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China's Rural Public Finance: The Village Perspective - Annex 8
Working Paper

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Report to the World Bank, Fiscal Reform and the Role of the Township

January 2006

In this paper we set out to accomplish three objectives. First, we wanted to track and describe the way the fiscal reforms have been implemented in China's townships. Second, we have tried to identify the effect that the fiscal reforms have had on the fiscal health of the township. This objective was pursued in three contexts: the effect on the average township; the effect on townships in different provinces; and the effect on townships in poor and rich townships. Finally, we sought to assess the impact that the fiscal reforms had on village fiscal health and farmer satisfaction.

Although farmers certainly have expressed their support for tax and fee reduction through a variety of media, our results show that the fiscal reforms are far more complicated and complex than tax reduction policies. They include a large set of policies that have sought to reassign expenditures, realign responsibilities (for control over resources that flow from county to town and town to county), reduce the importance of extrabudgetary and self raised funds, and increase investment into the public goods infrastructure in rural areas. When assessing the broad impact of these policies on township fiscal health, we find the average township has not fared well. Although county to town transfers have risen, the targeted transfers to offset the decline due to the tax and fee reduction policies do not nearly cover the losses of fiscal resources in the system as a whole. In addition, many policies are putting increasing control in the hands of the county financial office. through changes such as increasing requirement to hand up town to county transfers and expenditure reassignments (even though the fiscal resources come out of the township's budget). Hence, overall the fiscal condition of township's operating budget has clearly deteriorated between 2000 and 2004.

The bright side of the fiscal reforms has come in the area of capital budget management and flows of fiscal resources into new infrastructure investment. Between 2000 and 2004 there has been a veritable explosion of investment into the rural economy, mostly in roads, but also into irrigation, drinking water and to a lesser degree into clinics. The investments have risen largely due to the rising allocation by upper level governments. While we show that the rising investment from any source increases farmer satisfaction, there are some concerns with the new effort to improve rural infrastructure. First, in many places (and especially in Jiangsu and other richer townships) as investments from above have risen requirements for matching funds apparently have led to an increase in township debt. Second, the increasing reliance investment from above also has a drawback. While any investment from any source is shown to increase the satisfaction of farmers, ceteris paribus, when the investments come from above, they appear to reduce farmer satisfaction. Apparently, when villages are less involved with the project selection, design and implementation, the projects leave farmers less satisfied.

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