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University of Nevada, Reno the Effects of Fiscal Reforms On University of Nevada, Reno The Effects of Fiscal Reforms on Economic Growth in Chinese Provinces: 1985-2007 A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts in Economics by Xingchen Wang Dr. Mehmet Tosun/Thesis Advisor May, 2010 THE GRADUATE SCHOOL We recommend that the thesis prepared under our supervision by XINGCHEN WANG entitled The Effects of Fiscal Reforms on Economic Growth in Chinese Provinces: 1985-2007 be accepted in partial fulfillment of the requirements for the degree of MASTER OF ARTS Mehmet Tosun, Advisor Elliott Parker, Committee Member Jiangnan Zhu, Graduate School Representative Marsha H. Read, Ph. D., Associate Dean, Graduate School May, 2010 i Abstract Fiscal reforms have played an important role in China’s development for the last thirty years. This paper mainly examines the effects of fiscal decentralization on China’s provincial growth. Through constructing indicators for revenue and expenditure decentralization respectively, regression results indicate that they are both positively affecting economic growth in Chinese provinces. Along with the rapid development, the inequality issue has drawn much concern that fiscal reforms have indirectly hindered China’s even regional growth. Another model is set up to support this conclusion. However, as a distinct form of inequality, poverty has been largely alleviated in this process. Especially in the reform era of China, the absolute number of poverty population has declined dramatically. ii Acknowledgement I would like to express the deepest appreciation to my committee chair, Professor Mehmet Tosun, with whose patient guidance I could have worked out this thesis. He has offered me valuable suggestions and ideas with his profound knowledge in Economics and rich research experience. I would also like to thank my committee members, Professor Elliott Parker and Professor Jiangnan Zhu, who have given many constructional suggestions that make the thesis more complete and insightful. Especially Professor Elliott Parker, he has generously shared the original dataset with me and offered help with model testing and paper writing. Lastly, I offer my regards and blessings to all of those who supported me in any respect during the completion of this thesis. iii Table of Contents I INTRODUCTION .......................................................................................................................... 1 II LITERATURE REVIEW .............................................................................................................. 4 III FISCAL REFORMS IN CHINA................................................................................................... 8 1. PRE -1979: FISCAL CENTRALIZATION ............................................................................................ 8 2. 1979-1993: FISCAL DECENTRALIZATION (C ONTRACTING SYSTEM ) .............................................. 9 3. POST -1994: TAX ASSIGNMENT SYSTEM ...................................................................................... 11 IV EFFECTS OF FISCAL REFORMS ON ECONOMIC GROWTH IN CHINESE PROVINCES ........................................................................................................................................ 14 1. DATA .......................................................................................................................................... 14 2. VARIABLES ................................................................................................................................. 15 3. METHODOLOGY .......................................................................................................................... 16 4. DESCRIPTIVE STATISTICS ............................................................................................................ 17 5. REGRESSION RESULTS ................................................................................................................ 19 1) The First Phase: 1985-1993 ................................................................................................... 19 2) The Second Phase: 1994-2007 ............................................................................................... 22 3) Regression Results with only Revenue or Expenditure Indicator Respectively ................................. 24 V LINKAGE BETWEEN FISCAL REFORMS AND INEQUALITY ....................................... 31 1. EFFECTS OF FISCAL REFORMS ON CHINA ’S INEQUALITY ............................................................ 31 1) Two Types of Inequality ........................................................................................................ 31 2) Horizontal (Intra-provincial) Inequality in China’s Reform Era ............................................ 