Decomposing inequality in compulsory education finance in China: 1998-2008.

Author:Wang, Wen

    Though the finance schemes vary, most governments in the world provide basic education to their citizens. Equal opportunities to develop their talents are often considered by many as people's fundamental human rights (Faure et al., 1972; Lin, 2009). Since education is one of the major channels for individuals to move up the social ladder in China, disparities in access and quality of education will inevitably result in inequality in people's income and social status, and the inequality may become transmittable across generations (Lin, 2009). Though education expenditures do not provide an ideal measure of the underlying resources used by local governments for education or the outcomes of the process (Johnston and Duncombe, 1998), it remains a fundamental benchmark in evaluating the equality of public education system and continues to be an important concern of the public and the education community (Moser and Rubenstein, 2002). In recent decades, the Chinese government has implemented a series of reforms on its finance system for the nine-year compulsory education. Nevertheless, the school funding inequality across different regions has remained a widespread and serious problem even after several rounds of reforms, which has attracted a lot of public and academic attention in recent years.

    Since the 1985 education finance reform, China has established a highly decentralized compulsory education finance system, with education funding relying more and more on revenue resources provided by local governments (Wang and Zhao, 2012). (1) Later, two major governmental reforms in the country had an important impact on the compulsory education finance system. The first was the reform of the tax sharing system after 1994, which reinforced the central government's financial resources, leaving local authorities with insufficient fiscal capacity for funding compulsory education, especially in rural areas. The second was the implementation of rural taxation reforms since 2000 that led to the establishment of a new mechanism for financing compulsory education (Ding, 2008; Zhou and Liu, 2008) with the central and provincial governments playing a much more important role than before.

    Employing multiple methods, including factor decomposition and regression-based decomposition of Gini coefficient, this analysis intends to answer three research questions: First, what was the status of inequality in compulsory education finance after recent reforms in China? Second, how did each revenue source contribute to the inequality in total school revenues? Third, what major factors were associated with the inequality of spending for compulsory education in China? The empirical results of the analysis will provide new insights to identify the major factors that have contributed to the inequality in compulsory education finance and carry important implications for future governmental reforms in China.

    The analysis is conducted based on a provincial-level dataset in the period of 1998-2008. Investigating the inequality of funding for compulsory education at the provincial level can be very informative because the effectiveness of national equalization policies often depends on the behavior and policies of the 31 provincial-level governments, which consist of 22 provinces, 5 Minority Autonomous Regions, and 4 Municipalities. As Martinez-Vazquez et al. (2008) point out, in order to improve equity in the distribution of fiscal resources throughout the country, it may be necessary to determine to what extent provincial government actions contribute to or run counter to central government equalization objectives. Scholars who do educational research have also repeatedly argued that it would be beneficial for improving education equity if we could establish a compulsory education finance system in which provincial governments play a leading role (Wang et al., 2003; Wang, 2004). With the provincial governments being assigned greater responsibilities in the recently established new mechanism of compulsory education finance, the results of this analysis have important implications for understanding the behavior of provincial governments in the delivery of basic public services, in particular, compulsory education, thereby contributing to making more effective policies for addressing inequality in compulsory education finance in China.

    This paper is divided into six sections. Following the introduction is a description of the major reforms related to China's compulsory education finance system. The third section provides a review of previous literature. The fourth section describes data and methodology for empirical analysis. The fifth section evaluates the inequality in revenue and spending for compulsory education and the major factors that were associated with the inequality over the period of 1998-2008, using the methods of factor decomposition and regression-based decomposition of Gini coefficient. The final section concludes with a discussion of directions for future research.


    2.1 The Education Finance Reform of 1985

    In 1985, China officially launched a reform that changed its formerly centralized compulsory education system with a narrow revenue base to a decentralized system with revenue collected from both budgetary and extra-budgetary sources (Tsang, 1996). (2) After the reform, extra-budgetary funds generated at the local level constituted an increasing share of total resources to compulsory education, and local governments became the primary financing source for compulsory education (Tsang, 1996; Tsang, 2001). The overdecentralization of education financing put a great financial strain on local governments and resulted in a large disparity in funding for compulsory education (Tsang, 2000). Later, the tax sharing reform in 1994 left local authorities with insufficient fiscal capacity for funding the provision of compulsory education. With reduced fiscal capacity, provincial, and especially subprovincial, governments often relied heavily on informal levies to make up for insufficient funding in the 1990s (Lin et al., 2007), which, over time, led to an excessive tax burden for farmers in rural areas (Ding, 2008; Zhou and Liu, 2008).

    2.2 The "Tax-For-Fee" Reform

    Since 2000, the Chinese central government has implemented a series of "Tax-For-Fee" rural taxation reforms, abolishing all fees collected previously by townships and villages and replacing them with agriculture taxes and related surcharges (Lu et al., 2004). At the beginning of 2006, the government decided to phase out agricultural taxes completely (Lin et al., 2007). In the process of eliminating fees and agricultural taxes, the system whereby local governments assumed the major responsibility of funding for rural compulsory education could no longer be maintained (Zhou and Liu, 2008). Therefore, it became necessary for the government to establish a new scheme for financing its school system.

    2.3 The New Mechanism

    In the wake of the rural taxation reform, the Chinese central government has begun to take on more financial responsibility for compulsory education since 2001. It has introduced the "two exemptions and one subsidy" policy (TEOS) for the purpose of easing the financial difficulties shouldered by local governments and reducing the financial burdens of rural families for paying for their children's education. Under this system, governments provide free textbooks to poor rural students as well as an exemption from "miscellaneous fees" (zafei) to the same students (the two exemptions), along with a subsidy to cover living costs for boarding students with financial difficulties (the one subsidy) (Brock et al., 2008). The central government originally only provided free textbooks to poor rural students. Since 2006, it has significantly increased its own share of funding to the TEOS program to cover the majority of costs for the exemption of miscellaneous fees. For western provinces, the central government provides 80% of the costs and the provincial and local government 20%. For provinces in central China, the central government covers 60%, and the shares for eastern provinces are negotiated on a case-by-case basis. Since 2007, the central government has begun to provide one-third of the funding for the subsidy for boarding students, with the rest of the costs shared among the province, prefecture, and county levels (Brock et al., 2008).

    The expansion of the programs of TEOS has led to the formulation of a new finance mechanism for rural education (hereafter the "New Mechanism") (Broack et al., 2008). In addition to TEOS, the New Mechanism includes measures to raising the overall level of public expenditure for rural compulsory education, creating a mechanism for more investment into rural school buildings, and ensuring prompt and full issuance of salaries to rural school teachers. The New Mechanism has been implemented in the western provinces since 2006, and has been extended to other provinces in the next year (Ding, 2008). The Chinese government has decided to provide a completely free compulsory education for all children in both rural and urban areas nationwide since 2008. (3)


    Since the 1990s, studies using province as a unit of analysis consistently found that severe inequality existed in funding for China's compulsory education (Tsang, 1994; Jiang and Zhang, 1999; Li, 2008). Tsang (1994) showed that, in 1989, the top-spending province spent as much as 5.2 times that of the bottom-spending province in primary education; the corresponding ratio was 4.5 in secondary (both lower- and upper-) education. In 2000, these ratios rose to 10.6 in primary education and 6.6 in lower-secondary education (Tsang, 2001). Jiang and Zhang (1999) found that the ratio of total school spending among the three "Education Regions" in the country grew from 2.8:1.5:1.0 in 1988 to 3.0:2.0:1.0...

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