For National Unity:The Political Logic of Fiscal Transfer in China

Shaoguang Wang

Department of Government & Public Administration

The Chinese University of Hong Kong

Shatin, NT

HONG KONG

Tele: +852-2609-7515

Fax: +852-2603-5229

Email: wangshaogunag@cuhk.edu.hk

August 6, 2001

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Abstract

In theory, central transfers should be designed primarily to equalize fiscal

resources and/or outcomes among provincial units. But in practice, many other

factors, including political ones, may also play a role in the process of transfer

allocation. This study attempts to explore the underlying logic of intergovernmental

transfers in China. It finds that maintaining national unity is an overriding concern for

Chinese political elites: It is provinces with predominantly non-Han population that

have been given the highest levels of subsidies, even though their income levels

exceed those of the poorer provinces.

Key words: Fiscal transfer, national unity, China

Word count: 8,060

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Existing in all countries where there is more than one level of government,

intergovernmental fiscal transfers have attracted a great deal of attention from

economists. Much of their discussion has focused on how to justify intergovernmental

transfers.1 Three broad reasons have been identified.2 First, regions with low per

capita income and high per capita needs may entail transfers from those with opposite

characteristics to equalize their fiscal capacity. If collective action problem prevents

voluntary inter-jurisdictional transfers from materializing, there is a strong ethical

ground to expect the central government to do the job, for a country should treat its

citizens equally, no matter which jurisdiction they happen to reside. Second, due to

the fact that central government normally have broader tax bases at its disposal,

central transfers may be needed to address the imbalance between limited resources

available and indispensable expenditure responsibilities of sub-national governments.

Third, intergovernmental transfers may be needed to compensate for inter-

jurisdictional spillover effects of such regional fiscal operations as environment

protection and promoting education.

While such normative deliberation is useful for designing an equitable and

effective transfer system, the real world rarely functions according to abstract ethical

principles. In practice, intergovernmental transfers are often used to achieve goals

other than equalizing fiscal resources and outcomes among regions. In other words,

political factors may be as important as, and probably even more important than,

ethical and economic considerations for policy-makers to allocate transfers. Thus,

simply asking “what ought to be” would not take us very far. Instead, we should ask,

“What really happens”. More specifically, the real challenge is to explore positively

the underlying political logic of intergovernmental transfers.

Of course, the political logic of fiscal transfers is not the same in all systems all

the time. In normal situations, central politicians may use transfers to reward their

1 For examples, see James M. Buchanan, “Federalism and Fiscal Equity,” American

Economic Review, Vol. 40, No. 4 (September, 1950), pp. 583-99; William H.

Oakland, “Fiscal Equity, An Empty Box,” National Tax Journal, Vol. 47, No. 1

(March, 1994), pp. 199-210.2 Jun Ma, “Intergovernmental Fiscal Transfer: A Comparison of Nine Countries,”

Macroeconomic Management and Policy Division, Economic Development Institute,

the World Bank, May 1997, pp. 1-2.

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own constituencies or to “buy” support from those who can be lured to support them,3

while regional actors try to lobby for as much as central subsidies as possible.4

Wherever and whenever national unity is at stake, however, intergovernmental fiscal

transfers seem often to assume a different function, one of appeasing centrifugal

forces.

The most obvious example in this regard is Germany. East and West Germany

were formally unified on October 3, 1990. However, unification posed a new

challenge, the crux of which was a regional disparity. While the “old” Federal

Republic had enjoyed a high degree of interregional balance, now it became

politically imperative to extend this interregional equality to the east part and to

establish equivalent living conditions throughout the “new” Federal Republic. For this

reason, each year after 1990, the federal government has transferred at least DM 150

billion, or 5 percent of the West Germany GNP to East Germany. Without such

infusion of resources to narrow the overall income differential, the process of German

unification would have been much bumpier. As enormous as it seems, the fiscal

sacrifice was a necessary political price to pay for consolidating the newly unified

country.5

The case of Germany is by no means exceptional. In post-Soviet Russia, for

instance, despite its inability to collect taxes and to make ends meet, Moscow still

tried to placate separatist demands by central largess. As a result, it was those regions

that had posed serious threat to the country’s political stability and territorial integrity

that were rewarded with larger net per capital central transfers.6 As Treisman points

out, “the practice of appeasing mobilized anti-center regions was one reason why, 3 William D. Nordhaus, “Political Business Cycles,” Review of Economic Studies,

Vol. 42 (1975), pp. 169-90; Michael J. Rich, “Distributive Politics and the Allocation

of Federal Grants,” American Political Science Review, Vol. 83 (1989), pp. 193-213.4 See references in Treisman, “The Politics of Intergovernmental Transfers in Post-

Soviet Russia.” Also see M. Govinda Rao and Nirvikar Singh, “The Political

Economy of Central-State Fiscal Transfers in India,” an unpublished manuscript,

University of California at Santa Cruz, 2000.5 Ullrich Heilemann and Wolfgang H. Reinicke, “Together Again: The Fiscal Cost of

German Unity,” The Brookings Review, Vol. 13, No. 2 (Spring, 1995), p. 42-47;

Wolfgang Renzsch, “Financing Germany Unity: Fiscal Conflict Resolution in a

Complex Federation,” Publius, Vol. 28, No. 4 (Fall, 1998), pp. 127-146.

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despite separatist pressures, economic crisis, and weakened central institutions, Russia

did not disintegrate in the early 1990s as all three other post-communist federations

had done.”7 National unity may come at a high price, but central policy makers

everywhere seem to view such price as something worth bearing.8

This study focuses on the case of China, as of now, a united country that faces

no imminent danger of breaking up. But the country has a tragic past. Since 221 B.C.

when Qinshi Huangdi first united China, the country has been disintegrated as often

as it has been united. As recently as the 1910s and 1920s, for instance, China was

divided into feuding warlord-run kingdoms. The purpose of this paper is to explore

how important a part the concern for national unity plays when Chinese policy makers

come to allocate fiscal transfers. We do this with a set of cross-section data that

covers China’s all 31 provincial units9. The technique used is least square multiple

regression. Measures of per capita receipts of transfers are regressed upon factors that

may affect central allocators’ decision-making, which in our view is unlikely to be a

process free of political influence. Our key hypothesis is that central politicians tend

to allocate fiscal transfers according to their ranking order of preferences and that the

top priority for them is to maintain national unity, without which it is unlikely for

them to maintain their personal political preeminence in the country. Of course we

cannot rule out a priori the possibility that they give first priority to assisting regions

with poor tax bases and greater socio-economic needs. To ascertain to what extent

policy-makers are motivated by a concern for equity, we include indicators of social 6 Daniel Treisman, “The Politics of Intergovernmental Transfers in Post-Soviet

Russia,” British Journal of Political Science, Vol. 26 (1996), pp. 299-335;

“Deciphering Russia’s Federal Finance: Fiscal Appeasement in 1995 and 1996,”

Europe-Asia Studies, Vol. 50, No. 5 (1998); “Fiscal Redistribution in a Fragile

Federation: Moscow and the Regions in 1994,” British Journal of Political Science,

Vol. 28 (1998), 185-222.7 Treisman, “Fiscal Redistribution in a Fragile Federation,” p. 198.8 According to Melanie Beresford, a Vietnam specialist at Macquarie University,

Australia, when the Vietnamese government allocates fiscal transfers, the most

important consideration has been to appease minority nationalities. Personal

communications, July 23, 2001.9 In Appendix 1, we use another set of data that covers 2135 counties in these 31

provincial units.

