Empirical Study On Fiscal Decentralization And Market Segmentation

Market fragmentation is a peculiar phenomenon during the process of ChineseEconomic transition. It has spread into the labor force market and the capital marketas well.Fractional markets hindered the healthy and stable development of nationaleconomy,reduced the ability of hedging against economic crisis,and also debilitatedthe competitiveness of products”Made In China”. Under the background of economicglobalization and the transformation of Chinese economic growth pattern,how toprevent protectionism and fragmentation, speed up the integration process ofdomestic markets and the formation of regional division of labor,promote theharmonious growth of regional economy,increase the efficiency of resourcesallocation have a practical significance on the sustainable and healthy development ofChinese economy.The urban-rural dual system had made it possible in China to see the coexistenceof fragmentation of the three major markets:the commodity market,capital market,andthe labor force market.To face the complicated problem,it is necessary to have a deepresearch on the following questions:what is the root cause of fragmentation,what isthe differentiation of different markets and region,and finally,what are the solutions.Market fragmentation is resulted because of the protectionism of localgovernment,which use the executive power to compete for the limited economicresources for the sake of local economic benefits.This phenomena has a greatconnection with the fiscal centralization system. So,the study should focus on theinfluence of fiscal decentralization.Although there are plenty of theoretical studies on the effect of fiscaldecentralization on domestic regional market fragmentation,the empirical study on theeffect has always been the heated discussed issue among researchers. This papermeasures378province-to-province market fragmentation degree using regionalRPI(relative price index) which based on the “Glacial model”. Then, using Chineseprovincial panel date from2001-2011this paper studies the effects of fiscaldecentralization,market index,FDI,FTD,and adjusted distance on marketfragmentation.It focused on the role of fiscal decentralization measured by differentindicators and analyzed the effects it imposed on varied periods,markets,andregions.The results show that expenditure decentralization does strengthen marketsegmentation while income decentralization has a murky effect;In addition, the influence of fiscal decentralization on market fragmentation didn’t change much priorto the financial crisis in2008,slight increase can be seen on the effect of expendituredecentralization;Expenditure decentralization has an obvious influence on thefragmentation of the three markets while income decentralization only affects thelabor force market visibly;Regional speaking,both expenditure and incomedecentralization had great impact on market segmentation in eastern area,while theyshowed indifference in middle China,in western China,expenditure decentralizationaccounted much.