Fiscal Decentralization, Government Governance And China’s Economic Growth

Decentralization is a worldwide phenomenon while economic growth is not. Thekey to a big nation’s development is the good governance. This paper started from theangle of government governance, made an institutional analysis and explanation ofChina’s sustained rapid economic growth after the reform and opening-up.“Economicdecentralization and political centralization” is the core connotation of Chinese styledecentralization, how did such an institution promote China’s economic growth? Whatare the negative effects of it? How to reform and improve this institution to ensure thesustained and healthy development of China’s economy? Research on these issues hasgreat theoretical value and practical significance for China to deepen reform and makerelated policies. Firstly, this paper did an institutional explanation for China’s sustainedeconomic growth from the point of government governance, by coming up with anexplain framework of economic growth, which was the local government competitionmechanism dominated by central government. Then, from two aspects of fairness andefficiency, this paper did deeply study on the institutional framework, so as to providepolicy recommendations to improve the system. The main characteristics and theconclusions of this paper are as follows:Firstly, based on the institutional perspective, this paper did institutionalexplanation to China’s economic growth by the local government competitionmechanism dominated by central government. The institutional framework wasexpressed as: in a market economy with a strong central government leading, the centralgovernment did political centralization and economic decentralization in order toprovide local governments’ political motivation and economic incentive to create acompetition mechanism, then the economy got development by local governmentswhich competed for economic growth. However,“the cost of growth” also showed thesupplement or internal correction of system was needed to balance the growth and thecost, and then sustain growth in the process. For the long term, this kind of governmentmanagement mechanism was not enough to support the development of China’seconomy, instead, it need new institutional supply to provide China’s sustainedeconomic growth inner power, and this new institutional supply only came from thetransformation of the economic and political system reform.Secondly, based on the perspective of fairness, this paper did further research on the government governance and local government’s behavior which were contained inthe institutional explanation framework. By considering the heterogeneity, this paperintroduced the heterogeneity of local governments into the promotion tournament whichleading by central government, improved the traditional promotion game model, andexplained the behavior differences of local governments in the phenomenon of "weststrong east weak" on China’s economic growth, also provided some beneficialimplications for governments management reform. By considering the local governmentofficials’ fairness concerns, this paper applied fairness concerns theory into theframework of principal-agent, expanded the analysis framework of principal-agent fromsingle to double agent so as to develop the traditional principal agent theory. The studyfound that it was one of effective measures to improve the governance of governmentby cultivating local government officials’ fairness concerns and maintain a high levelthrough system design.Thirdly, based on the perspective of efficiency, this did research on the effects ofthe institutional explanation framework on the technical efficiency of economicdevelopment and the efficiency of fiscal expenditure on the environmental protection.This paper applied both fiscal decentralization and promotion tournament into thestochastic frontier empirical model based on the C-D production function, and foundboth fiscal decentralization and promotion tournament had a significant positive role inpromoting economic growth efficiency which mean this kind of institutional design,”economic decentralization and political centralization” was an effective governancemodel. By using DEA-Tobit model, the efficiency of fiscal expenditure on theenvironmental protection was calculated, and found there were widespread inefficiency infiscal expenditure on environmental protection and differences between regions, themodel of governance between central and local governments was defective, rooted inthe evaluation mechanism of GDP as the core. So, the fundamental and critical path toimprove the efficiency of fiscal expenditure, such as environmental protection, was tobalance the local governments’ economic functions and various public functions.Fourthly, based on the above research, this paper argued that the governance ofcentral government and local governments should be correctly understood, there weredrawbacks not negated. How to reform the local governments’ evaluation system is thekey to optimize the governance of central government and local governments,appropriate political decentralization was also necessary. And also, the personal interestsof local government officials should be objective understood; the incentive and restraint mechanism could be improved by sunny wage, property declaration system and so on.