Fiscal Decentralisation and Local Economic Growth: Evidence from a Fiscal Reform in China

This paper uses a fiscal decentralisation reform in China – namely, the province-managing-county (PMC) reform – to examine the effects of fiscal decentralisation on local economic growth. The PMC reform abolished the subordinate fiscal relationship between prefectures and counties and transferred mu...

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Bibliographic Details
Published in:Fiscal studies 2018-03, Vol.39 (1), p.159-187
Main Authors: Ma, Guangrong, Mao, Jie
Format: Article
Language:English
Subjects:
Counties
Decentralization
Districts
Economic growth
Economic models
Expenditures
fiscal decentralisation
GDP
Gross Domestic Product
Growth rate
H77
Infrastructure
local economic growth
Local government
Panel data
province‐managing‐county reform
R51
Reforms
Taxation
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Summary:This paper uses a fiscal decentralisation reform in China – namely, the province-managing-county (PMC) reform – to examine the effects of fiscal decentralisation on local economic growth. The PMC reform abolished the subordinate fiscal relationship between prefectures and counties and transferred much of the tax and spending authority from the prefecture to the county level. Exploiting a county-level panel data set over 2001–11, we find that the reform has led to a significant increase in the GDP growth rate. The effect is considerably more pronounced in regions with superior initial institutional quality. We also identify channels: the PMC reform induced county governments to exert lower tax burdens on firms and increase spending on infrastructure construction.
ISSN:0143-5671
1475-5890
DOI:10.1111/j.1475-5890.2017.12148