Fiscal Decentralization, Government Competition And Non - Economic Supply Of Public Goods

Fiscal decentralization with Chinese style has created the miracle of China’s economic growth. Decentralization creates local governments as growth-oriented governments successfully. But when local governments under decentralization try to compete for growth, they may have insufficient incentives to supply public goods of the people’s livelihood. This paper studied how the fiscal decentralization and government competition affect the supply of basic education and municipal facilities since the tax-sharing system reform. We find that the fiscal decentralization does not improve the efficiency of basic education supply, and the provision of municipal facilities as well. Moreover, the government competition exacerbates this trend. We also find that the impact of the decentralization on basic education has cross-regional differences, and the urbanization process in China significantly improves the level and quality of basic education supply. In addition, using financial autonomy index to measure the degree of fiscal decentralization does not change the conclusion that the Chinese-style decentralization is not conducive to the effective supply of education, municipal facilities and other non-economic public goods.Non-economic public goods is of great significance to enhance the welfare of the people’s livelihood, and decentralization is not conducive to non-economic public goods provision, but obviously it’s not the decentralization problem. On the discussion of policies, by improving the matching mechanism between rights and responsibilities, optimizing performance appraisal of local officials, activating the "voting by feet" mechanism, we can gradually reverse the status that the public sectors lack sufficient incentives to supply non-economic public goods, and then we may achieve the ultimate goal that fiscal decentralization improves residents’welfare.This paper is organized as follows. Chapter1raises questions and explains concepts. Chapter2reviews theoretical literatures on fiscal decentralization, including the intrinsic relationship between fiscal decentralization and the behavior of local government, economic growth, the supply of public goods. Chapter3analyses the development process and mechanism of China’s fiscal decentralization and the non-economic public goods supply. Chapter4builds regression models by using1994-2010annual provincial panel data, and analyses the effect of fiscal decentralization and government competition to the provision of non-economic public goods, in addition we make trans-regional effects analysis and robustness test. Chapter5summarizes the conclusions and perspectives of this paper, and then makes policy recommendations to the fiscal and tax reform in future.