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Fiscal Centralization and Decentralization in Russia and China

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  • Elliott Parker

    ()
    (Department of Economics, University of Nevada, Reno)

  • Judith Thornton

    ()
    (Department of Economics, University of Washington)

Abstract

In this paper we review the fiscal evolution of China and Russia, asking how the process of creating a separate, tax-financed public sector in the two countries differed. We observe that the size of China's budget sector was consistently smaller than in Russia and that budget decentralization was consistently greater. We see both pros and cons in China's decentralization. Local governments that were allowed to keep marginal increases in local tax revenue had incentives to pursue growth-supporting policies, including support for foreign investment and export-oriented production. However, in the absence of financial markets, there were barriers to investment outside the local region, resulting in inefficient use of capital and protectionism. Fiscal deficits and rapid expansion of credit have threatened stability in both countries, but China has proved more successful than Russia in managing macroeconomic policies. Finally, we argue that Russia's status as a petro-state makes management of the public sector particularly difficult. In Russia, recentralization has been associated with expansion of state ownership of enterprises and production by territorial governments, state ministries, state banks, and the natural monopolies.

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File URL: http://www.business.unr.edu/econ/wp/papers/UNRECONWP06013.pdf
File Function: First version, 2006
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Bibliographic Info

Paper provided by University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics in its series Working Papers with number 06-013.

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Length: 47 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:unr:wpaper:06-013

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Keywords: Fiscal decentralization; Russia; China; regional growth;

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  1. Chien-Hsun Chen, 2004. "Fiscal decentralization, collusion and government size in China's transitional economy," Applied Economics Letters, Taylor & Francis Journals, vol. 11(11), pages 699-705.
  2. Jack Diamond, 2002. "The New Russian Budget System," IMF Working Papers 02/21, International Monetary Fund.
  3. Richard Bird & Christine C.P.Wong, 2005. "China's Fiscal System: A Work in Progress," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0520, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
  5. Jin, Jing & Zou, Heng-fu, 2005. "Fiscal decentralization, revenue and expenditure assignments, and growth in China," Journal of Asian Economics, Elsevier, vol. 16(6), pages 1047-1064, December.
  6. Sylviane Guillaumont Jeanneney & Ping Hua, 2004. "Why Do More Open Chinese Provinces Have Bigger Governments?," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 525-542, 08.
  7. Lavrov, Aleksei & Litwack, John & Sutherland, Douglas, 2001. "Fiscal federalist relations in Russia: a case for subnational autonomy," MPRA Paper 26537, University Library of Munich, Germany.
  8. Shah, Anwar & Shen, Chunli, 2006. "Reform of the intergovernmental transfer system in China," Policy Research Working Paper Series 4100, The World Bank.
  9. Olivier Blanchard & Andrei Shleifer, 2000. "Federalism With and Without Political Centralization. China versus Russia," Harvard Institute of Economic Research Working Papers 1889, Harvard - Institute of Economic Research.
  10. Judith Thornton & Krisztina Nagy, 2006. "The Response of Federal Transfers to Measures of Social Need in Russia's Regions," Working Papers UWEC-2007-34, University of Washington, Department of Economics.
  11. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  12. Chong-En Bai & David D. Li & Zhigang Tao & Yijiang Wang, 2001. "A Multi-Task Theory of the State Enterprise Reform," William Davidson Institute Working Papers Series 367, William Davidson Institute at the University of Michigan.
  13. Ekaterina Zhuravskaya, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Working Papers w0001, Center for Economic and Financial Research (CEFIR).
  14. Goohoon Kwon & Antonio Spilimbergo, 2005. "Russia's Regions," IMF Working Papers 05/185, International Monetary Fund.
  15. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September.
  16. Jack Diamond, 2002. "The new Russian budget system: Critical assessment and future reform agenda," OECD Journal on Budgeting, OECD Publishing, vol. 2(3), pages 119-147.
  17. Yingyi, Qian & Roland, Gerard, 1996. "The soft budget constraint in China," Japan and the World Economy, Elsevier, vol. 8(2), pages 207-223, June.
  18. Berkowitz, Daniel & Li, Wei, 2000. "Tax rights in transition economies: a tragedy of the commons?," Journal of Public Economics, Elsevier, vol. 76(3), pages 369-397, June.
  19. John Knight & Li Shi, 1999. "Fiscal decentralization: Incentives, redistribution and reform in China," Oxford Development Studies, Taylor & Francis Journals, vol. 27(1), pages 5-32.
  20. Desai, Raj M. & Freinkman, Lev & Goldberg, Itzhak, 2005. "Fiscal federalism in rentier regions: Evidence from Russia," Journal of Comparative Economics, Elsevier, vol. 33(4), pages 814-834, December.
  21. Cai, Hongbin & Treisman, Daniel, 2004. "State corroding federalism," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 819-843, March.
  22. Feltenstein, Andrew & Iwata, Shigeru, 2005. "Decentralization and macroeconomic performance in China: regional autonomy has its costs," Journal of Development Economics, Elsevier, vol. 76(2), pages 481-501, April.
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Cited by:
  1. ROZELLE, Scott & SWINNEN, Johan F.M., 2009. "Why did the communist party reform in China, but not in the Soviet Union? The political economy of agricultural transition," China Economic Review, Elsevier, vol. 20(2), pages 275-287, June.

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