China's Western Development Program: a Chinese version of Germany's ‘Rebuilding the East’?

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I should like to thank Barbara Krug for helpful comments and suggestions on this article. I am also grateful for the useful comments of other participants of the conference ‘Open up China's West’, May 2003 in Hamburg, and for comments by several of my colleagues, especially Günter Schucher and Martina Timmermann.

Notes

1. Policies and Measures Pertaining to the Development of the Western Region Issued by the State Council and Suggestions on their Implementation, Beijing: China Planning Press, 2002, p. 46.

2. Other comparative approaches of intergovernmental fiscal relations in China and in various countries such as the Russian Federation, the USA, Indonesia, India, Canada and in Europe can be found in Jayanta Roy, ed., Macroeconomic Management and Fiscal Decentralization, EDI Seminar Series. World Bank, Washington, DC, 1995 and in Jun Ma, ‘Intergovernmental Fiscal Transfer: A Comparison of Nine Countries’, Macroeconomic Management and Policy Division Economic Development Institute. World Bank, Washington, DC: May 1997.

3. For the concept of ‘state capacity’, see Shaoguang Wang and Angang Hu, The Chinese Economy in Crisis: State Capacity and Tax Reform. Armonk, New York: M.E. Sharpe, 2001, pp. 24–39.

4. Shaoguang Wang and Angang Hu, The Political Economy of Uneven Development: The Case of China. New York: M.E. Sharpe, 1999, p. 206.

5. See for example, the discussion in Baohui Zhang, ‘The Political Economy of China's 1994 Fiscal Reform’, Asian Profile, vol. 28, no. 4, pp. 259–72; Roy Bahl, Fiscal Policy in China: Taxation and Intergovernmental Fiscal Relations. South San Francisco: Georgia State University, The 1990 Institute, 1999, pp. 5–18; see the chapter on reforming public finances in World Bank, The Chinese Economy. Fighting Inflation, Deepening Reforms. Washington, DC: 1996, pp. 39–44.

6. Armin Bohnet et al., Theoretische Grundlagen und praktische Gestaltungsmöglichkeiten eines Finanzausgleichssystems für die VR China. Frankfurt aM: Peter Lang Publishing, 2003, p. 31.

7. Hans Pitlik, Friedrich Schneider, Harald Strotmann, and Günter Schmid, ‘On the Politicization of Intergovernmental Fiscal Relations in Germany after Unification’, Johannes Kepler University of Linz, Department of Economics, Working Article no. 0105, March 2001, p. 7.

8. See Hans-Werner Sinn, ‘Zehn Jahre deutsche Wiedervereinigung – Ein Kommentar zur Lage der neuen Länder’, ifo Schnelldienst, vols 26–27, 2000, p. 11.

9. See Statistisches Bundesamt, Statistisches Jahrbuch 2000 and Eckhard Wurzel, The Economic Integration of Germany's New Länder, OECD, Economics Department Working Articles no. 307, 2001, pp. 11, 22.

10. ‘Fortschritte beim Aufbau Ost. Fortschrittsbericht wirtschaftswissenschaftlicher Forschungsinstitute über die wirtschaftliche Entwicklung in Ostdeutschland, Kurzfassung’, Wirtschaft im Wandel, vols 7–8, 2002, pp. 182–232; see pp. 190, 197.

11. The productivity in the manufacturing sector per employed person in the eastern German economy was 70% of that in the West in 2001; see ‘Fortschritte …’, p. 202. See also Wurzel, op. cit., p. 11.

12. See Ulrich Heileman and Hermann Rappen, The Seven Year Itch? German Unity from a Fiscal Viewpoint, AICGS Research Report No. 6, Economics Studies Program, American Institute for Contemporary German Studies, The Johns Hopkins University, 1997, pp. 5, 30; Wurzel, op. cit., p. 21.

