Fiscal Federalism, Fiscal Reform, and Economic Growth in China

Alexander McQuoid, Yi Ding () and Cem Karayalcin
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Yi Ding: Tianjin Precious Metal Exchange

Departmental Working Papers from United States Naval Academy Department of Economics

Abstract: Though it has been recognized that political institutions and state capacity play an important role in determining economic outcomes, for most non-Western economies we still do not have granular enough historical knowledge as to how. Here we study a particular historical episode in the case of China, which, after a period of fiscal decentralization that has been credited with leading to historically unprecedented growth rates but significant fiscal decline, recentralized the collection of tax revenues. The economic and political consequences of this new Tax Sharing System (TSS) have been debated extensively given the interest on fiscal decentralization and its interaction with political institutions and economic outcomes. The central question in this debate has been whether the TSS constitutes a significant departure from decentralization with adverse effects on fiscal federalism or whether the recentralization under the TSS corrects for the overshooting in decentralization with beneficial economic outcomes. Our approach exploits the staggered introduction of the TSS across regions and over time to causally identify the policy impact on economic outcomes. After showing traditional proxies of fiscal federalism provide unstable estimates and contradictory conclusions, we utilize a difference-in-difference approach, and find that the TSS increased per capita GDP growth rates by 17%.

Pages: 32 pages
Date: 2017-09
New Economics Papers: this item is included in nep-cna, nep-mac and nep-tra
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