Central To Relations With The Regional Economic Structure: The Perspective Of The Financial Transfer Payment

Concerning a country as big as China, how to adjust the intergovernmental relationship to achieve better governance efficiency is a huge challenge faced by the central government. The central government must ensure that local governments' economies will not be totally independent on the one hand, to avoid threats of social and political stability, on the other hand as China's "big country",the huge differences between regions, the central government needs local governments as an agents to manage local affairs, which also needs to approve local governments some economic incentive to increase development enthusiasm. It is in such a trade-off, the central and local governments have been in a bad circle of "disorder when decentralization, slowing down when centralization".The third fiscal decentralization reform began in the early 80's, characterized by the "all-round fiscal contract",forming a phenomenon of "strong local governments and weak central government",the contract gives local governments a great economic incentive to develop the local economy, the marginal retention rate even up to 100% in some provinces. In such a highly decentralized system, the Chinese economy witnessed an unprecedented growth, while also expanded the original regional disparity and urban-rural inequality, the disorder also affected the comparative capacity of central government and local governments. The two ratios-the share of total governmental revenue in GDP, and the central share of fiscal revenue-has been declining since 1980s to its lowest level of 11.2% and 22% in 1993, these changes also has a direct impact on the coordination of intergovernmental relations between central and provincial. So in 1994, the central government has to readjust the central-local relationship through the tax sharing reform, to strengthen the central fiscal centralization and raise the central governmental status of intergovernmental relations.Deng Xiaoping's "Two Major Configurations" emphasizes the ultimate goal of balanced development between regions, narrowing the regional gap is also that the central government trying to achieve, but is difficult to achieve under the current framework of decentralization, since the initial geographical conditions and economic endowment disparities, combined with the agglomeration effects during the process of economic development, the combined effect will make the difference between coastal and inland areas to be larger and larger. The tax sharing system reform reduces the role of decentralization for economic growth, while the central government regains the ability to make new adjustment of the relationship between the governments. Since 1999, China made financial support program for twelve western, three northeast provinces and six central provinces, and aid the development of these areas through the huge fiscal transfers.The implementation of these strategies means that the central government considers the inland provinces different of the coastal provinces, the increase of fiscal transfer payments made inland provinces be more dependent on central government. This paper studies the changes of relationship between the central and local, and its impact on the local economic patterns, economic growth and local governmental behaviors, under the context mentioned above. Comparing the previous literature, this paper has done the following work:First, this paper theoretical and empirically tests the existence of the bottom line of decentralization.Using the Chinese provincial data, this paper find that the process of economic development accompanied by some structural problems, particularly urban-rural division, regional segmentation and lack of investment in public goods from the government. Based on the non-parameter model of non-expected output (Slacks-based Measure-SBM), this paper calculates the efficiency of each province within the framework of fiscal decentralization, the efficiency is a comprehensive measure of the positive and negative outputs, the empirical results show that the fiscal decentralization improve the efficiency, but its effect showed significant decline over time, this is because the negative outputs will be increasingly serious as the economy develops, and finally threat the future economic growth.Second, the paper distinguishes the long-term effects of short-term effect of transfers on economic growth. Since the central government can not coordinate the governmental relationship perfectly under the decentralization, it has to adopt the form of transfer payment with a new round of adjustment. The empirical results show that the transfer payments will dramatically improve short-term economic growth, but would seriously reduce long-term potential economic growth, while the cumulative effect of transfer payments is negative, and the effects in western region is much larger. Although transfer payments is in favor of local infrastructure, but is not useful for the improvement of administrative efficiency, the establishment of market economic system and private economies development, then makes long-term economic growth performance is even worse, transfers therefore does not necessarily bring the balanced economic development between regions. Third, the fourth chapter in this paper examines the indirect effects and positive externalities of transfer payments, the increase of which is more conducive to the integration of the domestic market. Theoretical model shows that market protectionism is a rational choice of government under the framework of fiscal decentralization, while giving some financial assistance to less developed areas would reduce the role of fiscal decentralization, and then makes local governments turn to select the regional cooperation and regional division. The empirical results also support the conclusion above, using the "Price Based Approach" to calculate market segmentation index, which is significant negative correlative with transfer payments, and the special transfer is most important in various transfer payments, while the tax rebate is not significant. This fact shows that the central government not only increased special transfer payments, but also used such kind of transfer to adjust the relationship between central and local government to get more supportive action with the central government's policies from local governments, the local governments would give up their market protactinium and made segmentation index is only 1/4 after 1995 then before.Finally, this paper also study one of major negative effects of transfer payments, the transfer payments will make the short-term and long-term governmental sizes expand rapidly, thereby reducing the local government's administrative efficiency. A large number of empirical literatures show that China's local governments play the role of "helping hand" during the economic transition, which might be the main factor of economic achievement between Chinese and Eastern European countries. This paper finds that too much fiscal transfer will increase the dependence of local governments on central government financial resources, the amount of annual transfer payments in some provinces granted from the central is even much more than its own revenue, so local governments lack sufficient economic incentive to develop their economies, and the size of government has expanded much faster when they get more transfer payments, the expanding effect of local government staff size from the increase in revenue is much smaller than the effect of transfer payments, the later is over 1000 times larger than the former. The expansion of the local government size means that the acceptances of transfer payments to those who will in turn face the next "mouth-feeding finance" dilemma, and will thus increase the demand for central government transfer payments and eventually fall into a worse circle.In the methodology, this paper not only uses combined approach of theoretical research and empirical research, but also adopts some new methods considering the China's reality and this study, which including:1) this paper uses the DEA methods based on nonparametric estimation, this method is more objective and accurate for multi-input multi-output process, to make up for the general shortcoming of econometric methods. This paper uses the front SBM model which has the advantage of including the Slacks in the calculation of efficiency relative to the normal method DEA, the SBM is more suitable for the production of negative outputs; 2) This paper not only estimates the long-term effects by adding lagged terms, but also uses the framework proposed by Mitchell and Sperker in 1986, the later method has two advantages:first, it allows linear and nonlinear declining lagged effects, and uses indefinite lags similar to the Almon(1965) to avoid the artificial identification problem, second, it can be estimated by ordinary OLS;3) This paper mixes the knowledge of public finance and regional economics, builds a regional economic development models through the theory of division, the mathematical model shows that the division and cooperation between different regions can be achieved through fiscal transfer, and thus enhance the economies of scale on national level.This study not only has an important reference to the reform of fiscal system, but also gives policy recommendations for regional balanced development strategies and the direction of further reform, and also provides a comprehensive evaluation system for current regional development strategy. The conclusions show that the current fiscal transfer system has many disadvantages, the further reform should aim to build a more just, equal and open system of transfer payments, and it is not feasible to promote balance development by transferring financial resources by the central government and will therefore bring new contradictions. The implementation of balanced development in the future should rely on multi-directional reforms, we must first reform the current political promotion standards, regulate the role of the central fiscal transfer within the provision of public goods, then constructing the perfect market economic system to strengthen the protection of private property rights and encourage private investment, finally reforming the factor market to encourage free movement between different areas in order to achieve the balanced development of per capita sense. So this paper is not only a cross study of several fields, also the conclusions have important values on the next round of reform in China and the construction of a harmonious society in the future.