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Growth and Equity Tradeoff in Decentralization Policy: China's Experience

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Author Info
Baoyun Qiao
Jorge Martinez-Vazquez () (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
Yongsheng Xu () (Andrew Young School of Policy Studies, Georgia State University)

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Abstract

The paper uses China's recent experience to investigate the potential tradeoff between economic growth and regional equity in the design of fiscal decentralization policy. Although present in other countries, this policy tradeoff has been particularly relevant to China over the last two decades. We build a theoretical model of fiscal decentralization, where overall national economic growth and equity in the regional distribution of fiscal resources are the two objectives pursued by a benevolent policy maker. Solutions that emphasize regional equity tend to have larger central government expenditures and higher contribution to the central budget by the richer jurisdictions. The reverse is true for solutions emphasizing growth. The model is tested using panel data for 1985-98. We find that fiscal decentralization in China led to economic growth, but this relationship was non-linear. Decentralization also led to significant increases in regional inequality. Overall, the historical record shows that pushing for a more equitable distribution of fiscal resources across provinces in China is likely to lead to lower national economic growth. The tradeoff between economic growth and regional equity is the most important and difficult decision in intergovernmental fiscal reform currently facing the Chinese authorities.

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Paper provided by International Studies Program, Andrew Young School of Policy Studies, Georgia State University in its series International Studies Program Working Paper Series, at AYSPS, GSU with number paper0216.

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Length: 42 pages
Date of creation: 01 Jul 2002
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Handle: RePEc:ays:ispwps:paper0216

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Keywords: decentralization; china;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  3. Tao Zhang & Heng-fu Zou, 1996. "Fiscal decentralization, public spending, and economic growth in China," Policy Research Working Paper Series 1608, The World Bank. [Downloadable!]
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  4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October. [Downloadable!] (restricted)
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  5. Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Preserving Market Incentives," Working Papers 97042, Stanford University, Department of Economics. [Downloadable!]
  6. Qian, Yingyi & Weingast, Barry R, 1997. "Federalism as a Commitment to Reserving Market Incentives," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 83-92, Fall. [Downloadable!] (restricted)
  7. Hofman, Bert, 1993. "An analysis of Chinese fiscal data over the reform period," China Economic Review, Elsevier, vol. 4(2), pages 213-230. [Downloadable!] (restricted)
  8. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92 National Bureau of Economic Research, Inc. [Downloadable!]
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  9. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April. [Downloadable!] (restricted)
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  1. Bert Hofman & Susana Cordeira Guerra, 2004. "Ensuring Inter-regional Equity and Poverty Reduction," International Studies Program Working Paper Series, at AYSPS, GSU paper0411, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
  2. Jaime Bonet, 2006. "Fiscal decentralization and regional income disparities: evidence from the Colombian experience," The Annals of Regional Science, Springer, vol. 40(3), pages 661-676, August. [Downloadable!] (restricted)
  3. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2003. "Föderalismus, Dezentralität und Wirtschaftswachstum," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(3), pages 361-377.
  4. Lars P. Feld & Horst Zimmermann & Thomas Döring, 2004. "Federalism, Decentralization, and Economic Growth," Marburg Working Papers on Economics 200430, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
  5. Jaime Bonet, 2004. "Descentralización fiscal y disparidades en el ingreso regional: la experiencia colombiana," DOCUMENTOS DE TRABAJO SOBRE ECONOMÍA REGIONAL 002282, BANCO DE LA REPÚBLICA - ECONOMÍA REGIONAL. [Downloadable!]
  6. Jorge Martinez-Vazquez & Andrey Timofeev, 2006. "Regional-Local Dimension of Russia's Fiscal Equalization," International Studies Program Working Paper Series, at AYSPS, GSU paper0616, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
    Other versions:
  7. Bahl, Roy & Martinez-Vazquez, Jorge, 2006. "Sequencing fiscal decentralization," Policy Research Working Paper Series 3914, The World Bank. [Downloadable!]
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