Decentralised governance and empowerment of county governments in China: betting on the weak or the strong?

ABSTRACT

Decentralised economic development initiatives empowering local governments have gained currency in both developed and developing contexts. The empowerment of county governments in China is a case in point. This study uses difference-in-differences (DID) and the fixed-effects model with panel data (1997–2008) in counties in Zhejiang Province to empirically investigate the different impacts of the empowerment reform on county economies and fiscal revenue (FR). The results reveal that the reform has not promoted county economies as expected but has significantly increased FR. The reform has had a larger impact on less developed counties than on developed ones, which suggests a positive outcome of this decentralisation policy in China with regard to revenue generation. This study on county empowerment in Zhejiang Province provides some policy implications for other regions in China or developing countries.

KEYWORDS:

• Decentralisation
• federalism
• economic growth
• local government
• province-managing-county reform
• empowerment
• China

Acknowledgments

The authors thank two anonymous referees for their stimulating comments and the editors’ patience and encouragement. The authors are indebted to Liu Jingjun, Li Hui, and Wu Yiping for helpful comments and input on an earlier version of this article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. It should be noted that the positive assumptions of fiscal decentralisation may not be realised in reality as public officials may maximise their own interests (see Mehiriz 2017).

2. Fan (2015) notes that local responses to unfunded mandates from the central government given central transfers are substantial in today’s China.

3. In a nutshell, bottom-up accountability is lacking in the Chinese context (Fewsmith and Gao 2014).

4. In reality, there are variations in the implementation of the PMC model in local states (see Li and Wu 2014). In addition, criticism of the PMC reform abounds as well (see Zhong 2008).

5. Resources available to local governments are fundamental towards ensuring effective public service delivery (Ahmad 2018).

6. According to the Zhejiang Statistical Yearbook 2017, Zhejiang Province includes 89 county-level administrative units, including 37 city districts, 19 county-level cities, 32 counties, and 1 autonomous county.

7. Zhejiang Provincial Bureau of Statistics (2015). 2015 Zhejiang Statistical Yearbook (Electronic version). Beijing: China Statistics Press. Retrieved from Table 3.3. Investment in Fixed Assets (2010–2014). http://www.zj.stats.gov.cn/tjsj/tjnj/DesktopModules/Reports/12.%E6%B5%99%E6%B1%9F%E7%BB%9F%E8%AE%A1%E5%B9%B4%E9%89%B42015/indexeh.htm (assessed on 7 July, 2016).

8. Local public expenditure indicates county annual budgetary expenditure.

9. We have taken the time trend into consideration in robustness checks. A new variable TREND, which equals to (year 1997) has been added to the original model. Our key variable, D×KQ, shows a significant and negative effect on GDP per capita in all models, which is consistent with the original model (Table 3 in the article). Meanwhile, the variable, D×KQ, also presents consistent results compared with the original models, indicating that the PMC reform has a significant and positive effect on local fiscal revenue. By taking the time effect into consideration, most of other explanatory variables (e.g., fixed-asset investment) in the models remain the same.

10. As no data on individual income was available, this study uses the savings balance of all residents as a proxy to evaluate the residents’ income level.

11. The positive relationship between the PMC reform and revenue generation has been identified in other studies as well (see Zhang, Zhu, and Hou 2016).

12. Based on prefectural panel data in China between 1999 and 2011, Liu and Alm (2016) find a significantly positive relationship between the PMC reform and GDP growth. Nevertheless, our study has utilised the county-level panel data in a province.

13. Through having more resources, weak counties under the PMC reform have enhanced the capacity to compete with stronger counties according to Wu, Ramesh, and Yu (2017).

Additional information

Funding

This work was supported by the Education University of Hong Kong under the Grant [RG 77/2015-2016]

Notes on contributors

Yong Fan

Yong Fan is a professor in the School of Public Finance and Taxation at Central University of Finance and Economics, PRC. His research interests include public finance, taxation and local government fiscal policies.

Yan Wu

Yan Wu is an assistant professor in the Department of Public Administration at South China Agricultural University, PRC. Her research interests include public budgeting and finance, fiscal decentralisation, citizen participation, and public-private partnership. Her articles appear in Australian Journal of Public Administration, Public Finance and Management, and other outlets.

Alfred M. Wu

Alfred M. Wu is an associate professor in Lee Kuan Yew School of Public Policy at National University of Singapore. His research interests include public sector reform, central-local fiscal relations, corruption and governance, and social protection in Greater China. His articles appear in World Development, Public Choice, Publius: The Journal of Federalism, International Tax and Public Finance, Journal of Urban Affairs, Environment and Urbanization, Social Policy & Administration, Ageing & Society, among others. For more information see https://scholar.google.com.sg/citations?user=UyMYJPoAAAAJ&hl=en

Wei Wang

Wei Wang is a PhD Student in the School of Public Policy and Management at Tsinghua University. He is also a research assistant of the Institute for Contemporary China Studies at Tsinghua University. His research interests focus on public finance and local government fiscal policies.