Factor decomposition of sub-provincial fiscal disparities in China

With the help of fiscal statistics on sub-provincial public finances in the second half of the 1990s, this paper explores the hotly debated issues pertaining to fiscal disparities in China during this period, and the various factors driving the changes in fiscal disparities. Among them are economic factors (e.g., GDP per capita, economic structure), and institutional factors (e.g., urban–rural dichotomy, ethnic issues).We adopt Morduch and Sicular's general, regression-based approach to decompose fiscal disparity with respect to per capita fiscal expenditure (Morduch & Sicular, 2002). The empirical results indicate that among all the statistically significant factors, GDP per capita and urban–rural dichotomy are the two most important variables that affects fiscal disparities, with a total contribution of 60%. Other relatively important factors are economic structure and population density. Several features of fiscal expenditure in China identified by our empirical findings together with their corresponding policy implications are discussed.