Fiscal Decentralization In The Transformation Of China And The Supply Of Public Goods Incentives

It is thirty years since China has carried out reform opening policy. Without question China has made great achievements in economy, such as the average annual rate of GDP excesses 9%, the standard of living has been remarkably improved and the world competition power has also continuously been rising. However, as for the supply of public goods, it presents disaccord between "soft" and "hard" public goods. The latter such as infrastructural investment is greatly increased, but the former such as medical treatment and education investment looks relatively undercapitalized and lacks of efficiency.In transitional countries, there is deep and intrinsic relation between fiscal decentralization and public goods supply, which is relating to successful transition. It is important to understand the effects of the history of transition and post the law of the economy phenomena. The most distinct characteristic of Chinese transition economy is implementing the policy of fiscal decentralization since the beginning of reform. Because the beginning state and political supply condition of fiscal decentralization are different form the other countries. Thus the mechanism of decentralization is very complicated in China. It is said the outstanding achivement and the problems in the near future both owed to the fiscal decentralization to a certain extent. The key issue of fiscal decentralization is how to divide fiscal interest between central and local governments. And it matters all aspects of economy, especially the effect of local public goods and services.This paper tries to explain the behaviors and preferences of central and local governments in the point of economic view. It also analyses the evolvement of fiscal decentralization and public goods supply in China. And it clarifies the incentive and restriction mechanism. The paper also puts forward some helpful mechanism design scheme to perfect and develop the public fiscal system. It is not only helpful to increase the efficiency of public goods supply but also significant to the harmonious development in China.In economic transition the difference preferences between the centre and local governments deeply affect fiscal decentralization and the incentive structure. This paper analyses the course of the difference preferences and designs a theoretic model according to Chinese transition economic. It proves the degree of decentralization in develop region has positive incentive effects on economic growth; but in less develop region the degree of decentralization is hard to incentive effective public goods supply and economic growth, the private benefits will be increased. So the degree of decentralization perhaps increases the distance between different regions.The paper also contracts a model of centre and local government. It explains the decision of decentralization in China and proves that in the early development of economy because of under-decentralization the local government asks for centre government to increase the degree of decentralization. But with the development of economy, it will be over-decentralization and the local government will ask for centre government to decreases the degree of decentralization. However, if the economy goes a step further, the decentralization will achieve equilibrium. The paper also discusses that with more people and worse economy, the degree of decentralization will increase; while with less people and better economy the degree will decrease.At the same time, this paper sets up a dynamic structure model to control the intrinsic relation between fiscal decentralization and public goods supply, and then using panel data on provincial level, proves the theoretical conclusions through System GMM. It finds the ffiscal decentralization has positive effect on the increase of hard public goods and negative effects on the increase of soft public goods. The speed of decentralization in less-developed regions is increasing, while higher-population density means higher increasing speed in these regions. The speed of decentralization in more-developed and higher-population density regions is decreasing. It also proves the developing government prefers hard public goods and high degree of decentralization.Therefore, it is very significant to make sure the extent of fiscal decentralization between central and local governments and improve the examination of achievement in local government. In addition, it needs a reform in public fiscal institution to suit responsibilities with rights, such as on fiscal revenue and expenditure and budget system. Consequently, it can improve the efficiency of public goods and satisfy the public needs to construct socialistic harmonious society.