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A Summary of Fiscal Decentralization Theory

2006-5- 18 9:23

Keywords: fiscal decentralization; Fiscal federalism; Maintain marketization

The government system of almost any country is divided into several levels, and it is an important goal of the central government to realize the coordinated development of regional economy through the distribution of power. Therefore, the financial relationship between the central government and local governments has always been an important topic in economic research. Relevant economists at home and abroad have studied fiscal decentralization from different angles. The so-called fiscal decentralization refers to giving local governments a certain scope of tax power and expenditure responsibility, allowing them to decide the scale and structure of budget expenditure independently, so that local governments at the grass-roots level can freely choose the types of policies they need and actively participate in social management. As a result, local governments can provide more and better services. The theory of fiscal decentralization is not only widely concerned in developed countries, but also regarded by many developing countries as an important means to break the shackles of central planning and embark on the road of self-sustained growth.

First, the basic framework of traditional fiscal decentralization theory

If, according to the principle of neoclassical economics, the central government can fully supply public goods according to residents' preferences, the total amount of products and services in the economy and resource endowment, so as to maximize social welfare, then it is impossible for a country to have multi-level governments, and there is no need to discuss fiscal decentralization. However, the reality is that local governments not only exist, but also play a huge role. Based on this, the western fiscal decentralization theory has gradually emerged. The traditional theory of fiscal decentralization was marked by the Pure Theory of Local Expenditure published by Tibut in 1956, and then it was supplemented and developed by economists such as Musgrave and Oates.

The traditional theory of fiscal decentralization explains the rationality and necessity of fiscal decentralization to some extent. A basic problem in its research is how to rationally allocate various financial functions and corresponding financial tools among governments at all levels. The core view is that if the power of resource allocation is more inclined to local governments, local governments can better reflect the preferences of taxpayers through competition among local governments, thus strengthening the budget constraints on government actions and changing the situation that the central government does not listen to the opinions of local citizens to a certain extent.

(a) Tibut's theory of "sufficient voting"

Tibut (1956) starts with public goods, assuming that residents can move freely, residents with the same preferences and income levels will automatically gather around a local government, and the movement of residents will bring competition among governments. Once the government fails to meet the requirements, residents can "vote with their feet" and move to areas they are satisfied with. Therefore, if local governments want to attract voters, they must supply public goods according to the requirements of voters. Therefore, Pareto efficiency can be achieved. The empirical research results of Oates and brukner also show that rational residents really need to compare the benefits of public services in their places of residence with the costs of fulfilling their tax obligations. Under the constraint of residents, the motivation of local governments to provide public goods is the most effective.

(B) musgrave's thought of decentralization

Musgrave (1959) analyzed the rationality and necessity of the existence of central and local governments from the perspective of investigating the three major functions of finance. He believes that the central government should be responsible for the functions of macroeconomic stability and income redistribution, because local governments lack sufficient financial resources to control macroeconomic stability, and the mobility of economic entities has seriously hindered local governments' attempts to redistribute income; Resource allocation policies should be different according to the preferences of local residents. In this respect, the local government is more suitable than the central government, which is more conducive to the improvement of economic efficiency and social welfare. He also pointed out that the necessary decentralization between the central government and local governments is feasible from the perspective of the efficiency of public goods supply and the fairness of distribution. This decentralization can be solved by distributing taxes among governments at all levels, thus giving local governments relatively independent power.

(C) Oates's separation of powers theorem

In the book "Fiscal Federalism" (1972), Oates put forward the comparative advantage of decentralized public goods through a series of assumptions, that is, Oates' "Decentralization Theorem": for a public goods, if its consumption involves all population subsets in all regions, and the unit supply cost of the public goods is the same for the central government and local governments. Because compared with the central government, local governments are closer to their own people and have a better understanding of the utility and needs of voters in their jurisdictions. In other words, if the lower-level government can provide the same public goods as the higher-level government, it will be more efficient to provide them by the lower-level government.

Since the proof of Oates' separation of powers theorem is based on the assumption that the central government provides public goods equally, these restrictive conditions seem to be somewhat imposed on others, which is unconvincing. Subsequent research further explained this point. Oates (1999) pointed out that under the condition of complete information, the central government is likely to provide different outputs according to the different needs of different places in order to maximize social welfare. There is no need for fiscal decentralization at this time, but the reality is that due to the objective existence of information asymmetry, local governments have more information advantages than the central government. Due to some political pressures, the central government has also restricted the provision of public goods and services higher in some places than in others. These factors make the assumption that the central government provides public goods equally valid. In addition, decentralization is related to the difference in demand and supply cost of public goods among local governments. Even if the cost of public goods provided by the government is the same, as long as the demand is different, the welfare loss brought by the unified supply of the central government will increase with the decline of the price elasticity of public goods demand, and a large number of empirical studies show that the price elasticity of local governments' demand for public goods is just very low.

