system constructions and concludes that the concordance between fiscal decentralization and market system in history and compatibility between fiscal decentralization and political system has a positive impact on economic growth. The analytical idea, the logic analysis frame of system, behavior and growth and the analysis of concordance and compatibility, as mentioned above, construct a theoretical framework for this thesis.Secondly, in the point view of the system change of fiscal decentralization, the author analyzes the concordance between fiscal decentralization and autonomous market system in history and also such a trend has greatly affected economic growth. It is agreed that Chinese fiscal decentralization has mainly evolved through three main systems:strategic system in consolidating Income and Expenses period, tract system on fiscal revenue and expenditure and tax-sharing system, In the first, period, the construction system almost engulfed autonomous market system. Fiscal decentralization manifested itself as a zero-sum game between central and local governments because there was no market economy as the mutual and cooperative basis of two types of governments. Opportunist deviations hereby were severe, which expressed that the management trades ruled by people not by law decided the inefficiency of fiscal decentralization and it strongly affected economic growth and macroeconomic fluctuations. However, after the market-oriented economic reformation, the fiscal decentralization system used responsibility system in the form of the fixed contract or tax distribution system in the form of sharing contract. The local government strengthened gradually with other economic subjects in relevance of Interests. So the local governments chose to cultivate and maintain market with the administrative method in the specific period. This kind of game based on market development represented the Positive-sum Game, which was advantageous to the growth of the market, enhancement of the efficiency and economic growth and development of economy. On the other hand, because the local governments in our country were important quasi-market subjects in this special economic development stage, there appeared the market segmentation which aimed to achieve the partial economic growth and the financial revenue. We thought that the local governments were only market participants. So they partly affected the market segmentation. The. basic reason of Chinese market segmentation originated from the problem of matching-market system. The solution to it was to regulate market development, maintain the effective competition, and establish the perfect market matching system. Therefore, we thought that it was not right to deny the fiscal decentralization by the market segmentation problem.Thirdly, this paper has analyzed the fiscal decentralization and political system's compatibility and their influence to the economic growth. We think that there lies the dual asymmetrical information in the special political market between the central government and the local governments. The mechanism of the competition for the growth has not only solved the problem of the ability screening, but also has solved signal demonstration problem of governing ability that local governments have showed. Both China's fiscal decentralization and administrative achievement evaluation system for local governments have safeguarded the market, improved the efficiency and become an important factor in promoting growth. This shows that fiscal decentralization and the reality of the political system compatible with the theory. In order to clarify this problem further, we construct an intergovernmental game model in a fiscal decentralization system. The equilibrium results of the model show:first, if we only consider the financial incentives under the system of fiscal decentralization, local governments'competition has promoted China's economic growth; if we consider the political incentives for promotion, the competition between local governments is even more intense. From the point of view of promoting economic growth, there exists compatibility between fiscal decentralization and the political system. Second, the investment amount of the local governments under the system of decentralized decision-making is greater than that of the central government on behalf of the community, but the benefits of the local governments are less than optimal return on investment of the central government. After considering the political promotion incentives, the difference in investment between central and local governments would become even more significant, so would the competition. Therefore, the two types of governments tend to be lack of cooperation. This reminds us to affirming the compatibility of the Financial Decentralization and the political system and its role in promoting economic growth and at the same time, we should maintain a commitment to the compatibility. In order to know it, we must distinguish between the best and the most suitable systems and need to take into account the following factors:the current market development and the stage of economic development, China's authoritarian political system, and the indirect restriction mechanism of corresponding "top-down " achievement-based assessment, the mechanisms lack of direct market's restriction. Therefore, we believe that it is a rational choice to the above compatibility as well as its impact to China's economic growth in the process of market development and the dynamic change of the political system.Finally, the thesis studies the relationship of fiscal decentralization and economic growth by the empirical analysis. Under the framework of Zhang and Zou (1998) and Lin and Liu (2000), the author empirically tested their relationships in China with the time-series data between 1952-2004. We use real per capita GDP to reflect the economic growth and choose the ratio of total expenditure in local fiscal expenditure to describe the proportion of fiscal decentralization. In order to rule out the heteroscedasticity problem, we adopt the natural logarithm from the two variables corresponding to the data. In order to clarify the relationship about fiscal decentralization with economic growth, we conduct a Granger causality test and accept the original assumptions that the Fiscal Decentralization is the main reason for the economic growth. Due to the stability of time-series affecting the reliability of econometric analysis, we have applied unit root method to test the time-series data from the two variables—fiscal decentralization and economic growth. The results show that the two time series are first-ordered. Both Least-squares Estimation and the Co-Integration Analysis indicate:although over-separation and over-centralization of power have caused macro-economic fluctuant in a specific period, fiscal decentralization, however, has promoted Chinese economic growth in general.In summary, we believe that China's fiscal decentralization and the incentives and restraints of government action have promoted China's economic growth and development. The local governments'mechanism—competition for growth presents some problems. Hence, we should start with the financial incentive and restrictive mechanism and optimize the fiscal decentralization system and its environment in order to further promote China's economic growth and development further.