The impact of fiscal decentralization and market transition on local public finance in China: fiscal inadequacy and unmet social security needs

摘要

One of the frequently observed issues related to fiscal decentralisation in developingudand transition countries is that subnational governments may not have adequateudresources to finance the expenditure responsibilities decentralised to them. This oftenudresults in expenditure needs not being met in poorer areas. In China, fiscaluddecentralisation has taken place in an extreme form, where the social securityudresponsibility, a conventional central government function, has been devolved toudsubnational governments during the fiscal reforms.udWhile existing studies have anatomised the problem of unmet fiscal needs in poorerudareas of China using economic and political economy theories of fiscal federalism,udthey tend to under-estimate or neglect the fiscal needs induced by marketudtransition—the increasing demand for social security by workers from state andudnon-state sectors since the mid-late 1990s. This research illustrates that excess fiscaluddecentralisation, as in the case of China, could also create serious fiscal burdens forudrelatively affluent local areas and generate unmet social security needs in theseudlocalities. It is discovered that in response to the emerging social security burdens,udeven the relatively affluent local governments are forced to adopt measures that mayudcounter the intent of social benefit programs or produce other detrimentaludconsequences.udIn addition, this dissertation applies statistical analysis to ascertain a few inconclusiveudissues raised by the China-specific literature. It is perceived that the negativeudcorrelation between the share of consolidated provincial budgetary spending on socialudsecurity and health sector has become stronger and more significant in more recentudtime. This suggests that the expansion of social security expenses at subnational levelsudmight have bid away budgetary resources for health. The result from the multipleudregression analysis indicates that the degree of market transition has explanatoryudpower on the size of provincial government, even when a number of otherudindependent variables are controlled for. However, the explanatory power of marketudtransition on the size of central-provincial fiscal transfer is not robust.