13. See Wurzel, op. cit., p. 20.

14. See Wolfgang Kitterer, ‘Die Ausgestaltung der Mittelzuweisungen im Solidarpakt II,’ Finanzwissenschaftliche Diskussionsbeiträge no. 02-1, Finanzwissenschaftliches Forschungsinstitut an der Universität zu Köln, June 2002.

15. For the historical roots of contemporary fiscal federalism in Germany see the overview by Carsten Herrmann-Pillath, ‘Fiscal Federalism in Germany: on the Way from ‘Cooperative’ towards ‘Competitive’ Federalism?’, Carsten Herrmann-Pillath, ed., Fiscal Federalism: The German Experience – Challenges to China. Duisburg Working Articles on East Asian Economic Studies, no. 34, 1996, pp. 8–25.

16. For a more detailed description see Paul Bernd Spahn, ‘China's Reform of Intergovernmental Fiscal Relations in the Light of European Experiences’, Roy, ed., op. cit., pp. 125–62, here pp. 137–44; see also Pitlik, Schneider, Strotmann and Schmid, op. cit. and Herrmann-Pillath, op. cit., p. 14.

17. See Stefan Bach and Dieter Vesper, ‘Finanzpolitik und Wiedervereinigung – Bilanz nach 10 Jahren’, Vierteljahreshefte zur Wirtschaftsforschung, vol. 69, no. 2, 2000, pp. 194–224; see pp. 196–7.

18. See Pitlik, Schneider, Strotmann and Schmid, op. cit., pp. 4–9; Bach and Vesper, op. cit., pp. 196–9.

19. See Bach and Vesper, op. cit., pp. 196–9.

20. See Kitterer, op. cit., p. 5.

21. Wurzel, op. cit., pp. 24–6.

22. See Wurzel, op. cit., pp. 25–6; Kitterer, op. cit., pp. 5–6.

23. The total state indebtedness includes specific funds as well. See Bach and Vesper, op. cit., p. 219.

24. Bach and Vesper, op. cit., pp. 218–22.

25. See Pitlik Schneider, Strotmann and Schmid, pp. 2–3. See also Paul Bernd Spahn and Oliver Franz, ‘Consensus Democracy and Interjurisdictional Fiscal Solidarity in Germany’, Conference on Fiscal Decentralization, IMF Fiscal Affairs Department (FAD), Washington, DC, 6 November 2000.

26. The new intergovernmental transfer scheme regulates the part of the transfer's payments, which has been called ‘Basket 1’ in the bargaining process on fiscal revenue distribution between the federal government and the states. ‘Basket 1’ includes a volume of 105 billion euros offered to the new states (including Berlin) by the federal government in the form of specific vertical grants. These grants aim at financing the remaining infrastructure gap and compensating those states with disproportionately low fiscal revenue. The transfer volume in ‘Basket 2’ amounts to €51 billion and is based on the assurance by the federal government to give priority to the ‘Aufbau Ost’ programme. The eastern states have been promised they will receive disproportionately large transfers compared to western states. See Kitterer, op. cit. pp. 1–2.

27. See the discussion in Daniel F. Ziblatt, ‘Just How Powerful Are Ideas? The Failed Push for Fiscal Decentralization and the Persistence of Germany's Federal System’, University of California, Berkeley, Article prepared for the 2001 Annual Meeting of the American Political Science, 2 September 2001.

28. See for example, Houkai Wei and Kai Liu, ‘Wo guo diqu chayi biandong qushi fenxi yu yuce’, Zhongguo gongye jingji yanjiu, vol. 3, 1994, pp. 28–36.

