IDEAS home Printed from https://ideas.repec.org/p/ays/ispwps/paper1432.html
   My bibliography  Save this paper

Fiscal Decentralization, Equalization, and Intra-Provincial Inequality in China

Author

Listed:

Abstract

Using a nationwide county-level panel dataset for the years 1995-2009, this paper conducts the rst analysis in the literature to examine the impacts of scal decentralization and scal equalization, both measured at the sub-provincial level, on intra-provincial inequality in China. While scal decentralization o ers signi cant advantages regarding public expenditure eciency, a potentially large disadvantage is that it may lead to increased regional inequality. In this paper, in line with our theoretical hypotheses, we nd that while scal centralization at the sub-provincial level in China leads to larger intra-provincial inequality, scal equalization e orts performed by provincial governments tend to mitigate the detrimental e ect of scal decentralization on intraprovincial inequality. Our results also indicate that the quantitative e ects of scal decentralization on regional inequality tend to be larger when they are measured from the expenditure side, which is consistent with the fact that expenditure decentralization is a much more meaningful measure of decentralization in China. Overall, we provide evidence on the potential inequality costs of using scal decentralization as a development strategy. At the same time, we emphasize the importance of implementing a scal equalization program to ensure the overall success of decentralization policy.

Suggested Citation

  • Yongzheng Liu & Jorge Martinez-Vazquez & Alfred M. Wu, 2014. "Fiscal Decentralization, Equalization, and Intra-Provincial Inequality in China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1432, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper1432
    as