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needs as part of independent variables in our models. Also included are measures of

provinces’ bargaining power, because it is reasonable to assume that all provincial

governments want to extract as much central transfers as possible. This study finds

strong evidence that national unity is a far more important concern than interregional

equity when political elites come to make decisions about the allocation of fiscal

transfers.

The paper is organized as follows. Section I provides estimates of fiscal

disparities in China. Section II offers an overview of China’s transfer system and

defines the dependent variable. Section III lists possible determinants of

intergovernmental transfers, including our test variables and some control variables.

Section IV presents the results of our regression analyses, which is followed by

Section V that discusses those results. The final Section discusses the implications of

our empirical findings.

I. Fiscal Disparities in China

Intergovernmental transfers can be justified only if there are substantial gaps in

capacity and costs to produce a standard package of public services between sub-

national governments. Presumably, the larger the gaps are, the more indispensable the

fiscal transfers become.

Covering 9.6 million square kilometers, China is the third largest country in the

world. Due to its gigantic size, there have always been significant spatial variations in

geographical conditions, resource endowments, the sectoral distribution of economic

activity, and the level of socio-economic development. Given the regional economic

inequality, fiscal disparities are inevitable: lower income regions may not be able to

provide their residents with a standard package of public services that are taken

granted by the residents of high income regions. In such a circumstance, poor regions

may seek support from rich regions to reduce inequalities in public expenditure, be it

directly or via transfers from higher levels of government.

[Table 1 about here]

How large are fiscal disparities in today’s China? Table 1 may give us some

hints. For 1998, variations in per capita GDP appeared to be fairly large across

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China’s 31 provinces. While Guizhou, China’s poorest province, registered a per

capita GDP (2,342 Yuan) of 31.8 percent of the national average (7,373 Yuan),

Shanghai, China’s leading industrial and commercial center, enjoyed a per capita

GDP (28,253 Yuan) nearly 4 times higher than the national average and more than 12

times that of Guizhou. Relative differences in per capita budgetary revenue were even

more striking. As Table 1 reveals, the coefficient of variation—a measure of

dispersion equal to the standard deviation divided by the mean—of per capita revenue

was much higher than that of per capita GDP. It is worth noting, however, that,

compared to the inequality of per capita revenue, inequality of per capita expenditure

was significantly smaller, about in the same magnitude as inequality of per capita

GDP.10 Clearly, there were some central transfers that helped to reduce provincial

fiscal inequality. Thanks to central transfers, gaps in three key areas of public

spending (education, administration, law and order) were not as large as income gap.

But in two other key areas of public spending (health and capital construction), gaps

are larger. In any event, inequality of per capita budgetary expenditure in all areas was

pretty large by international standards. Table 1 seems to suggest that, while central

transfers in China were progressive, they were either not progressive enough or they

were too small in size to alleviate inter-provincial disparities. Thus, it is natural for us

to ask which regions tend to receive more net transfers from the central government

and why. But before trying to answer this question, a brief introduction about the

channels of intergovernmental transfers is in order.

II. Intergovernmental Transfers in China

During Mao's era, the central government enjoyed considerable control over the

distribution of resources. The fiscal system was so arranged that rich provinces had to

remit large proportions of their revenues to the central government and poor provinces

were allowed to "retain all their revenues and receive additional direct subsidies from

the central government."11 Acting as a redistributor in between, the central 10 The coefficient of variation of per capita expenditure in China was smaller than that

in Russia, but larger than that in the United States. See Treisman, “Deciphering

Russia’s Federal Finance,” p. 895.11 Nicholas R. Lardy, "Regional Growth and Income Distribution in China," in Robert

F. Dernberger, ed., China's Development Experience in Comparative Perspective,

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government could use fiscal transfers to influence behavior of sub-national

governments.

In the first 15 years of economic reforms, however, the Chinese central

government's ability to allocate transfers was critically enfeebled. Under the fiscal

contract system prevailing from 1980 to 1993, all the provinces, rich and poor, were

compelled to become financially more independent. Most taxes were collected and

most expenditure undertaken on a jurisdiction-by-jurisdiction basis.12 As fiscal

surpluses from rich provinces drained off, what was available for the central

government to redistribute became increasingly limited. The result was growing

fiscal gaps between provinces. With larger tax bases, rich provinces could afford

either directly invest more with their budgetary capital or offer more generous tax

concessions to potential investors. The same fiscal autonomy, however, worked to

the detriment of poor provinces, because, with less central subsidies, they were hard

up even for resources to support daily government operation and to provide such basic

services as health and education, not to speak of conducting productive investment.13

By the early 1990s, there was a growing concern that a widening income gap

between the prosperous coast and the laggard interior might eventually cause the

break up of the Chinese national state.14 To arrest this dangerous trend, China

Cambridge, MA: Harvard University Press, 1980, pp. 172-73.12 Shaoguang Wang, "China's 1994 Fiscal Reform: An Initial Assessment," Asian

Survey, Vol. XXXVII, No. 9 (Sept. 1997), pp. 801-817.13 The devastating effect of declining transfers on poor provinces can be seen in the

case of Guizhou. In the early 1980s, central transfers financed nearly 60% of the

province's total budgetary expenditures. By 1993, this has dropped to less then 20%.

