Government Fragmentation And Metropolitan Economic Performance:Evidence From China

With the accelerating of urbanization, city has gradually become the main unit of economic development. In addition to the traditional factors of economic performance, such as capital, labor and human resources, the governance system is gradually taken seriously. The government fragmentation degree is an important measurement of city government structure. Fragmented government is more likely to provide diversified services and public policy for the enterprises and individuals, but it is not helpful to mutual cooperation between the local governments, and it will also increase the cost of coordination. For China’s top-down governance system, the more number of districts will stimulate the competition between local governments. Appropriate competition can constraint the self-interested behavior of government officials, but excessive competition will cause the improper means of competition, thus damage the overall economic development of the city. Therefore, there is a optimal number of the districts in theory.Chinese style fiscal federalism under centralized political power plays an important role in understanding China’s economic growth. However, the existing literature focuses exclusively on the inter-region and inter-city scales, despite that fiscal decentralization operates in a similar fashion within cities, the engine of China’s economic growth. Using data from 286 cities at the prefecture and above levels, this study examines the existence and nature of the relationship between the number of urban districts and economic performance. After controlling for factors such as physical and human capital and population size, regional economic growth model estimates indicate that labor productivity increases with the number of districts, but the further increase in fiscal decentralization results in diminished and eventually negative effects on productivity. This result is robust to the potential bias due to endogenous urban district numbers, which is instrumented by historical district numbers and river density. In addition, the study use per capita GDP growth rate of the city from 2000 to 2010 as the dependent variable to test the relationship between the number of urban districts and the economic growth performance again. The result shows that the number of urban districts also have an inverted U to the economic growth. According to the result of empirical study, this study do a preliminary analysis of the mechanism between the number of urban districts and the economic growth performance. The result shows that the effect of the fragmentation can affect the structure of fiscal expenditure of local government, which affects the economic performance of the city.