IDEAS home Printed from https://ideas.repec.org/a/cuf/journl/y2012v13i1n1.html
   My bibliography  Save this article

Fiscal Decentralization in China: History, Impact, Challenges and Next Steps

Author

Listed:
  • Chunli Shen

    (CEMA, Central University of Finance and Economics)

  • Jing Jin

    (CEMA, Central University of Finance and Economics)

  • Heng-fu Zou

    (CEMA, Central University of Finance and Economics
    Shenzhen University
    Peking University
    Wuhan University)

Abstract

Fiscal decentralization has been a fundamental aspect of China's transition to a market economy; and the country has made substantial efforts to break down its highly centralized fiscal management system with various forms of fiscal contracting systems (1978-1993) and later a tax sharing system (1994-present). The objectives of this paper are to provide a comprehensive review of China¡¯s experience in fiscal decentralization over the last decade, explore the impact of fiscal decentralization on growth and public expenditures, and identify political as well as economic issues arising after 1994 tax sharing reform. As the government is shifting the development policy towards building a harmonious society, aspects of the current fiscal system that require policy attention include the opaque and inappropriate expenditure assignment, particularly at the sub-provincial levels; the vertical fiscal gap and widening fiscal disparities; the complex and malfunctioning intergovernmental transfer system; the neglected sub-provincial fiscal arrangements; and the weakness in the vertical accountability of local governments to the Center as well as the horizontal accountability of local administrations to the local needs and preferences.

Suggested Citation

  • Chunli Shen & Jing Jin & Heng-fu Zou, 2012. "Fiscal Decentralization in China: History, Impact, Challenges and Next Steps," Annals of Economics and Finance, Society for AEF, vol. 13(1), pages 1-51, May.
  • Handle: RePEc:cuf:journl:y:2012:v:13:i:1:n:1
    as

    Download full text from publisher

    File URL: http://www.aeconf.net/Articles/May2012/aef130101.pdf
    Download Restriction: no

