Academic journal article Public Finance and Management

Symposium on China's Public Finances: Part 1: Development Strategy, Revenues and Fiscal Transfers

Academic journal article Public Finance and Management

Symposium on China's Public Finances: Part 1: Development Strategy, Revenues and Fiscal Transfers

Article excerpt


China's public finances have played an important part in the country's economic performance. As the focus of development strategy changes from exports to domestic consumption and to the establishment of a harmonious society, China's public finances are now called upon to play a different, and even more important, role in economic and social development. The papers in this symposium address some of the issues arising from the new policy context. In addition to discussing the need for a change in China's development strategy, particular focus of the papers in this volume of the symposium is on the continuing need for further reforms in the taxation system and intergovernmental fiscal transfers.


China's economy has benefited greatly from adopting a gradualist approach in the transition from plan to market, and avoided many of the issues that plagued those countries in Eastern Europe which pursued a 'big-bang' model of reform. Nevertheless, it is now clear that major problems and imbalances have been building up within China's framework of 'sustained gradualism.' The sustained open-ing to market forces and to private agents - both Chinese and foreign - has been occurring while there has been only limited evolution of the institutions, structures and policies to govern and shape the market. As a result, the Chinese Government has decided that a major reorientation of de-velopment strategy is now required. But the distinctive Chinese balance between extensive opening to the market and only limited development of new policies and institu-tions has left China without many of the economic and so-cial institutions or the policy structures to achieve strategic change. Thus, the very success of the unleashing of market forces has created a complex and dynamic situation diffi-cult to manage, while institutional and policy development has lagged far behind. Now, with a perceived need to change strategic direction, the limits of the authority and of the governance resources of the Central Government are being sorely tested.

The paper by Sheehan and Grewal discusses these criti-cal issues, with particular emphasis on the federalism and governance aspects and on health reform as a case study. The federal structure of China's governance has impacted strongly on China's pattern of development and will con-strain its ability to implement an alternative strategy. Com-petition between local governments at various levels has been an important factor in, for example, uncontrolled and often sub-optimal expansion of energy intensive, polluting industries, of inefficient forms of energy production and of other industries not well adapted to China's needs. Expen-diture at both levels of government is still concentrated on capital formation and on capital transfers to the enterprise sector, although this is changing.

Not for the first time, the Chinese Government faces major challenges in shaping the nation's development strat-egy to achieve outcomes that increase the welfare of the Chinese people. Given the limits of central authority and the speed and complexity of China's growth, the task of achieving a major change in direction is likely to prove difficult and to require sustained policy action on a number of fronts over a decade or more. Sheehan and Grewal suggest that the initiatives required include establishing new priori-ties for governments, and for government expenditure in China; revising the incentives facing local governments, and in particular removing the revenue incentives to pursue regional economic growth as an overwhelming priority; building new institutions to facilitate the effective delivery of services in local areas, in ways that are not entirely de-pendent on market forces, and making greater use of meth-ods for providing funds to local governments (such as spe-cific purpose payments) so as to ensure that central priori-ties are achieved.

In the next paper, Grewal examines how refocusing of China's fiscal transfers might help in meeting China's na-tional economic priorities. …

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