Political institutions and fiscal reforms in China

Problems of Post-Communism

Volumn 48, Issue 1, 2001, Pages 16-26

  Huang, Yasheng ^a  

^a NONE

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EID: 0035531897     PISSN: 10758216     EISSN: None     Source Type: Journal    
DOI: 10.1080/10758216.2001.11655914     Document Type: Article

References (31)

1. This view was expressed in a very influential study by two U.S.-educated social scientists, Hu Angang, of the Chinese Academy of Natural Sciences, and Wang Shaoguang, now at the Chinese University in Hong Kong. For a good summary of their views in English, see Shaoguang Wang and Angang Hu, The Political Economy of Uneven Development: The Case of China (Armonk, NY: ME. Sharpe, 1999). Their views were widely circulated in China while the central leadership was contemplating fiscal reforms in 1993. According to press reports, Chinese central leaders and the Ministry of Finance strongly concur with the broad concerns raised in this study and have designed fiscal-reform measures based on some of its recommendations.
2. Amelia A. Newcomb, "China Without Deng: U.S. Debates Scenarios," Christian Science Monitor (February 14, 1995): 6.
3. For a detailed exposition of this view, see China: Macroeconomic Stability in a Decentralized Economy (Washington, DC: World Bank, 1995).
4. The calculations are based on figures from the State Statistical Bureau, Zhongguo tongji nianjian 1997 (China Statistical Yearbook, 1997) (Beijing: Zhongguo tongji chubanshe, 1997). The revenue figures used here conform to the revenue definitions set forth by the International Monetary Fund.
5. This does not mean that fiscal centralization has been completely effective. The central tax offices in the localities are still staffed by local officials, and thus central tax collection is still subject to local influences. (I owe this observation to an anonymous reviewer at Problems of Post-Communism.) However, the true significance of the 1994 fiscal reforms is not so much that the system became effective overnight, but that the reforms created conditions for future effectiveness.
6. The tax figures are from Zhongguo tongji nianjian 1997.
7. This article extends my earlier work showing that the central government has increased its administrative controls during the era of economic reforms, in part to compensate for its losses of economic resources. See Yasheng Huang, Inflation and Investment Controls in China: The Political Economy of Central-Local Relations During the Reform Era (New York: Cambridge University Press, 1996), especially pp. 90-96.
8. The rival hypothesis points to economic factors rather than political factors. According to economic analysis, the low level of inflation in China, despite rapid monetary expansion, was due to the declining velocity of money. The problem with this analysis is that it is merely an observation, not an explanation. It is informed by a simple monetary identity in which money supply multiplied by the velocity of money equals GDP. As price levels have held steady in China, while monetary expansion exceeds the growth of real output, the velocity of money has to decrease by definition. However, this analysis does not explain why the velocity of money should decrease. Indeed, inflation can accelerate even when monetary expansion is held steady if there is a sudden increase in the velocity of money. One reason that the velocity of money can decrease is that holders of cash and deposit assets, such as households or enterprises, have faith in the ability of the government to control inflation. Or, at least in the enterprise sector, spending is administratively constrained. Thus the issue of control becomes relevant to the discussion.
9. For a more detailed exposition of this view, see Wallace E. Oates, Fiscal Federalism (New York: Harcourt Brace Jovanovich, 1972).
10. For more details, see Peter N.S. Lee, Industrial Management and Economic Reform in China, 1949-1984 (New York: Oxford University Press, 1987).
11. For a more detailed discussion, see Wu Peilun, Woguo de zhengfu jigou gaige (Reform of Government Institutions in China) (Beijing: Jingi ribao chubanshe, 1990).
12. See Yasheng Huang, "The Statistical Agency in China's Bureaucratic System-With a Comparison to the Former Soviet Union," Communist and Post-Communist Studies 29, no. 1 (1996): 59-77; idem, "Administrative Monitoring in China: Institutions and Processes," China Quarterly, no. 143 (September 1995): 828-43.
13. See Yasheng Huang, "The Statistical Agency in China's Bureaucratic System-With a Comparison to the Former Soviet Union," Communist and Post-Communist Studies 29, no. 1 (1996): 59-77; idem, "Administrative Monitoring in China: Institutions and Processes," China Quarterly, no. 143 (September 1995): 828-43.
14. Huang, Inflation and Investment Controls in China, pp. 90-96.
15. Ibid.
16. Ibid.
17. For a review of personnel changes during this period, see Hong Yung Lee From Revolutionary Cadres to Party Technocrats in Socialist China (Berkeley: University of California Press, 1991).
18. Oates, Fiscal Federalism, p. 17.
19. Christine P.W. Wong, "Central-Local Relations in an Era of Fiscal Decline: The Paradox of Fiscal Decentralization in Post-Mao China," Department of Economics Working Paper No. 210 (Santa Cruz: University of California, 1990).
20. During the reform era, the center has not "borrowed" only from Guangdong to cover its budget shortfalls, for in 1981 it borrowed 154 million yuan from Fujian, and in 1987 it borrowed 236 million yuan from Tianjin. Tianjin jingji nianjian 1988 (Tianjin Economic Yearbook, 1988) (Tianjin: Renmin chubanshe, 1989), p. 515. In 1988, the central government returned a portion of this money to Tianjin by excluding thirteen small taxes from being counted as local revenue and by excluding loans as an expenditure item, as is customary in the Chinese tax system. In this case, the money appropriated by the center equaled the difference between Tianjin's loans and the value of the thirteen taxes. See Tianjin jingji nianjian 1989, pp. 539-40. Thus the center does not appropriate the borrowings in an outright manner but appropriates a significant portion by reducing local retention and the collection base simultaneously.
