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

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.