The impact of unequal regional distribution of fiscal resources on China’s post‐reform economic growth

Motivation The relationship between unequal fiscal resources among regions and China’s economic growth remains unclear due to its possibly different short‐ and long‐run directions. This study considers the role of unequal fiscal resources among regions in China’s economic growth. Purpose The article develops an empirical model to investigate the effect of unequal regional distribution of fiscal resources on China’s economic growth in the short and long run in the post‐reform period. Approach and Methods A time‐series data during the 1979–2010 period is used, adopting the Autoregressive Distributed Lag (ARDL) approach plus co‐integration with two indicators of inequality, the GINI coefficient (GINI) and coefficient of variance (CV), calculated from different components of provincial fiscal revenue. Six model specifications of the ARDL plus co‐integration equation are estimated. Findings The primary finding is that, in the short run, China’s regional fiscal distribution inequality has a negative one‐year lagged effect on its economic growth as the fiscal subsidy from central government is considered. However, the long‐run equilibrium relationship between fiscal inequality and economic growth in China is positive during the research period. Policy Implications As China is pursuing sustainable economic growth and trying ultimately to achieve equal regional development, this study thus suggests that China should continue to support the principle of ‘let some people grow rich first’, perhaps implying that some regions should have more fiscal resources to develop successfully first. This will eventually benefit the country’s overall economic development.