Fiscal Decentralization, Budgetary Transparency, and Local Government Size in China

ABSTRACT

This article makes use of panel data for 31 provinces between 1985 and 2010 and specifies a dynamic panel model to investigate the determinants of local government size in China and achieved several conclusions: (1) the fiscal decentralization since TSS reform in 1994 has increased the local government size; (2) budgetary transparency has a U-shape nonlinear effect on local government size; (3) fiscal revenue is the important factor to drive the overexpansion of local government size in China; and (4) local government size has a strong dependence of past path.

KEY WORDS:

• budgetary transparency
• determinants analysis
• fiscal decentralization
• local government size

Notes

1. The raw data used to construct the proxy variables in the study comes from China Statistical Yearbook (each year), Finance Yearbook of China (1992–2011), and China Compendium of Statistics 1949–2009 (2010) officially provided by National Bureau of Statistics of China.

2. In the study, the eastern region in China includes 11 provinces such as Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Hainan; other provinces belong to the mid and western regions. The newly establishment of Hainan is from the year 1988.

3. When studying the effects of the fiscal decentralization on local government expenditure size, Guo and Jia (2010) also estimated the dynamic panel model in order to account for the strong persistence of local government size and possible endogeneity of the explanatory variables.