China’s 1994 fiscal reform and local governments’ efforts on fighting industrial pollution

Abstract China’s fiscal reforms over 1980–1988 steadily increased the degree of its fiscal decentralization (FD) by allowing local governments more fiscal power to tax and spend. The country’s fiscal reform in 1994 continued the rise in FD on the expenditure side (FDE) but reversed its upward trend on the revenue side (FDR). This article aims to ascertain whether this change in the mix of FDE and FDR since 1994 had significantly reduced local governments’ efforts to combat industrial pollution in the context of China’s political and official-promotion systems. We do so by applying the sys-GMM to estimate the effects of FDE and FDR on local governments’ spending to combat industrial pollution, using data covering 29 Chinese provinces over the 1992–2015 period. Our findings strongly indicate that China’s 1994 fiscal reform has exerted a negative impact on local governments’ efforts to fight industrial pollution.