Loraine A. West and Christine P.W. Wong, "Fiscal Decentralization and Growing

Regional Disparities in Rural China: Some Evidence in the Provision of Social

Services," Oxford Review of Economic Policy, Vol. 11, No. 4; Mark Selden, "China's

Rural Welfare System: Crisis and Transformation," a paper presented at the

conference "PRC Political Economy: Prospects under the Ninth Five-Year Plan,"

National Cheng Kung University, Tainan, Taiwan, June 7-10, 1997.14 Shaoguang Wang and Angang Hu, Zhongguo guojia nengli baogao [A Study of

China's State Capacity], Shenyang: Liaoning People’s Press, 1993; Hong Kong:

Oxford University Press, 1994. An English translation of the book is available under

the title "Strengthening Central Government's Leading Role Amid China’s Transition

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overhauled its fiscal system at the beginning of 1994. The new system was called the

tax-assignment system (fenshuizhi). One of the manifested goals of the 1994 reform

was to restore the central government’s redistributive ability so that it could again

transfer surpluses extracted from more developed provinces to less-developed

provinces.

The post-1994 Chinese fiscal flows between the central and provincial

governments can be divided into four broad categories.

Returned revenue: Because strictly following the new rules would lower the

revenue income of every province, at the time when the 1994 system was

introduced, the central government made a pledge of compensating each and

every province for what it would have to sacrifice for accepting the new system.

For this purpose, each province's net loss in accepting the new system was

calculated.15 Thereafter, every year a province was supposed to receive a central

compensation (or “returned revenue”) amounting to:

Rt = R0 * (1 + 0.3 * Gt)t

where Rt is the central compensation in year t; R0 is the compensation baseline

or the calculated net loss of the province for the first year; Gt is the average

growth rate of VAT and consumption tax in the province in year t; t represents

the first, second, third...year after the introduction of the new system. Since the

mechanism of “returned revenue” was primarily designed as a kind of side

payment for the provinces not to resist the new system, its distribution was not

expected to conform to the equity principle.

to a Market Economy," Chinese Economic Studies, Vol. 28, No. 3 (May-June 1995)

and No. 4 (July-August, 1995). Also see Angang Hu, Shaoguang Wang, and

Xiaoguang Kang, Zhongguo diqu chaju baogao [A Study of China’s Regional

Disparities], Shenyang: Liaoning People’s Press, 1995.15 The net loss of a province was calculated according to the following formula:

R = S + 75%V - T

Where R was the net loss of the province for the first year or the compensation

baseline; S was revenue from consumption tax; V was revenue from VAT; T was the

province's actual revenue in 1993.

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Old system subsidies (or remittances): Even after 1994, part of the revenue-

sharing contracts negotiated under the old system remained effective. The

provinces continued to remit a certain amount of their locally collected revenues

to, or receive a certain amount of subsidies from, the central government as they

had under the pre-1994 regime. The only difference was that now the amounts

of remittance or subsidies were fixed once for all. Normally, a province that

received subsidies did not have to remit to the central coffers. Shandong was the

only exception. Among the other 30 provinces, sixteen were on the recipient

side and fourteen on the remitting side. The former group included all the eight

provinces where minority nationalities were concentrated (Tibet, Xinjiang, Inner

Magalia, Ningxia, Guangxi, Qinghai, Yunnan, and Guizhou) and other poor

provinces such as Sichuan and Jiangxi. Rich provinces such as Shanghai,

Beijing, Guangdong, and Liaoning all belonged to the latter group. Thus, this

mechanism contained elements of fiscal equalization. But, the significance of

this mechanism will diminish, because, as time goes by, the relative size of such

transfers will become smaller and smaller in the ever growing public finance.

New system subsidies (or remittances): They were “new” because they were

introduced after 1994. All the transfers in this category were for specific

purposes, such as disaster relief, subsidies to certain regions (e.g., Beijing,

Chongqing, Xinjiang, and Yan’an), subsidies to certain projects (e.g., education,

environmental protection, and industrial restructuring), and the like.

“Transfer of the transition period ”: First introduced in 1995, this transfer was

specifically designated to address horizontal fiscal imbalance. Unlike other

“new system subsidies”, this was the only formula-based type of transfer, the

allocation of which is determined by objective measurements of fiscal capacities

and fiscal needs of the provinces.16

16 Every year after 1995, Ministry of Finance issued a detailed guideline on how the

distribution formula was designed. Fro a collection of those yearly guidelines, see

Zhang Hongli, Zhongugo guoduqi caizheng zhuanyi zhifu [Fiscal Transfers in the

Transition Period] (Beijing: Zhongguo caizheng jingji chubanshe, 1999).

10

Table 2 presents data on central-provincial fiscal flows in 1998. The net central

transfers to the provinces can be calculated by subtracting provincial remittances of

taxes to the central coffers from the total of all central transfers to the provinces. In

1998, this figure amounted to 272.4 billion Yuan, which accounted for about a half of

the central revenue, or 3.4 percent of China’s GDP. However, the bulk of the central

transfers took the form of “returned revenues,” kind of de facto provincial

entitlements about which the central government could exercise little discretional

power. If the “returned revenue” were to be excluded, the net central transfers were

barely 65 billion Yuan. As for the most redistributive “transfer of the transition

period,” its size (6 billion Yuan) was too small to be significant.

[Table 2 about here]

Given the heterogeneous natures of different forms of central subsidies, it may

be useful to distinguish two concepts of net central transfers, with one including

“returned revenue” and the other excluding “returned revenue”.

Net Transfer I = Returned revenue + Old subsidies + New subsidies + Transfer

of the transition period – Old remittances – New remittances

Net Transfer II = Old subsidies + New Subsidies + Transfer of the transition

period – Old remittances – New remittances

The dependent variables in this study are per capita net transfer I and per capita

transfer II.

III. Determinants of Intergovernmental Transfers

In theory, central transfers should be designed primarily to equalize fiscal

outcomes or resources among provincial units. But in practice, political factors may

matter in the process of transfer allocation in China every bit as they do under

electoral democracies. Even though Chinese national policy makers do not have to

stand for election and re-election, they, just like their counterparts elsewhere, care a

great deal about their political legitimacy and survival. So do provincial leaders.

Preoccupied with unusual concern for political stability, Chinese central politicians

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tend to use fiscal transfers to award prospective supporters and/or to neutralize

potential threats. In the same vein, provincial governments are inclined to extract as

much central transfers as possible so as to please their own constituents. The

allocation of fiscal transfers thus often becomes a focus of contention in

intergovernmental relations. For this reason, to figure out the key determinants of

central transfers in China, one has to consider not only ethical and economic factors

but also political factors. Accordingly, three categories of independent variables are

used in this study.

Central decision makers’ concern for equity

Per capita GDP. This is a proxy for fiscal capacity, that is, the capacity to

raise revenue. A major source of fiscal disparity arises from asymmetries in

fiscal capacity, which in turn arises from asymmetries in income

distribution. The lower the per capita GDP, the lower the fiscal capacity. If

central decision makers’ objective in allocating transfers were to mitigate

fiscal disparities and to level the fiscal playing ground, a negative regression

coefficient would be expected.

