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Fiscal Decentralization, Corruption and Local Economic Growth |
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Reforming the government is a crucial component of both the transition from a planned to a market economy and economic development. Creating thriving markets in these economies typically requires transforming a highly centralized and interv
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Submitted On: 04-01-2010 | Views:
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Reforming the government is a crucial component of both the transition from a planned to a market economy and economic development. Creating thriving markets in these economies typically requires transforming a highly centralized and interventionist government into one that supports the market and fosters decentralized economic activities. In China, on the one hand, fiscal system, characterized as "fiscal contracting system" and "separating tax system", gives local government fiscal incentives. On the other hand, the vertical control system with local officials appointed by the central government, by which the central government reward and punish local officials on the basis of their economic performance, gives local government political incentives. Whether fiscal or political incentives, these motivate local officials to promote the local economy.There are two different production technologies. "Good" technology is a way to protect environment or save resources. "Bad" technology destroys environment and wastes resources. Both technologies generate the same output. However, their costs differ. "Good" technology has extra cost. "Bad" technology creates a negative externality. Because the cost of economic development will not appear until a long period have past, the central government does not observe the real cost in a relative short tenure of local government. Local government connives that the capital may adopt the "bad" technology for the aim of economic growth in a short period. In addition, this article analyses the behavior of local government when corruption occurs.The models and main conclusions of this article are the following:1. By using the dynamic and static models, we show that representative household (individual) will invest both in "good" and "bad" technology after considering long-term utility, and invest only in "bad" technology when considering current interests.2. By using the dynamic model, we show that the government can utilize tax and fiscal means to lead capital invest in "good" technology when considering the long-term utility of the representative household (individual). At equilibrium representative household (individual) will invest all in "good" technology.3. By studying the static equilibrium with local government, we show that under fiscal decentralization system, whether or not considering the negative externality brought from "bad" technology will decide different behavior of local government. A local government which does not consider the negative externality brought from "bad" technology will acquire higher GDP growth rate only by reducing punishment rate than a local government which does. 4. By studying the static equilibrium with corruption in local government, we show that the capital invested in corruption will be influenced by the punishment rate local government imposes on "bad" technology. At a relative high punishment rate, representative household (individual) need bribe local government to reduce the tax probability for maximizing output.The innovation of this article is to investigate how local governments make different decisions for different local economic growth aims under fiscal and political incentives of central government.
Article Source:
http://latest-finance-articles.com/Taxes/Fiscal-Decentralization--Corruption-and-Local-Economic-Growth-906.html
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