Fiscal Decentralization and Public Education Provision in China

Abstract

After reform and opening up, China is experiencing rapid economic growth but inefficient public services provision. Public education expenditure-to-GDP ratio is too low to keep sustainable growth of China’s social and economic development. Some scholars believe that fiscal decentralization is an important reason. Firstly, this paper analyzes the main factors and path of how fiscal decentralization affects public education provision. While the 1994 tax-sharing reform raised the fiscal revenue of central government, it also increased the fiscal expenditure burden of local governments. Under local officials’ yard-stick competition regime, fiscal decentralization on expenditure may make local governments tend to allocate fiscal expenditure in infrastructure, to attract outside capital to develop local economy, but in the same time, reduce provision of public services, such as education, which has positive externalities. Then, empirical tests based on 1996-2007 prefectural jurisdications panel-data verifies that this phenomenon does exist in China. Further empirical tests make comparisons among different regions and we find that negative effect of fiscal decentralization on public education provision is the highest in Cenral and West China, and the lowest in Northeast China. At last, according to the analysis and empirical results, we give policy proposals on how to improve the public education provision in China.Key words: Fiscal Decentralization; Tax-Sharing Reform; Public Education Provision; Externalities; Panel Data