Fiscal decentralization and the development of the tobacco industry in China

Fiscal decentralization provides incentives for governments to promote local economies. However, the same motive to increase local tax bases can also induce governments to take protectionist measures detrimental to market competition. The Chinese tobacco industry makes an excellent case for the study of the impact of governmental competition on market performance. The industry enjoys an impressive growth in the 1980s and early 1990s with the support of local governments, while it witnessed interprovincial protectionism in the mid-1990s when the market became saturated. The existence of grossly inefficient firms in a prosperous industry also reveals that governmental competition, while playing an important role in weakening or breaking state monopoly, has its limitations. (C) 2000 Elsevier Science Inc. All rights reserved. JEL classification. D43; H32; P35; F13.