Academic journal article Public Finance and Management

Fiscal Decentralization in China and India: Competitive, Cooperative or Market Preserving Federalism?*

Academic journal article Public Finance and Management

Fiscal Decentralization in China and India: Competitive, Cooperative or Market Preserving Federalism?*

Article excerpt

ABSTRACT

This paper provides a comparative assessment of fiscal decen-tralization in China and India, including the standard components of expenditure and revenue assignments and institutions for intergovern-mental transfers, as well as the nature of sub-national authorities over general economic activity. In particular, the case of China, where town and village enterprises have been very active, is contrasted with that of India, where local governments remain circumscribed in their author-ity, despite decentralizing reforms. The implications of differences in decentralization for fiscal outcomes and economic growth are dis-cussed. The characterization of each country in terms of concepts of federalism, i.e., competitive, cooperative and market preserving feder-alism, is discussed, in attempting to abstract from the two cases to more general lessons for fiscal decentralization.

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

China and India are the major global growth stories of the past decade. Their size and their high growth rates imply that, if they continue on their current trajectories, there will be a significant shift in the world's economic landscape. In each country, despite differences in historical circumstances and policies, growth has been accompanied by, and almost certainly driven by, a shift toward greater market orientation in economic policies. International trade, investment, technology adoption and private enterprise are all components of the two countries' recent economic suc-cess.

While redrawing the boundaries between state and market has been a well-recognized factor in China and In-dia's growth accelerations, a subtler aspect of governance involves the decentralization of government decision-making. This kind of decentralization can have two poten-tial positive effects on economic activity and growth. First, it can improve the efficiency of delivery of public goods, which may be complementary to private goods in support-ing economic activity (e.g. infrastructure). Second, it can be a facilitating channel for implementing changes in the boundary between public and private economic activity, by restraining the power of government decision makers. In each case, the potential driving force, as usually theorized, is greater accountability through greater competition among government decision-makers for approval of constituents. In the Chinese case, however, the personal gain of local government decision-makers may also have been a moti-vating factor. Thus, the benefits of decentralization, and the channels through which it works, are not necessarily straightforward. In addition, competition and local govern-ment capture of economic rents may have negative impacts, including under-provision of public goods and rent-seeking burdens on private enterprise.

Therefore, this paper examines the relative nature and impacts of fiscal decentralization in China and India, with the goal of understanding the role of decentralization in the two countries' economic growth. We include a sum-mary of the standard components of expenditure and reve-nue assignments and institutions for intergovernmental transfers, as well as the nature of sub-national authorities over general economic activity. In particular, the case of China, where town and village enterprises have been very active, is contrasted with that of India, where local gov-ernments remain circumscribed in their authority, despite decentralizing reforms. The implications of differences in decentralization for fiscal outcomes and economic growth are discussed. The characterization of each country in terms of concepts of federalism, i.e., competitive, cooperative and market preserving federalism, is discussed, in attempting to abstract from the two cases to more general lessons for fis-cal decentralization.

The remainder of the paper is structured as follows. Section 2 provides an overview of federal institutions in the two countries, including assignments of authority. …

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