Role Of Fiscal Decentralization Research Articles

Rising Chinese regional income inequality: The role of fiscal decentralization

This article examines the quantitative effects of the Chinese fiscal system on the increasing regional income inequality in China, from 1978 to 2007. Fiscal decentralization is a multifaceted concept not likely to be captured by a single measure. This paper investigates the evolution of three aspects of fiscal decentralization including spending decentralization, revenue decentralization, and autonomy power, and tests the effects of each aspect on the regional income inequality in China in the past thirty years. Several critical findings were obtained through econometric analysis. The fiscal decentralization on spending side in China has contributed to rising income inequality over the last three decades. On the revenue side, the fiscal system became more decentralized from mid-1980s to 1994, and re-centralized after the 1994 tax sharing reform. The econometric analysis shows that the increase in revenue share of local governments from mid-1980s to 1994 indeed increased regional inequality, while the revenue re-centralization in 1994 only had a modest effect on reducing regional inequality. In terms of autonomy power measured by how public spending at local level of government is maintained by its own revenue, the degree of fiscal decentralization decreased since mid-1980s, and experienced a sharp reduction in 1994 due to the tax sharing reform. The autonomy power has mixed effects on regional inequality in the two periods, before and after the 1994 reform, depending on the targeting of fiscal transfers and the incentives of local governments. As it turns out, fiscal decentralization may not be automatically equalizing or anti-equalizing, whereas how fiscal decentralization is promoted is important for how it impacts regional inequality.

In Government We Trust: The Role of Fiscal Decentralization

We measure the contribution of fiscal decentralization to trust in government. Using repeated cross-country survey data of individuals on several measures of trust in government over the 1994-2007 period, we estimate an ordered response model of the government trust and fiscal decentralization nexus. We control for unobserved country characteristics, macroeconomic determinants, and individual characteristics. Our main finding is that fiscal decentralization increases trust in government. More specifically, a one percentage point increase in fiscal decentralization causes roughly a four-fifths of a percentage point increase in government trust. The beneficial effect of fiscal decentralization on trust in government is neither limited to nor necessarily large for relatively decentralized countries.

Interprovincial Disparities in China: Output and Consumption, 1952-1987

The flood of economic information from China in recent years has permitted reassessment of the "Chinese model of development" and the extent to which China's own development experience has conformed to it. The prevailing consensus of the 1970s concerning the substance of the model itself-typically characterized in terms of the Chinese leadership's objectives and priorities and its strategy for pursuing them-has stood up quite well. The same cannot be said about past appraisals of the extent to which China's economic reality has been reshaped to accord with the model's prescriptions. One of the most widely remarked elements of the Chinese model is the high priority assigned to regional objectives and, more specifically, to "balance" in the distribution of productive capacity and equity in the distribution of income and, hence, consumption. During the Maoist era (i.e., prior to 1979), the central government pursued regional objectives through such measures as interregional transfers of investment resources (effected via the planning system), subsidization of health and education expenditures in poor regions, and attempts to maintain a safety net of state relief (effected largely via control of grain surpluses). In short, there is little doubt that prior to 1979 the Chinese leadership placed an unusually high value on the spread of modern growth and the improvements in welfare associated with it and persistently acted to limit the emergence or widening of interregional disparities.' Although China's post-Mao leaders have shown greater concern with efficiency and with the potential trade-offs between efficiency and such goals as balance and equity, their continuation of many redistributive policies indicates that they have not abandoned regional objectives. But how successful has China been in achieving these objectives?