Fiscal Decentralization and Economic Growth in China, 1994–2002

The question of whether fiscal decentralization has affected economic growth since the 1994 fiscal reform in China is interesting to both policy makers and economists. Using a simple model of endogenous growth that incorporates spending by different levels of government, and a panel data set for 30 provinces for the period of 1994–2002, this paper finds that fiscal decentralization contributes significantly to economic growth. This finding is consistent with the theoretical prediction that fiscal decentralization can increase economic efficiency. In addition, this paper attempts to investigate how the relationship between fiscal decentralization and provincial growth differs in the different regions considered. For this purpose, the 30 Chinese provinces and regions are categorized into three conventional economic belts that comprise the eastern, central, and western areas. This study finds that the effects of fiscal decentralization on economic growth vary among these three regions.