Transfer Payment And Equalization Of Basic Public Service

While the "Fiscal Responsibility System(FRS)" promoted the development of regional economy, it enlarged regional disparity, resulting in the inequality of fundamental public services. China's tax system introduced in 1994, the financial management system, we began to establish a financial transfer payment system. Then local government got a great deal of transfer payments from central government every year. Because of the finance system and the political tournaments among the local officials, whether transfer payments can promote the equalization of basic public services is open to doubt. On this issue, The academic circles have paid most of their attention to the contrast of Gini coefficient or coefficient of variation before and after transfer payments. Endogenous problem was an important factor restricting the study of transfer payment's effect on the improvement of public services level.First, this paper summarizes related literatures both in domestic and foreign, reviews the development of transfer payment system. Based on a natural experiment of ministers' reappointment in 2003, this paper studies the influence of ministers' political connection, to his birthplace, on the allocation of fiscal transfer using Difference-in-difference identification. We find a newly appointed minister makes the earmarked grants of his prefecture increase 202 million. At the same time, we find that general transfer payments have more positive effect on promoting the equalization of public services than earmarked grants.Then we have a further study about what extent does earmarked grants facilitate basic public services level. By constructing instrument variable in term of the positive correlation between earmarked grants and ministers' political connection, we efficiently tackle the problem of endogeneity in the regressions. The result shows that earmarked grants cannot promote local basic public services level, but significantly improve social-security expenditure. The earmarked grants increased by 1 yuan will cause the social-security expenditure increasing 0.9 yuan. Furthermore, to verify the results' reliability, we change the data and methodology separately for a robust test. On the one hand, the ministers' reappointment is used as a substitution variable defining earmarked grants. On the other hand, we use the existence of minister as IV variable of earmarked grants. Our results still hold.