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Distributional Consequences of Reforming Local Public Finance in China*

Published online by Cambridge University Press:  12 February 2009

Albert Park ,
Scott Rozelle ,
Christine Wong  and
Changqing Ren
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Extract

Central-local budgetary arrangements have undergone numerous changes since the 1960s as the Chinese government in its quest for modernization has sought to balance the needs of central control and local autonomy. During the reform period, the falling tax share of GNP and a commitment to greater decentralization of the planning system led to major changes in the public finance system that have devolved expenditure responsibilities and financial authority to local governments. Fiscal decentralization has been credited with hardening budget constraints for local publicly controlled enterprises and government agencies. New budgetary relations have instilled fiscal discipline, allowing local governments to disburse more expenditures only if they generated more revenues. These reforms have helped unleash the entrepreneurial spirit of local bureaucrats, fuelling the rapid growth of rural industry.

Type
Research Article
Information
The China Quarterly , Volume 147 , September 1996 , pp. 751 - 778
Copyright
Copyright © The China Quarterly 1996

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References

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6 For example, see Oi, Rural China Takes Off, and Susan Whiting, The Micro-Foundations of Institutional Change in Reform China: Property Rights and Revenue Extraction in the Rural Industrial Sector, Ph.D. dissertation, University of Michigan, 1995. For more balanced treatment of rich and poor regions, see Christine Wong, Financial local government: feasts, famines, and growing regional disparities in post-Mao China, mimeo, 1994; and Christine Wong, Subprovincial finance in the People's Republic of China: a pilot study in Hebei province, a report for the Ministry of Finance under the Asian Development Bank TA for Supporting Policy Analysis, 1994.

7 See Wong, Fiscal reform and local industrialization, for a general description. In Shaanxi, local fixed revenues, which were retained fully by the province, included income from local firms and administration, salt tax, agricultural and livestock tax, industrial commercial earnings tax, other industrial/commercial taxes, fines from late payment and underpayment of taxes, and other income. Income divided by a fixed percentage (80% to the central government and 20% to the province) consisted primarily of income from centrally owned firms managed by the local government (not including military firms, loss-making firms, and non-industrial/commercial firms). Land use taxes and profits-turned-taxes (ligaishui) were also split 80–20. Finally, adjustment revenue consisted of industrial and commercial taxes, 11.9% of which went to the central government.

8 Susan Shirk, The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993).

9 Shaanxi caizheng sishinian, 1950–1990 (Forty Years of Shaanxi Financial Statistics, 1950–1990) (Xian: Shaanxi Finance Bureau, 1992), p. 428.

10 Christine Wong, Christopher Heady and Wing Woo, Fiscal Management and Economic Reform in the People's Republic of China (Hong Kong: Oxford University Press, 1995), p. 92.

11 Revenue shortfall is defined as the gap between collected revenues and approved expenditures.

12 Table 1, column 3, shows that the nominal revenue shortfall rose after 1986. However, in real terms revenue shortfall fell monotonically after 1986. Throughout the article, the provincial wage index is chosen as the price deflator since wages are the largest component of fiscal expenditures.

13 Consolidated is defined to include all budgetary revenues and expenditures of lower level units (including townships but not villages). In 1992, the revenues earned by the province itself (own revenues), for example, account for 15% of provincial consolidated revenues. In this article discussion of county revenues and expenditures always includes township budgets, so the term consolidated is dropped.

14 Since 1985, the share of spending on health/education and agricultural services has increased, and the share of administration expenditures initially fell and then has risen since 1988.

15 M. Gallagher and O.M. Ogbu, Public expenditures, resource use and social services in Sub-Saharan Africa, Africa Region Technical Department (Washington, D.C.: World Bank, 1989), cited in Ferroni, Marco, and Ravi Kanbur, Poverty-Conscious Restructuring of Public Expenditure, Social Dimensions of Adjustment in Sub-Saharan Africa, Working Paper No. 9 (Washington, D.C.: World Bank, 1990). Nationally, the share of administrative expenses in total expenditures grew from 3.9% in 1979 to 8.7% in 1991, and expenditures on culture, health, science and health grew 14.7% per year. During the same period, the capital investment share fell from 30% to 7.5% of expenditures (Wong, Heady and Woo, Fiscal Management and Economic Reform).

