Structure of the Dissertation

The core question driving this study was on the relationship between regional disparities and decentralization. By summarizing the experiences of OECD countries and the explorations of China, this paper presents answers to the questions of whether China, as well as other developing countries should adopt the decentralizing system, so as to handle the increasingly complex regional challenges. In the first place, the multiple connotations of decentralization are clarified, which are divided into fiscal decentralization, administrative decentralization and welfare decentralization. Then, how the three dimensions of decentralization affect one country’s regional development are discussed, based on the experiences and practices of OECD countries and China.

Firstly, the transformations of OECD countries’ regional policies are discussed.

Overall, there are three stages: the comprehensive intervention stage, in order to achieve equality of regional income, the focused intervention stage, so as to reduce regional unemployment, and the regional governance stage, for upgrading the regional competitiveness and coordinated development between regions. During this transformation process, the powers of the central government become gradually decentralized toward the local government, regional organizations and other governing bodies. However, whether the decentralization system can ease the regional challenges is still a controversial issue. Based on the panel data from 1996 to 2009 of OECD countries, this project investigated the effects of three dimensions of decentralization on regional disparities, and also the various effects on relatively rich and relatively poor OECD countries.

Some preliminary conclusions are presented: firstly, the higher degree of a

119 Xie, Y., & Hannum, E. (1996). Regional variation in earnings inequality in reform-era urban China. American Journal of Sociology, 101(4), 950-992.

country’s expenditure on decentralization, the lower the degree of the country’s regional disparities. However, during the last decade, the decentralizing process of expenditure has led to the further deterioration of regional disparities. Secondly, taxation decentralization may also cause the escalation of regional inequalities.

Thirdly, if the costs of the salaries of civil servants exceed one third of the total local expenditure, the degree of a country’s regionally imbalanced development may be exacerbated. Fourthly, welfare decentralization may not have the desired effects on reducing regional disparities.

Secondly, the relationships between fiscal decentralization and regional disparities of China are discussed from a historical perspective. Before the processes of Reform and Opening up (改革開放), which were led by the regional balanced development strategy, China had experienced two stages of fiscal decentralization to stimulate the development initiatives of the local government. Although the purposes of the policy were good, the policy implementation had become chaotic, because of the contradiction caused by the planning system of the central government and the inward looking stance of the local governments. In the process of local government’s internecine competitiveness, even though there was a significant increase in the number of firms and investments, neither the production efficiency nor the business efficiency grew significantly. During the ensuing process of the economic crisis and power adjustment, the backward regions suffered greater losses and the regional disparities grew sharply.

At the beginning of the process of Reform and Opening up, after an adjustment, policy makers continued the implementation of fiscal decentralization, so as to act in concert with the regional unbalanced development strategy. According to the previous experience, the weak central financial and control capabilities should lead to the increase of regional disparities; however, the situation of regional inequalities showed a decrease. The reason for this anomaly was because of the process of rural reform. The “Household Contract Responsibility System” (生産責任制) reform released the developmental potentials of rural areas, increased the income of farmers and stimulated the emerging of township enterprises. The convergence between the rural and the urban in turn led to convergence between regions. During this time, the central government's fiscal revenue, accounting for total revenue, reached historic

lows of around 22%. In response to the collapse of the central government’s capacities, fiscal power was recentralized by the reform named “Revenue-sharing”

(分 税 制).¹²⁰ This reform was considered to have the characteristics of fiscal federalism, which afforded a clearer distribution of fiscal resources between the central and local governments. By this system, regional fiscal disparities enlarged significantly. In the meantime, reasonable and effective transfer payments and the financial aid system had not been established; therefore, regional disparities demonstrated a trend of increase.

Thirdly, the relationships between administrative decentralization and regional disparities are discussed, based on the experiences of China. It is difficult to establish a clear definition of administrative decentralization, along the lines of fiscal decentralization. Using the reported experience of OECD countries, this study analyzed administrative decentralization from three perspectives. Firstly, how the structure of the Chinese government affects the implementation of regional policies.

The structure of the Chinese government can be summarized as an “overall isomorphic structure” (职责同构), which demonstrates that all levels of government have exactly the same institutional settings. On the one hand, this rigid and aligned structure can guarantee control by the central government of the process of regional policy implementation. On the other hand, it promotes a rigid and expansive form of government, regardless of the economic conditions of specific regions, which leads to contradictory messages from the central and local governments, resulting in the conflicts between local governments and gives rise to the segmentation between central departments. Each of these issues harm the effective implementation of regional coordination policies. Secondly, how does the size of the local government affect regional balanced development? The size of the local government in China reflects the significant regional disparities. Both the number of government officials and administrative expenses of relatively backward regions are too large to stimulate the economic and social development which are the root cause of the regional development gap. Thirdly, how do the incentive mechanisms of the Chinese

120 Notes: The “revenue-sharing” reform is thought as a reform with features of fiscal federalism. In the Western context, fiscal federalism means fiscal decentralization. However, in the early 1990s, Chinese central government was on the verge of “bankruptcy”. So, the “revenue-sharing” reform means fiscal recentralization with a western institutional tool. It just like a “recentralization body” wearing a “decentralization coat”.

government affect the execution of regional policies. Scholars regularly use the terms

“Political Championship” and “Yardstick Competition” to generalize the incentive mechanisms of the Chinese government, which are thought of as the secret of China's economic miracle. However, intense competition between local governments has led to a series of contradictions in the processes of regional development, such as unfair competition between the rich and poor regions, vicious competition for resources, and the plight of the cause of regional cooperation.

Fourthly, the relationships between public service decentralization and regional disparities are discussed, based on the practices of China. In general, 95% of the basic public services are supplied by the local government; particularly the sub-provincial government. Fiscal centralization and public service decentralization causes an inversion effect between financial resources and expenditure responsibilities. This situation leads to diverse problems. Firstly, the economic and financial regional disparities convert to regional public service disparities, which in turn establish and solidify the inequalities between regions. Secondly, in order to avoid a region becoming a “welfare magnet”, it is hard to break down the welfare barriers between regions, such as the Household Registration System, which causes issues of unequal citizenship and other injustices. Thirdly, with respect to the background of regional welfare barriers, China's floating population cannot enjoy equal public services across the working and living regions.

In practice, though developed regions enjoy the benefits of the human capital brought in and are enhanced by a floating population, these regions do not have to undertake the cost of training and culturing the human capital. This situation causes the subsidies from backward regions effectively to be transferred to developed regions, this is called reverse subsidies, which worsen and encourage regional inequalities.