29. One of the more significant recent studies on regional disparities is a discussion article written by Sylvie Demurger, Jeffery D. Sachs, Wing Thye Woo, Shuming Bao, Gene Chang and Andrew Mellinger, ‘Geography, Economic Policy and Regional Development in China’, Harvard Institute of Economic Research, Discussion Article no. 1950, March 2002. In this article the authors provide evidence of the distinct influence of geography and policy on spatial inequality. See also the collection of articles on regional development in V.F.S. Sit and Dao Lu, eds, China's Regional Disparities: Issues and Policies. Huntington, New York: 2001; Yehua Dennis Wei, Regional Development in China: States, Globalization, and Inequality. London and New York: Routledge 2000; and World Bank, China 2020: Sharing Rising Income: Disparities in China. Washington DC: 1997 for an overview of literature on regional disparities.

30. Among the first studies on Western Region development are David Goodman, ‘The Politics of the West. Equality, Nation-Building and Colonisation’, University of Technology, Sydney: November 2001; Yasuo Onishi, ed., China's Western Development Strategy: Issues and Prospects, December 2001. Institute of Developing Economies, Japan; Margot Schüller and Constanze Kriete, ‘Entwicklung Westchina – Visionen und Realisierungschancen’, China aktuell, October 2002, pp. 1139–55.

31. See for example, the study of the Asian Development Bank, The 2020 Project: Policy Support in the People's Republic of China, 2002, pp. 69–94, 337–54.

32. For the lobby of provinces to be included in the Western Region Development Programme see Norihiro Sasaki, ‘Political Analysis of the Strategy for Developing the Western Region’, Onishi, op. cit., pp. 17–30.

33. Asian Development Bank, op. cit., p. 9.

34. See Schüller and Kriete, op. cit., p. 1151.

35. See Wang and Hu, 1999, op. cit., p. 5.

36. See ‘Outlines of the Ninth Five-Year Plan for National Economic and Social Development and the Long-Term Target for the Year 2010’, in Summary of World Broadcasts (SWB), FE/2586, 15.4.1996.

37. ‘Plans to Develop Western Parts of China Outlined’, SWB, FE/2679, 1.8.1996.

38. See Wang and Hu, op. cit., pp. 206–7.

39. See Sasaki, op. cit., pp. 17–28.

40. XNA-e.086 WC:1606 FR:wsb037s30pe Xinhua 2000.12.01.

41. The Overall Plan of Western Region Development and Related Policy Measures (Overall Plan). Beijing, China Planning Press, June 2002.

42. See the Overall Plan, op. cit., pp. 99–100.

43. See the Overall Plan, op. cit., pp. 100–29.

44. The priority areas are defined in more detail in the Overall Plan, op. cit., pp. 125–9.

45. See the Overall Plan (‘Policies and Measures Pertaining to the Development of the Western Region’, 29 September 2001), op. cit. (Chinese version pp. 38–45; English version pp. 150–95), here pp. 150–8.

46. See the Overall Plan, pp. 40–2, 152–6.

47. See Hassanali Mehran, Marc Quintyn, Tom Nordman, and Bernard Laurens, Monetary and Exchange System Reforms in China: An Experiment in Gradualism, International Monetary Fund, Occasional Article no. 141, Washington, DC, September 1996, p. 16.

48. See the Overall Plan, op. cit., pp. 42–3, 157–8.

49. New Regulations on Guiding the Direction of Foreign Investment was published in 11 February 2002 by the State Council, replacing the Provisional Regulations of 7 June 1995. Regulations for investment in the Western Region are defined in The Catalogue of Priority Industries for Foreign Investment in the Central and Western Regions, issued on 16 June 2000. See Deloitte, Touche, Tohmatsu, China Tax Advisor, Issue 4.

50. See the Overall Plan, op. cit., p. 162.

51. For further details on income tax reductions and regional variations in tax benefits see Deloitte, Touche, Tohmatsu, op. cit.

52. See the Overall Plan, op. cit., pp. 176–7.

53. See the Overall Plan, op. cit., pp. 171–3.

54. See the Overall Plan, op. cit., p. 142, p. 175.

55. See the Overall Plan, op. cit., p. 176.

56. Local governments levy a huge number of legal and illegal fees and charges, representing extra-budgetary revenues. Thus, the tax quota as the percentage of taxes to GDP does not reflect the entire state extractive capacity. By 2001, extra-budgetary revenue came to 4.3% of GDP. See Organisation for Economic Cooperation and Development (OECD), China in the World Economy: The Domestic Policy Challenges, Paris: 2002, p. 665.

