Decentralization for Economic Growth: A Critical Review

  • Jinhua Cheng
Part of the Governing China in the 21st Century book series (GC21)


This chapter takes a critical review on the current literature on decentralization, federalism, and economic growth. It defines several basic concepts about decentralization and summarizes contemporary debates on decentralization for economic growth in general and the theory of “market-preserving federalism” particularly. Through an in-depth review of the literature, the chapter answers the question of why existing wisdom is insufficient in overcoming the “fundamental state-market dilemma.”


  1. Adams, Brian E., “Assessing the Merits of Decentralization: A Framework for Identifying the Causal Mechanisms Influencing Policy Outcomes,” Politics & Policy, Vol. 44, No. 5, 2016, pp. 820–849.CrossRefGoogle Scholar
  2. Bahl, Roy W., & Johannes F. Linn, Urban Public Finance in Developing Countries, Oxford: Oxford University Press, 1992.Google Scholar
  3. Bardhan, Pranab, “The Nature of Institutional Impediments to Economic Development,” Center for International and Development Economics Research Working Paper No. C96-066, “Decentralization of Governance and Development,” Journal of Economic Perspectives, Vol. 16, No. 4, 2002, pp. 185–205.CrossRefGoogle Scholar
  4. Baskaran, Thushyanthan, Lars P. Feld, & Jan Schnellenbach, “Fiscal Federalism, Decentralization and Economic Growth: Survey and Meta-Analysis,” CESifo Working Paper No.4985, 2014.Google Scholar
  5. Bird, Richard M., “Fiscal Decentralization and Competitive Governments,” in Gianluigi Galeotti, Pierre Salmon, and Ronald Wintrobe eds., Competition and Structure: The Political Economy of Collective Decisions: Essays in Honor of Albert Breton, New York: Cambridge University Press, 2000.Google Scholar
  6. Brennan, Geoffrey, & James M. Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution, Cambridge: Cambridge University Press, 1980.Google Scholar
  7. Buchanan, James, “Federalism as an Ideal Political Order and an Objective for Constitutional Reform,” Publius: The Journal of Federalism, Vol. 25, No. 2, 1995, pp. 19–27.CrossRefGoogle Scholar
  8. Burgess, Michael, Comparative Federalism: Theory and Practice, New York: Routledge, 2006.Google Scholar
  9. Cao, Yuanzheng, Yingyi Qian, & Barry R. Weingast, “From Federalism, Chinese Style, to Privatization, Chinese Style,” Economics of Transition, Vol. 7, No. 1, 1999, pp. 103–131.CrossRefGoogle Scholar
  10. Carruthers, Bruce G., & Naomi R. Lamoreaux, “Regulatory Races: The Effects of Jurisdictional Competition on Regulatory Standards,” Journal of Economic Literature, Vol. 54, No. 1, 2016, pp. 52–97.CrossRefGoogle Scholar
  11. Cheema, G. Shabbir, & Dennis A. Rondinelli eds., Decentralizing Governance: Emerging Concepts and Practices, Washington, D.C.: Brookings Institute Press, 2007.Google Scholar
  12. Cremer, Helmuth, Maurice Marchand, & Pierre Pestieau, “Interregional Redistribution through Tax Surcharge,” International Tax and Public Finance, Vol. 3, No. 2, 1996, pp. 157–173.CrossRefGoogle Scholar
  13. De Figueiredo, Rui J. P., Jr., & Barry R. Weingast, “Self-Enforcing Federalism,” The Journal of Law, Economics, & Organization, Vol. 21, No. 1, 2005, pp. 103–135.Google Scholar
