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24-08-2021

The impact of fiscal centralization policies on education expenditure among Chinese local governments

Authors: Lin-Feng Yue, Jing-Ran Sun, Long-Jian Yang

Published in: Quality & Quantity | Issue 4/2022

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Abstract

In 1994, the education policy goal for the Chinese government was that the education expenditure as a share of GDP should be at least 4% of GDP. However, this educational policy goal has not been achieved until 2010. Another relevant social issue was related to teachers’ pay: there were 168 strike and protests occurred in almost every part of China from 2014 to 2015. In this article, we examine the impact of fiscal centralisation policies have on China’s educational spending and teachers’ salary. We use a county-level panel data for period of 2001 to 2005 and apply a quasi-experiment. This study finds evidence that fiscally-centralising policies, exemplified by the Corporate Income Tax Reform passed in 2002, are one of the determinants that lead to less education expenditures and subsequently affect teachers’ merit salary.

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Data source: World Bank. https://data.worldbank.org/indicator/SE.XPD.TOTL.GD.ZS.

China’s fiscal system is a vertical and hierarchical one, and it is similar to the Marble Cake Federalism described by McLean (1950). The five hierarchical levels of Chinese local governments are administratively subordinate to governments of higher levels and are responsible for a variety of expenditure responsibilities assigned by the central governments, including health care, capital projects, and basic education.

According to the Income tax revenue sharing reform plan issued by Chinese State Council. http://www.gov.cn/gongbao/content/2002/content_61880.htm.

Data source: China Statistical Yearbook. http://www.stats.gov.cn/tjsj/ndsj/.

Most of those counties are located in North-Western and Northern provinces of China, including Xinjiang Province, Tibet Province, Gansu Province and Inner Mongolia Province.

We only used one year pre-policy data because the corporate income tax data is available from 2001.

Industry structure defined by the value added of primary industry divided by the value added of second industry.

Fiscal population is defined as the number of employees who either directly work for the government, or work for any public organizations.

General transfer and earmarked transfers are similar to the block grants and categorical grants in the U.S., respectively. Earmarked transfers are primarily given for the following purposes: infrastructure development, forest protection, returning farmland to forest, mandatory education in poorer areas, social security, and public health. The ultimate purpose of intergovernmental transfer is to equalize public service provisions due to regional inequality. Unfortunately, our data does not disaggregate earmarked transfers by type.

The way to distinct different parts of Chinese mainland was firstly mentioned in Chinese central government’s Seventh Five-Year Plan in 1986, which clearly divided Chinese mainland into three parts: East, Central and West, East region including Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, Hainan provinces (municipals). Central region including Shanxi, Inner Mongolia, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan, Guangxi provinces. West region including Sichuan, Guizhou, Yunnan, Tibet, Shannxi, Gansu, Qinghai, Ningxia, Xinjiang provinces. Similar statement can be found in Chinese National Bureau of Statistics (http://www.stats.gov.cn/ztjc/zthd/sjtjr/dejtjkfr/tjkp/201106/t20110613_71947.htm).

Based on the Chinese Industrial Enterprise Database, the number of industrial firms located in West, East, and Central Region were 22,610, 114,022, and 35,453 respectively in 2002.

Central government appropriates education funding through the administrative chain (provincial–prefecture–county), then the county government appropriates the funding to each school within its jurisdiction. In addition to the appropriation from the central government, a county government still needs to allocate other funding to support schools.

The non-availability of 2004 data does not allow us identifying the immediate effects of the CIT reform. Therefore, based on the previous results shown in Fig. 2 and subsequent results shown in Table 6, we speculate the effect of 2004 may still be negative significantly, but the absolute value of the coefficient of 2004 may smaller than 2005.

The CIT reform is consecutive in 2002 and 2003, and we need to make sure parallel trend in 2002 because the earliest year of complemental data is 2002.

Since there are too many students in the same class (e.g. class-2019), the students are assigned to different sections (class-2019-section 3).

Teachers in public schools are considered public employees since their salary is financed through state finance. Thus, they are less likely to express negative attitudes toward governments.

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Title: The impact of fiscal centralization policies on education expenditure among Chinese local governments
Authors: Lin-Feng Yue
Jing-Ran Sun
Long-Jian Yang
Publication date: 24-08-2021
Publisher: Springer Netherlands
Published in: Quality & Quantity / Issue 4/2022
Print ISSN: 0033-5177
Electronic ISSN: 1573-7845
DOI: https://doi.org/10.1007/s11135-021-01223-6

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