Fiscal decentralization and economic growth in China

In this study, we examine the effect of fiscal decentralization on economic growth by using a production-function-based regression analysis framework that has been widely adopted in the empirical literature on economic growth. Our estimation results, based on a province-level panel data set from 1970 to 1993, suggest that fiscal decentralization has made a positive contribution to the growth process. We also find that rural reform, the nonstate sector, and capital accumulation along with fiscal reform are the key driving forces of China's impressive growth over the past 20 or so years. The innovation of the current study is twofold. First, we include separate proxies for major reforms in the empirical investigation, while focusing on the effect of the changes in the fiscal system on the rate of economic growth. Second and more important, unlike previous scholars, we measure the degree of fiscal decentralization by a marginal retention rate-the rate at which revenue increments are retained by provincial governments. The rest of the article proceeds as follows. In Section II, we provide an overview of the fiscal reforms in China in the 1980s, concentrating on the changes in fiscal relations between the central and provincial governments. We then set out the econometric model in Section III and briefly discuss the data set in Section IV. In Section V, we report the estimation results. In the last section, we summarize the conclusions of the study.