  14. De Figueiredo, Rui J. P., Jr., Michael McFaul, & Barry R. Weingast, “Constructing Self-Enforcing Federalism in the Early United States and Modern Russia,” Publius: The Journal of Federalism, Vol. 37, No. 2, 2007, pp. 160–189.CrossRefGoogle Scholar
  15. Falleti, Tulia G., “A Sequential Theory of Decentralization: Latin American Cases in Comparative Perspective,” American Political Science Review, Vol. 99, No. 3, 2005, pp. 327–346.CrossRefGoogle Scholar
  16. Feld, Lars P., Horst Zimmermann, & Thomas Doring, “Fiscal Federalism, Decentralization and Economic Growth,” in Pio Baake & Rainald Borck eds., Public Economics and Public Choice, Berlin: Springer, 2007, pp. 103–133.CrossRefGoogle Scholar
  17. Feng, Xingyuan, Christer Ljungwall, Sujian Guo, & Alfred M. Wu, “Fiscal Federalism: A Refined Theory and Its Application in the Chinese Context,” Journal of Contemporary China, Vol. 22, No. 82, 2013, pp. 573–593.CrossRefGoogle Scholar
  18. Hayek, Friedrich A., The Road to Serfdom: Text and Documents, Chicago: The University of Chicago Press, Individualism and Economic Order, London: Routledge & Kegan Paul, 1976.Google Scholar
  19. Hirschman, Albert O., Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Cambridge, MASS: Harvard University Press, 1970.Google Scholar
  20. Huther, Jeff, & Anwar Shah, “A Simple Measure of Good Governance,” in Anwar Shah ed., Public Services Delivery, Washington, D.C.: World Bank, 2005.Google Scholar
  21. Iimi, Atsushi, “Decentralization and Economic Growth Revisited: An Empirical Note,” Journal of Urban Economics, Vol. 57, Issue 3, 2005.CrossRefGoogle Scholar
  22. Inman, Robert P., “Transfers and Bailouts: Enforcing Local Fiscal Discipline with Lessons from U.S. Federalism,” in Jonathan Rodden, Gunnar S. Eskeland, & Jennie Litvack eds., Fiscal Decentralization and the Challenge of Hard Budget Constraints, Cambridge, Mass.: The MIT Press, 2003.Google Scholar
  23. Jin, Hehui, Yingyi Qian, & Barry R. Weingast, “Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style,” Journal of Public Economics, Vol. 89, 2005, pp. 1719–1742.CrossRefGoogle Scholar
  24. Kee, Woo Sik, “Fiscal Decentralization and Economic Development,” Public Finance Review, Vol. 5, No. 1, January 1977, pp. 79–97.Google Scholar
  25. Kobayashi, Bruce H., & Larry E. Ribstein eds., Economics of Federalism, Cheltenham, Northampton, Mass: Edward Elgar, 2007.Google Scholar
  26. Lin, Justin Yifu, & Zhiqiang Liu, “Fiscal Decentralization and Economic Growth in China,” Economic Development and Cultural Change, Vol. 49, No. 1, 2000, pp. 1–21.CrossRefGoogle Scholar
  27. Litvack, Jennie, & Jessia Seddon, Decentralization Briefing Notes, Washington, D.C.: The World Bank, 1999.Google Scholar
  28. Litvack, Jennie, Junaid Ahmad, & Richard Bird, Rethinking Decentralization in Developing Countries, Washington, D.C.: the World Bank, 1998.Google Scholar
  29. Martinez-Vazquez, Jorge, & Robert M. Mcnab, “Fiscal Decentralization and Economic Growth,” World Development, Vol. 31, No. 9, 2003, pp. 1597–1611.CrossRefGoogle Scholar
  30. Martinez-Vazquez, Jorge, & Andrey Timofeev, “Decentralization Measures Revisited,” International Studies Program Working Paper 09-13, Andrew Young School of Policy Studies, Georgia State University, August, 2009.Google Scholar
  31. McKinnon, Ronald I., “The Logic of Market-Preserving Federalism,” Virginia Law Review, Vol. 83, No. 7, Symposium: The Allocation of Government Authority, 1997, pp. 1573–1580.Google Scholar
