Like the new and hate the old: The impact of fiscal decentralization on regional development strategy

Abstract

This paper evaluates the impact of China’s fiscal decentralization reform, namely the “Province-Managing-County” (PMC) fiscal reform, on local governments’ regional development strategy using county-level data in China covering 2000 to 2013. Surprisingly, after implementing the PMC fiscal reform, local governments will adjust their strategy of supporting zombie firms and attracting new firms, indicating that fiscal decentralization has changed the regional development strategies of local governments. We perform a difference-in-differences (DID) analysis and find that the PMC fiscal reform materially induces an average rise of 0.131 in newly added firms, an average decline of 0.383 in zombie firms, and no significant change in other firms. There is a pronounced substitution effect between zombie firms and newly added firms. We also find evidence supporting this argument: the government’s subsidy, tax treatment, and financial support. Our study provides empirical evidence that local governments’ regional development strategies can be affected by fiscal decentralization.

Fiscal Decentralization and the Human Development Index: A Cross-Border Empirical Study

“…Fiscal decentralization is helpful in giving full play to the information advantages and initiative of local governments, resulting in increased economic efficiency [1][2][3]. However, decentralization may also intensify intergovernmental competition and distort the fiscal choices or the composition of expenditures, for example, by crowding out expenditures lacking direct economic effect, such as public health, education, social welfare, etc., eventually exerting an adverse impact on national development [4][5][6][7][8][9]. As shown by Lockwood (2002) [18], regional or local governments may find it difficult to coordinate in order to internalize interjurisdictional externalities, whereas the cost of centralization is reduced "responsiveness" to the preferences of regions with respect to the provision of public goods.…”

“…Fiscal decentralization is helpful in giving full play to the information advantages and initiatives of local governments, as well as in increasing economic efficiency [1][2][3]. However, decentralization may also intensify intergovernmental competition and distort the fiscal choices or the composition of expenditures; for example, crowding out expenditures lacking direct economic effect, such as public health, education, social welfare, etc., eventually exert an adverse impact on national development [4][5][6][7][8][9]. Therefore, fiscal decentralization may impact the economic and social development of a country [10].…”