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China: reforming intergovernmental fiscal relations


  • Ram Agarwala
  • Raja Chellia
  • Toshi Fujiwara
  • Yan Wang
  • Heng-fu Zou


Since 1979, the Chinese authorities have made a sustained effort at introducing market-oriented reforms and the results have been impressive in terms of growth and poverty reduction. However, reform of fiscal system has lagged behind. In particular, the system of intergovernmental fiscal relations has been unstable, non-transparent, and inequitable. As the economy moves toward greater market orientation, a rule-based system of intergovernmental fiscal relations will be essential. The paper reviews the theory and experience of multilevel fiscal systems in various countries and makes some suggestions for China. Its basic conclusion is that while recognizing the specificities of Chinese conditions, the Chinese authorities cannot but follow some basic principles of multilevel fiscal systems. Among these are the following. First, international experience in countries big and small, federal and unitary, indicates that the Central Government must have effective control over the most important sources of tax revenue, not only in termks of tax law and policy, but also in terms of administration, collection, and allocation of revenue. Second, taxes should not be looked upon mainly as providers of revenue; they must also be seen as tools of policy that, whether intended or not, affect the allocation of resources and their efficient utilization, interregional and interpersonal distribution, and the level of aggregate demand. Third, while for the sake of efficiency and equity most of the major taxes have to be collected centrally, a considerabled egree of decentralization is required on the expenditure side because closeness to the beneficiary helps efficiency. There is thus a need for designing a system for transfer of resources from the center to the localities, but it needs to be done in a way that is transparent and equitable and gives incentives to the localities to maximize their efforts for revenue mobilization. The paper details the practices followed by Japan, India, Canada and Germany as examples on which China can draw in designing its own system of intergovemmental fiscal relations.

Suggested Citation

  • Ram Agarwala & Raja Chellia & Toshi Fujiwara & Yan Wang & Heng-fu Zou, 1993. "China: reforming intergovernmental fiscal relations," CEMA Working Papers 475, China Economics and Management Academy, Central University of Finance and Economics.
  • Handle: RePEc:cuf:wpaper:475

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    References listed on IDEAS

    1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    2. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
    3. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, pages 323-338.
    4. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-243, June.
    5. Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, pages 221-240.
    6. Xie, Danyang & Zou, Heng-fu & Davoodi, Hamid, 1999. "Fiscal Decentralization and Economic Growth in the United States," Journal of Urban Economics, Elsevier, vol. 45(2), pages 228-239, March.
    7. Brueckner, Jan K, 1999. " Fiscal Federalism and Capital Accumulation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(2), pages 205-224.
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    Cited by:

    1. Sylviane GUILLAUMONT JEANNENEY & Ping HUA, 2000. "Ouverture économique et dépenses publiques en Chine : une analyse régionale," Working Papers 200006, CERDI.
    2. Era Dabla-Norris, 2005. "Issues in Intergovernmental Fiscal Relations in China," IMF Working Papers 05/30, International Monetary Fund.
    3. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, pages 565-591.
    4. Zhang, Tao & Zou, Heng-fu, 2001. "The growth impact of intersectoral and intergovernmental allocation of public expenditure: With applications to China and India," China Economic Review, Elsevier, vol. 12(1), pages 58-81.
    5. Andres Rodriguez-Pose & Nicholas Gill, 2005. "On the 'economic dividend' of devolution," Regional Studies, Taylor & Francis Journals, vol. 39(4), pages 405-420.
    6. David Wildasin, 1996. "Introduction: Fiscal Aspects of Evolving Federations," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(2), pages 121-135, May.
    7. Ma, Jun, 1995. "Modelling central-local fiscal relations in China," China Economic Review, Elsevier, vol. 6(1), pages 105-136.

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