Fiscal Decentralization or Centralization: Diverging Paths of Chinese Cities

Abstract

If fiscal decentralization promotes growth, why do some regions decentralize more than others? This article identifies the growing divergence of fiscal centralization among Chinese cities and explains it in a public finance framework. It argues that fiscal decentralization and its economy-liberalizing effect entail significant short-term fiscal risk. The more a locality relies on uncompetitive business ownership for fiscal revenue, the less likely fiscal decentralization is to occur. This article compiles a dataset of 20 provincial capitals between 1999 and 2016 to test for the connection between a city's tax base and its fiscal centralization level. It then pairs two "most similar" cities to trace how fiscal security concerns drove their fiscal and economic policies apart. This article adds a micro-level perspective to the literature on fiscal federalism. By pointing out the fiscal constraints confronting local governments, it offers a new angle to understand the different growth paths of Chinese cities.

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Measurement of Productivity of Local Government Spending in Poverty Alleviation

“…Indonesia since 2001 has implemented a decentralized system that is expected to drive the regional economy more advanced and competitive. [1] states that fiscal decentralization provides flexibility of authority to local governments to allocate resources to increase economic growth and encourage competitiveness between regions. With the authority of local governments in regulating their budgets, it can be directed more precisely at poverty reduction programs.…”

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“…This is thought to be part of a reform package aimed at improving public sector efficiency and attracting healthy competition among states and local governments in the delivery of public services in order to boost economic growth (Bahl & Linn, 1992;Bird & Wallich 1993). According to Yang (2019), fiscal decentralization is described as the transfer of financial responsibilities from higher-level governments to lower-level governments. It can take the shape of income and expenditure redistribution, tax rate adjustments, extra fiscal revenue creation, and other changes that bolster lower-level government's fiscal resources (Yang, 2019).…”

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