A Study On The Economic Growth Effects And Efficiency Losses Of The Fiscal Expenditure Competition Of Local Governments In China

The rapid growth of China in the last 40 years cannot be separated from the relatively effective competition of local government under decentralization reform.The government mainly achieves its policy intentions through fiscal revenue and expenditure.Therefore,fiscal competition is the most important means by which competitive local governments prove economic growth.At present,the operable space for taxation competition among local governments in China has been reduced.Competition in fiscal expenditure has become the mainstream of local government competition.In order to promote local economic growth,local governments change the scale and structure of fiscal expenditure to improve local investment and living conditions,and to attract more inflow of external resources such as physical capital,human capital and other factors of production.What's more,local governments increase productivity through technological and institutional innovation to obtain output that is much higher than the factors cost.However,due to the disorderly competition,the fiscal expenditures competition among local governments has led to a serious problem of unreasonable allocation of resource and low efficiency,which has resulted in a loss of economic efficiency.The purpose of this paper's is to explore the mechanism of the impact of China's local government fiscal expenditure competition on economic and social development through theoretical and empirical research,and to find ways to maximize economic growth and the social welfare under a reasonable level of expenditure competition.Obviously studies on fiscal expenditure competition among local governments in our country are inadequate at present.Most of the articles on this subject are scattered in relevant documents which themes are about fiscal decentralization,local government competition and local fiscal competition.This study not only has a certain theory value for enriching related domestic researches but also can provide reference to policy makers on how to guide a healthy competition among local governments and standardize their fiscal expenditures.Based on the research idea of "institutional environment – competitive behavior – mechanism of action – consequences of actions – behavior criterion",this paper conducts theoretical and empirical research.This article believes that Chinese special system of decentralization in economic and centralization in politics has stimulated fierce fiscal expenditure competition among local governments.This kind of competition promotes the economic growth.But meanwhile it leads to the loss of economic efficiency.This paper has analyzed the two consequences of fiscal expenditure competition theoretically and empirically.Specifically,on the basis of relevant theories and literatures,the main part of this article is organized as follow: Firstly,this paper has tested the existence of fiscal expenditure competition of local governments and analyzed the characteristics of the competition.Based on the panel spatial autocorrelation model,this paper calculates the spatial lag coefficient of different spatial weight matrix.The result proves that the local governments in China have expenditure competition obviously in both total scale and any type of fiscal spending.Then,the characteristics of Chinese fiscal expenditure competition are analyzed.Secondly,this article studies on the economic growth effect of expenditure competition among Chinese local governments.The positive and negative effects on economic growth caused by fiscal expenditure competition are analyzed deeply.And then,the thesis introduces the fiscal expenditure competition of local government into an endogenous economic growth model.It is proved that when the intensity of horizontal fiscal expenditure competition among local governments is small,it will promote economic growth.But when the intensity is excessive,it will hinder economic growth.In the end of this part,the paper verifies the theoretical analysis through establishing a spatial econometric model.It is shown that,this kind of competition promotes the economic growth.But meanwhile,for the sake of lacking effective supervision,irregular competition brings many negative problems such as repeated construction of low end,excess capacity,more local government debt,excessive investment of government,shortage and imbalance of public goods supply,rent seeking and corruption,and so on.The empirical analysis of China's data from year 2007 to year 2015 shows that the fiscal expenditure competition has an inverted U-shape relationship with economic growth.Structurally speaking,both maintenance expenditure competition and constructive expenditure competition have a relationship of inversed U-shape with economic growth,but welfare expenditure competition has no significant impact on economic growth.The interaction of the three categories of expenditure competition has not only promoted local economic growth,but also had a positive spillover effect on economic growth of other regions.However,the competitive intensity of constructive expenditures has exceeded the inflection point in 2013 and 2014 and the average total scale competition has exceeded the inflection point too,which means the negative effect is greater than the positive effect on economic growth.Thirdly,this paper further analyzes the efficiency loss caused by negative effects of fiscal expenditure competition among local governments.It is considered that the inefficiency factors in the process of fiscal expenditure competition of local government in China include the low adaptability of the system,the existence of disorder or vicious competition,the flaws in the supervision mechanism,and the lack of perfect incentive and restraint mechanism that lead to X-inefficiency,etc.Using the DEA model,it is found that fiscal expenditure efficiency of Chinese local government not only is generally low from 2007 to 2015 but also shows a trend of declining.The efficiency of constructive expenditure has decreased significantly most.This part of the thesis finally constructs a nonlinear limited Tobit model and verifies that the fiscal expenditure competition among local governments affects the efficiency of local fiscal expenditure significantly.The result of Tobit model also shows that local governments have excessive competition in constructive expenditure competition,which is the main factor that causes the decline of overall efficiency of fiscal expenditures;welfare expenditure competition can be strengthened further;while the relationship between maintenance expenditure competition and the overall efficiency of fiscal expenditure is not significant.The paper also measure the losses of fiscal expenditure efficiency caused by the competition of various fiscal expenditures and total scale of fiscal expenditures.The result implies that the structural adjustment of fiscal expenditures should be prior to scale adjustment when making policy.According to the research above,the policy recommendations on how to regulate the fiscal expenditures competition among local governments are proposed.