ABSTRACT
Financial reform after 1994 is a story of recentralization and national policies designed to recapture local revenues and create a standardized tax system as well as increased local service provision. The story begins with initial market reforms in the 1980s and decentralization of resource allocation at the lower levels to allow for local economic development decisions. This created the impetus for economic growth in the 1980s and increasing local revenues. However, tax restructuring lagged behind market reforms and the central government continued to lose revenues relative to provincial governments. By 1993, central revenues were about a third of total provincial revenues. Moreover, the central government ran a deficit while the combined provincial government budgets had a surplus (see Table 1). In order to regain fiscal control at the macro level, the central government launched the 1994 tax reform that established a tax sharing system with the provinces. This reform strengthened the capacity of the national government to collect revenues from the provincial governments, but the center also shifted responsibility for a number of expenditures to local governments. The 1994 reform provided greater autonomy to sub-provincial governments at the county and township level to levy local taxes and fees in order to make up the balance between central remittance and local expenditure needs. Soon after, the reform officials at the lowest administrative level shifted their key duties from service provision to revenue
We would like to acknowledge Kevin O’Brien, Emily Ting Yeh and Saturnino Borras for their insightful comments as well as the Northwest Socioeconomic Development Research Center (NSDRC) in Xian China and the Ford Foundation, Beijing, for their support.
