Fiscal decentralization, revenue and expenditure assignments, and growth in China

Jing Jin and Heng-Fu Zou ()
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Jing Jin: Central University of Finance and Economics

No 169, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: Theory suggests that a close match between revenue and expenditure assignments at sub-national levels benefits allocative efficiency, and hence economic growth. That is, a convergence of revenue and expenditure assignments at sub-national levels of government should, according to the theory, be positively associated with a higher growth rate. In the case of China, this paper shows, divergence, rather than convergence, in revenue and expenditures at the sub-national level of government is associated with higher rates of growth. A panel dataset for 30 provinces in China is used to examine the relationship between fiscal decentralization and economic growth over two phases of fiscal decentralization in China: (1) 1979¨C1993 under the fiscal contract system, and (2) 1994¨C1999 under the tax assignment system. The seeming contradiction between the theory and evidence in the China case is reconciled by taking into account the institutional arrangements that prevailed during the two phases of fiscal decentralization, in particular the inconsistency between the assumptions of the theory of fiscal decentralization and the institutional reality of China.

Pages: 18 pages
Date: 2004
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Published in Journal of Asian Economics, Volume 16, Issue 6, December 2005, Pages 1047-1064

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Journal Article: Fiscal decentralization, revenue and expenditure assignments, and growth in China (2005)
Working Paper: Fiscal decentralization, revenue and expenditure assignments, and growth in China (2005)
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