16 Spending by provincial governments as a share of revenues jumped in the mid-1980s to reach 104% in 1986 (from 67% in 1982), implying a diminished ability of the central government to redistribute surplus funds. Since 1986, provincial remittance rates have fallen from 33.6 to 22.2% in 1991 (Wong, Heady and Woo, Fiscal Management and Economic Reform). According to Roy Bahl and Christine Wallich, Intergovernmental fiscal relations in China, Policy Research Working Paper No. 863 (Washington, D.C.: World Bank, 1992), per capita expenditures of richer provinces are higher and growing faster than poorer provinces.

17 The prefecture also plays an important role in the financial system since the reforms. Examination of prefectural revenue, expenditure and deficit patterns shows that while there is some equalizing redistribution of resources among prefectures in Shaanxi, a heavy urban bias in financial resource allocation is evidenced by the much higher expenditure per capita enjoyed by residents in urban municipalities and counties with prefectural capitals than in rural counties.

18 In other words, there are three types of expenditures made by the province: direct spending on its own fiscal matters; disbursement to prefectures to be spent by the prefectures themselves (prefectural own expenditures); and disbursements that move to the county for expenditure at that level (county expenditures). Figure 1, Panel C shows that of the total of these three types of spending (consolidated expenditures), the county spends the largest share

19 Hereafter, counties refers to both counties and county-level municipalities. Urban districts are excluded because of the significant differences in public finance in urban and rural areas.

20 Data on township revenues and expenditures are reported separately for the years 1986–89 in Table 7 and discussed in a later part of the article. Township revenues consist primarily of TVE taxes, agricultural taxes, and, beginning in 1991, special agricultural product taxes. Townships, in turn, have responsibilities to meet fixed expenditures for local agricultural infrastructure construction, education and health services, and welfare.

21 Office of the Leading Group for Economic Development in Poor Areas Under the State Council, Outlines of Economic Development in China's Poor Areas (Beijing: Agricultural Publishing House, 1989).

22 Here, counties in Yanan and Yulin prefectures are defined as northern counties. Southern counties refer to the 26 non-northern poor counties (i.e., those in Shaanxi's eight other prefectures).

23 Albert Park, Scott Rozelle and Fang Cai, China's grain policy reforms: implications for equity, stabilization, and efficiency, China Economic Review, Vol. 5, No. 1 (1994), pp. 15–34.

24 Xingqing Ye, Bianyuan didai zhengfu shouzhi xingwei fenxi (Analysis of government revenues and expenditures in remote regions), Jingji kaifa luntan (The Tribune of Economic Development), March 1991; Bahl and Wallich, Intergovernmental fiscal relations in China.

25 Barry Naughton, Implications of the state monopoly over industry and its relaxation, Modern China, Vol. 18, No. 1 (1992), pp. 14–41.

26 Village leaders have fewer fiscal expenditure responsibilities than township leaders. Greater revenue scarcity and the fewer number of taxable TVEs may have led township leaders in poor areas to be more predatory than in richer regions, resulting in greater relative profitability of village industry; see Hehui Jin and Zhixiong Du, Productivity of China's rural industry: growth rates and regional disparity, paper presented for a National Workshop on Rural Industrialization in Post-Reform China sponsored by the International Labour Organization, Beijing, October 1993.

27 Though not as low as in 1984 when expenditures per capita plummeted.

28 Partial correlations use prefectural dummy variables to control for across-region effects.

29 Ling Zhu and Zhongyi Jiang, Public works and poverty alleviation, paper presented at a Discussion Forum on China's Poverty Policies sponsored by Ford Foundation, Beijing, October 1994.

30 In 1983, two 10% profit taxes for energy and communications construction and urban construction were established as sources of extra-budgetary revenue. Local finance departments are officially required to report all extra-budgetary revenues, though widespread under-reporting is likely.

