chapter  8
22 Pages

FISCAL DUALISM IN CHINA Gradualist Reform and the Growth of Off-Budget Finance

Decentralization is a crucial dimension of market reform and economic liberalization. Decentralization strengthens the links between effort and reward and allows economic agents more flexibility in responding to market changes. However, as an aspect of fiscal reform, decentralization poses difficulties to the extent that the revenue-producing mechanism that is integral to centralized planning and resource allocation is dismantled and replaced by a corresponding "decentralized" revenue system. As a result, market reforms are typically associated with significant fiscal declines and a falling gross domestic product (GDP) share of the budget. This erosion of the center's power to tax makes governments somewhat reluctant to decentralize for fear of slippage in government revenues. l Despite the danger, decentralization of the fiscal system seems inevitable as market reforms compromise the government's ability to monitor local tax effort, a factor that also weakens the redistributive system of revenue sharing.