Decentralization in Transition Economies: A Tragedy of the Commons?

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 one reason for this difference is that Chinese local governments enjoy more clearly defined rights of taxation than their counterparts in Russia. When rights of taxation 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 independent tax agencies increases. A model is constructed in which these differences in property rights generate a forecast consistent with the observation that the effective tax rate facing an enterprise tends to be higher in Russia while local tax collections and the local provision of public goods and infrastructure tend to be stronger in China.

JEL Classification: H71, P52