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Fiscal decentralization, public spending, and economic growth in China

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  • Tao Zhang
  • Heng-fu Zou

Abstract

The authors of this report use data on China to demonstrate how the allocation of fiscal revenue and expenditures between central and local governments has affected economic growth since reforms that began in the late 1970s. They find a higher degree of fiscal decentralization associated with lower provincial economic growth over the past 15 years in China. This implies that fiscal reforms begun in China in the early 1980s have probably failed to promote the country's economic growth. This result is consistently significant and robust in their empirical examinations, and is surprising in light of the argument that fiscal decentralization usually contributes positively to provincial or local economic growth.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1608.

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Date of creation: 31 May 1996
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Handle: RePEc:wbk:wbrwps:1608

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Keywords: Public&Municipal Finance; Public Sector Economics&Finance; Urban Economics; Economic Theory&Research; Banks&Banking Reform; Urban Economics; Economic Theory&Research; Public Sector Economics&Finance; National Governance; Public&Municipal Finance;

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References

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  1. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  2. Zou Heng-fu, 1994. "Dynamic Effects of Federal Grants on Local Spending," Journal of Urban Economics, Elsevier, vol. 36(1), pages 98-115, July.
  3. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  4. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1996. "The composition of public expenditure and economic growth," CEMA Working Papers 77, China Economics and Management Academy, Central University of Finance and Economics.
  5. 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.
  6. Feder, Gershon, 1983. "On exports and economic growth," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 59-73.
  7. Bird, Richard M., 1993. "Threading the Fiscal Labyrinth: Some Issues in Fiscal Decentralization," National Tax Journal, National Tax Association, vol. 46(2), pages 207-27, June.
  8. Bird, Richard & Wallich, Christine, 1993. "Fiscal decentralization and intergovernmental relations in transition economics : toward a systematic framework of analysis," Policy Research Working Paper Series 1122, The World Bank.
  9. Bahl, Roy W. & Wallich, Christine, 1992. "Intergovernmental fiscal relations in China," Policy Research Working Paper Series 863, The World Bank.
  10. Zou, Heng-fu, 1996. "Taxes, Federal Grants, Local Public Spending, and Growth," Journal of Urban Economics, Elsevier, vol. 39(3), pages 303-317, May.
  11. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-87, October.
  12. Prud'homme, Remy, 1995. "The Dangers of Decentralization," World Bank Research Observer, World Bank Group, vol. 10(2), pages 201-20, August.
  13. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
  14. Edward M. Gramlich & Harvy Galper, 1973. "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 15-66.
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