    File URL: http://down.aefweb.net/AefArticles/aef130101Shen.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jing Jin & Chunli Shen & Heng-fu Zou, 2012. "Fiscal Decentralization and Peasants' Financial Burden in China," Annals of Economics and Finance, Society for AEF, vol. 13(1), pages 53-90, May.
    2. Mr. Ehtisham Ahmad & Li Keping & Mr. Raju J Singh & Mr. Thomas J Richardson, 2002. "Recentralization in China?," IMF Working Papers 2002/168, International Monetary Fund.
    3. Shah, Anwar, 2004. "Fiscal decentralization in developing and transition economies: progress, problems, and the promise," Policy Research Working Paper Series 3282, The World Bank.
    4. 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.
    5. World Bank, 2005. "Deepening Public Service Unit Reform to Improve Service Delivery," World Bank Publications - Reports 8648, The World Bank Group.
    6. International Monetary Fund, 2004. "Toward More Effective Redistribution: Reform Options for Intergovernmental Transfers in China," IMF Working Papers 2004/098, International Monetary Fund.
    7. Mr. Marc G Quintyn & Mr. Bernard J Laurens & Mr. Hassanali Mehran & Mr. Tom Nordman, 1996. "Monetary and Exchange System Reforms in China: An Experiment in Gradualism," IMF Occasional Papers 1996/006, International Monetary Fund.
    8. Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Reserving Market Incentives," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 83-92, Fall.
    9. Kanbur, Ravi & Zhang, Xiaobo, 2001. "Fifty Years Of Regional Inequality In China: A Journey Through Revolution, Reform And Openness," Working Papers 7236, Cornell University, Department of Applied Economics and Management.
    10. Chunli Shen & Xiaojun Zhao & Heng-fu Zou, 2008. "Fiscal Decentralization and Public Services Provision in China," CEMA Working Papers 330, China Economics and Management Academy, Central University of Finance and Economics.
    11. Chunli Shen & Heng-Fu Zou, 2008. "China: Regional Disparities In Poverty Distribution," Division of Labor & Transaction Costs (DLTC), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 17-56.
    12. Huang, Yasheng, 1996. "Central-local relations in china during the reform era: The economic and institutional dimensions," World Development, Elsevier, vol. 24(4), pages 655-672, April.
    13. 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.
    14. Anwar Shah & Theresa Thompson & Heng-fu Zou, 2004. "Decentralising the public sector: The Impact of Decentralisation on Service Delivery, Corruption, Fiscal Management and Growth in Developing and Emerging Market Economies: A Synthesis of Empirical Evi," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(1), pages 10-14, October.
    15. 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.
    16. Zhihua Zhang & Jorge Martinez-Vazquez, 2003. "The System of Equalization Transfers in China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0312, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    17. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
    18. Anwar Shah, 2014. "Fiscal federalism and macroeconomic governance : for better or for worse?," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 200-240, May.
    19. Li, Jie & Qiu, Larry D. & Sun, Qunyan, 2003. "Interregional protection: Implications of fiscal decentralization and trade liberalization," China Economic Review, Elsevier, vol. 14(3), pages 227-245.
    20. Anwar Shah & Theresa Thompson & Heng-fu Zou, 2004. "Decentralising the public sector: The Impact of Decentralisation on Service Delivery, Corruption, Fiscal Management and Growth in Developing and Emerging Market Economies: A Synthesis of Empirical Evi," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(01), pages 10-14, October.
    21. Tsui, Kai-yuen, 2005. "Local tax system, intergovernmental transfers and China's local fiscal disparities," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 173-196, March.
    22. Shah, Anwar, 2008. "Fiscal decentralization and macroeconomic governance," Seminarios y Conferencias 7112, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    23. Jorge Martinez-Vazquez & Baoyun Qiao & Shuilin Wang & Heng-fu Zou, 2008. "Expenditure Assignments in China: Challenges and Policy Options, Public Finance," CEMA Working Papers 329, China Economics and Management Academy, Central University of Finance and Economics.
    24. Lardy,Nicholas R., 1978. "Economic Growth and Distribution in China," Cambridge Books, Cambridge University Press, number 9780521219044, October.
    25. repec:ces:ifodic:v:2:y:2004:i:1:p:14567690 is not listed on IDEAS
    26. Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, vol. 67(2), pages 221-240, February.
    27. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, December.
    28. Jing Jin & Chunli Shen & Qian Wang & Heng-fu Zou, 2012. "Decentralization in China," CEMA Working Papers 546, China Economics and Management Academy, Central University of Finance and Economics.
    29. Alwyn Young, 2000. "The Razor's Edge: Distortions and Incremental Reform in the People's Republic of China," NBER Working Papers 7828, National Bureau of Economic Research, Inc.
    30. Justin Yifu Lin & Zhiqiang Liu, 2000. "Fiscal Decentralization and Economic Growth in China," Economic Development and Cultural Change, University of Chicago Press, vol. 49(1), pages 1-21.
    31. Seabright, Paul, 1996. "Accountability and decentralisation in government: An incomplete contracts model," European Economic Review, Elsevier, vol. 40(1), pages 61-89, January.
    32. Jiwei Lou & Shuilin Wang, 2008. "Public Finance in China : Reform and Growth for a Harmonious Society," World Bank Publications - Books, The World Bank Group, number 6360, December.
    33. Anwar Shah, 2006. "Local Governance in Developing Countries," World Bank Publications - Books, The World Bank Group, number 7192, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yang, Zhou, 2016. "Tax reform, fiscal decentralization, and regional economic growth: New evidence from China," Economic Modelling, Elsevier, vol. 59(C), pages 520-528.
    2. Zhiguo Wang & Liang Ma, 2014. "Fiscal Decentralization in China: A Literature Review," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 51-65, May.
    3. Tristan Canare, 2021. "Decentralization and Development Outcomes: What Does the Empirical Literature Really Say?," Hacienda Pública Española / Review of Public Economics, IEF, vol. 237(2), pages 111-151, June.
    4. Wang, Zhiguo & Ma, Liang, 2012. "New Development of Fiscal Decentralization in China," MPRA Paper 36918, University Library of Munich, Germany.
    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. Liangliang Liu, 2021. "Fiscal decentralization and the imbalance between consumption and investment in China," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 66(1), pages 1-17, February.
    7. Zao Sun & Chun-Ping Chang & Yu Hao, 2017. "Fiscal decentralization and China’s provincial economic growth: a panel data analysis for China’s tax sharing system," Quality & Quantity: International Journal of Methodology, Springer, vol. 51(5), pages 2267-2289, September.
    8. Xu, Cheng-Gang, 2010. "The Institutional Foundations of China?s Reforms and Development," CEPR Discussion Papers 7654, C.E.P.R. Discussion Papers.
    9. Anping Chen & Nicolaas Groenewold, 2011. "Regional Equality and National Development in China: Is There a Trade‐Off?," Growth and Change, Wiley Blackwell, vol. 42(4), pages 628-669, December.
    10. Qichun He & Meng Sun, 2018. "Does Fiscal Decentralization Increase the Investment Rate? Evidence from Chinese Panel Data," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 75-101, May.
    11. Chen, Xiaodong & Mi, Haoming & Zhou, Peng, 2023. "Whether to decentralize and how to decentralize? The optimal fiscal federalism in an endogenous growth model," Cardiff Economics Working Papers E2023/11, Cardiff University, Cardiff Business School, Economics Section.
    12. Jia, Junxue & Guo, Qingwang & Zhang, Jing, 2014. "Fiscal decentralization and local expenditure policy in China," China Economic Review, Elsevier, vol. 28(C), pages 107-122.
    13. Yongzheng Liu & Jorge Martinez-Vazquez & Alfred M. Wu, 2017. "Fiscal decentralization, equalization, and intra-provincial inequality in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(2), pages 248-281, April.
    14. Abd. Ghani, Judhiana & Grewal, Bhajan & Ahmed, Abdullahi D. & Mohamed Nor, Norashidah, 2019. "Fiscal Decentralisation and Economic Growth in Malaysia: A Market Preserving Federalism Perspective," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 53(1), pages 153-170.
    15. Anping Chen & Nicolaas Groenewold, 2013. "The national and regional effects of fiscal decentralisation in China," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 51(3), pages 731-760, December.
    16. Antonio N. Bojanic, 2018. "The Impact of Fiscal Decentralization on Accountability, Economic Freedom, and Political and Civil Liberties in the Americas," Economies, MDPI, vol. 6(1), pages 1-20, February.
    17. Qun Bao & Jiuli Huang & Yanling Wang, 2015. "Productivity and Firms’ Sales Destination: Chinese Characteristics," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 620-637, August.
    18. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 5367, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    19. Ms. Era Dabla-Norris, 2005. "Issues in Intergovernmental Fiscal Relations in China," IMF Working Papers 2005/030, International Monetary Fund.
    20. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2016. "Fiscal Federalism, Decentralization, And Economic Growth: A Meta-Analysis," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1445-1463, July.

    More about this item

    Keywords

    Fiscal decentralization; Corruption; Financial burden; China;
    All these keywords.

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • P10 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - General
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cuf:journl:y:2012:v:13:i:1:n:1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Qiang Gao (email available below). General contact details of provider: https://edirc.repec.org/data/emcufcn.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.