57. See Jun Ma, Intergovernmental Relations and Economic Management in China, Houndsmills/London: 1997, cited in Bohnet et al., op. cit., pp. 91–3 and Christine Wong, ‘Central-local Relations Revisited: the 1994 Tax Sharing Reform and Public Expenditure Management in China’, World Bank Office, July 2000, pp. 5–7.

58. For a detailed description of the various revenue-sharing arrangements between central government and local governments see Bahl, op. cit., pp. 149–73; Bohnet et al., op. cit., pp. 66–72; OECD, op. cit., p. 661.

59. See Bohnet et al., op. cit., pp. 64–71, 96.

60. Proceeds from VAT were initially divided between the central government and the local government in the ratio of 75:25, and securities taxes were divided in the ratio of 88:12.

61. See Bohnet et al., op. cit., p. 117; Bahl, op. cit., pp. 47–69.

62. See Bohnet et al., op. cit., pp. 82–8, 93–6.

63. See Wilhelm Pfähler and Margot Schüller, ‘Neue Herausforderungen für China's Steuersystem’, China aktuell, February 2003, pp. 159–74, here p. 161. For the ratio of central government in budgetary revenue see China Statistical Yearbook 2002, p. 271; OECD, op. cit., pp. 626–29.

64. The reform objective of raising the central government's share in total revenue to 60% has so far not been achieved. See Ahmad Ehtisham Ahmad, Keping Li and Thomas Richardson, ‘Recentralization in China?’, IMF Conference on Fiscal Decentralization, November 2000.

65. Wong, 2000, op. cit., p. 3.

66. Ahmad, Li and Richardson, op. cit., p. 9; Wong, 2000, op. cit., pp. 8, 13; Vivek B. Arora and John Norregaard, ‘Intergovernmental Fiscal Relations: The Chinese System in Perspective’, International Monetary Fund, Working Article WP/07/129, October 1997, p. 21.

67. See Wong, 2000, op. cit., p. 16; Jun Ma and John Norregaard, ‘China's Fiscal Decentralization’, October 1998, pp. 7–10.

68. Bohnet et al., op. cit., p. 126.

69. This argument has been put forward by Dr Ning Jizhe, Vice Director-General, Department of Comprehensive Planning, Office of the Leading Group for Western Region Development of the State Council, during the interview on financing the Western Region policy by the author, 16 December 2002.

70. See Ahmad, Li and Richardson, op. cit., p. 20.

71. See Démurger, Sachs, Woo, Bao, Chang and Mellinger, op. cit.

72. See Xubei Luo, ‘Infrastructure and Western Region Development: The Role of Transportation Hubs’, CERDI, France.

73. Asian Development Bank, The 2020 Project: Policy Support in the People's Republic of China, Manila: 2002; see chapter 6 on transport policies.

74. Sylvie Démurger, ‘Infrastructure Development and Economic Growth: An Explanation for Regional Disparities in China?’, Journal of Comparative Economics, vol. 29, 2001, pp. 95–117.

75. Wenxiang Wang, Xibu kaifa zhongda jichu sheshi tou rong zi fangshi yanjiu (Research of the forms of investment and finance of West China's large and medium-sized infrastructure), Zhongguo hongguan jingji congshu (A collection of China's macro economy), Beijing: Zhongguo Jihua Chubanshe, 2002, p. 3.

76. OECD, op. cit., pp. 692–3.

77. See Wang, op. cit., pp. 15–8.

78. See Wang, op. cit., p. 18.

79. See Roy, ed., op. cit., pp. 30–1.

80. See Wong, 2000, op. cit., pp. 16–8.