Bridging Fiscal Divergence in China

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Shen, Chunli
Schick, Allen
This dissertation asks, from the fiscal perspective, whether the Chinese government has been effective in moving towards a more equitable development strategy. It seeks to answer this question through an in-depth examination of China's intergovernmental fiscal system with respect to the following three aspects: public expenditure policies, fiscal inequality, and the intergovernmental fiscal transfer system. Chapter 1 aims to provide a comprehensive review of China's experience in fiscal decentralization. It examines the system of central control in the pre-reform period of 1949 to 1978; the fiscal contracting system, which resulted from a series of ad hoc decentralization reforms between 1979 and 1993; and the single most important intergovernmental fiscal reform, that of 1994. Following a thorough history and background knowledge of China's fiscal system in Chapter 1, Chapter 2 provides an institutional analysis of China's public expenditure policies by looking into the following three areas, expenditure assignment, expenditure composition and local accountability. This chapter tries to answer the question of whether China's public expenditure management serves the objective of adequate and equitable public services provision. Chapter 3 examines fiscal inequality at the provincial, prefectural, and county levels of government. Where data are available, the spending inequality on core public services is also explored. There is also a comparison of fiscal inequality at the provincial, prefectural, and county levels. With Chinese leaders and citizens expressing increasing concern at the regional inequalities that have accompanied China's rapid growth, the question of the redistributive effectiveness of the intergovernmental transfer system has become more and more important. The distribution of fiscal resources is taking the center stage in policy debates because the poorest regions may not be financially equipped to provide the most basic public services, such as education and health care, at the national average levels. The intergovernmental transfer system could ease fiscal disparities by equalizing fiscal capacity across regions. Chapter 4 conducts a comprehensive evaluation of the redistributive effects of the intergovernmental transfer system, at both the provincial and the county levels.