The political logic of fiscal transfers in China

This paper examines the factors that are most influential in affecting the patterns of intergovernmental transfers in China using a set of newly released public finance data that covers all of China’s 31 provincial units for the period of 1997-99. The study indicates that the patterns of allocation of fiscal transfers between the center and the provinces follow a certain political logic. Central politicians’ concern about national unity and unequal provincial representation in central decision-making have noticeable effects on provinces’ shares of central transfers. A broad concern is to investigate the extent to which theoretical frameworks that were developed in the context of electoral democracy are helpful in analysing undemocratic systems.

The paper deals with three main issues:

• the theoretical framework under which determinants of fiscal transfers will be analysed
• the four types of central transfers in China and the possible determinants of intergovernmental transfers
• the extent to which fiscal transfers in China are governed by equity considerations, and whether political considerations override ethic considerations.

The empirical findings suggest that:

• per capita central transfers are negatively related to per capita urban income and positively related to per capita cost of natural disasters implying that the Chinese are motivated by a concern for equity in their policies of regional redistribution
• the concern of central policy-makers over national unity is a very important determinant in the Chinese transfer system where China’s 55 minority nationalities hold importance for the country’s long-term development and national security
• overrepresented Chinese provinces are likely to receive larger per capita transfers than do under-represented provinces
• there is evidence of unequal per capita representation in the Central Committee of the Chinese Communist Party
• political factors can influence the design of formulae and may have an effect on the distribution of discretion based as well as formula-based transfers when there is lack of equity principle.

In conclusion, institutional structure matters in the process of transfer allocation in China the same way it matters in electoral democracy. The author stresses on the fact that the distribution of fiscal transfers is largely determined by the interactions between central and regional politicians. Chinese politicians tend to use fiscal transfers to please their constituents or to neutralise potential threats as do their counterparts in electoral democracies and even though China’s political system is different from electoral democracy, it nevertheless reflects the same results of countries from the West.