The Nexus of Capital Accumulation and Public Capital in the Framework of Decentralized Economy:The Case of China

Abstract

This article empirically examines the interaction mechanism between fixed capital formation and government investment in an intertemporal framework,employing data on China and Japan.We found that although China and Japan both implement fiscal decentralization,the respective mechanisms through which economic development and investment are boosted are quite different.While correlation between the growth rate of GDP and capital formation is weak in Japan,its central government investment stimulates the formation of capital.In China,local governments have played an irreplaceable role in the formation of public and fixed capital.The paper makes a comprehensive and comparative study of the fiscal systems in China and Japan in terms of the demand,supply,financing and efficiency of public investment.The better performance of Japan's public investment should be attributed to its effective incentive mechanism,under which local governments are encouraged to invest to build good infrastructure for economic growth.