Fiscal Reform and Local Industrialization

Abstract

The relationship between fiscal reform and local industrialization stems from three features of the Chinese economic landscape. First, China's fiscal structure depends overwhelmingly on industry for the generation of revenues. Throughout the Maoist and post-Mao eras, this single feature has remained basically intact in spite of the many changes introduced to the tax system. In 1983, over 90% of total governmental revenues (at all levels) came from industrial profits and taxes. Even though this share has since fallen to about 70%, industry remains the cash cow of the Chinese fiscal system (Wong, 1991a). The second feature is that fiscal reforms in the post-Mao period have reapportioned revenue incomes among administrative units largely on the basis of enterprise ownership. Before 1980, the central government lay claim to virtually all of the surplus generated by industry, including profits and indirect taxes, and local governments were able to retain only a portion of the profits of selected local enterprises. This changed in the reform period, when fiscal reform reassigned to local governments virtually all of the surplus generated by local industry. At the same time, fiscal reforms greatly strengthened the link between local revenues and expenditures. The direct outcome is that local government budgets are highly dependent on the financial health of local enterprises.