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Fiscal Decentralization or Centralization: Diverging Paths of Chinese Cities
2019-05-15 11:33:00

China & World Economy  / 102–125, Vol. 27,  No. 3, 2019

Fiscal Decentralization or Centralization: Diverging Paths of Chinese Cities

Shiming Yang*

 

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.

 

Key words: developing country, economic growth, fiscal decentralization, state-owned enterprise

JEL codes: E62, H2, H7, O1