Decentralizing in Transition Economies: A Tragedy of the Commons?

Daniel Berkowitz and Wei Li

No 45, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: China began its gradual economic reform in the late 1970s; Russia initiated radical reform in the early 1990s. During the course of reform, China has enjoyed rapid growth while Russia has contracted. This paper argues that an important explanation for the striking performance difference in China and Russia is that, during the course of reform, Chinese local governments have gained much more clearly defined tax rights than their counterparts in Russia. When tax rights are sharply defined, a local government has the exclusive right to tax enterprises located within its territory. These rights become fuzzier as the number of agencies which independently tax enterprises increases. The implications of these differences in government tax rights are analyzed using a model of a local economy which predicts that: 1) investment is higher when tax rights are more clearly defined- 2) local tax collections and local provision of public goods and infrastructure are higher when tax rights are more sharply defined; 3) the effective tax rate for investors increases as tax rights become fuzzier; 4) tax evasion is higher when tax rights are fuzzier. It is argued that these four points capture important differences in the performance of local Chinese and Russian economies. The model also predicts that capital mobility tends to encourage local and regional governments to limit cross-border capital flows. This prediction is consistent with local and regional government policies observed in both China and Russia.

JEL-codes: H77 P35 (search for similar items in EconPapers)
Pages: pages
Date: 1997-09-01
New Economics Papers: this item is included in nep-ifn and nep-pbe
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp45.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp45.pdf [302 Found]--> https://wdi.umich.edu/files/Publications/WorkingPapers/wp45.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:1997-45

Access Statistics for this paper

More papers in William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109. Contact information at EDIRC.
Bibliographic data for series maintained by WDI ().