The Problem Of Fiscal Decentralization In Economic Transition In China

This dissertation tries to inquire into the problem of the fiscal decentralization on the background of economic transition in China in reference of the western Fiscal Federalism, using institutions and government behavior as the main line, utilizing the theoretical tools and methods of new institutional economics, game theory and information economics. It aims at understanding and grasping the inherent logic of the economic transition in China from the view of fiscal institutional change and the inherent rule of the fiscal institutional change on the background of economic transition, disclosing the relation between fiscal decentralization and economic transition in China, and pointing out the institutional malpractices of fiscal decentralization and its harmful effects. Furthermore, this dissertation puts forward the target and basic approach of the reform of the fiscal decentralization in China based on the international comparisons and experiences. The fiscal institutions of China went through three periods, that is, the period of the centralized fiscal system under the planned economy, the period of "eating in separate ritchen"fiscal system under the combination of planned economy and market economy and the period of the tax-sharing fiscal system under the socialist market economy. Under the traditionally planned economy, national administrative allocation means replaced the scattered decision-making of microeconomic agents and became the dominant way of resources allocation, resulting in the wider management scope and longer chain of management by the central planned authorities. That is the first kind of information problem of planned economy. At the same time, due to the complexity of demand and supplement of products, the second kind of information problem came into being. So, there was severe information asymmetry between the central planned authorities and enterprises. Cost of information and supervision was high and economic efficiency was low, which induced the three times of practice of fiscal decentralization before and after the reform. The fiscal contracting system which formed after the reform encouraged local governments to develop local economy and promote the institutional innovation. However, the intrinsic institutional malpractices of the fiscal contracting system decided its nature of transition. This dissertation reveals the institutional malpractices lying in the fiscal contracting system by use of mathematic models and the certainty of the transition from the fiscal contracting system to the tax-sharing system from the view of fiscal game between central and local governments and the relative superiority of the tax-sharing system. The theory of institutional change of new institutional economics can in a certain extent explain the inhere logic of China' fiscal institutional reform. Also, this dissertation analyzes the transitional nature of fiscal institution from the fiscal contracting system to the share-tax system, that is, from the fiscal institution on the basis of principal-agency relation to the fiscal institution not basing itself on principal-agency relation. In brief, China' fiscal institutional change is gradual and compulsory and it has obvious nature of "Pareto improvement" and path dependence. One of the main topics of this dissertation is the relation between fiscal decentralization and economic transition. Fiscal decentralization beginning after the reform is an important part of economic transition and had close relation with the whole economic transition. Although the fiscal decentralization after the reform aimed at improving planned economy, it created conditions to bring in and cultivate market organism and became the means to bring in market organism in fact due to the new content added to fiscal decentralization, power transferred to microeconomic agents, enlargement of autonomy of enterprises in production and operation. At the same time, as an effectively incentive organism, fiscal decentralization made clear the status of local governments who have independent interests, aroused the enthusiasm of local governments to develop local economy and promote institutional innovation, made local governments play the role of "political enterpriser" and "the first action group" in economic transition to a certain extent and put forward China's economy transition and institutional change. In this dissertation, a model of three stages is used to analyze the role and behavior transition of local governments and its economic efficiency. On the other hand, as a part of economic transition, the path and style of fiscal decentralization is restricted however by that of the economic transition. The gradual characteristic of economic institutional reform decides the gradual characteristics of fiscal decentralization in China. China's fiscal institutions, regardless of the fiscal contracting system or the tax-sharing system, has obvious institutional malpractices and exerts some bad influences on economic growth and institutional transition. Due to the institutional malpractices, some severe influences emerged such as repeating construction, local protectionism, small scale of the supplements of local public goods, enlarged regional gap, and the soft budget constraint of local governments and so on. This dissertation analyses the expand of informal fiscal revenues and its effects under China' dual fiscal institutions. This dissertation uses the method of comprehensively comparative analysis in the light of the division of responsibility and expenditures among governments, the division of tax and the fiscal transfer system, chooses several typical countries, introduces andcompares relative contents and concludes some experiences from which we can learn in the light of the institution of fiscal decentralization. The conclusions are as follows: (1) the fiscal relations among governments should be normal, scientific and according to laws; (2) the responsibility and scale of expenditure among all levels of governments should be decided according to the benefits from public goods; (3) we must ensure the leading role of central tax rights and give local governments certain tax rights; (4) a kind of transfer system should be chosen and applied mainly when many kinds of ones are used crossly. Based on the international comparisons and experiences concluded, the dissertation analyses the problem of rational fiscal decentralization theoretically and brings forward some principles of rational decentralization. The first is that the boundary between government and market should be decided. The second is that the scale of responsibility among central and local governments should be divided scientifically. The third is that fiscal rights should be decided according to responsibility and fiscal rights and responsibility should be symmetric. The fourth is that the relation among governments should be lawful. It points out that we should try our best to establish a public fiscal system, which combines "proper centralization of fiscal revenues and proper decentralization of fiscal expenditures", and puts forward the basic approach about the further reform of the tax-sharing system, especially local fiscal system below the level of provinces. The first is that three-level government fiscal system should be established. The second is that responsibilities should be decided clearly among central and local governments. The third is that categories of taxes should be divided among all levels of governments properly. Property tax should be developed on the level of municipality (county) governments. Business tax should be the main tax sources of provincial finance and property tax should be the main tax sources of municipality (county) finance. The fourth is that formal fiscal transfer system should be established among governments and the fiscal transfer system under the level of province should be innovated. The fifth is that the reform and innovation about management institutions of fiscal expenditures should be quickened and the establishment of public fiscal system should be promoted.