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Fiscal decentralization, revenue and expenditure assignments, and growth in China

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  • Jing Jin

    (Central University of Finance and Economics)

  • Heng-fu Zou

    (Peking University and Wuhan University
    Research Department, The World Bank)

Abstract

Theory suggests that a close match between revenue and expenditure assignments at sub-national levels benefits allocative efficiency, and hence economic growth. That is, a convergence of revenue and expenditure assignments at sub-national levels of government should, according to the theory, be positively associated with a higher growth rate. In the case of China, this paper shows, divergence, rather than convergence, in revenue and expenditures at the sub-national level of government is associated with higher rates of growth. A panel dataset for 30 provinces in China is used to examine the relationship between fiscal decentralization and economic growth over two phases of fiscal decentralization in China: (1) 1979¨C1993 under the fiscal contract system, and (2) 1994¨C1999 under the tax assignment system. The seeming contradiction between the theory and evidence in the China case is reconciled by taking into account the institutional arrangements that prevailed during the two phases of fiscal decentralization, in particular the inconsistency between the assumptions of the theory of fiscal decentralization and the institutional reality of China.

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Bibliographic Info

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 169.

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Length: 18 pages
Date of creation: 2004
Date of revision:
Publication status: Published in Journal of Asian Economics, Volume 16, Issue 6, December 2005, Pages 1047-1064
Handle: RePEc:cuf:wpaper:169

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Web page: http://cema.cufe.edu.cn/
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  1. Jing Jin & Heng-fu Zou, 2003. "Soft Budget Constraints on Local Government in China," CEMA Working Papers 132, China Economics and Management Academy, Central University of Finance and Economics.
  2. Hamid Davoodi & Heng-fu Zou, 1996. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," CEMA Working Papers 98, China Economics and Management Academy, Central University of Finance and Economics.
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  8. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  9. Alwyn Young, 2000. "The Razor'S Edge: Distortions And Incremental Reform In The People'S Republic Of China," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1091-1135, November.
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  14. de Mello, Luiz Jr, 2000. "Fiscal Decentralization and Intergovernmental Fiscal Relations: A Cross-Country Analysis," World Development, Elsevier, vol. 28(2), pages 365-380, February.
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  16. Feder, Gershon, 1983. "On exports and economic growth," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 59-73.
  17. Akai, Nobuo & Sakata, Masayo, 2002. "Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States," Journal of Urban Economics, Elsevier, vol. 52(1), pages 93-108, July.
  18. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
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