8 - Inverted Soft Budget Constraints and Resource Extraction

Summary

In this chapter, I examine another salient phenomenon associated with local government behavior; that is, local governments engage in extensive extractions of resources from below – firms, subordinate agencies, or residents within their jurisdictions – in order to obtain extra-budgetary resources. Such extra-budgetary resource-seeking activities often take the form of imposing various taxes and fees or using political pressures or incentives to induce local firms to sponsor government-initiated projects. This type of behavior is especially salient at, and associated with, lower-level government administrations (e.g., governments at the township or county levels), where resources are scarce and where governments come into direct contact with ordinary citizens and all kinds of enterprises. Over the years, such behavior that seeks extra-budgetary resources from below has been remarkably persistent, extensive, and widespread, despite the central government’s repeated efforts to curb it.