Fiscal Decentralization and Political Centralization in China - Implications for Regional Inequality

IFPRI DSGD Discussion Paper No. 21

30 Pages Posted: 22 Feb 2006

See all articles by Xiaobo Zhang

Xiaobo Zhang

International Food Policy Research Institute (IFPRI)

Date Written: July 2005

Abstract

While, politically speaking, China has a centralized government structure with strong top-down mandates, under the country's current fiscal system, local governments are responsible for providing most local public goods and services. Large differences in economic structures and revenue bases exist, however, causing the implicit tax rate and fiscal burdens in support of local government functions to vary significantly across jurisdictions. Regions initially endowed with a broader non-farm tax base do not need to rely heavily on new and existing firms to finance public goods provision, which creates a healthy investment environment in support of non-farm sector growth. In contrast, local governments in regions where agriculture is the major economic activity spend the majority of their resources on their own operating costs, leaving little for public investment. Because of the relatively high transaction costs associated with collecting taxes from the agricultural sector, local governments tend to levy the existing non-farm sector heavily, thereby greatly inhibiting its growth. As a result, regional differences in economic structures and fiscal dependent burdens may translate into widening gaps in equality.

Keywords: Nonfarm Sector, Regional Economics, Inequality, Fiscal Policy, China, PUBLIC SERVICES, Economic Structures, Taxes, Local Government, Investment Policies, Agricultural Sector, Public Investment, Regional Development

JEL Classification: R11, E62, R51

Suggested Citation

Zhang, Xiaobo, Fiscal Decentralization and Political Centralization in China - Implications for Regional Inequality (July 2005). IFPRI DSGD Discussion Paper No. 21, Available at SSRN: https://ssrn.com/abstract=774206 or http://dx.doi.org/10.2139/ssrn.774206

Xiaobo Zhang (Contact Author)

International Food Policy Research Institute (IFPRI) ( email )

2033 K Street, NW
Washington, DC 20006
United States
202-862-5677 (Phone)
202-467-4439 (Fax)

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