Chinese-style Decentralization, Local Financial Model And The Supply Of Public Goods: Theory And Empirical Research

Decentralization is a worldwide phenomenon, while growth is not. Theperformance of decentralization is largely determined by the fact that whether localgovernments are growth-preserving ones. A decentralized nation needs goodgovernance to maintain local governments rival for growth rather for rents. This paperprovides a framework to fully account for how Chinese Style decentralization turnedlocal governments to preserve growth, and how decentralized governance andgovernments' competition induced some distorting costs as far as fiscal expenditurecomposition and public goods provision concerned.The combination of political centralization and economic decentralization is theunique character of Chinese Style decentralization. As Chapter 3 implies, China isamong the most decentralized countries in the world, and local governments playcrucial roles to push growth and provide basic public goods. The model in Chapter 4demonstrates that how the effective fiscal incentives and the relative evaluation-basedincentive schemes ensure local governments rival for growth rather for rents.Meanwhile, foreign direct investments (following the open-up policy) lead localgovernments can not only care about the present interests any more. Thus, the rivalfor growth is an important incentive inducing the fiscal expenditure composition bias,social welfare can be increased if parts of fiscal resources are transferred frominfrastructure construction to public goods provision. Moreover, given the factors'different mobility, local governments prefer head tax to commodity tax to organizetheir revenues, which can deteriorate the fiscal expenditure composition bias.The following positive researches support these propositions. While a recentbody of theoretical literature discusses the local governments' bias on their pubicexpenditure composition, this paper contributes a deeper sight to this phenomenonwith the context of the Chinese Style federalism, which consolidates the economicdecentralization with political centralization. Using provincial panel data from 1994to 2004, we find that fiscal decentralization and government competition indeed causea significant and remarkable expenditure bias: local governments emphasize capitalconstruction while neglecting their responsibility to provide science, education,culture, and health care. Furthermore, some principal policies implemented by thecentral government even exacerbate this bias. The Chinese Style federalism is inducing more and more costs as though it is a successful mechanism to fostereconomic growth.Chapter 6 checks the question that whether fiscal decentralization and presentgovernance increase the public goods provision in local governments. When regionaldifferences in fiscal resources and other exogenous variables are controlled, fiscaldecentralization decrease effective provision of primary education and municipalpublic services significantly and remarkably. As for governance, the highly replicatehierarchy is a heavier burden for less developed areas, which worsens their publicgoods provision. The efforts to anticorruption increase the quality of primaryeducation while decrease some items of municipal public services, which implies thatthe rent space is quite large in some public fields. Thus, an appropriate governancepackage is required to transfer local governments' focus to public goods provision.The paper is organized as follows. Chapter 1 is an introduction. Chapter 2surveys the literatures concerning the theme, and provides comments to them whennecessary. Chapter 3 analyses the stylized facts and institutionalized backgroundsabout local governments' fiscal pattern and their behavior inclination. Chapter 4 givesa framework to study local fiscal expenditure composition and behavior inclination.Chapter 5 discusses the determination of fiscal expenditure composition empirically.Chapter 6 answers the question that whether fiscal decentralization have enhancepublic goods provision empirically. Chapter 7 concludes.