Is it worthwhile or just a bootless errand? The case of China's fiscal decentralization and eco-efficiency

Abstract During the last two decades, China has made commendable efforts to control environmental pollution and promote sustainable development. Empowering local governments regarding their budgets is an example of such efforts. Although China's fiscal decentralization (FD) stimulated inter-regional economic competition, environmental pollution also came along as a byproduct. Considering these dynamics, this study aims to investigate the association between the FD and the eco-efficiency of 99 prefecture-level cities from China's top ten urban agglomerations from 2003 to 2016. We investigated the issue of cross-sectional dependence among the panel variables and, to check the stationary properties of our data, applied the second generation Pesaran and Cross-sectional Im, Pesaran, and Shin unit root tests. Subsequently, to check the possible impact of FD on eco-efficiency, we applied both Difference Generalized Method of Moments (GMM) and System GMM with the help of several control variables. The results indicated that FD improved eco-efficiency for the overall sample cities; however, this impact varied among different regions of China. The regional analyses confirmed that FD improved eco-efficiency in the eastern and central parts of China, whereas the relationship was negative in the western region. Our results also confirm that irrational use of resources for economic development reduces eco-efficiency. However, sustainable economic development has a positive and significant impact on eco-efficiency. The negative impact of foreign direct investment and secondary industry was also more significant than was that of population density. Our study presents important policy implications for both central and local governments in China, which include an increase in decentralization and eco-efficiency practices and control over foreign investments, lead towards environmental pollution.