Per capita cost of natural disaster. China is a country that is prone to natural

disaster. In each particular year, however, some areas may incur greater

losses than others. Central decision makers are supposed to take this factor

into consideration when they allocate fiscal transfers. If they do, we expect a

positive coefficient.

The share of agriculture in the regional economy. This is an indicator of

underdevelopment. If central transfers were targeted to subsidize

underdeveloped regions, one would expect a positive regression coefficient.

Dependency ratio. Such ratio refers to the share of the population that is

below and above working age. It serves as an indicator of fiscal need.

Regions with a larger dependent population are expected to receive larger

per capita transfers.

Population density. This is a proxy for the unit costs of social services.

Fiscal disparities can be the result of differences in revenue bases as well as

in the unit cost of provision. There may be many environmental factors

affecting costs of provision. Population density is just one of them.

Presumably, the lower the population density in a region, the higher the unit

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cost of delivering any particular level of social services to the population. If

central policy were to compensate cost differences, one would expect a

negative coefficient.

Central decision makers’ political concerns

The proportion of minorities in the population or whether an area is an

autonomous area. Regions with a high concentration of non-Han inhabitants

might be thought more likely to cultivate separatist aspirations. If a

significant regression coefficient is found, we may conclude that the central

government uses transfer as an instrument to pacify the most potentially

troublesome areas.

The instances of labor disputes. This is an indicator of social stability. If

social stability were a major concern for central leaders, one would expect a

positive regression coefficient.

Regions’ bargaining power

The representation in the Politburo. This is a dummy variable, which take

the value 1 for all provinces that have a representative in the Politburo, the

most powerful decision-making organ in China, and 0 for all others. A

significant positive regression coefficient on this variable would suggest the

existence of pork-barrel allocation in China.17

The size of the population. Beijing might be more likely to yield to pressure

from a province with 50 million or more population than from a province

with less than 10 million.

The size of the economy measured by provincial GDP. This is another

proxy for bargaining power. Provinces with greater economic power are

expected to receive higher per capita transfers due to their political weights.

IV. Results

17 In a study of Russia, whether a region has a permanent representative in Moscow is

used as a variable measuring the influence of the region. See Treisman, “The Politics

of Intergovernmental Transfers in Post-Soviet Russia,” p. 316. In the case of China,

however, each and every province has a permanent liaison office in Beijing.

13

In this section, we conduct regression analyses on central-provincial transfers.

Dependent variables are per capita transfer 1 and per capita transfer 2 as defined in

the section III. Independent variables are those listed in the previous section. Since

there is no explicit model, regressions reported below should be seen as exploratory

rather than an attempt to test a theory. They are used to explore to what extent fiscal

transfers in China are governed by economic and ethical considerations and to what

extent political considerations override economic and ethical considerations.

Table 3 presents the results of linear regressions for each of the two dependent

variables. In both cases, columns marked (a) offer estimated regression coefficients

when a broad range of theoretically relevant predictors are included, while columns

marked (b) give results for short regressions which exclude all independent variables

that do not significantly improve the fit of the regression, as judged by an F-test at the

0.10 level.

[Table 3 about here]

Regression (1a) in Table 3 presents the results for per capita transfer 1 as the

dependent variable. Three observations can be made. First, the equity consideration

does not appear to have played any clear role in allocating transfer 1. Four of the five

variables in this regard have the “wrong” signs. Transfer 1 is positively related to “per

capita GDP” and “population density,” and negatively related to “the share of

agriculture in the economy” and “dependency ratio.” In other words, the richer the

province and the higher the population density, the more the per capita transfer. And a

province with less developed economy and a larger dependent population tends to

receive smaller rather than larger per capita transfer. In any event, none of the five

variables are statistically significant.

Second, pressure politics does not play a major role in central allocation,

either.18 Two of the three variables measuring bargaining power carry the “right”

signs. Membership on the Politburo and GDP (which measures the economic

importance of a province) are positively related to per capita transfer. But neither is

even close to statistically significantly different from zero at conventional level. As 18 In this regard, China is very different from Russia. See Daniel Treisman, “The

Politics of Intergovernmental Transfers in Post-Soviet Russia;” “Fiscal Redistribution

in a Fragile Federation;” “Deciphering Russia’s Federal Finance.”

14

for another measure of provincial bargaining power, population turns out to be

negatively related to receipts of transfer. Less populous provinces tend to do better in

per capita terms.19 But this variable is not statistically significant.

Third, the most dramatic result of Regression (1a) is the high significance of two

variables measuring central policy makers’ political concerns. The ethnical make-up

variable has a positive coefficient that is statistically significant (significant at p =

0.000). The higher the proportion of the non-Han population a province is, the more

per capita transfer it receives. Interestingly, per capita transfer is negatively correlated

with the variable that measures social stability (“the instances of labor disputes/the

population”). Rather than to calming down less stable provinces by allocating more

per capita transfers, such provinces are actually penalized.20 Central policy makers

seem to bias allocation in favor of those provinces that are able to maintain social

stability. Indeed, it may be politically unwise to reward trouble provinces with

financial concessions.

After excluding variables that fail F test, Regression (1b) retains only two

variables. The provincial ethnic composition remains highly significant. The other

variable is per capita GDP, which is again positively related to per capita transfer.

This is not entirely surprising given the fact that “returned revenue” makes up more

than three-fourths of transfer 1. As pointed out above, the “returned revenue” is the

remnant of the pre-1994 fiscal system, the distribution of which by definition is not

governed by the equity principle. Thus, rich provinces are able to grab more rather

than less per capita “returned revenues” from Beijing.

Now, let’s turn to transfer 2. Clearly Regression (2a) more or less resembles

Regression (1a) in all aspects except one, namely, the sign of the coefficient for per

capita GDP. While per capita GDP is positively related to per capita transfer 1, it is

negatively related to per capita transfer 2. This implies that concern of equity plays a

greater role when policy makers come to the allocation of transfers other than 19 This is also true in Russia. See Treisman, “The Politics of Intergovernmental

Transfers in Post-Soviet Russia,” p. 325. But in a case study of fiscal politics in India,

population is found to have a positive effect on per capita transfers. See Rao and

Singh, “The Political Economy of Central-State Fiscal Transfers in India,” p. 23.20 On the contrary, in Russia, regions with more strikes tend to receive more central

transfers. See Treisman, “The Politics of Intergovernmental Transfers in Post-Soviet

Russia,” p. 319.

