The Study On Environmental Pollution Under Chinese-style Fiscal Decentralization

Since the reform and opening up, China's economic and social society has achieved rapid growth, people's living standards have been significantly improved. However, with rapid advance of industrialization and urbanization, China's environmental pollution is also becoming increasingly severe. Environmental protection related to long-term development of our economy and society, has become the focus of attention of the whole society. Traditional literatures mainly analyze environmental pollution problems from the perspectives of externalities, economic growth, trade and investment. However, economic factors can only partly explain China's environmental pollution problems. If they are divorced from the institutional factors, they can not play a role independent, especially in a country in transition.In the transition process, China's the most notable feature is Chinese-style fiscal decentralization, which combines economic decentralization with vertical political management system. The core of Chinese-style fiscal decentralization is to reallocate fiscal interests between central government and local government. A large number of studies have shown that, Chinese-style fiscal decentralization greatly has mobilized the enthusiasm of local government, achieving regional economic growth. However, there are incentive distortions in Chinese-style fiscal decentralization, which cause local government ignore the environmental protection, thereby deteriorating the environmental quality.The paper tries to explain the China's environmental pollution based upon the perspective of Chinese-style fiscal decentralization. It introduces the evolvement of Chinese-style fiscal decentralization, indicates its excitation mechanism and restriction mechanism. Through establishing the model of multi-task principal-agent between central and local government, and the game model of local government and polluting company, the paper considers fiscal decentralization reform has changed the behavior and the incentive structure of local government, thereby creating environmental pollution. Under the incentives of China's fiscal decentralization, local government which are attempt to increase local revenues, enhance officials promotion opportunities, often invest the areas (such as highways, rail, airports and other infrastructure) and attract investment. Local government also takes initiative to reduce the environmental threshold and environmental regulation efforts, and even provide "protection" for the illegal pollution discharge. As a result, we propose that China's environmental pollution is induced by Chinese-style fiscal decentralization, and is the performance under distorted incentives of China's decentralized system.At the same time, the paper empirically analyzes the impact of decentralization reform on the China's environmental pollution, using spatial panel model and quantile regression analysis. The results show that, with improvement the level of fiscal decentralization, local budget deficit as well as rent-seeking, environmental pollution emissions would appear in an upward trend. This suggests that, under the mechanism of fiscal decentralization and political promotion, local government faces strict financial constraints, and must strives to attract foreign investment for short-term economic growth, neglecting the cost of ecological environment. In addition, due to the distorted incentives of the decentralization reform, there are common interests between local government and polluting company. When local government and polluting company establish the cooperation of rent-seeking, local government would relax environmental regulation, thus causing the situation of "environmental regulation captured by capital".To further understand the impact of decentralization reform on the regional environment, we analyze the relationship between Chinese-style fiscal decentralization and regional pollution emission using panel data. The study finds that, the impact of China's fiscal decentralization on eastern areas of environmental pollution is less than the central and western areas. Due to the relatively weak economic base and the ecological environment of the central and western regions, those regions need to put the effort to attract investment, thus deteriorating the environmental quality. Therefore, in the regional development, we need to focus on the mechanism design of the Chinese-style fiscal decentralization, which contribute to sustainable development of the central and western regions.In short, we consider that the Chinese-style fiscal decentralization has an important impact on environmental pollution in China. Therefore, it needs to clear the central and local decentralized system, improve local government incentives. First, in the fiscal institutional asystem, it needs to resume a reform in public fiscal institution. Second, in political promotion, it needs to take "Green GDP" as a performance evaluation mechanism, and put environmental protection into the performance evaluation content. Third, it needs to strengthen the public participation in environmental protection, and supervise pollutants discharged illegally, thereby improving the efficiency of the environmental pollution control.