Fiscal Decentralization And Economic Growth In China

This dissertation mainly analyses the relation between the fiscal decentralization and economic growth from the perspective below the provincial level (municipality) since the reform of the tax-sharing system in China. In this paper, it firstly discusses about the research background of the fiscal decentralization, including several important fiscal decentralization theories, a simple retrospect of the history of fiscal decentralization after China's reform and opening up, expecially since the tax-sharing system and a detailed literature review of the research about the relationship between the fiscal decentralization and economic growth. Then from focusing on the indicators of fiscal decentralization, the explanatory power of the model and the control variables, it analyses the reasons of the inconsistent conclusions and finds that the indicators of fiscal decentralization in most of the exiting researches still implicate the endogenous problem that the better of the economy the higher degree of decentralization, even wiping out the population size factor. Thus taking the provincial GDP growth as explained variables is similar to analyse the relationship between not the fiscal decentralization but the financial capacity and economic growth. The real promotion effect of the fiscal decentralization to economic growth should be that the decentralization would change the allocation of the resourses so that to improve the whole economic efficiency with the fixed quantity of the resourses. In addition, control variables are different may be one of the reasons that lead to the inconsistent conclusions.The empirical analysis in this paper use the panal data of 27 provinces in China during the period from 1994 to 2004 and mainly test the effect of fiscal decentralization below the provicial level (municipality) to the economic growth. At the same time, it does the regional tests (east, middle and west regions) according to the economic development in regional disparity. Different with most literatures, from the prespective of decentralization below the provincial level this paper take the rate of the budgetary expenditure/revenue of the municipalities to the budgetary expenditure/revenue of the province as the decentralization indicators and the provincial GDP growth as explained varibles which in a large part avoid the endogenous problem of the decentralization indicators and the explained variables. The research found that on a national scale the decentralization below the provincial level has a significant role in promoting economic growth (provincial GDP growth). The promotion effect is more significant in the middle regions than that in the eastern and western regions. Meanwhile, we have the results that the tax rate in the western regions is too high to hinder the economic growth, then we should have a tax rate reduction; the tax rate in the middle regions is lower and doesn't have the block effect to the economic growth; the eastern regions'tax rate is higher than that in middle reagions, but do not impede the economic growth. Finally, from the comprehensive analysis, we have the conclusions that the eastern regions'local government below the provincial level have stronger capacity (including administrative and financial) and autonomy to push forward the local development so that to promote the provicial economic growth, thus the further fiscal decentralization does not pose a bigger impact. In western regions the local government of municipalities almost cut no ice to promote the provincial economic growth which is mainly drived by the plannings and decisions of the provincial level and the fiscal decentralization is also hard to play a role. This explained in a certain extent the reasons why the effect of fiscal decentralization in middle regions is more important than that in eastern and western regions.