15

“returned revenues.” But the negative relationship between per capita GDP and per

capita transfer 2 is not statistically significant. Remarkably, the two measures of

political concerns remain highly significant in Regression (2a). So are they in

Regression (2b). This is impressive evidence that policy makers are motivated by

political concerns more than anything else in allocating transfer 2.

As will be shown in the Appendix, provincial governments in China follow the

same political logic when they allocate fiscal transfers to county governments.

In sum, from the regressions reported in Table 3, we may draw three broad

conclusions. First, equity consideration seems to have played little role in central-

provincial transfers. Second, contrary to the conventional wisdom, there is little scope

for bargaining as far as fiscal transfers are concerned. Third, the most important

determinant of fiscal transfers turn out to be policy makers’ political concerns, in

particular, their concern over national unity. All the four regressions in Table 3

reinforce each other and point to this conclusion.

V. Discussion

Fiscal transfers exist in all countries where there is more than one level of

government. However, the key determinants of fiscal transfers differ from country to

country. Some countries (e.g. the United States) favor conditional (or specific

purpose) grants, while others (e.g. Canada) prefer unconditional (or general purpose)

grants. 21 Where unconditional grants dominate and transfers are calculated according

to certain elaborate formulas, the possibility of political intervention is reduced to the

minimum (e.g. Germany). When rules for allocating general-purpose grants are

vague, there is much room open for bargaining (e.g. India and Russia).22 Systems

dominated by conditional grants provide a perfect institutional environment for pork-

barrel politics (e.g. the United States).23

21 Jun Ma, “Intergovernmental Fiscal Transfers: A Comparison of Nine Countries,”

the World Bank, 1997. 22 Rao and Singh, “The Political Economy of Central-State Fiscal Transfers in India;”

Treisman, “The Politics of Intergovernmental Transfers in Post-Soviet Russia.”23 John Ferejohn, Pork Barrel Politics: Rivers and Harbors Legislation 1947-68

(Stanford: Stanford University Press, 1974).

16

In China, general-purpose transfers account for the major part of the total

transfers. However, the bulk of general-purpose transfers in China consist of

“returned revenues,” the distribution of which is generally made according to certain

formulas. Even though those formulas do not embody the equalization principle,

nevertheless they limit the scope of bargaining. So are old subsidies and remittances.

No wonder that all of our variables measuring bargaining power add little to the

explanation.

As pointed out above, the “returned revenues” are designed to recognize the

vested interests of the localities, rather than to address the issue of growing regional

disparity. That explains why it is hard to find evidence that the central distribution of

transfers favors low-income areas. In a sense, it seems fair to say that, as far as the

allocation of fiscal transfers is concerned, there is not much room for central policy

makers to act at will. Of course, we are not suggesting that they are powerless. The

allocation of some fiscal transfers is surely still within their discretion. The question is

what would be their priorities in allocating funds under their control. The analysis in

the previous section suggests that national unity is probably their number one

concern.

This is by no means a new finding. In a study of fiscal transfers during the

period of 1978-92, Martin Raiser already found that the poor provinces had all

received some subsidies but the poorest provinces had not necessarily received the

highest levels of subsidies. Rather it was provinces with predominantly non-Han

population that had been given the highest levels of subsidies, even though their

income levels exceeded those of the poorest provinces. This finding led him to

suspect that fiscal transfers in China might have been motivated largely by political

concern rather than by concern over equity.24 This study provides systematic evidence

to support his conjecture.

Why does national unity figure so prominently in the allocation of fiscal

transfers in China?

China is a multi-national country with 56 nationalities. The majority nationality,

the Han, comprise 91 percent of the population. The rest of the population is divided

into 55 minority nationalities. However, the minorities hold an importance for China's 24 Martin Raiser, “Subsidizing Inequality: Economic Reforms, Fiscal Transfers and

Convergence across Chinese Provinces,” The Journal of Development Studies, Vol.

34, No. 3 (Feb. 1998), pp. 1-26.

17

long-term development and national security that is disproportionate to their

population.

First, although small in proportion, China’s minorities are large in number.

Accounting for about 9 percent of the population, the absolute size of China’s

minority nationalities actually exceed those of such large European countries as

Germany, France, and the Great Britain. Few people realize that China has one of the

world's largest Muslim populations--nearly 20 million, more than the United Arab

Emirates, Iraq, Libya, or Malaysia.

Second, the minority nationalities have grown at much higher rates than that of

the Han. While the Han population grew a total of 10 percent between 1982 and 1990,

the minority population grew 35 percent overall--from 67 million to 91 million. A

sample survey conducted among one percent of the total population in 1995 showed

that 108.46 million people belonged to minority ethnic groups, accounting for 8.98

percent of the country's total population of more than 1.2 billion, a 0.94 percentage

point increase over the figure in 1990.25 If the minority populations' growth rate were

to continue, it is estimated that they could total 864 million by 2080.26

Third, the national minorities are scattered over vast areas. There are minorities

in every province, autonomous region and municipality directly under the Central

Government, and in most county-level units. But minority nationalities are mostly

concentrated in West China, which spans nearly two-thirds of the country’s

landmass.27

Fourth, the areas most heavily populated by minorities happen to be resource-

rich areas. Northwest China has plenty of coal, China’s chief fuel, and Southwest

China has unlimited hydroelectric potential. Qinghai’s Qaidam basin has quantities of

natural gas, and Xinjiang’s Tarim basin holds both oil and gas. Gold and other metals 25 Information Office of the State Council, National Minorities Policy and Its Practice

in China , September 1999, Beijing.26 Zhang Tianlu. 1999. "Xiandai zhongguo shaoshu minzu renkou zhuangkuang"

[Analysis of the Contemporary China minority nationality population situation], a

paper presented at the Conference on Contemporary Migration and Ethnicity in

China, 7-8 October 1999, Institute of Nationality Studies, Chinese Academy of Social

Sciences, Beijing.27 National Bureau of Statistics, China ’ s Statistical Yearbook, 1999 (Beijing: China

Statistics Press, 1999), p. 37.

18

are plentiful in Tibet, Guizhou and Yunnan. Energy is a bottleneck for China’s future

development. West China seems to hold the key.

Finally, China's ethnic groups live mostly along the borders, such as the

Mongolians in the north, Uygurs and Tibetans in the west, and the Zhuang, Yi, and

Bai in southwestern China. Or put differently, China’s border areas are mostly

inhabited by minority peoples. In counties and villages along many border areas of

Xinjiang, Tibet, Inner Mongolia, Yunnan and Guangxi, over 90 percent of the local

population belong to minority groups. From a security point of view, those areas have

enormous strategic value as China's outposts for national defense.

