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Reform of the intergovernmental transfer system in China

Author

Listed:
  • Shah, Anwar
  • Shen, Chunli

Abstract

In China, most of the service delivery responsibilities are assigned to the subnational governments. Yet for reasons of efficiency in tax collection and administration, the central government collects revenues far in excess of its expenditure needs. In 2003 the central government collected 70 percent of consolidated revenues but accounted for only 30 percent of consolidated expenditures. The initial fiscal surplus of the central government enables it to use its spending power to provide financing to subnational jurisdictions for the achievement of national objectives and to influence local priorities. This paper examines the incentives associated with the design of such transfers and their implications for the efficiency and equity of public service provision and accountable local governance in China. The paper argues that the existing design of such transfers is not consistent with efficiency and equity considerations. It further undermines local autonomy without enhancing local accountability while creating incentives for imprudent fiscal management. Its main limitations include a complex and opaque system, a piecemeal approach to gap filling, lack of consistency of design with objectives, focus on input controls without regard for output accountability, incentives to support an antiquated management paradigm, a one-size-fits-all approach to local financing, and lack of transparency and regulatory framework for the intergovernmental transfer system. The paper makes specific suggestions on a reform of this systemto overcome these limitations and on better use of fiscal transfers to create responsive, responsible, equitable, and accountable local governance in China.

Suggested Citation

  • Shah, Anwar & Shen, Chunli, 2006. "Reform of the intergovernmental transfer system in China," Policy Research Working Paper Series 4100, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4100
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    References listed on IDEAS

    as
    1. Anwar Shah, 1996. "A Fiscal Need Approach to Equalization," Canadian Public Policy, University of Toronto Press, vol. 22(2), pages 99-115, June.
    2. Zhihua Zhang & Jorge Martinez-Vazquez, 2003. "The System of Equalization Transfers in China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0312, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    3. Tsui, Kai-yuen, 2005. "Local tax system, intergovernmental transfers and China's local fiscal disparities," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 173-196, March.
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    Citations

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    Cited by:

    1. Elliott Parker & Judith Thornton, 2007. "Fiscal Centralisation and Decentralisation in Russia and China," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 49(4), pages 514-542, December.
    2. Liu, Antung Anthony & Zhang, Junjie, 2012. "Fiscal Incentives and Environmental Infrastructure in China," Discussion Papers dp-12-36, Resources For the Future.
    3. World Bank, 2012. "Central-Local Government Relations in Thailand : Improving Service Delivery," World Bank Other Operational Studies 17362, The World Bank.
    4. Pi-Han Tsai, 2016. "Fiscal incentives and political budget cycles in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(6), pages 1030-1073, December.

    More about this item

    Keywords

    Intergovernmental Fiscal Relations and Local Finance Management; Regional Governance; Public&Municipal Finance; Urban Economics; Public Sector Management and Reform;

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