  32. Montinola, Gabriella, Yingyi Qian, & Barry R. Weingast, “Federalism, Chinese Style: The Political Basis for Economic Success in China,” World Politics, Vol. 48, No. 1, 1995, pp. 50–81.CrossRefGoogle Scholar
  33. Musgrave, Richard Abel, The Theory of Public Finance: a study in public economy, New York: McGraw-Hill, 1959.Google Scholar
  34. Oates, Wallace E., Fiscal Federalism, New York: Harcourt Brace Jovanovich, 1972.Google Scholar
  35. Oates, Wallace E., “Searching for Leviathan,” The American Economic Review, Vol. 75, No. 4, (Sep., 1985), pp. 748–757.Google Scholar
  36. Oates, Wallace E., “Fiscal Decentralization and Economic Development,” National Tax Journal, Vol. 46, No. 2, 1993, pp. 237–243.Google Scholar
  37. Oates, Wallace E., “An Essay on Fiscal Federalism,” Journal of Economic Literature, Vol. 37, No. 3, (Sep., 1999), pp. 1120–1149.CrossRefGoogle Scholar
  38. Oates, Wallace E., “Toward A Second-Generation Theory of Fiscal Federalism,” International Tax and Public Finance, Vol. 12, 2005, pp. 349–373.CrossRefGoogle Scholar
  39. Ong, Lynette H., “Fiscal Federalism and Soft Budget Constraints: The Case of China,” International Political Science Review, Vol. 33, No. 4, 2012, pp. 455–474.CrossRefGoogle Scholar
  40. Ostrom, Elinor, “Decentralization and Development: The New Panacea,” in Keith Dowding et al eds., Challenges to Democracy: Ideas, Involvement and Institutions (The PSA Yearbook 2000), New York: Palgrave, 2001, pp. 237–256.CrossRefGoogle Scholar
  41. Ostrom, Elinor, “Doing Institutional Analysis: Digging Deeper than Markets and Hierarchies,” in Claude Menard & May M. Shirley eds., Handbook of New Institutional Economics, Boston, MA: Springer, 2005.Google Scholar
  42. Prud’homme, Remy, “The Dangers of Decentralization,” The World Bank Research Observer, Vol. 10, No. 2, 1995, pp. 201–220.CrossRefGoogle Scholar
  43. Qian, Yingyi, & Barry R. Weingast, “China’s Transition to Markets: Market-Preserving Federalism, Chinese Style,” Journal of Economic Policy Reform, Vol. 1, Issue 2, 1996, pp. 149–185.CrossRefGoogle Scholar
  44. Qian, Yingyi, & Barry R. Weingast, “Federalism as a Commitment to Preserving Market Incentives,” Journal of Economic Perspectives, Vol. 11, No. 4, 1997, pp. 83–92.CrossRefGoogle Scholar
  45. Ribstein, Larry, & Bruce Kobayashi, “Introduction,” in Ribstein and Kobayashi eds., Economics of Federalism, Northampton, Mass: Edward Elgar, 2007, pp. xi–xxvii.Google Scholar
  46. Riker, William H., Federalism: Origin, Operation, Significance, Boston: Little, Brown, 1964.Google Scholar
  47. Riker, William H., Federalism: Origin, Operation, Significance, Boston: Little, Brown, “Federalism,” in Fred I. Greenstein & Nelson W. Polsby eds., Handbook of Political Science, Vol. 5, Mass.: Addison-Wesley Publishing Company, 1975.Google Scholar
  48. Rodden, Jonathan, “Comparative Federalism and Decentralization: On Meaning and Measurement,” Comparative Politics, Vol. 36, No. 4, 2004, pp. 481–500.CrossRefGoogle Scholar
  49. Rodden, Jonathan, & Susan Rose-Ackerman, “Does Federalism Preserve Markets?” Virginia Law Review, Vol. 83, No. 7, Symposium: The Allocation of Government Authority, 1997, pp. 1521–1572.Google Scholar