In recognition of the minorities' official status as well as their strategic

importance, China has created four levels of autonomous administration, including

five regions, 30 prefectures, 120 counties (or, in Inner Mongolia and Manchuria,

banners), and more than 1,200 villages. Although such autonomous areas may not

enjoy true political control over local affairs, it is nevertheless desirable for minorities

to obtain the autonomous status, for groups identified as minorities can receive real

benefits from the implementation of various affirmative action programs. The most

significant privileges included permission to speak and learn their native languages,

worship and practice their religions, express their cultural differences through the arts

and popular cultures, have more children, obtain better opportunities for their

children’s education, have greater access to public office, and above all pay fewer

taxes and receive more subsidies.

Prior to 1980, the dependence of autonomous areas on fiscal transfers was very

high. So was the dependence of poor areas that were inhabited by the Han Chinese.

Since the early 1980s, however, the magnitude of fiscal transfers has substantially

diminished.28 As a result, poor areas no longer received as much transfers as before.

But there were exceptions. As Martin Raiser noted in his 1998 study, even before the

1994 fiscal reform, all of the large transfer recipients were provinces with big

minority populations such as Tibet, Xinjiang, and Qinghai. This study shows the

continuity of such distributional pattern.

What motivates China’s policy makers to favor minorities is above all a strong

desire to maintain national unity. Deep in the Chinese psyche there is a great fear of

the country breaking up. Since 221 B.C. when Qinshi Huangdi first united China, the 28 Ma Jun., “Macro-economic Management and Intergovernmental Relations in

China,” Policy Research Working Papers 1408 (1994), World Bank, Washington, DC.

19

country has been disintegrated as often as it has been united. As recently as the 1910s

and 1920s, for instance, China was divided into feuding warlord-run kingdoms. And

the Mainland China did not become fully united until the early 1950s. Central

political leaders thus are willing to maintain the unity of the nation at all costs. China,

as of now, is a unified country and there is no imminent danger of any sort for China

to break up again. But China’s top leaders do not want to leave it to chance.

What worries Chinese political leaders is twofold. First, there have been

persistent economic gaps between coastal regions where the Han Chinese dominate

and western regions that are most heavily populated by minority nationalities. China’s

market-oriented reform only widens the existing gulf.29 With little sign that eastern

prosperity has trickled west, central decision makers have reasons to worry that such

disparities may fuel age-old resentments along ethnic, linguistic, and cultural lines.

Second, separatist activities and ethnic unrest in some of China's border areas,

especially Xinjiang and Tibet, constitute another evil omen for those holding the reins

in Beijing. In particular, the creation of several new nations on China's Central Asian

frontier has risen Chinese concern over the influence of separatist sentiment spilling

over from the other side of the border into China's Muslim areas. Beijing's challenge

is to convince China's minorities that they will benefit more from cooperating with

their national government than from breaking away. To do so, central policy makers

have to take into account the interests of minority nationalities. Fiscal transfer is a

political instrument to appease ethnic or religious independence sentiments, real or

potential. This is something that the Chinese government is willing and even happy to

admit. In fact, whenever the issue of fiscal transfers comes up, the central government

29 Wang Shaoguang and Hu Angang, The Political Economy of Uneven Development:

The Case of China (Armonk, NY: M.E. Sharpe, 1999).

20

never tires of emphasizing that ethnic regions deserve preferential treatments.30 So do

provincial governments.31

[Table 4 about here]

Political consideration underlying fiscal transfers is evident in Table 4. Per

capita locally collected revenue is generally lower in eight minority-concentrated

provinces than in the other provinces. Thanks to central transfers, however, per capita 30 According to a government white paper on the issue of minorities, “The state set up

‘ethnic region subsidies’ in 1955, and the Flexible Ethnic Region Fund in 1964, and

adopted the preferential financial policy of raising the proportion of the financial

reserve fund of the ethnic regions to help minority areas develop their economies and

improve the local people's livelihoods. According to statistics, in terms of the above-

mentioned three preferential policies, the state had offered 16.8 billion yuan of

subsidies to minority areas by 1998. Since 1980, the central financial authorities have

adopted a quota subsidy system for the five autonomous regions and the three

provinces with large ethnic minority populations--Guizhou, Yunnan and Qinghai

provinces. The above-mentioned three preferential policies have also been included in

the quota subsidy system. From 1980 to 1998, the autonomous areas received more

than 140 billion yuan of quota subsidies from the central financial authorities…In

1994 China began to reform the ‘revenue-sharing-scheme’ financial management

system. In the meantime, all the original subsidies and special financial allocation

policies for minority areas were preserved. With respect to the transfer payment

method for the transition period which China adopted in 1995, the state specially

added the policy-related transfer-payment contents for the five autonomous regions,

including Tibet, and the autonomous prefectures in Yunnan, Guizhou, Qinghai and

other provinces, offering preferential policies to the ethnic minority areas. The policy-

related transfer-payment sum has constantly increased along with the growth of the

state's financial capacity. In 1998 the ordinary transfer-payment sum by the central

authorities to the five autonomous regions and Guizhou, Yunnan and Qinghai

provinces where ethnic minorities are fairly concentrated was nearly 2.9 billion yuan,

making up 48 percent of the nation's total transfer-payment sum.” Information Office

of the State Council, National Minorities Policy and Its Practice in China (Beijing,

1999).

21

expenditure is generally much higher in those eight provinces than in the rest of the

country with exceptions of Beijing, Tianjin, Shanghai and Guangdong. More

interestingly, when allocating fiscal transfers, the central government seems to have

given first priority to those provinces most susceptible to ethnic separatism, namely,

the provinces mainly inhabited by Tibetans and Moslems (Tibet, Xinjiang, Qinghai,

and Ningxia). On the other hand, provinces where minorities make little trouble (e.g.

Guangxi and Guizhou) do not seem to have found much favor with Beijing as far as

fiscal transfers are concerned.

Conclusion

Fiscal transfers are supposed to be allocated according to the equity principle.

But politicians often use transfers for pursuing other political objectives. This study

reveals that fiscal transfers in China follow considerations other than regional equity.

It is central policy-makers’ concern over national unity that seems to have dominated

intergovernmental transfers. As a result, an area with large non-Han population tends

to receive much more per capita transfer than one with predominantly Han

population, even if the former has higher per capita GDP than the latter. For instance,

there were ten provinces whose per capita GDP were lower than Xinjiang’s, but

Xinjiang received a level of per capita transfers that was several times higher than

those ten provinces (Table 4). The only explanation for such a large discrepancy is

Xinjiang’s predominantly non-Han population. More striking is a comparison

between Shaanxi, Gansu, and Ningxia (In China, they are often lumped together and

called the Shaan-Gan-Ning region), three neighboring provinces that resembles one

another in almost every aspect except one: Ningxia is inhabited by a large number of

Chinese Moslems whereas Shaanxi and Gansu are the legendary birthplace of the Han

Chinese. That difference seems to be crucial in explaining why Ningxia received far

more per capita transfer than its two neighbors, despite the fact that its per capita GDP

is higher (Table 4).

