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Fiscal decentralization, revenue and expenditure assignments, and growth in China

Author Info

Listed author(s):
  • Jing Jin

    (Central University of Finance and Economics)

  • Heng-fu Zou

    (Peking University and Wuhan University
    Research Department, The World Bank)

Abstract

Theory suggests that a close match between revenue and expenditure assignments at sub-national levels benefits allocative efficiency, and hence economic growth. That is, a convergence of revenue and expenditure assignments at sub-national levels of government should, according to the theory, be positively associated with a higher growth rate. In the case of China, this paper shows, divergence, rather than convergence, in revenue and expenditures at the sub-national level of government is associated with higher rates of growth. A panel dataset for 30 provinces in China is used to examine the relationship between fiscal decentralization and economic growth over two phases of fiscal decentralization in China: (1) 1979¨C1993 under the fiscal contract system, and (2) 1994¨C1999 under the tax assignment system. The seeming contradiction between the theory and evidence in the China case is reconciled by taking into account the institutional arrangements that prevailed during the two phases of fiscal decentralization, in particular the inconsistency between the assumptions of the theory of fiscal decentralization and the institutional reality of China.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 212.

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Length: 18 pages
Date of creation: 2005
Publication status: Published in Journal of Asian Economics, Volume 16, Issue 6, December 2005, Pages 1047-1064
Handle: RePEc:cuf:wpaper:212
Contact details of provider: Web page: http://cema.cufe.edu.cn/

More information through EDIRC

Keywords: Fiscal decentralization; Economic growth; Revenue; Expenditure;

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Find related papers by JEL classification:
  • H2 - Public Economics - - Taxation, Subsidies, and Revenue
  • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
  • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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  1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
  2. 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.
  3. Akai, Nobuo & Sakata, Masayo, 2002. "Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States," Journal of Urban Economics, Elsevier, vol. 52(1), pages 93-108, July.
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  18. Shahid Yusuf, 1994. "China's Macroeconomic Performance and Management during Transition," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 71-92, Spring.
  19. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
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