Decentralization and Macroeconomic Performance in China : Regional Autonomy Has its Costs

We give an empirical examination of the impact of fiscal and economic decentralization in China on the country's economic growth and inflation, using a vector autoregressive (VAR) model with latent variables. Our econometric investigation offers strong evidence that there is a connection between decentralization and macroeconomic performance in China. Economic decentralization appears to be positively related to growth in real output for the entire postwar period in China. Fiscal decentralization seems to have adverse implications for the rate of inflation, especially after the late 1970s. Decentralization would therefore seem to be good for growth and bad for price stability