31 For examples see,《青海省过渡期转移支付办法》(1997年 12月 5日); 《湖南省人民政府关于加快少数民族和民族地区社会经济发展若干优惠政策的通知》(2000年 4月 25日).

22

Does this finding imply that Beijing care little about the issue of regional

inequality as such? Probably not. After all, growing regional disparities even among

Han-dominated provinces may undermine the country’s political instability. The

problem is that the Chinese central government simply does not have much fiscal

resource at its disposal to address the issue. In 1998, its revenue (including provincial

remittances) accounted for barely 7 percent of GDP, far lower than the ratio

prevailing in most countries (20 percent and above). Even such small revenue was not

all within central discretion. The 1994 fiscal regime obligated the central government

to “return” a substantial share of its revenue (38% in 1998) to the provinces. What left

fell far short to cover the central government’s own basic expenses. In order to make

transfers to the provinces, the central government had to run deep into debt. The weak

extractive capacity forced the Chinese central government to carefully order its

priorities. What Beijing deems the most fearsome prospect is when regional

disparities overlap ethnic and cultural distinctions. Therefore the top priority in

allocating limited fiscal transfers was given to appeasing ethnic or religious groups, at

the risk of upsetting poor provinces with predominately Han population. In this sense,

fiscal transfers indeed represent a price of national unity. National unity requires a

price, but, in the view of Chinese policy makers, the price is one worth bearing.

23

Table 1: Fiscal Disparities among China’s 31 Provinces, 1998

(Unit: Yuan)

N Min. Max. Mean S.D. C.V.

GDP 31 2342 28253 7373 5269 0.71

Budgetary revenue 31 145 2606 491 512 1.04

Budgetary expenditure 31 348 3218 814 620 0.76

Expenditure on capital construction 31 16 655 96 127 1.32

Expenditure on education 31 56 452 120 83 0.69

Expenditure on health 31 15 171 43 37 0.85

Administrative expenditure 31 37 308 72 48 0.67

Expenditure on law and order 31 22 180 52 38 0.73

Extra-budgetary revenue 31 63 942 254 197 0.78

Extra-budgetary expenditure 31 40 865 240 187 0.78

All values are expressed in per capita terms.

24

Table 2: Central-Provincial Transfers, 1998

(Unit: Million Yuan)

Return

Old

Subsidies

Old

Remittance

New

Subsidies

New

Remittance

Transition

Transfer

Transfer

I

Transfer

II

Nation 207661.6 11092.48 53814.82 107345.93 5898.18 6054 272441 64779.41

Beijing 7592.57 0 3663.04 3079.09 53.34 0 6955.28 -637.29

Tianjin 4702.13 0 2856.05 1771.15 0 0 3617.23 -1084.9

Hebei 8246.01 0 2066.23 3228.05 35.27 191 9563.56 1317.55

Shanxi 4323.27 0 703.18 1852.38 24.91 196 5643.56 1320.29

Inner Mongolia 3148.52 1841.91 0 3930.33 28.27 576 9468.49 6319.97

Liaoning 9920.4 0 3486.78 8268.58 2079.8 0 12622.4 2702

Jilin 4766.13 106.62 0 4444.76 53.12 134 9398.39 4632.26

Heilongjiang 5872.75 0 760.72 6423.64 17.9 192 11709.77 5837.02

Shanghai 16720.16 0 12000 4959.35 95 0 9584.51 -7135.65

Jiangsu 15544.37 0 8072.12 3715.76 51.38 0 11136.63 -4407.74

Zhejiang 9519.87 0 3491.9 4279.77 1073.19 0 9234.55 -285.32

Anhui 5448.48 0 936 4271.43 49.28 205 8939.63 3491.15

Fujian 4514.25 541.78 0 2443.58 545.14 0 6954.47 2440.22

Jiangxi 3377.69 45.46 0 5553.48 41 243 9178.63 5800.94

Shandong 9153.4 158.62 288.77 6504.04 2246.35 0 13280.94 4127.54

Henan 8529.89 0 1522.1 4724.21 151.42 432 12012.58 3482.69

Hubei 7461.46 0 2691.67 5923.15 57.51 303 10938.43 3476.97

Hunan 7775.28 0 1213.93 5792.01 40.62 234 12546.74 4771.46

Guangdong 15666.18 0 2390.38 3969.08 518.42 0 16726.46 1060.28

Guangxi 5131.56 607.83 0 2556.45 5.66 298 8588.18 3456.62

Hainan 638.99 371.05 0 709.99 5.55 88 1802.48 1163.49

Chongqing 3299.23 0 1640.98 3659.11 6 76 5387.36 2088.13

Sichuan 7659.67 342.6 0 4096.21 65.45 381 12414.03 4754.36

Guizhou 3593.44 742.27 0 2334.77 12 558 7216.48 3623.04

Yunnan 12852.14 673.47 0 3048.36 419.34 24 16178.63 3326.49

Tibet 155.88 2288.26 0 1534.33 0 210 4188.47 4032.59

Shaanxi 3884.54 120.26 0 3355.55 32 272 7600.35 3715.81

Gansu 4016.68 125.6 0 2813.81 15.88 229 7169.21 3152.53

Qinghai 667.9 656.07 0 1397.26 0 397 3118.23 2450.33

Ningxia 655.51 533.45 0 1367.98 0 221 2777.94 2122.43

Xinjiang 2111.05 1937.23 0 3463.48 241.56 597 7867.2 5756.15

25

Note: There are some discrepancies between figures reported in the central budget and

the sum totals of provincial figures. One explanation is that there are independent

accounting units other than the provinces, such as Dalian, Ningbo, Qingdao, Xiamen,

and Shenzhen, which are not included in this table. But some discrepancies cannot be

explained by this factor, either.

