ABSTRACT
The reorientation of regional policy requires financial backing. Yet, by the late 1980s, China’s fiscal system exhibited features common to most developing countries where “budget deficits have been financed to an excessive extent by money creation and borrowing abroad with consequent inflation and foreign debt problems. In principle, the deficit problem could be resolved by cutting expenditure and raising charges for services. But, with realistic allowances for expenditure economies and nontax revenue, it seems clear that many countries will need to increase tax revenue” (Goode 1990:121; see also A.Lewis 1955). As I have discussed elsewhere, China’s fiscal problems stemmed from a fundamental disjuncture between a set of economic institutions that were designed for a command economy and an economy that has become increasingly market-oriented (D.Yang 1994). While the fiscal contracting system adopted in the 1980s provided local governments with strong incentives to promote economic growth, it nevertheless capped the fiscal benefits the central government could derive from that growth. As a result, central government revenue as a share of economic activities, such as GNP, declined over time, making it difficult for the center to secure a stable macroeconomic environment and-even if it wanted to-increase support for interior development (D.Yang 1990).
