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Chinese-style Decentralization, Government Competition And The Economic Performance

Posted on:2011-12-03Degree:DoctorType:Dissertation
Country:ChinaCandidate:S K WangFull Text:PDF
GTID:1119360305957943Subject:Western economics
Abstract/Summary:PDF Full Text Request
It is just in a dual-process of economic restructuring and transition for China. In this progress, each level of governments acts as an initial engine for economic and social development, and it almost becomes a deep-rooted thinking tradition to turn to governments for help. Since 1978, Chinese governments of all levels are the main driving force for most areas of reform during more than 30 years of reform and opening-up. We can find much evidence to reflect the important role of Chinese governments, such as local infrastructure construction, local business development and policy supporting, attracting foreign direct investment, and even directly involving in state business investment and management. It can be said that the enthusiasm of Chinese local governments to seek all possible sources for promoting GDP growth is seldom seen in the world.For the research of government behavior, scholars often refer to building the rule of law, constitutional reform, and the balance of government power and so on. Besides those above-mention aspects, the relationship between central and local governments has always been an important issue for economic or political science, and the most influential theory is fiscal decentralization. On the base of existing decentralization theories and positive literatures, this dissertation gives a basic judgment about the essence of Chinese fiscal decentralization which is characterized by the interaction of fiscal decentralization and political centralization, and then it illustrates the internal relationship between decentralization of Chinese style and its macroeconomic performance. It's certainly very important to recognize the concrete manifestation of the remarkable interaction between Chinese local governments. This reorganization is imperative to go a step further to understand the advantages and disadvantages of Chinese decentralization. It's a pity for me to point out that we have not a bridge to ferry from decentralization gains to decentralization losses, and there is no doubt that to build a self-consistent economic framework between decentralization gains and losses is an urgent task. This dissertation tries to do this task mentioned before initially. One purpose of establishing the self-consistent economic framework is try to find the equalization power of local public services in China, and then to avoid the prisoner's dilemma when Chinese local governments race to bottom driving by radical economic and political competition. In a word, this dissertation will help us to understand the history and basic direction of Chinese financial reform deeply.In order to achieve research objective of this dissertation, it always insists on two research paradigms, and they are the unity of historical analysis with logical analysis and the combination of theoretical research with empirical research. What deserves to indicate specially is that this dissertation adopts some fashionable parameter estimation method nowadays, such as Generalized Method of Moments (GMM), two-stage least-squares estimation (2SLS) and so on. Apart from the above estimation methods, this dissertation also uses a number of other mathematical methods, such as numerical simulation method, kernel density estimation, the Gini coefficient calculation, Theil index calculation and so on.The key conclusions drawn from this dissertation are as follows:(1) After bring the reform and opening-up policy into force, the intrinsic relationship between Chinese central and local governments is much closer to extreme point of decentralization than the period of planning economy, at least in the public financial area. With the condition of political centralism in China, we can group this kind of decentralized relationship under the jurisdiction of fiscal federalism. This dissertation gives the judgment mentioned above after strict econometric analysis. Under this judgment, we can give a reasonable comprehension for the phenomenon as follows:In China, the local governments are always inclined to increase the proportion of extra-budget revenues through GDP growth competition, and then they will implement local protectionism to protect the interests of their own jurisdiction. At the same time, the local governments have to scale the gap between public expenditures and local revenues down, and only by this they can avoid the constraint power coming from the central transfer payments system. The ultimate purpose of local governments to do like an independent kingdom is to enhance the bargaining power with central government.(2) There exists remarkable strategic interactions between central and local governments, and what's more, the similar strategic behaviors appear among the Chinese provincial governments. At the same time, the strategic interactions of east, middle and west regions display different characteristics, namely cross-region effect and club effect. As two manifestations of strategic fiscal interaction, tax competition and yardstick competition have different policy connotation, so this dissertation also tries to recognize the concrete manifestation of the remarkable interaction by proposing two tentative hypotheses. The empirical results show that tax competition for the fluid tax base among Chinese provincial governments is the main manifestation of fiscal interaction, and it isn't remarkable that there exists top-down yardstick competition.(3) By constructing a benchmark model about the balanced allocation for financial resources of local governments in a decentralized institutional environment, this dissertation gives an optimal equilibrium solution when the financial resources are classified into non-productive and productive investment. On the base of the benchmark model, this dissertation sets up the classical forms of production function and utility function, and then by making use of numerical simulation, it concludes that with the declining curvature of the production function and the increasing public preference heterogeneity of local governments, social utility function will suffer more and more losses, which means that the costs brought by extravagant competition among local governments become increasingly obvious. According to the economic reality after China's reform and opening-up policy, as well as the conclusions of numerical simulation, this dissertation stresses those social costs of Chinese fiscal decentralization, such as the income gap between urban and rural areas, the segmentation and structural similarity of regional market, and the structural distortion of local government's fiscal expenditure.(4) This dissertation investigates the distribution characteristics of the three fundamental categories of local public services in two periods including 1985-1994 and 1997-2006, and it tells us that even though the public transport infrastructure services, public health services and public education services of Chinese provinces have achieved upgrade relatively to some extent, but the discrepancy of those three categories of local public services is increasing over time. This situation originates from the unique Chinese-style decentralization. The following question is that if the central transfer payments system of China can not able to endure the function of public services'equalization, so what is its real intention behind the scenes. According to the theory of asymmetric and imperfect information, this dissertation points out that the Chinese central government may have some kind of political consideration to tame the local governments when they need financial resources to fill in the gap between local revenue and expenditure.About the policy implication, this dissertation indicates that the Chinese central government has established an effective motivation mechanism on the local governments during the first 30 years after the reform and opening-up policy, which we call "getting the incentive right". However, the problem deserving more attention at present is to eliminate the social costs accompanied with decentralization benefits. When referring to the Chinese central government, the connotation of this problem lies in the urgency to getting the coordination right when getting the incentive right, and only by this way it can break the vested interests of each province in China. In other words, the central government of China has no choice but to bring the overall regulation into the economic development. What's more, it has to get the assessment right if we want to rectify the structural distortion of fiscal function existing among the local governments, and the key step to do this is to change the singular assessment criterion of GDP growth to the local governments gradually.
Keywords/Search Tags:Chinese-style Decentralization, Fiscal Federalism, Local Government Competition, Macroeconomic Economic Performance, Equalization of the Basic Public Services
PDF Full Text Request
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