The national and regional effects of fiscal decentralisation in China

Chen, Anping; Groenewold, Nicolaas
December 2013
Annals of Regional Science;Dec2013, Vol. 51 Issue 3, p731
Academic Journal
Fiscal decentralisation has been an important part of the restructuring of China’s economy over the past three decades. Yet, there has been only limited analysis of the way in which decentralisation in China might affect variables such as welfare, output and income at the aggregate level and none at the regional level. This paper makes a start at filling this gap by analysing the aggregate and regional effects of various policies which aim to change the balance between fiscal activities of the national and regional governments. For this, we use a small theoretical model designed to capture some of the features of the Chinese economy, and we solve it numerically using a parameterisation based on Chinese data. We analyse the effects of four different shocks; all of them involve a transfer of resources to the regional governments financed by a cut in central government expenditure, but they differ in the way in which regional governments use the additional funds: (1) they adjust expenditure on the consumption good, (2) they adjust infrastructure expenditure, (3) they maximise the size of their own budget, and (4) they maximise the welfare of the representative citizen. We find that the aggregate economic effects of decentralisation depend on the precise nature of the policy and that aggregate benefits may often mask a deterioration in the inter-regional distribution of those benefits.


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