International Tax and Public Finance

, Volume 24, Issue 2, pp 248–281 | Cite as

Fiscal decentralization, equalization, and intra-provincial inequality in China

  • Yongzheng Liu
  • Jorge Martinez-Vazquez
  • Alfred M. Wu
Article

Abstract

Using a nationwide county-level panel dataset for the years 1995–2009, this paper conducts the first analysis in the literature to examine the impacts of fiscal decentralization and fiscal equalization, both measured at the sub-provincial level, on intra-provincial inequality in China. While fiscal decentralization offers significant advantages regarding public expenditure efficiency, a potentially large disadvantage is that it may lead to increased regional inequality. In this paper, in line with our theoretical hypotheses, we find that while fiscal decentralization at the sub-provincial level in China leads to larger intra-provincial inequality, fiscal equalization efforts performed by provincial governments tend to mitigate the detrimental effect of fiscal decentralization on intra-provincial inequality. Our results also indicate that the quantitative effects of fiscal decentralization on regional inequality tend to be larger when they are measured from the expenditure side, which is consistent with the fact that expenditure decentralization is a much more meaningful measure of decentralization in China. Overall, we provide evidence on the potential inequality costs of using fiscal decentralization as a development strategy. At the same time, we emphasize the importance of implementing a fiscal equalization program to ensure the overall success of decentralization policy.

Keywords

Fiscal decentralization Equalization Intra-provincial Inequality China 

JEL Classifications

H11 H77 R11 R12 

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Yongzheng Liu
    • 1
  • Jorge Martinez-Vazquez
    • 2
  • Alfred M. Wu
    • 3
  1. 1.School of Finance, China Financial Policy Research CenterRenmin University of ChinaBeijingChina
  2. 2.International Center for Public PolicyGeorgia State UniversityAtlantaUSA
  3. 3.Department of Asian and Policy StudiesThe Education University of Hong KongHong KongChina

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