Problems within the central-local relationship

The central government had strengthened its power via establishing a tax-sharing system and appointment rights. For example, in the 1980s, the fiscal extractive capacity of the central government kept declining until it stumbled in the early 1990s (Wang and Hu, 1993). However, after the significant adjustments of the tax system in 1994, the government’s fiscal revenue – defined here as the sum of budgetary revenue, extra-budgetary revenue and income of the social security fund – sharply

increased from less than 800 billion yuan to nearly 37,000 billion (Tsui and Wang, 2004). The central government could also control the local government to some extent and ensure the implementation of central policy. However, such processes were a kind of longitudinal extension of state power, and such an extension does not completely explain the centrally regulated relationship and power structure between the central and local. In fact, it is the unreasonable allocation of governmental power and the GDP-centred evaluation standards which make the local governments prefer to engage in the pursuit of self-interest, which may lead to regional economic barriers and is harmful to the national economy. Meanwhile, local governments lack the capacity to offer public goods and services, which is a responsibility of this level of government (Huang, 2010).

Despite the tax reforms in 1994, there are still many problems with a rational division of tax. After the reform, those taxes which had a stable source and a potential to increase were determined as central tax or central-local shared revenues. For example, 75% of the local industrial value-added tax was turned over to the central government, while 25% was left to the local governments. Business tax of railways, banks and insurance companies owned by the central government, which are left for the local government, are almost all sources of unstable income with dispersed sources and difficulties in collection and management (Huang, 2010). However, compared with the bottom-up process in fiscal power adjustment, there is an obvious top-down process in government power distribution. Moreover, lower-level government has less flexibility and more rigidity in their administrative power. For example, several centrally formulated policies such as preferential policies for laid-off workers, low-rent housing, preferential policies to support technological innovation and compulsory education are mainly funded by business tax, personal income tax, income tax and other main resources of local finance. Such an arrangement has resulted in more and more work for local government with fewer and fewer financial resources to show for the time expended. We are able to observe the change of proportion of local governments’ fiscal revenue accounted for in the national fiscal revenue and the expenditure proportion from Table 1 (Huang, 2010). This is an

important manifestation of the irrational distribution of fiscal rights and administrative powers between central government and local governments.

Table 1: Proportion of local fiscal revenue and fiscal expenditure from 2000–2007.

Year

Local fiscal revenue as percentage of national

fiscal revenue (%)

Local fiscal expenditure as percentage of national fiscal expenditure (%) 2000 47.80 65.30 2001 47.60 69.50 2002 45.40 69.29 2003 45.36 69.90 2004 45.06 72.29 2005 47.71 74.14 2006 47.22 75.28 2007 45.90 77.00

Source: Huang (2010), converted by author.

The fiscal responsibility of the government to provide public goods was excessively decentralized, so that fiscal self-sufficiency of local government declined and leads to local fiscal deficit. Meanwhile, the redistribution system was not improved to adequately solve such local deficits. Local governments now have to turn their attention to increasing local economic and fiscal revenue. In the process of pursuing income, local governments fall back on some of the “unsuitable” behaviours, such as government intervention in the normal operation of the market, market segmentation, local protectionism, self-aggrandisement, “grey power” and pursuit of income sources outside the tax system (Ping, 2007). In addition, the tax-sharing system only regulates the revenue within the budget and thus those extra-budgetary funds lack strict oversight. Therefore, local governments attempt to seek extra-budgetary revenue. The most typical manifestation of this is the “land finance” of local government. Since 1994, the land premium (income through selling land) belongs to

the local government and is not handed over to the central government. Since then, the land transfer income has become a major source of extra-budgetary revenue for local governments, who rely on land sales finance (Ping, 2007). The government gets land through land acquisition at a low price from farmers, and then resells it at a higher price to meet various expenses. In developed areas, there is a huge amount of land premium, which has become the most important source of extra-budgetary revenue for local governments. In 2004, the local government land sales revenue reached 615 billion yuan and local governments gained 1,612.6 square kilometres of land, including land in the provinces of Guangdong, Shandong, Jiangsu in east China and Hunan in central China (Ping, 2007). The land expropriated by these four provinces was equivalent to half of the national land acquisition acreage in that year. In the same year, the provincial revenue obtained through land sale in Jiangsu, Zhejiang and Hunan reached 325.8 billion yuan, which was close to half of national land sale revenue (Ping, 2007). This type of land finance harms the interests of the farmers whose land is requisitioned and results in potential social instability. According to 2005 data from the National Bureau of Rural Economic Surveys, provided by the Rural Development Institute of the Chinese Academy of Social Sciences and the Team for the Development of the Rural Economy, from the perspective of distribution of benefits of land acquisition, local governments accounted for 20–30%, enterprises accounted for 40–50% and farmers accounted for 5–10% of these benefits (Ping, 2007). From 1952 to 2002, Chinese farmers have given up their rights to 26 trillion yuan worth of land (calculated with an interest rate of 3%) (Dang, 2005). Moreover, the local governments tend to sell as much land as possible to obtain benefits and real estate-related taxes. With internal driving forces pushing up land premium prices and real estate prices, local governments have both directly and indirectly accelerated the rise in real estate prices, resulting in a serious blow to the future spending power of residents. However, such a large amount of land sales revenue has not been used to provide public goods such as education, health care and social security. It has been used for administrative overhead, highway repair and urban infrastructure construction. In 2004, extra-budgetary fiscal revenue of local governments reached 469.918 billion yuan, with 313.38 billion yuan directly

spent on “administrative expenses” (Ping, 2007). Among the administrative expenses of the local government, 58.9% is spent “off budget” (ibid.). The central government has introduced a number of policies to local governments trying to control this land finance phenomenon in recent years. However, facing such a huge economic interest and the evaluation system based on GDP, local governments selectively or completely ignored the policies introduced by the central government. Such a situation reduces the effects of the national regulatory policies.

On the other hand, most local government officials are concerned about their own interests in political promotion. The main indicator of the recent performance evaluation system is the economic performance of and urban construction in provinces and cities. This performance evaluation system is conducive to local GDP growth and economic development. However, it is also an evaluation system that makes local government officials consider what they can get from provision of public goods, so that local officials have different preferences for the provision of different public goods. Some public goods are supplied excessively, while others are insufficiently supplied. Local government officials often prefer to provide public goods with high economic returns in order to pursue personal achievements and promotions. They often choose projects which have a high degree of observability and can be objectively evaluated. For example, they tend to invest in establishing development zones, building highways and bridges and constructing “image projects”, while other public goods like environmental protection, education, healthcare and social security are more neglected. Although the central government has focused more on these areas and balanced development in recent years, there are insurmountable contradictions between the central government's macro-control goals and local governments’ evaluations. Such a situation shows that the central government is in some respects powerless when facing local government interference.

This chapter has provided a brief summary of the political system in China, together with an overview of central-local relations in China. It has reviewed the government and Party system, which is the main arena for the interaction of the central and local

governments. The central-local relationship has also been reviewed historically, which helps to provide an understanding of the features of the central-local relationship in China. These two sections have offered a background of the context against which I will discuss the research questions more deeply. With this contextual understanding, the next chapter offers an in-depth discussion of the theoretical foundation and analytical framework chosen to examine the central-local relationship and its impact on social policy.