36 2. EFFECTS OF FISCAL REFORMS ON CHINA ’S POVERTY REDUCTION .............................................. 41 1) How does Fiscal Decentralization Affect Poverty? ............................................................... 41 2) Poverty Reduction in Contemporary China ........................................................................... 42 VI FUTURE OF FISCAL REFORMS IN CHINA ......................................................................... 47 1. IMPROVE INTERGOVERNMENTAL SYSTEM TO ENSURE THE CONSISTENCY OF FISCAL RIGHT AND FISCAL CAPABILITY ............................................................................................................................. 47 2. ESTABLISH A STANDARD FISCAL TRANSFER AND IMPROVE THE TRANSPARENCY OF THE TRANSFER SYSTEM ............................................................................................................................................... 48 3. LINK FUTURE FISCAL REFORMS WITH MARKET -ORIENTED FACTORS AND GUARANTEE EVERY CITIZEN HAS ACCESS TO PUBLIC GOODS AND SERVICES ........................................................................ 49 VII CONCLUSION ............................................................................................................................ 51 REFERENCES ..................................................................................................................................... 53 iv List of Tables TABLE 1: DESCRIPTIVE STATISTICS —PROVINCIAL GROWTH AND FISCAL DECENTRALIZATION .... 18 TABLE 2: REGRESSION RESULTS FOR THE FIRST PHASE ..................................................................... 20 TABLE 3: REGRESSION RESULTS FOR THE SECOND PHASE ................................................................. 22 TABLE 4: REGRESSION RESULTS WITH REVENUE INDICATOR FOR THE FIRST PHASE ...................... 25 TABLE 5: REGRESSION RESULTS WITH EXPENDITURE INDICATOR FOR THE FIRST PHASE ............... 26 TABLE 6: REGRESSION RESULTS WITH REVENUE INDICATOR FOR THE SECOND PHASE ................... 28 TABLE 7: REGRESSION RESULTS WITH EXPENDITURE INDICATOR FOR THE SECOND PHASE ........... 29 TABLE 8: GINI COEFFICIENTS AT THE PROVINCIAL LEVEL (22 PROVINCES IN 2003) ........................ 36 TABLE 9: DESCRIPTIVE STATISTICS —GINI COEFFICIENT AND FISCAL DECENTRALIZATION .......... 38 TABLE 10: EFFECTS OF FISCAL DECENTRALIZATION ON REGIONAL INEQUALITY (22 PROVINCES ) . 39 v List of Figures FIGURE 1: CHINA ’S INCOME INEQUALITY IN THE PERIOD OF 1985-2007 ............................................. 2 FIGURE 2: CHINA ’S POVERTY REDUCTION .......................................................................................... 43 1 I INTRODUCTION Fiscal decentralization is the devolution of fiscal power to regional and local governments. It specifically studies how public goods and services are provided by regional and local governments in a devolved government system (Skira, 2006). Different countries have reached different degrees of decentralization on the fiscal side. For China, it is nowadays considered as one of the most fiscally decentralized countries in the world. Over the past 30 years, this largest developing country made substantial efforts to reform its highly centralized economic system. As a result, China’s economy boosted dramatically. Among all the factors that push China’s growth, fiscal decentralization has been identified one of the most important elements in the transitional process started from the late 1970s. The pattern of how a decentralized fiscal system works in China is much similar as elsewhere in the world (this paper focuses on the provincial level): provincial governmental incentives to develop local economies could be effectively enhanced through receiving more fiscal power from the center on both local revenue and expenditure. Local economy therefore would be stimulated with further provincial governmental participation. However, the effect of fiscal decentralization is not single-dimensional. While it helped to accelerate China’s overall growth, it might have negatively acted on the even regional development and furthermore individual equality. Figure 1 illustrates income inequality at the national level in China from 1985 to 2007. The main trend of China’s Gini coefficient was generally going up, and as estimated, it approached 0.50 in 2007. Usually, a higher Gini coefficient indicates a deeper degree of unequal distribution, and 0.40 is called the warning line for a country’s inequality. Since 1999, China’s Gini coefficient has been keeping increasing at a level above the 0.40 line. 2 Apparently, with the expansion of China’s fiscal reforms, inequality issue has been worsened. A linkage might exist between the two sides.
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