    Download full text from publisher

    File URL: http://icepp.gsu.edu/files/2015/03/ispwp1432.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lessmann, Christian & Seidel, André, 2017. "Regional inequality, convergence, and its determinants – A view from outer space," European Economic Review, Elsevier, vol. 92(C), pages 110-132.
    2. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    3. Christian Lessmann, 2009. "Fiscal Decentralization and Regional Disparity: Evidence from Cross-Section and Panel Data," Environment and Planning A, , vol. 41(10), pages 2455-2473, October.
    4. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003. "Instrumental variables and GMM: Estimation and testing," Stata Journal, StataCorp LP, vol. 3(1), pages 1-31, March.
    5. Uchimura, Hiroko & Jütting, Johannes P., 2009. "Fiscal Decentralization, Chinese Style: Good for Health Outcomes?," World Development, Elsevier, vol. 37(12), pages 1926-1934, December.
    6. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
    7. Ting Gong & Alfred M. Wu, 2012. "Central Mandates in Flux: Local Noncompliance in China," Publius: The Journal of Federalism, Oxford University Press, vol. 42(2), pages 313-333, April.
    8. Fisman, Raymond & Gatti, Roberta, 2002. "Decentralization and corruption: evidence across countries," Journal of Public Economics, Elsevier, vol. 83(3), pages 325-345, March.
    9. Yongzheng Liu, 2014. "Does competition for capital discipline governments? The role of fiscal equalization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 345-374, June.
    10. Iimi, Atsushi, 2005. "Decentralization and economic growth revisited: an empirical note," Journal of Urban Economics, Elsevier, vol. 57(3), pages 449-461, May.
    11. X. B. Zhao & L. Zhang, 1999. "Decentralization Reforms and Regionalism in China: A review," International Regional Science Review, , vol. 22(3), pages 251-281, December.
    12. Roberto Ezcurra & Pedro Pascual, 2008. "Fiscal decentralization and regional disparities: evidence from several European Union countries," Environment and Planning A, Pion Ltd, London, vol. 40(5), pages 1185-1201, May.
    13. Jason Sorens, 2014. "Does Fiscal Federalism Promote Regional Inequality? An Empirical Analysis of the OECD, 1980-2005," Regional Studies, Taylor & Francis Journals, vol. 48(2), pages 239-253, February.
    14. Fleisher, Belton & Li, Haizheng & Zhao, Min Qiang, 2010. "Human capital, economic growth, and regional inequality in China," Journal of Development Economics, Elsevier, vol. 92(2), pages 215-231, July.
    15. George Petrakos & Andres Rodríguez-Pose & Antonis Rovolis, 2003. "Growth, Integration and Regional Inequality in Europe," ERSA conference papers ersa03p46, European Regional Science Association.
    16. Song, Yang, 2013. "Rising Chinese regional income inequality: The role of fiscal decentralization," China Economic Review, Elsevier, vol. 27(C), pages 294-309.
    17. Christian Lessmann, 2012. "Regional inequality and decentralization: an empirical analysis," Environment and Planning A, Pion Ltd, London, vol. 44(6), pages 1363-1388, June.
    18. Martinez-Vazquez, Jorge & Timofeev, Andrey, 2008. "Regional-local dimension of Russia's fiscal equalization," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 157-176, March.
    19. Shankar, Raja & Shah, Anwar, 2003. "Bridging the Economic Divide Within Countries: A Scorecard on the Performance of Regional Policies in Reducing Regional Income Disparities," World Development, Elsevier, vol. 31(8), pages 1421-1441, August.
    20. Wu, Alfred M. & Wang, Wen, 2013. "Determinants of Expenditure Decentralization: Evidence from China," World Development, Elsevier, vol. 46(C), pages 176-184.
    21. 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.
    22. Lessmann, Christian, 2014. "Spatial inequality and development — Is there an inverted-U relationship?," Journal of Development Economics, Elsevier, vol. 106(C), pages 35-51.
    23. Cowell, Frank, 2011. "Measuring Inequality," OUP Catalogue, Oxford University Press, edition 3, number 9780199594047.
    24. Hongbin Cai & Daniel Treisman, 2005. "Does Competition for Capital Discipline Governments? Decentralization, Globalization, and Public Policy," American Economic Review, American Economic Association, vol. 95(3), pages 817-830, June.
    25. 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.
    26. Ravi Kanbur & Xiaobo Zhang, 2005. "Fifty Years of Regional Inequality in China: a Journey Through Central Planning, Reform, and Openness," Review of Development Economics, Wiley Blackwell, vol. 9(1), pages 87-106, February.
    27. 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.
    28. Nobuo Akai & Masayo Hosio, 2009. "Fiscal Decentralization, Commitment and Regional Inequality: Evidence from State-level Cross-sectional Data for the United States," Journal of Income Distribution, Ad libros publications inc., vol. 18(1), pages 113-129, March.
    29. 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.
    30. Yuen Tsui, Kai, 1991. "China's regional inequality, 1952-1985," Journal of Comparative Economics, Elsevier, vol. 15(1), pages 1-21, March.
    31. 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.
    32. Kanbur, Ravi & Zhang, Xiaobo, 1999. "Which Regional Inequality? The Evolution of Rural-Urban and Inland-Coastal Inequality in China from 1983 to 1995," Journal of Comparative Economics, Elsevier, vol. 27(4), pages 686-701, December.
    33. Roberto Ezcurra & Pedro Pascual, 2008. "Fiscal Decentralization and Regional Disparities: Evidence from Several European Union Countries," Environment and Planning A, , vol. 40(5), pages 1185-1201, May.
    34. Brambor, Thomas & Clark, William Roberts & Golder, Matt, 2006. "Understanding Interaction Models: Improving Empirical Analyses," Political Analysis, Cambridge University Press, vol. 14(01), pages 63-82, December.
    35. Krugman, Paul, 1998. "What's New about the New Economic Geography?," Oxford Review of Economic Policy, Oxford University Press, vol. 14(2), pages 7-17, Summer.
    36. Martinez-Vazquez, Jorge & McNab, Robert M., 2003. "Fiscal Decentralization and Economic Growth," World Development, Elsevier, vol. 31(9), pages 1597-1616, September.
    37. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-633, November.
    38. 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.
    39. Brehm, Stefan, 2013. "Fiscal Incentives, Public Spending, and Productivity – County-Level Evidence from a Chinese Province," World Development, Elsevier, vol. 46(C), pages 92-103.
    40. Marinella Terrasi, 1999. "Convergence and divergence across Italian regions," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 33(4), pages 491-510.
    41. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
    42. Oates, Wallace E, 1985. "Searching for Leviathan: An Empirical Study," American Economic Review, American Economic Association, vol. 75(4), pages 748-757, September.
    43. 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.
    44. Kotsogiannis, Christos & Schwager, Robert, 2008. "Accountability and fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2336-2349, December.
    45. 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.
    46. Terry Sicular & Yue Ximing & Björn Gustafsson & Li Shi, 2007. "The Urban–Rural Income Gap And Inequality In China," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(1), pages 93-126, March.
    47. Andreas P. Kyriacou & Leonel Muinelo-Gallo & Oriol Roca-Sagalés, 2015. "Fiscal decentralization and regional disparities: The importance of good governance," Papers in Regional Science, Wiley Blackwell, vol. 94(1), pages 89-107, March.
    48. World Bank, 2002. "China - National Development and Sub-National Finance : A Review of Provincial Expenditures," World Bank Other Operational Studies 15423, The World Bank.
    49. Agnese Sacchi & Simone Salotti, 2014. "How regional inequality affects fiscal decentralisation: accounting for the autonomy of subcentral governments," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 32(1), pages 144-162, February.
    50. Iris Claus & Les Oxley & Chen Wang & Guanghua Wan & Dan Yang, 2014. "Income Inequality In The People'S Republic Of China: Trends, Determinants, And Proposed Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 28(4), pages 686-708, September.
    51. Dan Stegarescu, 2005. "Public sector decentralisation: measurement concepts and recent international trends," Fiscal Studies, Institute for Fiscal Studies, vol. 26(3), pages 301-333, September.
    52. George Petrakos & Andrés Rodríguez-Pose & Antonis Rovolis, 2005. "Growth, integration, and regional disparities in the European Union," Environment and Planning A, Pion Ltd, London, vol. 37(10), pages 1837-1855, October.
    53. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
    54. Huang, Bihong & Chen, Kang, 2012. "Are intergovernmental transfers in China equalizing?," China Economic Review, Elsevier, vol. 23(3), pages 534-551.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Fiscal decentralization; equalization; intra-provincial inequality; China;

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:ays:ispwps:paper1432. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Benson). General contact details of provider: https://icepp.gsu.edu/ .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.