In addition, there are stigler's "menu" theory, Tracy's preference error theory and Buchanan's decentralized club theory.

Second, a new generation of fiscal decentralization theory

The new generation of fiscal decentralization theory introduces the theory of incentive compatibility and mechanism design under the framework of decentralization, which is the application of the latest progress of contemporary microeconomics in the financial field. This new decentralization theory is represented by the papers published by Qian Yingyi Chanandrolan, B Weingast and D·e· Wildsin in recent years. They are more concerned about how to design fiscal decentralization.

Qian Yingyi et al. (1997) opened the government's "black box" with the help of the new enterprise theory, thus constructing the second generation of fiscal decentralization theory. They believe that the traditional theory of decentralization only explains the benefits of decentralization from the information advantage of local governments, but does not fully explain the mechanism of decentralization, especially the assumption that government officials are loyal to their duties. In fact, both the government and government officials have their own material interests. Similar to business managers, government officials will seek rent as long as they lack constraints. Therefore, an effective government structure should achieve incentive compatibility between officials and local residents' welfare.

On the issue of marketization, the government should provide "positive" and "negative" incentives and make some promises. The former is used to prevent the predatory behavior of the government, and the latter is used to punish soft budget constraints. In the state of decentralization, giving up the right to use information afterwards, reducing the information transmission between the bottom decision makers and the top leaders, and limiting the upper authority will have a positive incentive for local governments. On the other hand, decentralization also helps to harden the budget constraints of local governments. Under the "federalism of maintaining the market", banks control credit, but local governments have no right to intervene, so the government cannot protect backward enterprises by borrowing money indefinitely, which leads to the hardening of budget constraints. In addition, the competition among governments also limits the local governments' random intervention in the market, and the competition among regional governments limits the predatory behavior of officials, because factors (especially foreign capital) can avoid the transitional jurisdiction of local governments through the flow, and the flow of factors also increases the cost for local governments to subsidize backward enterprises.

The new generation of fiscal decentralization theory further studies the sustainability of fiscal federalism and becomes an important part of its theory. Qian Yingyi and others pointed out that fiscal decentralization helps the government to maintain the market reliably, but to achieve this effect, the implementation of the federal policy must be sustainable. This sustainability requires the government to have a self-enforcement mechanism to ensure that government officials must have incentives to abide by federalist rules. It also points out that in order to make fiscal federalism play a sustained and stable role, it must have two points: first, it must give the central government enough resources to supervise the lower-level governments to avoid responsibility; At the same time, local governments must have means of supervision and unanimously oppose the abuse of power by the central government.

Third, the latest development of fiscal decentralization theory

From a global perspective, decentralization has become a major trend. Of course, the research on the theory of decentralization has gone beyond the financial field, and more and more attention has been paid to its impact on other societies and economies, mainly in the following aspects:

(A) experimental federalism and institutional innovation

Oates pointed out that under incomplete information, local governments can gain potential benefits from various experiments to solve social and economic problems by learning by doing. Because local governments have a better understanding of local residents' preferences and resource conditions, under fiscal decentralization, local governments may find institutional arrangements suitable for local governments, and the institutional knowledge contained in them may spread out through competition among local governments, thus indirectly promoting institutional innovation in other places. In this way, through various institutional innovation experiments carried out between different places, the "technical progress" of public policy formulation was finally promoted. This is also one of the reasons why many countries devolve the social security right originally held by the central government to local governments and carry out welfare reform. They admit the failure of the original social security welfare system and hope to find a new social security system that can play a role with the help of "local government".

At present, the theory of experimental federalism is still lacking, and it is difficult to guide empirical research. Of course, when the local government adopts a new policy, it will produce useful information and bring about positive externalities of information (Strumpf, 1997). Therefore, it will also weaken the internal motivation of local government system innovation. From this perspective, we are not sure whether centralization or decentralization can bring more institutional innovation. At this time, the central government's transfer payment policy is very important. The central government can adjust the benefits and costs of local government system innovation through transfer payment to ensure the motivation of local government innovation.

Fiscal decentralization and official corruption

RaymondFisman and RobertaGatti pointed out that in recent years, some economists have also studied fiscal decentralization from the perspective of political economy, and the relationship between fiscal decentralization and corruption of government officials has caused great controversy in system design. Some existing theories think that there is a strong relationship between them: Brennan and Buchanan (1980) emphasize that intergovernmental competition will reduce the rent-seeking of government officials in the process of providing public services. Jinetal (1999) thinks that competition among local governments will inhibit them from formulating policies to interfere and distort resource allocation. PerssonandTabellini(2000) believes that under the decentralized system, government officials, as agents, must be responsible for a specific task in a single jurisdiction, so it is much easier to evaluate their performance, and their efforts and remuneration can be directly linked. This system design makes government officials directly responsible for their actions, makes them more willing to take responsibility and can improve their performance. In the centralized situation, it is difficult to evaluate the performance of government officials, which makes it difficult to link their efforts with returns, and the possibility of corruption is even greater. However, these theories lack relevant empirical research. RaymondFisman and RobertaGatti(2002) investigated the relationship between them through systematic empirical research. They believe that the form of fiscal decentralization plays a great role in curbing the corruption of government officials, and the decentralization of fiscal expenditure between governments will bring about lower official corruption.

