ABSTRACT

Fiscal decentralization has been a key feature of China’s economic reforms, leading to the devolution of responsibilities over both revenue collection and public expenditures to lower levels of government-the province, county, township, and village. While a decentralized system improves incentives for local governments to generate revenues and to be responsive to local needs, it can hamper efforts to meet goals of distributional equity. Given overall budget scarcity, it is not surprising that in China decentralization led to greater inequity in the provision of public goods and services across regions. Many poor areas confronted a lack of local government revenues or subsidies from upper levels of government, leading to fiscal crises which prevented local governments from even meeting their salary obligations to government officials and teachers, let alone enabling them to finance high quality public services (Park et al. 1996; Wong 1997).