Fiscal decentralization and local education spending

: a difference-in-differences analysis of the province-managing-county reform in China

Abstract

Since the 1990s, China has been promoting the province-managing-county (PMC) reform in several provinces as an experiment to vitalize development in the counties. Owing to the fiscal decentralization nature of the PMC, more fiscal autonomy is given to pilot counties to boost local economic growth, accelerate administrative efficiency, and improve the provision of public services. The PMC reform provides a valuable opportunity to evaluate how fiscal decentralization influences local public spending and the provision of public services. Based on the sudden change in the vertical government structure at a certain point in time and the observation that the reform is initiated in only a few localities, the PMC reform is studied as a quasi-natural experiment using a difference-in-differences analysis. This analysis evaluates the effects of fiscal decentralization in China by comparing the local spending behavior of local governments designated as pilots and their unreformed counterparts both before and after the implementation of the PMC reform. This study focuses on the two most representative PMC reform approaches: expanding the local autonomy of economic and social management in better-performing counties, as exemplified by Heilongjiang; and the autonomy of fiscal management in poverty-stricken counties, with Jiangxi as example. Using the 1998–2007 socioeconomic and fiscal data retrieved from statistics yearbooks and fieldwork, this dissertation examines how the PMC reform affects local public spending in education at the prefecture- and county-level governments in Heilongjiang and Jiangxi Provinces. The findings show that fiscal decentralization has a significant effect on altering local spending share on education at the sub-provincial level. First, better-performing counties authorized with additional fiscal autonomy in economic management tend to spend a smaller share of the local expenditure on education than non-pilot counties do. By contrast, poverty-stricken counties authorized with additional fiscal autonomy in fiscal management tend to increase local spending share on education or slow down the speed of share reduction. Second, the reform results in self-reinforcing effects as the reform progresses. Third, comparing the reform approaches in the abovementioned provinces, the strong county empowerment in Heilongjiang exerts a stronger negative effect on local spending share on education than the fiscal empowerment in poverty-stricken counties in Jiangxi. Last, the increase in local expenditure share on education of prefecture-level cities that had pilot counties within their jurisdiction is higher compared with that of prefecture-level cities that had no pilot counties. This study attempts to enhance the understanding of the sub-national intergovernmental fiscal relations in multi-level governments. Therefore, this thesis aims to make a timely attempt to examine the transition of public spending composition under fiscal empowerment at county-level governments and power retrenchment at prefecture-level governments. Moreover, the findings of this study heighten the discussion on fiscal decentralization in spatial difference, particularly within the context of countries with multi-level governments and nondemocratic political systems. By treating the piloting process of this nationwide institutional change as a policy experiment, this study contributes to the literature on vertical administration reform and employment of experimental methods in public policy.

Date of Award	16 Feb 2015
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Wen WANG (Supervisor), Xiaoling ZHANG (Supervisor) & Che Lan Linda LI (Co-supervisor)