JOURNAL OF COMPARATIVE ECONOMICS 26, 603–605 (1998)ARTICLE NO. JE981515

Christine P. W. Wong (Ed.), Financing Local Government in the People’sRepublic of China. Hong Kong: Oxford Univ. Press, 1997. xix / 377 pp.,index, $55.00.

This book, edited by the leading authority on China’s fiscal system, buildson an earlier book, Fiscal Management and Economic Reform in the People’sRepublic of China (Christine Wong, Christopher Heady, and Wing T. Woo,Hong Kong: Oxford Univ. Press, 1995), which examines China’s evolvingfiscal system during the reform period, including the relationship betweennational and provincial governments. It ‘‘extends the exploration of intergov-ernmental fiscal relations downward by assessing the problems of financinglocal government, including the subprovincial levels, in light of public financetheory and the practice in other countries’’ (p. 28). Both books were theproduct of studies cofinanced by China’s Ministry of Finance and the AsianDevelopment Bank. As a result, the chapter authors (including Kam WingChan, Christopher Heady, Loraine West, and Christine Wong) had uniqueaccess to data and interviews with local finance officials in the study sites inGuizhou and Shandong.

In China, most government revenues and expenditures are collected andspent by subprovincial units—cities, prefectures, counties, and townships.Despite the important implications of local public finance for growth andequity concerns, there is remarkably little information on how these levelsof government collect and spend money. This study makes an importantcontribution in illuminating the nature and consequences of changing subpro-vincial fiscal arrangements. It is particularly timely because it is one of thefirst studies to provide information on fiscal performance following the sweep-ing fiscal reforms of 1994 that aimed to increase revenues, especially thoseof the central government, to simplify the tax structure, and to standardizecentral–local revenue-sharing arrangements.

A major strength of the study, and of the previous study, is the consistenteffort to assess fiscal arrangements in China with reference both to theoreticalprinciples of public finance and to the experience of other countries. After anintroductory chapter by Wong that reviews key issues in local public financein the PRC (the fiscal reform of 1994, administrative setup, revenue sharing,vertical distribution of revenues and expenditures, and off budget finance), anentire chapter by Heady is devoted to ‘‘The Role of Subnational Governments:

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Theory and International Practice.’’ With this background, subsequent chaptersaddress the concerns of cities and municipal public finance (Chapters 3 and 4)and then rural public finance (Chapters 5 and 6), drawing heavily on fieldinterview data collected in cities and counties in Guizhou (a poor province)and Shandong (a prosperous one). One common concern of all of these chaptersis the degree of equity in per capita expenditure levels and public serviceprovision across localities. These equalization issues are discussed in depth inChapter 7. The final chapter makes policy recommendations.

The authors conclude that ‘‘local public finance in the PRC is an arearequiring urgent policy action,’’ and describe the system as being in a ‘‘dys-functional state’’ (p. 313). This is because local governments now bear veryheavy spending responsibilities but are asked to be largely self-financing inproviding required services. Many local governments have not been up to thechallenge, and have imposed ad-hoc fees (off budget funds) but still accumu-lated deficits and payments arrears. The result has been large inequities acrossregions in the provision of public investments and services. The 1994 reformsfocused on center–provincial divisions of taxes and revenues but did notclearly specify changes in subprovincial finance.

The study makes a number of sensible policy recommendations. For in-stance, it points out that in contrast to other countries where local governmentscontrol at least one local tax rate (often property taxes) and so can respondto local demand for public spending, in China local governments have nosay over tax rates, which leads them to impose local fees and levies that areperceived to be ‘‘onerous and inequitable.’’ Also, while in most countries alarge share of local expenditures are financed by grants from higher levelgovernments awarded based on transparent formulas to equalize financialresources, in China, grants from upper levels are much smaller and based onunclear political and other criteria. Correcting these shortcomings shouldreceive high priority. Also, the transitional nature of China’s economy hascaused some confusion about the appropriate public expenditure responsibili-ties of government (e.g., pensions), and these need to be carefully consideredand clarified given limited available resources. Where possible, the localgovernments should be permitted to charge user fees so that the beneficiariesbear the true costs of services, and to finance high-return public investmentsby borrowing. In rural areas, to promote greater equalization of basic servicessuch as education and health, county and township finance should be consoli-dated and greater responsibility taken for such expenditures rather than leavingit to villages. Other, more specific policy recommendations are also made.

A question raised by the book’s theme that China has large inequities inthe provision of public investments and services is how this degree of inequitycompares to other countries. More comparative information on this issuewould have been revealing. One limitation of the study is the relatively smallsample of areas surveyed (a few cities and counties in each of two provinces),

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although the authors, to their credit, try whenever possible to supplementtheir arguments with other data. Also, there is very little information onvillage-level finance (collective fees and expenditures), which is understand-able given the difficulty in collecting such data. One final quibble is thatsome of the chapters, especially the 70-page chapter on the provision ofpublic services in rural areas, are packed with descriptive examples, numbers,and tables, which makes for a rather lengthy read. While informative, onewonders if some of this information could have been abridged or omittedwithout detracting from the key points. Equalization issues are stressed repeat-edly in each chapter and this discussion could be better streamlined.

But these are minor criticisms. Overall, this volume achieves the goals thatit sets for itself, providing much new information on a vastly understudiedbut important topic. The book is well written and easy to read. Along withthe earlier study, it is likely to become a standard reference for the manyscholars and students who find themselves confused by the complexity ofChina’s system of taxation and public spending.

Albert ParkUniversity of MichiganAnn Arbor, Michigan 48109-1220

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