  50. Rondinelli, Dennis A., “Government Decentralization in Comparative Perspective: Theory and Practice in Developing Countries,” International Review of Administrative Sciences, Vol. 47, No. 2, 1981, pp. 133–145.CrossRefGoogle Scholar
  51. Rondinelli, Dennis A., & G. Shabbir Cheema, “Implementing Decentralization Policies: An Introduction,” in G. Shabbir Cheema & Dennis A. Rondinelli eds., Decentralization and Development: Policy Implementation in Developing Countries, Beverly Hills: Sage, 1983.Google Scholar
  52. Rondinelli, Dennis A., & John R. Nellis, “Assessing Decentralization Policies in Developing Countries: A Case for Cautious Optimism,” Development Policy Review, Vol. 4, Issue 1, 1986, pp. 3–23.CrossRefGoogle Scholar
  53. Rondinelli, Dennis A., James S. McCullough, & Ronald W. Johnson, “Analysing Decentralization Policies in Developing Countries: A Political-Economy Framework,” Development and Change, Vol. 20, 1989, pp. 57–87.CrossRefGoogle Scholar
  54. Rose-Ackerman, Susan, “Risk Taking and Reelection: Does Federalism Promote Innovation?” The Journal of Legal Studies, Vol. 9, No. 3 (Jun., 1980), pp. 593–616.CrossRefGoogle Scholar
  55. Rose-Ackerman, Susan, “Does Federalism Matter? Political Choice in a Federal Republic,” The Journal of Political Economy, Vol. 89, No. 1 1981, pp. 152–165.CrossRefGoogle Scholar
  56. Rose-Ackerman, Susan, From Elections to Democracy: Building Accountable Government in Hungary and Poland, New York: Cambridge University Press, 2005.CrossRefGoogle Scholar
  57. Schneider, Aaron, “Decentralization: Conceptualization and Measurement,” Studies in Comparative International Development, Vol. 38, No. 3, 2003, pp. 32–56.CrossRefGoogle Scholar
  58. Schragger, Richard C., “Decentralization and Development,” Virginia Law Review, Vol. 96, 2010, pp. 1837–1909.Google Scholar
  59. Seabright, Paul, “Accountability and Decentralisation in Government: An Incomplete Contracts Model,” European Economic Review, Vol. 40, Issue 1, 1996, pp. 61–89.CrossRefGoogle Scholar
  60. Solow, Robert M., “A Contribution to the Theory of Economic Growth,” The Quarterly Journal of Economics, Vol. 70, No. 1, 1956, pp. 65–94.CrossRefGoogle Scholar
  61. Solow, Robert M., “A Native Informant Speaks,” Journal of Economic Methodology 8: 1, 2001, 111–112.CrossRefGoogle Scholar
  62. Stiglitz, Joseph E., The Economic Role of the State, Cambridge, MA: B. Blackwell, 1989.Google Scholar
  63. Strumpf, Koleman S., “Does Government Decentralization Increase Policy Innovation,” Journal of Public Economic Theory, Vol. 4, No. 2, 2002, pp. 207–241.CrossRefGoogle Scholar
  64. Thieben, Ulrich, “Fiscal Decentralisation and Economic Growth in High-Income OCED Countries,” Fiscal Studies, Vol. 24, No. 3, 2003.Google Scholar
  65. Thornton, John, “Fiscal Decentralization and Economic Growth Reconsidered,” Journal of Urban Economics, Vol. 61, Issue 1, 2007, pp. 64–70.CrossRefGoogle Scholar
  66. Tiebout, Charles M., “A Pure Theory of Local Expenditures,” The Journal of Political Economy, Vol. 64, No. 5, 1956, pp. 416–424.CrossRefGoogle Scholar
  67. Tocqueville, Alexis de, Democracy in America: historical-critical edition of De la democratie en Amerique, edited by Eduardo Nolla; translated by James T. Schleifer, Indianapolis: Liberty Fund, 2010.Google Scholar