(c) Impact of fiscal decentralization on environmental quality

Through fiscal decentralization, the idea that local governments provide public goods in a decentralized way has been widely recognized in theory and practice, but it also brings a problem that can not be ignored, that is, the competition of local governments under decentralization will lead to the decline of environmental quality. Under the decentralized system, in order to attract enterprises to invest, local governments often adopt the strategy of reducing tax burden. The decrease of income may lead to the decline of public goods expenditure, thus making the output of public services not reach Pareto level. An important aspect of the decline of public services is the decline of environmental quality: in order to develop the community economy, local governments will lower the environmental quality standards to reduce the pollution control costs of enterprises within their jurisdiction, and as a result, inter-regional government competition will lead to excessive deterioration of the environment. Therefore, it is suggested that environmental problems should be controlled by the central government to avoid the adverse effects of local government competition. However, rivlin pointed out that the tax-sharing reform can weaken the adverse consequences of local government competition, and its idea is to regard value-added tax as a * * * tax enjoyed by local governments. Since the value-added tax is levied as a result of the business activities of enterprises, if local governments enjoy this tax, there is no need for individual local governments to attract investors by reducing the tax rate. For all jurisdictions, the tax burden of VAT is the same.

However, in the theoretical model of Oates and others, local governments not only provide public goods for local residents to consume, but also provide public input for enterprises and residents, which can improve the production efficiency of local enterprises and improve the local environmental quality. Therefore, the advantages and disadvantages of local government competition are conditional. If the local government truly represents the interests of voters, then voters' preference for environmental quality should be considered, and voters should choose an appropriate combination of environmental quality and employment level in balance.

Four. Summarize and comment

Western fiscal decentralization theory makes a comprehensive and in-depth discussion on the rationality and necessity of intergovernmental decentralization, the distribution of fiscal functions and financial tools among governments, the design of incentive mechanism for the government to maintain the market, and the sustainability of federalism. Especially with the economic transformation of pre-planned countries and developed countries, the theory of fiscal decentralization has been paid more and more attention. The discussion content is no longer limited to the financial field, but more consideration is given to the impact of fiscal decentralization on other social and economic issues, such as environmental quality issues and welfare reform. Due to the various influences brought by fiscal decentralization, it is unscientific to simply say absolute decentralization or absolute centralization. Instead, through the rational setting of centralization and decentralization, the financial system will operate harmoniously and effectively, and the central and local governments will fully mobilize their enthusiasm while performing their respective duties.

Centralized financial system is not conducive to institutional innovation and the supply of public goods. The tax-sharing reform in China 1994 has fully explained this point (although economists still have differences on whether China's economic growth is positively related to fiscal decentralization), the tax-sharing reform in China 1994 is not a real decentralization system. Because the functions of governments at all levels have not been straightened out at present, the central government still has the initiative to formulate policies, and even can modify the rules of the game at will, despite the widespread phenomenon of "absence", "offside" and "dislocation" in finance. The lack of a clear legal basis for intergovernmental financial relations enables the central government to take greater initiative in the reform of the financial system. In addition, China's current democratic decision-making mechanism is not perfect, and the implementation of almost all financial competition measures is mainly manifested in the behavior of the local government, rather than the embodiment of real democratic will and interests. In addition, the current household registration management system also makes it difficult for residents to "vote with their feet" and easily leave the jurisdiction where they live, which makes it difficult to implement the mechanism that the public expenditure structure and expenditure level of governments at all levels in China tend to be reasonable. In the future, the focus of financial system reform will still be: further rationalizing government functions, scientifically dividing the boundaries of government power, financial power and tax power at all levels, and reducing or even eliminating the phenomenon of "absence", "offside" and "dislocation" of finance; The central government should gradually establish an effective coordination mechanism among governments at all levels, that is, establish a fair compensation mechanism with reasonable scale among governments; On the premise of ensuring that the central government has sufficient resources to provide pure public goods and carry out macro-control, it should continuously weaken the intervention of administrative orders of higher-level governments, gradually internalize the economic achievements made by governments at all levels, and gradually increase the representation of local governments in the central government, which not only allows lower-level governments to fully express their opinions, but also has a mechanism for lower-level governments to resist the predatory ability of higher-level governments.