Fiscal Decentralization and Regional Coordinated Development Incentive Structures, Transfer Systems, and Spatial Equity in China

Fiscal decentralization fundamentally shapes the spatial distribution of public resources and economic opportunities. This paper examines how China's system of fiscal decentralization, intergovernmental transfers, and local fiscal incentives influences regional coordinated development. Drawing on theories of fiscal federalism, soft budget constraints, and spatial equity, the analysis constructs a framework linking fiscal arrangements to regional convergence through four mechanisms: local revenue mobilization and infrastructure investment, interregional fiscal equalization through transfers, competition among local governments for mobile capital, and the provision of public goods that affect human capital and productivity. While fiscal decentralization has been credited with unleashing local entrepreneurialism and growth, its spatial consequences depend on the design of transfer systems and the incentive structures facing local officials. The paper analyzes China's evolving fiscal architecture—from the fiscal contracting system through the 1994 tax-sharing reform to recent refinements—and explores how it has shaped regional development trajectories. It discusses the role of general-purpose and earmarked transfers in narrowing fiscal disparities and improving public service delivery in lagging regions. The paper further identifies institutional conditions under which fiscal decentralization can promote spatial equity rather than reinforce divergence, including robust equalization mechanisms, transparent performance evaluation, and coordination across jurisdictions. Policy pathways are proposed for aligning fiscal incentives with regional coordination objectives. The paper concludes that fiscal decentralization is not inherently inimical to spatial equity; rather, its impact depends on the institutional framework within which it is embedded.