Research On Two-sided Economic Effect Of Chinese Fiscal Decentralization

The Institutional form determines the economic performance through its vitalrole in determining the behavior. The core connotation of the Chinese-style fiscaldecentralization is the integration of the economic decentralization and the verticalpolitical governance institutional form. The Chinese-style fiscal decentralizationsystem plays a crucial role in the process of the regional economic growth. Sustainedeconomic growth along with the government-induced fluctuations is the China’s mostreasonable economy characterization these years. From this perspective, this paperanalyzed the relationship between the fiscal decentralization and the economic growththrough both the theoretical and the empirical ways, and found that fiscaldecentralization is an important cause of the economic fluctuations. This paperempirically studies about the relationship among the fiscal decentralization, theeconomic growth and the economic fluctuations with the panel data from1994to2008of29provinces. The study results show that: The fiscal decentralization has adouble-sided effect on the economy: Not only did it generate the long-term growtheffect, but also generated the short-term fluctuation effect through affecting the localgovernment behavior. Under the fiscal decentralization, the interaction of thecompetition between the local governments and the soft budget constraint led to thelocal governments’ expansive fiscal policy bias in either recession or boom term. It isthe implementation of these fiscal policies have resulted in macroeconomic volatility.That means the root cause of the macroeconomic fluctuations is the decentralizedsystem itself. Finally, the paper gave some relevant policy recommendations with thegiven conclusions based on empirical analysis: Improve the tax sharing fiscal systemfurther to promote common development of all regions; Reform the local governmentassessment mechanism, turn to the public finances while maintaining the enthusiasmof the local governments, transform the government functions to achieve the fiscaltransformation from the production finance to the public finance.