  68. Treisman, Daniel, The Architecture of Government: Rethinking Political Decentralization, New York: Cambridge University Press, 2007.CrossRefGoogle Scholar
  69. Wasylenko, Michael, “Fiscal Decentralization and Economic Development,” Public Budgeting & Finance, Vol. 7, Issue 4, 1987, pp. 57–71.CrossRefGoogle Scholar
  70. Weingast, Barry R., “The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development,” Journal of Law, Economics, & Organization, Vol. 11, No. 1, 1995, pp. 1–31.Google Scholar
  71. Weingast, Barry R., “Second Generation Fiscal Federalism: The Implications of Fiscal Incentives,” Journal of Urban Economics, Vol. 65, Issue 3, 2009, pp. 279–293.CrossRefGoogle Scholar
  72. Wibbels, Erik, Federalism and the Market: Intergovernmental Conflict and Economic Reform in the Developing World, New York: Cambridge University Press, 2005.CrossRefGoogle Scholar
  73. Wibbels, Erik, “Madison in Baghdad? Decentralization and Federalism in Comparative Politics,” Annual Review of Political Science, Vol. 9, 2006, pp. 165–188.CrossRefGoogle Scholar
  74. Williamson, Oliver E., “Economies as an Antitrust Defense: The Welfare Tradeoffs,” The American Economic Review, Vol. 58, No. 1, “Transaction-Cost Economics: The Governance of Contractual Relations,” Journal of Law and Economics, Vol. 22, No. 2, 1979, pp. 233–261.Google Scholar
  75. Williamson, Oliver E., “Transaction Cost Economics,” in Claude Menard & May M. Shirley eds., Handbook of New Institutional Economics, Boston, MA: Springer, 2005.Google Scholar
  76. Willis, Eliza, Christopher da C. B. Garman, & Stephan Haggard, “The Politics of Decentralization in Latin America,” Latin American Research Review, Vol. 34, No. 1, 1999, pp. 7–56.Google Scholar
  77. The World Bank, World Development Report, Decentralization Topics: What, Why, & Where, online available at (visited on December 4, 2016).
  78. World Bank Independent Evaluation Group, Decentralization in Client Countries: An Evaluation of World Bank Support, 1990–2007, Washington, D.C.: World Bank, 2008.Google Scholar
  79. Wunsch, James S., “Decentralization: Theoretical, Conceptual, and Analytical Issues,” in J. Tyler Dickovick & James S. Wunsch ed., Decentralization in Africa: The Paradox of State Strength, Boulder, CO: Lynne Rienner Publishers, 2014, pp. 1–22.Google Scholar
  80. Xu, Chenggang, “The Fundamental Institutions of China’s Reforms and Development,” Journal of Economic Literature, Vol. 49, No. 4, 2011, pp. 1076–1151.CrossRefGoogle Scholar
  81. Zhang, Qianfan, & Paul Gewirtz eds., The Legalization of Central-Local Relations (《中央与地方关系法治化》), China, Nanjing: Yilin Publishing House, 2009.Google Scholar
  82. Zhang, Tao, & Heng-fu Zou, “Fiscal Decentralization, Public Spending, and Economic Growth in China,” Journal of Public Economics, Vol. 67, Issue 2, 1998, pp. 221–240.CrossRefGoogle Scholar
  83. Zhang, Xiaobo, “Fiscal Decentralization and Political Centralization in China: Implications for Growth and Inequality,” Journal of Comparative Economics, Vol. 34, Issue 4, 2006, pp. 713–726.CrossRefGoogle Scholar
  84. Zheng, Yongnian, De Facto Federalism in China: Reforms and Dynamics of Central-Local Relations, Hackensack, NJ: World Scientific, 2007.CrossRefGoogle Scholar

Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Jinhua Cheng
    • 1
  1. 1.KoGuan Law SchoolShanghai Jiao Tong UniversityShanghaiChina

Personalised recommendations