Enhancing the redistributive capacity of the Chinese state? Impact of fiscal reforms on county finance

Abstract

Many observers contend that fiscal deprivation of the centre in reform China is detrimental to the overall capacity of the Chinese state, and thus the danger of national disintegration cannot be discarded. One relevant concern here is the obligation of the state to redress socio-economic dislocations, of which growing regional inequality is a major issue. The Tax Sharing Scheme introduced in 1994 represents the most colossal effort to redress the centre-local imbalance. The analysis of the patterns of income and expenditure of county finance between 1993 and 2002, however, highlights the many facets of state capacity and reiterates the possibility of state involvement amidst an improved fiscal position. The success in extractive capacity in this case does not guarantee parallel improvement in the central government's redistributive capacity. Analysis of local expenditure patterns shows that the growing support of the centre simply fails to reverse the declining level of local services in areas that may be targeted as key for poverty alleviation and equalization. The danger of the simple reading of the rise in extractive capacity attributed to the 1994 reform as a symptom of a strong central state is evident.