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Abstract
China’s achievement of miraculous economic growth is a theoretical proposition that calls for an explanation. The key to understanding the logic of China’s economic reform is a rational explanation of the logical paradox between irregular local finance and the incentive compatibility of central and local governments. Based on the fact that autonomous local financial resources have long been dependent on irregular fiscal revenue, this paper constructs an inclusive public financial system analysis framework from the dual perspectives of the central and local government. This analytical framework offers an explanation of the long-standing implicit fiscal decentralization contract in which irregular fiscal revenue is the carrier in the reform process, together with a description of the central-local interaction process and institutional space underlying the behavioral motivations of central finance tolerance and local financial autonomy. It demonstrates the logical consistency of irregular fiscal revenue, central and local incentive compatibility, economic growth and market-oriented reform. The inclusive public finance system, which takes into account both local dynamism and central control, provides the important institutional logic that has enabled China to reach the dual goals of economic growth and market-oriented reform.
Notes
1 Zhang Jun, “China’s Economic Development: Competing for Growth.”
2 Y. Qian and G. Roland, “Federalism and the Soft Budget Constraint,” pp. 1143-1162.
3 See Zhou Li’an, “Governing China’s Local Officials: An Analysis of the Promotion Tournament Model.”
4 See Gao Peiyong, “Basic Approaches for Tax-for-Fee Reforms.”
5 See Lü Wei and Jin Jidong, “Consistently Obey and Serve the Construction of a Modern and Powerful Socialist Country: The Historical, Practical and Theoretical Logic of China’s Seventy Years of Public Finance Development since 1949.”
6 Y. Qian and B.R. Weingast, “China’s Transition to Markets: Market-Preserving Federalism, Chinese Style,” pp. 149-185; Y. Qian and G. Roland, “Federalism and the Soft Budget Constraint,” pp. 1143-1162; J.Y. Lin and Z. Liu, “Fiscal Decentralization and Economic Growth in China,” pp. 1-21.
7 See Zhou Li’an, “The Incentive and Cooperation of Government Officials in Political Tournaments: An Interpretation of the Prolonged Local Protectionism and Duplication of Investment in China”; “Governing China’s Local Officials: An Analysis of the Promotion Tournament Model”; Hongbin Li and Zhou Li’an, “Political Turnover and Economic Performance: The Incentive Role of Personnel Control in China,” pp. 1743-1762.
8 T. Zhang and H.F. Zou, “Fiscal Decentralization, Public Spending and Economic Growth in China,” pp. 221-240.
9 Zhou Li’an, “Governing Local Officials: An Analysis of the Promotion Tournament Model”; Yu Yongze and Liu Dayong, “The ‘Chinese Model’ of Fiscal Decentralization and the TFP: Race to the Bottom or Race to the Top?”.
10 See Tao Ran, Su Fubing, Lu Xi and Zhu Yuming, “Can Economic Growth Bring about Promotion?: A Logical Challenge to the Promotion Tournament Theory and an Empirical Revaluation at the Provincial Level”; Zhang Tianhua, Zhong Zekai and Han Zefeng, “Can Economic Growth Bring Officials’ Promotion?: A New Survey Based on County-Level Satellite Lighting Data.”
11 See Fan Gang, “The New Norms of Public Revenue and Expenditure: Research and Reflection on Several Cases of ‘Irregular Revenue’ in China’s Rural Areas”; Huang Peihua et al., China: National Development and Local Finance.
12 See H. Cai and D. Treisman, “Did Government Decentralization Cause China’s Economic Miracle?”, pp. 505-535; Tao Ran, Lu Xi, Su Fubing and Wang Hui, “China’s Transition and Development Model under Evolving Regional Competition Patterns: Financial Incentives and Development Model Reflection.”
13 See Zhang Jun and Fan Ziying, “Once Again, China’s Economic Reform.”
14 See Chen Xiaoguang, “Fiscal Pressure, Tax Administration and Regional Inequality”; Xi Penghui, Liang Ruobing, Xie Zhenfa and Su Guocan, “Fiscal Stress, Excess Capacity and Supply-side Reform.”
15 See Yang Qijing and Nie Huihua, “Market-Reversing Federalism and Relevant Criticisms”; Lü Wei and Jin Jidong, “Consistently Obey and Serve the Construction of a Modern and Powerful Socialist Country: The Historical, Practical and Theoretical Logic of China’s Seventy Years of Public Finance Development since 1949.”
16 See Zhou Feizhou, “Ten Years of the Tax-Sharing System: The Institution and Its Impact”; Li Xuewen, Lu Xinhai and Zhang Weiwen, “Local Governments and Extrabudgetary Revenues: China’s Economic Growth Patterns.”
17 See Huang Peihua et al., China: National Development and Local Public Finance.
18 Liu Kegu and Jia Kang, Thirty Years of China’s Fiscal and Taxation Reform: Experience and Review; Wang Bingqian, Review and Reflection on China’s Sixty Years of Finance.
19 Zhou Xueguang, “‘Reverse Soft Budget Constraints’: An Organizational Analysis of Government Behavior.”
20 Li Xuewen, Lu Xinhai and Zhang Weiwen, “Local Governments and Extrabudgetary Revenues: China’s Economic Growth Patterns.”
21 Wang Shaoguang, “The Bottom Line of Decentralization.”
22 Gao Peiyong, “China’s Forty Years of Fiscal and Taxation Reform: The Main Path, Fundamental Experience and Rules.”
23 Zhang Jun, Gao Yuan, Fu Yong and Zhan Hong, “Why Is China’s Infrastructure So Much Better?”.
24 Research Group on China’s Economic Growth (CASS), Zhang Ping and Liu Xiahui, “Urbanization, Fiscal Expansion and Economic Growth.”
25 Zheng Siqi, Sun Weizeng, Wu Jing and Wu Yun, “Infrastructure Investment, Land Leasing and Real Estate Prices: A Unique Financing and Investment Channel for Urban Development in Chinese Cities.”
26 Lou Jiwei, “Adhere to the Main Line of the Modern Financial System and Improve the Financial Relationship between the Central and Local Governments.”