An Exploration On How Fiscal Decentralization Influences Economic Growth

We take a research on how the public capital, the federal burden impacts the regional economic growth in the view of federal decentralization which was a result of China’s gradual revolution. It did promote the development of economy, increase the supply of public goods and improve the efficiency of governance. But at the same time, the difference between the regions was increasing. The purpose of this research is to find the details of the relationship between federal decentralization and economic growth. We hope it can provide reference to the policymakers who try to reduce the regional difference with federal tools.Both qualitative and quantitative analyses are involved in this paper. Especially, we apply the regression model for panel data and Granger causality test. And this paper is consisted of five parts. The first is the introduction. The second is about federal decentralization. The third is a theoretical model. The fourth is empirical analysis. Finally we give a conclusion and policy advice.We preview the searches on how federal decentralization affects economic growth. We conclude that most of the searches have just tested the economic effect of federal decentralization. But they didn’t tell us how it happened. We are inspired by the traditional theory of federal decentralization and some recent researcher. We suppose that public capital is the main factor by which the federal decentralization takes influence on economy.In order to support the empirical study, we build a mathematical model under the framework of federal decentralization. We derive the rate of economic growth under steady sate which shows the tax is bad for economic growth and the structure of public capital also affects the economic growth.In the empirical analysis, the result of fixed effect regression model shows that public capital is significantly beneficial to economic growth. And the existence of federal decentralization enlarges the influence from public capital to economic growth which proves our suppose is reasonable. Besides, our result shows that tax and administrative burden is significantly bad for economic growth which is expected by us.In order to test the relationship between federal decentralization and public capital, we take a Granger causality test. From the result we discover that there is a long-run steady relationship between the change of the federal decentralization and the rate of public investment.In the further analysis, we study how the difference of public capital expands. We establish the coefficient of variation which shows that the difference is becoming larger and larger in the revolution of federal decentralization. We know that public capital is determined by the federal income and the structure of payment. Through our analysis, we find that the rate of tax is positively correlated to the economic level, the third industry and the rate of state-owned enterprises, which can explains why the rate of tax in eastern region is higher than that in middle and western region. But at the same time we find the federal burden in the eastern region is smaller than that in the middle and western region which we think makes the difference of regional public capital larger.Based on the result of our study, we provide some policy advice, like the individual income tax can be centralized to the central government in order to reduce the difference of federal income because of the difference of regional income and at the same time the central government should be responsible to the supply of public good and social security.