Budgeting under Central Economic Planning in China, 1949-1978

By Hou, Yilin | Journal of Public Budgeting, Accounting & Financial Management, Winter 2006 | Go to article overview
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Budgeting under Central Economic Planning in China, 1949-1978


Hou, Yilin, Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT.

This paper examines public budgeting in the first 30 years of China under central economic planning and one-party system. The research question is whether budgeting operates as it does under market economy in a democratic system. Analysis of historical documents finds that as a subordinate to central economic planning, budgeting was not able to play its functions. Though China was successful in employing all fiscal and monetary means to channel resources into targeted policy areas, budgeting was not effectively used as an administrative instrument. In the 30 years examined, the country seemed to be searching in vain for a workable budgeting system so as to avoid repeated financial frustrations.

INTRODUCTION

Public budgeting as we are most familiar with is a system operating under open market economy in a representative democracy, playing the functions of control, management and planning. How does budgeting function in a different political and economic environment? Does it behave in a similar way at all? A study of this type promises the potential to generate fresh perspectives about budgeting in general, to broaden our theoretical horizon, and to help us penetrate the rationale behind budgetary decision-making across political and economic systems. This last feature is the most useful in the current trend of globalization that demands a more generic theory of public budgeting. Operating from 1949 to 1978 under a closed system of centrally planned economy with one party dominating, China was an ideal experiment for comparative observation.

This paper attempts to contribute to the study of public budgeting in China by examining whether and how public budgeting as an administrative instrument worked in the first 30 years of the People's Republic of China (PRC). The purpose is to help resolve the puzzle around Chinese budgetary affairs by adding more substance to reduce speculation. Answers to the question may facilitate better understanding of the rationale behind budgetary decision-making in similar situations where budgeting is subordinate to centrally planned economic development.

In this paper, public budgeting is defined as a system for fiscal administration, with analysis done around the three functions of control, management, and planning (Schick, 1966). The sample period runs from 1949 when the Communist Party of China (CPC) founded the PRC to 1978 when China officially ended the "Cultural Revolution" to start the era of reforms. For this reason, the discussion covers only mainland China. Due to data limitations, budgeting activities examined are restricted to those of the central government. The analysis is of historical documents; the paper is descriptive and conceptual.

FISCAL ADMINISTRATION PRACTICES

After founding the new republic, Chinese leaders ranked rapid industrialization as their top priority, and as a result, every possible means for resource collection and allocation, including government budgeting, was mobilized for this purpose. Keenly aware that fiscal administration controlled the bloodline of government, Chinese leaders were explicit upfront that fiscal authority "must be under the party's leadership; therefore the national budget shall be centralized to the Party's Central Committee and local budgets centralized to provincial and municipal Party Committees" (Chen, 2000, Vol. II). The real policy-making power was always firmly grasped by the Party. Government bodies, from the State Council to its cabinet ministries, followed the Party's guidelines. In fact, it was impossible to separate the Party from the government because the same group of people held positions in two sets of organs that were only nominally separated.

Party Control: Organizational Framework

Before winning control of the country, CPC top leaders began to prepare for management of finance and economy. When its army took the upper hand on the battlefield, the CPC organized regional finance and economic committees (FEC) to take charge of currency issuance, takeover of cities, restoration of urban economy, and all other finance-related affairs.

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