Fiscal Decentralization,Local Government Expenditure,and Urban-rural Income Disparity

Since reform and Opening-up policy, the whole economy in China has got lasting and fast growth, but it also faces a number of issues, such as widening urban-rural income gap. Data indicates that in1978the ratio of Urban-rural income gap was2.57, while in2010, the ratio of Urban-rural income gap has increased to3.33, which has increased by30percent. The rising urban-rural income gap is not only a obstacle to the long-term economic growth but also a barrier to the overall efficiency of improvement, which will have a negative impact on social harmony and stability. So it has significant importance in exploring the factors which contribute to the widening urban-rural income gap.The topic on the urban-rural income disparity has been researched by scholars at home and abroad from different aspects. It is believed that they haven’t put much emphasis on the factors of fiscal expenditure of the local government. In fact, the rising urban-rural income gap is closely related to the expenditure of the local government. So, it is of great importance to do our research by putting much more emphasis on the local government expenditure.Different local fiscal expenditure structure will lead to different size of urban-rural income inequality. The local government expenditure is always used to support local infrastructure, the production of agriculture, medical, education and health care. If the expenditure is spent on the agriculture or the medical and education, we predict that the urban-rural income gap will decrease, while the expenditure is spent on the local infrastructure which is often built in the city, we will predict the gap will increase.But what induce local government expenditure have a high degree of urban bias? One of our answers is Chinese Style decentralization. This paper show that Chinese Style decentralization have a great impact on local government fiscal expenditure structure, which then contribute to the rising rural-urban income gap.Using the provincial panel data from1994to2007,we find that fiscal decentralization have a remarkable expenditure bias which cause the local government put much emphasis on infrastructure construction, while put less emphasis on agriculture, science culture and health care. The former expenditure will increase rural-urban income gap, the latter expenditure will decrease it.Although, Chinese style decentralization increase the local government expenditure, only more expenditure is spent on the agriculture, science culture and health care by the local government, the urban-rural income gap will decrease.