The reform of public finance management in China: introductory overview of issues and contributions of the symposium Part 2.

Author:Liu, Rong
 
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  1. INTRODUCTION

    The reform of the fiscal system in China is motivated by challenges associated with world economic slowdown and fallouts resulting from rapid urbanization and unbridled growth without having adequate safeguards against urban-rural and regional divides, urban encroachment of productive agricultural land without fair value compensation, pollution and congestion, social exclusion of migrant labor and rising concentration of wealth. Part 1 of this symposium addressed issues concerning assignment of responsibilities, financial and fiscal risk management, tax reform and management of local debt. Part 2 is concerned with issues relating to the structure of government, incidence of public expenditures, reform of intergovernmental finances and facilitating coordinated urban-rural development. This introductory overview highlights the issues and challenges and directs the reader's attention to specific contributions of the symposium Part 2, providing an analysis and suggestions for reform.

  2. MAJOR CHALLENGES OF FISCAL SYSTEM REFORM

    Several selected fiscal system reform challenges addressed by this volume are highlighted in the following paragraphs.

    The Structure of Government

    The PRC has a well-designed structure of government consistent with a unitary form of government. The Central Government provides policy direction and leadership whereas local governments deliver on the central mandates. The PRC has a well-functioning fiscal system and it delivers better outcomes for its residents than most developing and transition countries but a number of important issues have been identified for further reform due to limitations of the existing system in dealing with emerging issues regarding improving efficiency and equity, and challenges arising from urbanization, environmental protection, and inclusive growth (see Shah, 2014). These include:

    (a) Large number of fiscal tiers contribute to higher costs and act as barriers to faster intergovernmental communication and coordination. This has been an important concern since 2003 as a result of enhanced focus of the PRC in expanding access to public services in the rural areas. The PRC has the highest number of tiers among large countries. These concerns often lead to a debate on the role of the prefecture level governments and constitutional basis of their oversight on county governments. Prefectures were viewed detrimental to administrative efficiency, faster communications, smooth coordination as well as undermining county autonomy thereby creating bureaucratic drag in the timely delivery of county services.

    (b) Some local governments are too small while other are too large. Population size of county governments in the PRC varies from 6,000 to 2.7 million with an average of about half a million people whereas world average for local governments is about 101,000.

    (c) Prefectures have inadequate focus on rural development and access to public services by rural residents. In 2002 the PRC adopted a policy of developing a harmonious society with special emphasis on rural development and expanding access of rural services. In the context of this policy, it was recognized that the existing local government structure especially prefecture-county relationships were not conducive to having a fair shake for rural residents. This is due to the perceived conflict in incentives for urban growth and development and a vibrant countryside. Prefecture governments were perceived to have an urban bias in their incentives and accountabilities to a relative neglect of the concerns of rural residents or even for food security of the nation. This prompted the central government to encourage 'province managing county' and 'county managing township finances' reforms in 2002 on a pilot bas is. Subsequently in 2009 the policy for the provinces to finance counties and counties to manage township finances was recommended for nationwide adoption jointly by the CPC Central Committee and the State Council. The 12th Five Year Plan has subsequently highlighted this area as an important priority for the plan period. In 2012, the Central Ministry of Finance advised all provinces to implement these reforms with suitable adaptation to local context.

    Henan province introduced province managing county reforms. Li, Liu and Zheng (this issue) examined the impact of these reforms on county finances and growth of local economy. They find that while these reforms improved county finances, there was no positive...

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