This paper compares two approaches to decentralization in local government, namely the administrative and the fiscal approaches, in order to discern which approach has the better influence on local economic growth. Although previous studies tend to exclusively focus on fiscal decentralization. Administrative decentralization refers to the devolution of government decision-making power, while fiscal decentralization refers to tax and revenue sharing with lower levels of government. Using data from a county-level policy experiment in China between 1998 and 2008, this paper employs a natural experimental approach. The results confirm that administrative decentralization has a positive effect on economic growth, partly because it enables local governments to generate capital investment thro...[ Read more ]

This paper compares two approaches to decentralization in local government, namely the administrative and the fiscal approaches, in order to discern which approach has the better influence on local economic growth. Although previous studies tend to exclusively focus on fiscal decentralization. Administrative decentralization refers to the devolution of government decision-making power, while fiscal decentralization refers to tax and revenue sharing with lower levels of government. Using data from a county-level policy experiment in China between 1998 and 2008, this paper employs a natural experimental approach. The results confirm that administrative decentralization has a positive effect on economic growth, partly because it enables local governments to generate capital investment through land sales. On the other hand, fiscal decentralization is found to have no significant effect on economic growth.

Keywords: administrative decentralization, fiscal decentralization, economic growth.