Self-Enforcing Mechanism Of The Financial Resources Concentrating Phenomenon In China

After the tax-sharing reform, China faced a harder situation about local financial difficulties, particularly within county-level and township-level, and cities squeezing financial resources from county governments. From many scholars'opinion, it is because the financial resources have been centralized to central government after tax-sharing reform.Based on our research, we think it is a self-enforced mechanism that the financial resources are centralized to the governments with high level. Firstly, we find that government fiscal expenditure has a feature that, such expense item consists of basic expenditure and developmental expenditure, and to ensure local economy would be maintained, the government must pay for basic expenditure in prior. As the growth rate of GDP is the most important index when higher government assess the performance of lower government, local government would tend to put importance on productive part of developmental expenditure, which compared with welfare part of developmental expenditure, contributes more to GDP growth rate, therefore, the structure of local fiscal expenditure is not in accordance with the one of maximizing social well-being. Secondly, under the "city dominating county" system, out of economic interests maximization, municipal government would withhold the financial resources that belong to county government, besides, due to agglomeration effect, municipal government would allocate most of the resources in urban district, so not only the financial resource would concentrate to high government, but also the material resources would be concentrated to urban district geographically. Thirdly, even though it is an effective way to promote economic development, it would bring "The Matthew Effect", which means the poor get poorer while the rich get richer. As the final charger of the whole country, center government has the incentive to make the economic gap among regions under control. In order to have enough financial strength to pay fiscal transfer, central government has to centralize the financial resources, which on the contrary, would further the situation that local governments face with financial difficulties, the structure of public expenditure get twisted and city government squeeze the resources belong to county government. Then we draw a conclusion that it is a self-enforced mechanism for financial resource being centralized to higher government. To solve the problems exist in this system, it would be better to understand them from the whole system.