Research On The Optimal Size Of Local Government In China

The research about the functions and size of government has been an important topic since Adam Smith, who emphasized "the invisible hand" and thought government as a night watchman. With continuous change in the relationship between government and market, scholars’study on the size of government also is changing. And nowadays, some countries’governments are intervening in markets by many ways after the global financial crisis and the debt crisis in Europe. This makes more and more people begin to keep a watchful eye on government’s actions. So, it is more urgent to go into the research on the optimal size of government.After reading a lot of papers, we can find that the size of government is often measured by public spending or its share in GDP. In the early days, not only foreign study but also domestic research about the optimal size of government both based on the maximization of economic growth. This research is very important for China. But we must realize that our government’s actions should improve social education, living, health and so on, not only the economic growth. In other words, government should maximize social welfare by making use of limited resources. So, the optimal size of government should be determined by the maximization of social welfare. In our country, following the persistent improvement of local social welfare, the welfare level is still low, and its disparity is large among different regions. According to these phenomena, we need to put more attention on the study, that how the size of government impact on social welfare and what the optimal size of government is. In fact, now some scholars begin to transfer their attention to study about the optimal size of government based on maximizing social welfare. But so far, they only discuss the optimal size of the whole national government. The research on the optimal size of local government from maximizing social welfare is still blank.In order to make up the deficiency of the current research, the paper will study the optimal size of local government based on maximizing social welfare. In the paper, the size of government is measured by the share of public expenditure in GDP, and social welfare is measured by human development index. Firstly, the paper explains governmental responsibility for the supplying of social welfare and the influence mechanism of the size of government on social welfare, and gives a mathematical proof of having an optimal size of government from the maximization of social welfare. Secondly, the present situations about local social welfare and the size of local government in China are investigated by the analysis of parallel and vertical compare. Thirdly, taking advantage of the data of the size of local government and HDI among1982to2010, we find the size of local government is the granger reason for HDI, but the reverse is false. Making use of the overall sample of the panel data of25provinces among1997to2010, by fixed effect model, we know the optimal size of local government is38.38%. This is bigger than it is measured based on maximizing economic growth. Then, by empirical test of grouping sample under fixed or random effect model, we successfully compute every optimal size of25local governments. The lowest is27.54%of Jiangsu, and the highest is47.39%of Yunnan. The size of east China and middle China is lower than38.38%, excluding Jiangxi. The size of west China is higher than38.38%, excluding Chongqing. At last, for maximizing local social welfare, some suggestions are given, such as transforming administrative concepts, adjusting government functions, perfecting fiscal restraint mechanism, optimizing the scale and distribution of financial expenditure, better matching the responsibility between central government and local government, setting up incentive system and oversight mechanism, enhancing the officeholders’quality and so on.