Fiscal Decentralization, Flat Administrative Structure, and Local Government Size: Evidence and Lessons from China
| Date | 01 August 2016 |
| DOI | http://doi.org/10.1002/pad.1762 |
| Author | Yilin Hou,Ping Zhang,Chunkui Zhu |
| Published date | 01 August 2016 |
FISCAL DECENTRALIZATION, FLAT ADMINISTRATIVE STRUCTURE,
AND LOCAL GOVERNMENT SIZE: EVIDENCE AND LESSONS FROM
CHINA
PING ZHANG
1
*, CHUNKUI ZHU
1
AND YILIN HOU
2
1
School of International Relations and Public Affairs, Fudan University, China
2
Maxwell School of Syracuse University, USA
SUMMARY
This paper examines the effects of fiscal decentralization and flat administrative structure on local budget size and program out-
lays. We test three related theoretical hypotheses in China’s adoption of province-over-county scheme of financial administra-
tion. We provide evidence that both decentralization of expenditure and decentralization of revenue increase the size of local
budgets; that the impact of the former far outweighs that of the latter with local budgets on a rising trajectory; and that discretion
grants localities more means to increase their budget. These results show that as China’s reform deepens the proportion of local
outlay on administration declines because of more local discretion from eliminating the prefecture bypass between the province
and counties. But neither decentralization nor increased local discretion has allocated more local resources for education, and
both contribute to increasing outlay on economic development. The paper formulates tentative policy recommendations that
carry potential application for other countries. Copyright © 2016 John Wiley & Sons, Ltd.
key words—Chinese local government; province-over-county; fiscal decentralization; government size
INTRODUCTION
This article studies the issue of governance from the perspective of administrative structure, whether it is highly
hierarchical with many layers or relatively more flat with few layers. The administrative reforms in China provide
a very good and timely window for empirical tests of this issue. Viewed from an alternative angle, these reforms
can be taken as fiscal decentralization in that more authority, in particular authority on fiscal affairs, has been
granted to county-level governments to improve efficiency and effectiveness of public service provision. Such re-
forms are in line with the decentralization movement that has swept through most developing and transitional coun-
tries since the 1980s, but China’s reforms differ from that movement in substantive ways, with perhaps the
so-called “Chinese characteristics.”In this very sense, a detailed empirical study of China’s reform may provide
perspective into other countries’reform explorations, because every country is uniquely different.
Fiscal decentralization has been a very important measure and strategy in the past three decades (1978–2007) of
China’s reform and economic development, as it has been used in explicit as well as implicit ways.
1
Accordingly,
there have been many studies of this strategy (Blanchard & Shleifer, 2000; Montinola et al., 1995; and Roland,
2000); researchers have reached very different, sometimes opposite findings about the impact of fiscal decentrali-
zation on the country’s direction of development, which is in fact not at all surprising. The vastly different conclu-
sions are because of variation in the design of measures of decentralization and to the choice of factors controlled
for in their studies. This current study attempts to go further into the exploration. Whereas previous research
*Correspondence to: P. Zhang, Department of Public Administration, School of International Relations and Public Affairs Fudan University,
220 Handan Road, Shanghai 200433, China. E-mail: zhangp@fudan.edu.cn
1
Note that the tax sharing reform in 1994 actually centralized the tax revenues; however, as mentioned in the following, the expenditure respon-
sibilities are kept local and even more decentralized.
public administration and development
Public Admin. Dev. 36, 198–214 (2016)
Published online 25 July 2016 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/pad.1762
Copyright © 2016 John Wiley & Sons, Ltd.
focused on the power distribution between the central and provincial governments, this study will fathom down to
the power structure below the province, to examine an important change in that structure between the province,
prefecture, and county levels, which makes full sense given that, as is well known, China has the most layers of
local governments in the world. As shown in Figure 1, China has five official government levels, of which four
different levels under central governments (province, prefecture/city, county, and township) are all referred as “lo-
cal.”Prefecture level city is acted as an important link between province and county. Based on the data from China
Statistical Yearbook and the Ministry of Civil Affairs, there are 34, 333, 2854, and 40 381 governments at the four
different local levels in 2014, respectively.
2
Thus people argue that China has too many layers and number of local
governments and propose some reforms to simplify and downsize the local governments for a flatter administrative
structure.
As the country’s reform deepens, fiscal decentralization has granted provinces and prefectures unprecedented
autonomy. With regional and local economic interests becoming more and more clearly separated, competition
for tax revenue intensifies and thereby issues like redrawing jurisdiction boundaries and reducing the number of
layers in the government hierarchy have attracted increasing attention of the academia and the policy community,
focusing, amidst of all, on the rationality or otherwise of the prefecture-over-county versus the province-over-
county regime. Against this background, regimes of local (province and below) administrative structure casts pro-
truding impact on local government behavior and local economic development. In the first 30 years of the People’s
Republic of China (PRC, 1949–1978), the regime of local finance was that of direct province-to-county budgeting
and account settlement system. In the 1980s, prefectures were turned into metro cities as regional economic cen-
ters; prefectures have since dominated in sub-province financial distribution, which led to unexpected financial dif-
ficulty at the county and township levels. After adoption of the tax sharing system in 1994, county and township
fiscal stress worsened. Out of the necessity of solving that difficulty, the focus of subsequent reforms returned to the
prospect of reinstating the province-over-county regime.
This study examines three research questions for sub-central fiscal decentralization that occurred in China over
the past decade: Do outlay decentralization and increased top-down fiscal transfer formulate intergovernmental
“collusion”that leads to expansion of county governments? Does revenue/expenditure decentralization increase
the size of county governments? And does the province-over-county scheme of financial administration expand
county governments? We use a sample of 330 counties in six selected provinces from years 2000 to 2006 to em-
pirically explore the effects of the regime shift from prefecture-over-county to province-over-county on the size and
structure of county governments. Such a study carries theoretical as well as practical significance. In theory, it will
test the applicability of the hypotheses formulated by Oates (1985) and Wallis and Oates (1988), and Brennan and
Buchanan (1977) on decentralization, and by Brennan and Buchanan (1980) on collusion. The test will provide ev-
idence on the policy preferences as favored by local bureaucrats, whether it is to place as top priority outlays on
administrative expenses, public service, or infrastructure for economic development. Answers to these will be of
great utility in understanding decision patterns of local governments in an old administrative tradition that is under-
going drastic changes.
The rest of this paper is organized as follows. Section two reviews existing literature; section three discusses the
sample, data, and empirical methodology. Empirical results are discussed in section four. The final section con-
cludes with directions for future research.
Figure 1. The structure of government levels in China.
2
At the county level, there are districts, counties, and county-equivalent cities. In this paper, “city”only refers to prefecture level cities otherwise
specified, and “local”refers to governments under provincial levels, especially counties and county-equivalent cities. Under township, China has
another governmental hierarchy, i.e., villager’s committee and urban residents’committee which is not an official government level but self-
government organizations. In 2014, the number of villager’s committee and urban residents’committee was 682 144.
199FISCAL DECENTRALIZATION, ADMINISTRATIVE STRUCTURE, AND GOVERNMENT SIZE
Copyright © 2016 John Wiley & Sons, Ltd. Public Admin. Dev. 36, 198–214 (2016)
DOI: 10.1002/pad
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