21. During the reform era, the center has not "borrowed" only from Guangdong to cover its budget shortfalls, for in 1981 it borrowed 154 million yuan from Fujian, and in 1987 it borrowed 236 million yuan from Tianjin. Tianjin jingji nianjian 1988 (Tianjin Economic Yearbook, 1988) (Tianjin: Renmin chubanshe, 1989), p. 515. In 1988, the central government returned a portion of this money to Tianjin by excluding thirteen small taxes from being counted as local revenue and by excluding loans as an expenditure item, as is customary in the Chinese tax system. In this case, the money appropriated by the center equaled the difference between Tianjin's loans and the value of the thirteen taxes. See Tianjin jingji nianjian 1989, pp. 539-40. Thus the center does not appropriate the borrowings in an outright manner but appropriates a significant portion by reducing local retention and the collection base simultaneously.
22. This calculation may bias downward tax contributions from Jiangsu and Liaoning, because we have no data on central borrowings from these two provinces. It is likely that central subsidies to Guangdong are small, because one of the reasons that Guangdong has a rather low formal tax burden is to give it nearly complete fiscal autonomy and responsibility.
23. Since the measurement used here already normalizes the differences in economic development, poor provinces may have lower tax contribution ratios and still receive substantial subsidies because of the central government's pricing policies. According to the World Bank, Chinese energy and raw material prices are set low relative to their economic costs. The price of heavy fuel oil is one-third that of international levels, and coal is set at 60 percent of its long-run marginal production cost. See Edwin Lim and Adrian Wood, China: Long-Term Development Issues and Options (Baltimore: Johns Hopkins University Press, 1985), p. 71. Administrative pricing affects the levels of tax revenues from different provinces. In provinces with a large energy sector (usually located in the interior regions), tax revenue is artificially depressed since their main products are priced below world-market values.
24. World Development Report, 1988 (Washington, DC: Oxford University Press for the World Bank, 1988). To some extent, China's consolidated revenue is underestimated by 11 percent. In addition to formal budgetary revenue, central ministries and regional governments also impose extra-budgetary levies.
25. Gabriella Montinola, Yingyi Qian, and Barry R. Weingast, "Federalism, Chinese Style: The Political Basis for Economic Success in China," World Politics 48, no. 1 (October 1995): 50-81.
26. For more details along this line, see Huang, Inflation and Investment Controls in China. 25. Appropriations would appear less illegitimate if these appeals were convincing and sensible either on ideological or nationalistic grounds.
27. Many China analysts view bargaining with alarm, equating it with a loss of central control. My analysis shows that bargaining can actually be a form of political participation and is a positive outcome of fiscal decentralization. For a similar view, see Yongnian Zheng and Guoguang Wu, "The Political Economy of Central-Local Relations in China," Modern Chinese Studies 6, no. 45 (1994). An optimistic scenario is that local governments retain a say not only on fiscal policies but on personnel appointments at the center. If local officials are presented with different personnel choices, representing different fiscal visions, they should have personnel preferences. Shirk argues that Chinese politics is already characterized by "reciprocal accountability." See Susan Shirk, The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993). This analysis does not imply that candidates favored by the localities are necessarily better, but simply that there needs to be a mechanism to balance and check the central government's personnel selections. Who eventually emerges from this process is of less importance than the continued process of consultations and consensus-building between the central and local authorities.
28. Many China analysts view bargaining with alarm, equating it with a loss of central control. My analysis shows that bargaining can actually be a form of political participation and is a positive outcome of fiscal decentralization. For a similar view, see Yongnian Zheng and Guoguang Wu, "The Political Economy of Central-Local Relations in China," Modern Chinese Studies 6, no. 45 (1994). An optimistic scenario is that local governments retain a say not only on fiscal policies but on personnel appointments at the center. If local officials are presented with different personnel choices, representing different fiscal visions, they should have personnel preferences. Shirk argues that Chinese politics is already characterized by "reciprocal accountability." See Susan Shirk, The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993). This analysis does not imply that candidates favored by the localities are necessarily better, but simply that there needs to be a mechanism to balance and check the central government's personnel selections. Who eventually emerges from this process is of less importance than the continued process of consultations and consensus-building between the central and local authorities.
29. As Levi points out, revenue contributions are a reciprocal process: "Quasi-voluntary compliance rests on reciprocity. It is a contingent strategy in which individual taxpayers are more likely to cooperate if they have reasonable expectations that both the rulers and other taxpayers will also cooperate." Margaret Levi, Of Rule and Revenue (Berkeley: University of California Press, 1988).
30. Barry R. Weingast, "The Economic Role of Political Institutions," Journal of Law, Economics, and Organization 11, no. 1 (April 1995): 1-31.
31. Weingast, "Economic Role of Political Institutions," takes this line of analysis.