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Fiscal decentralization: Incentives, redistribution and reform in China

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  • John Knight
  • Li Shi

Abstract

China's great size and diversity give rise to serious principal-agent problems among tiers of government. The fiscal relationships between central and provincial governments over the period of economic reform are examined within an agency framework. Provincial governments have been responsible for most revenue collection and public spending, but they have done so within the consolidated state budget: central government takes, or gives, the difference between a province's revenue collection and expenditure. Five interrelated questions are posed. Does provincial expenditure depend on provincial revenue collection, i. e. to what extent are provinces fiscally self-sufficient? How does the pattern of provincial expenditure relate to provincial revenue and income level? Is fiscal redistribution equalizing, i.e. to what extent does central government redistribute revenue from rich to poor provinces? Does central government's marginal propensity to tax the provinces serve as a deterrent to their revenue collection? Do the arrangements create greater fiscal instability for central or provincial governments? The provincial governments retained an increasing proportion of their revenue collected over the reform period, and the extent of fiscal redistribution by the centre from the rich to the poor provinces correspondingly declined. An important reason for these trends is that revenue effort was sensitive to the various marginal tax rates—mostly high—imposed by central government on the provinces: the Laffer curve is alive and well and living in China. This helps to explain the fiscal reforms of the mid-1990s, the effects of which are not yet discernible.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:oxdevs:v:27:y:1999:i:1:p:5-32
    DOI: 10.1080/13600819908424164
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    Citations

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    Cited by:

    1. Sai Ding & John Knight, 2011. "Why has China Grown So Fast? The Role of Physical and Human Capital Formation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(2), pages 141-174, April.
    2. John Knight & Sai Ding, 2008. "Why has China Grown so Fast? The Role of Structural Change," Economics Series Working Papers 415, University of Oxford, Department of Economics.
    3. Zhuravskaya, Ekaterina V., 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Journal of Public Economics, Elsevier, vol. 76(3), pages 337-368, June.
    4. Hashiguchi, Yoshihiro & Chen, Kuang-hui, 2010. "Has China's Interregional Capital Mobility Been Low? A Spatial Econometric Estimation of the Feldstein-Horioka Equation," MPRA Paper 24595, University Library of Munich, Germany.
    5. 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.
    6. Xin Meng, 2004. "Economic Restructuring and Income Inequality in Urban China," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(3), pages 357-379, September.
    7. Qiao, Baoyun & Martinez-Vazquez, Jorge & Xu, Yongsheng, 2008. "The tradeoff between growth and equity in decentralization policy: China's experience," Journal of Development Economics, Elsevier, vol. 86(1), pages 112-128, April.
    8. Tochkov, Kiril, 2007. "Interregional transfers and the smoothing of provincial expenditure in China," China Economic Review, Elsevier, vol. 18(1), pages 54-65.
    9. Elliott Parker & Judith Thornton, 2007. "Fiscal Centralisation and Decentralisation in Russia and China," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 49(4), pages 514-542, December.
    10. Zhang, Xiaobo, 2006. "Fiscal decentralization and political centralization in China: Implications for growth and inequality," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 713-726, December.
    11. John Knight & Li Shi & Deng Quheng, 2008. "Education and the Poverty Trap in Rural China," CSAE Working Paper Series 2008-02, Centre for the Study of African Economies, University of Oxford.
    12. Sven Stö & Christian Traxler, 2005. "Tax Evasion and Auditing in a Federal Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(4), pages 515-531, August.
    13. Yongzheng Liu & Jorge Martinez-Vazquez & Baoyun Qiao, 2014. "Falling Short: Intergovernmental Transfers in China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1423, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    14. Ziang, Xiaobo, 2005. "Fiscal decentralization and political centralization in China," DSGD discussion papers 21, International Food Policy Research Institute (IFPRI).
    15. Huang, Bihong & Chen, Kang, 2012. "Are intergovernmental transfers in China equalizing?," China Economic Review, Elsevier, vol. 23(3), pages 534-551.
    16. Meng, Xin & Gregory, Robert & Wang, Youjuan, 2005. "Poverty, inequality, and growth in urban China, 1986-2000," Journal of Comparative Economics, Elsevier, vol. 33(4), pages 710-729, December.

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