Fiscal Decentralization And Economic Growth In China

This paper is devoted to research the relationship between fiscal decentralization and economic growth in China since its implementation of reform and opening policy. In order to keep the consistency with the development of finance reforms, starting from 1949, we first reviewed the process of fiscal decentralization from 1949 to 1978, the purpose of which is to find the inherent logic of these reforms. Then the article studied the" Fiscal Responsibility System (FRS)" and "Tax Sharing System (TSS)" in detail, and analysed the influence of both sides that these reforms bring to economy theoretically.Based on the research results before summarizing, we structured a brand-new and suitable for Chinese fiscal decentralization indicator DC, which was characterize by mixing budgetary revenue or expenditure and extra-budgetary revenue or expenditure on the basis of proving result of fiscal decentralization that development was at full speed of the extra-budgetary fund. We first study the causal relationship between fiscal decentralization and economic growth with Granger Causality Test, and find fiscal decentralization has been endogenous in economic growth since 1978. But there is not a significant Granger causality between them since 1994, which means that the reform of Tax Sharing System makes fiscal decentralization no longer only follow the economic growth, but begin to have a positive impact on economic growth. Then we build a model, and find fiscal decentralization have a negative effect on economic growth since 1978. Surprisingly, the important discovery is that the reform of Tax Sharing System largely changes the relationship, fiscal decentralization has a significant negative effect on economic growth before 1994 while a significant positive effect after 1994, which is mainly because that the reform of Tax Sharing System standardized the fiscal decentralization to some extent. We also discuss elementarily the optimal level of fiscal decentralization and the criterions by which the optimal level of fiscal decentralization is judged. In addition,we find there is a non-linear relationship between fiscal decentralization and economic growth, by which we concluded that 66.7% is the optimal level of fiscal decentralization since 1978. Based all the conclusions above, we follow that it's not a simple problem of only further decentralization or centralization for China's fiscal reform, but to standardize or further standardize the fiscal decentralization so that it has a positive effect on economic growth.