31 Oksenberg and Tong, The evolution of central-provincial fiscal relations.

32 Wong, People's Republic of China.

33 Wong, Heady and Woo, Fiscal Management and Economic Reform

34 Wong, Financing local government.

35 Wong, Heady and Woo, Fiscal Management and Economic Reform

36 Wong, Subprovincial finance in the People's Republic of China.

37 Tanzhen Sun and Gang Zhu, Woguo xiangzhen zhiduwai caizheng fenxi (Analysis of extra-system township finance in China), Jingji yanjiu (Economic Research), No. 9 (1993).

38 Wong, Heady and Woo, Fiscal Management and Economic Reform.

39 Remarks by Duan Yingbi, Vice-Director, Financial and Economic Committee of the State Council, at a seminar on food problems in China held at Beijing Agricultural University on 19 October 1994.

40 Budget officials in one northern county reported that borrowing to cover the net deficit in 1992 was 1.25 million yuan (8% of the total government deficit) and had almost entirely been financed by loans from the Agricultural Bank. The county had run up a cumulative debt of 7.75 million yuan from 1984tol992.In contrast, a poor southern county accumulated debts of 16.69 million yuan from 1985 to 1992 (in 1992 alone borrowing to cover the net deficit reached 6.8 million yuan, about one-third of the total deficit), but did not borrow any money from banks. Rather, funds had been borrowed (jiekuan) from about 30 different administrative units within the county. This borrowing included 1.5 million yuan in education fees collected by the Education Committee and 0.3 million yuan from the Forestry Bureau originally meant to finance afforestation programmes.

41 Yingyi Qian and Weingast, Beyond decentralization; and Yingyi Qian and Gerard Roland, Regional decentralization and the soft budget constraint: the case of China, mimeo, Stanford University, 1994.

42 Guobao Wu, Goal conflict in poor areas.

43 Ibid.

44 Gallagher and Ogbu, Public expenditures, resource use, and social services.

45 In 1980 yuan (deflated by provincial government wage index). Expenditures per capita recovered to 35 yuan in 1992.

46 The fall in investment is less dramatic if firm improvement investments are excluded (falling from about 13% in 1983). These investments were systematically shifted from budget to enterprise accounts and so overstate the drop in actual investment. Similar reports of the increased importance in wages are found in Xingqing Ye, Analysis of government revenues and expenditures for 25 poor counties and in Wong, Heady and Woo, Fiscal Management and Economic Reform, for Gansu, where 80% of expenditures went to personnel costs. Though not as dramatic, the national trend has also been falling for spending on capital construction, though it is being partly offset by increasing availability of EBF. Part of the reason for this trend is that government employment has grown at a high rate, even exceeding that of the urban labour force. Administrative personnel in China grew from 20 to 29 million people from 1978 to 1990, an increase of 45% or 3.1% per annum (Ibid.).

47 Scott Rozelle, Albert Park and Jikun Huang, Dilemmas of reforming state-market relations in rural China, mimeo, Stanford University, 1995.

48 Carl Pray, Scott Rozelle and Jikun Huang, Assessing reforms in China's agricultural research system, mimeo, Rutgers University, 1994.

49 Rozelle, Park and Jikun Huang, Dilemmas of reforming state-market relations.

50 Oi, Rural China Takes Off.

51 This is consistent with the concerns about over-investment expressed in Wong, Fiscal reform and local industrialization.

52 Guobao Wu, Goal conflict in poor areas; Scott Rozelle, Albert Park and Changqing Ren, Assessing the effectiveness of poverty alleviation investments in China, mimeo, Stanford University, 1994; Xingqing Ye, Analysis of government revenues and expenditures.

53 Wong, Heady and Woo, Fiscal Management and Economic Reform, p. 127.

54 Bahl and Wallich, Intergovernmental fiscal relations.

55 Naughton, Implications of the state monopoly.

56 Ramgopal Argawala, China: reforming intergovernmental fiscal relations, World Bank Discussion Paper No. 178 (Washington, D.C.: World Bank, 1992).

57 Oksenberg and Tong, The evolution of central-provincial fiscal relations.

58 Jean Oi, Fiscal flows and institutional incentives for economic growth in China, paper presented at the Taxation, Resources, and Economic Development Conference, Local and Intergovernmental Finance in Transitional Economies, Lincoln Institute of Land Policy, Cambridge, MA, 15–16 October 1993.