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The Political Economy of Earmarked Transfers in a State-Designated Poor County in Western China: Central Policies and Local Responses*

Published online by Cambridge University Press:  16 December 2009

Abstract

In order to improve the effectiveness of redistributive policies, in 2002 the Chinese government increased fiscal transfers and imposed more stringent regulations on the use of earmarked funds. This article evaluates the impact this had on K county in a north-western province. The case study finds that the misappropriation of earmarked transfers did decrease but this did not necessarily indicate an improvement in the local government's compliance in the usage of transfers. Instead, the county governments found ways to sabotage central policies by exporting fiscal burdens to the subordinate bureaus that received the earmarked subsidies. In some bureaus this was done by reducing the amount of funds allocated for operating expenses. In others it involved increasing staff numbers. These findings provide a basis for evaluating the effectiveness of using earmarked funds and internal supervisory mechanisms to achieve policy objectives in an authoritarian regime.

Type
Special Section on “Reinventing the Local Party-State: Between Budgetary Squeeze and Reform”(Edited by Frank. N. Pieke)
Copyright
Copyright © The China Quarterly 2009

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References

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17 Chinese government report, 2003, http://www.gov.cn/test/2006-02/16/content_201173.htm.

18 Ministry of Finance, “Nongcun feishui gaige zhongyang dui difang zhuanyi zhifu zhanxing banfa” (“Temporary method of central transfer payments to the local governments to help rural tax-for-fees reforms”), in Documents and Information Concerning Local Final Budgetary Reporting: 2002.

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23 In democracies too, decentralization does not necessarily constrain government size and bureaucracy expansion. Instead, research has found that it is the sources of revenue that matter for the size of government. According to Stein and Rodden, if decentralization creates self-financing sub-national governments, it tends to be associated with smaller governments. Stein, Ernesto, “Fiscal decentralization and government size in Latin America,” Journal of Applied Economics, Vol. 2, No. 2 (1999), pp. 357–91Google Scholar; Rodden, Jonathan, “Reviving Leviathan: fiscal federalism and the growth of government,” International Organization, Vol. 57, No. 4 (2003), pp. 695729CrossRefGoogle Scholar. In contrast, dependence on intergovernmental fiscal transfer helps a Leviathan-type local state to expand.

24 In these localities, local cadres are often busy creating government jobs for their relatives and friends, which becomes an important source of the uncontrolled government overstaffing. Rent-seeking can also happen in hiring public employees if jobs in public sectors are attractive. Government officials can make money by selling positions to people who want to get a job in government agencies.

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31 Ministry of Finance, Bank of China, Document No. 4 (2002); and the provincial government document No. 58 (2000), available at http://book.hnadl.cn:8086/web/index2.html.

32 As an example of the increase in EMS funds, in K county the “rural tax-for-fee reform fiscal transfers” alone increased more than seven times in 2002 compared to 2001.

33 Interviews with officials in the finance bureau and the poverty relief office of K county government, 21 November 2005. These officials explained that the accumulated fiscal debts during the 1990s needed to be repaid in the early 2000s. In other words, the county government was under substantial pressure in debt repayment, which had contributed to very high levels of fund misappropriation in the early 2000s. See Table 3.

34 Shih and Zhang, “Who receives subsidies.”

35 Interviews with officials in the finance bureau of K county government, 21 November 2005.

36 Interview with an official in the education bureau of K county, 5 July 2006. In of fact, the education bureau did not know there was such a specific EMS until one official in the bureau participated in an education fund auditing initiated by the provincial education department. The director of county education bureau then came to the county governor asking for the fund to be allocated to the bureau.

37 Interview with an official in the education bureau of K county, 5 July 2006.

38 Chinese government official website portal, http://www.yn.xinhuanet.com/lianzheng/2006-09/04/content_7951330.htm, 4 September 2006. Local matching fund requirements may also lead to the diversion of funds from earmarked transfers. In some localities, local governments use funds designated for specific projects to serve as the “matching funds” that must be presented in order to apply for other grants. Once the funds for the new special-purpose project are in hand there is the possibility that this money will be diverted to other uses. For example, in 2002 K county received an earmarked transfer of 5 million yuan for an environment improvement project. This had been raised through national bonds that required 10% of the total project costs to be met through local matching funds, so the local government in K county diverted 500,000 yuan from other earmarked funds to this project.

39 At both the central and sub-national levels in China, civilian public sector employees consist of those who work directly for core government agencies (civil servants) and those who work for public service units such as hospitals, schools and various service units affiliated with specific government agencies (PSU employees). Together these constitute the bulk of fiscal dependents in China. World Bank, China National Development and Sub-national Finance.

40 For reference, in China, within-roster personnel (bianzhinei renyuan) refers to all positions officially created and out-of-roster personnel (chaobian renyuan) refers to the number of employees exceeding approved levels.

41 Rong, Jingben, Cui, Zhiyuan and Wang, Shuanzheng, Cong yalixing tizhi xiang minzhu hezuo tizhi de zhuanbian: xianxiang liang ji zhengzhi tizhi gaige (From a Pressure Imposing System to a Democratic Co-operation System: the Political Reform at County and Township Level) (Zhongyang bianyi chubanshe, 1998), pp. 269–70Google Scholar.

42 Bernstein, Thomas and Xiaobo, , Taxation without Representation in Contemporary Rural China (Cambridge: Cambridge University Press, 2003)CrossRefGoogle Scholar.

43 Dabla-Norris, “The challenge of fiscal decentralisation in transition countries.”

44 Ibid.; Dabla-Norris, “Issues in intergovernmental fiscal relations.”

45 de Mesquita, Bruce Bueno, Morrow, James D., Siverson, Randolph M. and Smith, Alastair, “Political institutions, policy choice and the survival of leaders,” British Journal of Political Science. Vol. 32, No. 4 (2002), pp. 559–90CrossRefGoogle Scholar, and “Policy failure and political survival: the contribution of political institutions,” Journal of Conflict Resolution, Vol. 43, No. 2 (1999), pp. 147–61.

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