A Study On The Relationship Between Chinese Fiscal Decentralization And Regional Economic Growth

As the main part of inter-government decentralization relationship, Chinese fiscal decentralization has been playing significant roles in the processes of regional economic growth. Unlike other countries, the decentralization mode in China not only authorizes local governments to develop regional economy, but also imposes restrictions on the behaviors of local officials via the political promotion system. Fiscal decentralization in China is thus a combination of economic decentralization and political centralization. This paper analyzes the characteristics of Chinese decentralization mode and its effects on the behaviors of local government officials. It also does the empirical studies on the relationship between fiscal decentralization and regional economic growth.Chinese fiscal decentralization places the political promotion tournament at its core and acts as a powerful institution that influences the behaviors of local government officials. With strong promotion incentives, the probabilities of local officials' moral hazard behaviors are decreased. As the promotion utility increases, local officials will also make more efforts on regional growth. Thus, the promotion based fiscal decentralization in China brings about significant effects on local governments. In order to enjoy higher promotion benefits, local governments compete with each other for more economic factors and better local growth performances. Chinese fiscal decentralization therefore enhances the efficiency of central-local decentralization contract in the sense that it poses more political controls on the local officials.The regression results in the empirical analysis show that fiscal decentralization and government competition factors bring about significant positive effects on regional economic growth. However, it is necessary to note that an increase in government competition can weaken the growth-promoting effect of fiscal decentralization. The paper also empirically tests the factors that may influence the structural government expenditures under the Chinese decentralization system. Fiscal decentralization brings about expansions of local economic and societal government expenditure and contractions of administrative expenditure. Government competition can intensify the effects that decentralization has on local expenditures. Thus, fiscal decentralization significantly changes the expenditure structure of local governments. The marginal effect of government competition is nevertheless both uncertain and insignificant. Besides, there are also significantly positive spatial spillover effects as to the government structural expenditures. It can be inferred that local governments may imitate each other on their fiscal behaviors.