chapter  4
24 Pages

The Grave Consequences of the Decline of the State's Fiscal Capacity

The state's financial extractive capacity is the foundation upon which the central government may exercise control over the macroeconomy; it is also the basis upon which the state may reach the goals of modernization. Thus any decline in the state's financial extractive capacity implies a decline in the central government's ability to control the macro economy and to achieve the goals of modernization, which will have very grave short-and long-term consequences. All the problems that have appeared in the process of transforming China's econ-

omy in a market-oriented direction have been, almost without exception, closely related to the decline in the state's financial extractive capacity. It is precisely because of the decline in state capacity that the central government's ability to resolve these problems is extremely limited, and, indeed, one may even say that in certain areas it is utterly impotent.