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Local Governments’ Fiscal Pressure and the Dependence on Polluting Industries in China
2017-07-10 16:39:00

China & World Economy / 109–130, Vol. 25, No. 4, 2017


Local Governments’ Fiscal Pressure and the Dependence
on Polluting Industries in China

Ruoyu Wang, Qi Zhang*


Abstract

Using a large, unique county-level panel dataset for China from 1998 to 2006, this paper investigates the relationship between local governments’ fiscal pressure and their preference for developing polluting industries. The results show that there exist fiscal pressure effects; namely, a positive link between the fiscal pressure faced by a county and its industrial tax dependence on polluting industries. We also investigate the heterogeneity of the fiscal pressure effects and find that fiscal pressure effects are significant only when local fiscal pressure is sufficiently high up to a certain point, and when there are more earmarked transfers. In contrast to the situation in east China, fiscal pressure effects in central and west China are more pronounced. Therefore, when dealing with environmental problems, policy-makers need to take local governments’ fiscal conditions into account.


Key words: China, fiscal pressure, industrial dependence, polluting industry
JEL codes: H3, H8, Q5