26

Table 3: Explaining Central-Provincial Transfers, 1998Variables Per Capita Transfer 1 Per Capita Transfer 2

(1a) (1b) (2a) (2b)

Concern over equity

Per Capita GDP 6.4E-03

(0.246)

2.3E-02**

(3.920)

-2.1E-02

(-0.714)

Per capita disaster cost 1400.11

(1.164)

1643.191

(1.220)

% Agriculture in economy -9.573

(-1.457)

-6.865

(-0.933)

Dependency ratio -4.583

(-0.792)

-3.125

(-0.483)

Population density 0.320

(1.532)

0.172

(0.738)

Political concerns

% Minority in population 12.33***

(6.481)

11.70***

(8.398)

11.47***

(5.384)

10.82***

(7.928)

Labor disputes/population -120.64**

(-2.728)

-115.71**

(-2.338)

-71.41**

(-3.445)

Regions’ bargaining power

Seat in the Politburo 104.6

(0.851)

43.985

(0.320)

Population -4.3E-02

(-1.158)

-5.8E-02

(-1.400)

GDP 2.2E-06

(0.286)

9.4E-06

(1.115)

Constant 726.02*

(1.810)

-13.47

(0.224)

610.45

(1.360)

113.70*

(1.980)

R2 0.824 0.720 0.819 0.767

Adjusted R2 0.737 0.701 0.729 0.750

N 31 31 31 31

Notes: t-ratios in parentheses; *p<0.1; **p<0.05; ***p<0.01 (all two-sided)

27

Table 4: Fiscal Transfers to Minority-Concentrated Provinces

(Unit: Yuan)

Provinces Minority as

% of the

Population

Per Capita

GDP

Per Capita

Transfers

(excluding

returns)

Per Capita

Transfer

(Including

returns)

Per Capita

Revenue

Per Capita

Expenditure

Tibet 96.18 3716 1613.39 1676.27 145.60 1812.80

Xinjiang 62.42 6229 324.25 445.21 377.43 842.66

Qinghai 42.14 4367 466.20 598.85 255.66 882.68

Guangxi 39.24 4076 72.39 181.30 257.13 426.21

Yunnan 33.41 4355 79.89 388.92 408.42 796.31

Ningxia 33.27 4270 389.01 510.76 332.40 844.94

Guizhou 32.43 2342 95.30 193.40 179.90 366.44

Inner Mongolia 19.42 5068 264.32 397.67 332.56 729.22

Beijing 3.83 18482 -49.59 541.27 1845.94 2258.09

Tianjin 2.31 14808 -112.10 373.76 1061.78 1444.29

Hebei 3.94 6525 19.38 143.79 315.81 460.59

Shanxi 0.29 5040 40.22 175.71 330.08 520.86

Liaoning 15.62 9333 64.27 300.25 638.02 941.02

Jilin 10.24 5916 172.09 350.62 355.24 721.17

Heilongjiang 5.67 7544 152.83 306.94 418.05 689.58

Shanghai 0.47 28253 -478.49 642.69 2606.64 3218.42

Jiangsu 0.23 10021 -60.74 153.48 413.93 593.02

Zhejiang 0.51 11247 -6.33 204.98 445.62 645.17

Anhui 0.58 4576 55.41 143.00 258.61 393.26

Fujian 1.55 10369 73.23 208.71 571.10 774.56

Jiangxi 0.27 4484 136.53 216.65 232.97 420.24

Shandong 0.60 8120 46.28 148.93 399.92 553.62

Henan 1.18 4712 36.37 127.19 224.38 348.78

Hubei 3.97 6300 57.64 182.67 286.84 475.59

Hunan 7.95 4953 72.20 190.60 241.08 422.06

Guangdong 0.56 11143 14.81 233.68 902.85 1163.32

Hainan 17.00 6022 150.59 235.12 450.13 734.09

Chongqing 5.70 4684 66.37 173.13 233.14 412.19

Sichuan 4.56 4339 54.84 144.28 233.16 379.28

Shaanxi 0.48 3834 101.71 208.81 260.48 463.86

Gansu 8.30 3456 123.50 282.01 215.56 500.06

28

Appendix 1: Provincial-County Transfers

Imitating the central-provincial fiscal relations, all the provincial governments

also made transfer arrangements with county governments within their respective

jurisdictions. In addition to money from Beijing, some provincial governments also

provided funds from their own budgets to finance downward transfers. Details of such

arrangements varied greatly from province to province, but funds flowing to and from

counties largely fell into the same four categories mentioned in Section II.32

Unfortunately, we do not have information about provincial “transfer of the transition

period” to county governments, which was aggregated in the category of “new

subsidies”. Table 1.1 details the information about provincial-county transfers in

1998.

[Table 1.1 about here]

In this appendix, we conduct regression analyses on provincial-county transfers.

It needs to be noted, however, that data on some of the independent variables listed in

Section III are not available at this level.

How do provincial governments allocate fiscal transfers to county governments?

Do they follow the same political logic as the central government does? Table B hints

the answer to this question. Regrettably, due to the unavailability of data on many

important variables, each of the two regressions in Table 1.2 contains only five

independent variables.

[Table 1.2 about here]

32 For information about provincial transfer arrangements, see Zhang Hongli,

Zhongguo guoduqi caizheng zhuanyi zhifu; Jiang Weizhuang, Zhongguo fenshuizhi

de juece yu shijian [Policy and Practice of Chinese Tax Assignment], (Beijing:

Zhongguo caizheng jingji chubanshe, 1998); Du Shanxue, Su Ming, Li Hao, Difang

caizheng pingheng wenti yanjiu [A Study of Balanced Budgeting at Local Level]

(Taiyuan: Shanxi jingji chubanshe, 1999); Yang Canming, Zhengfu jian caizheng

zhuanyi chifu zhidu yanjiu wenji [Intergovernmental Fiscal Transfers: A Collection],

(Beijing: Jingji kexue chubanshe, 2000);

29

Regression (A) reported in Table 1.2 presents the results for the case where the

dependent variable is per capita transfer 1. The coefficients on four of the five

variables are significantly different from zero at the 1% level. The only exception is

GDP, which I interpret as an index of bargaining power. The other measure of

bargaining power, the size of the population, is significant but again has the “wrong”

sign. One possible explanation is that sparsely populated counties tend to be counties

where the proportion of non-Han population is high. As will be shown below, such

areas are normally given more per capita transfers than others. In any event, the size

of the population does not appear to be a useful bargaining chip.

The two indexes of concerns over equity—per capita GDP and the share of

agriculture in the economy—are not only statistically significant but carry the “right”

signs in Regression (A). This implies that provincial governments are substantially

motivated by equity considerations in allocating fiscal transfers, including “returned

revenues.” However, that does not mean that political considerations are not

important. In fact, the dummy variable registering whether a county is categorized as

an autonomous area is highly significant.33 If a county is classified as an autonomous

area, it tends to receive much more in per capita provincial transfers than a county that

is not.

Regression (B) in Table 1.2 presents the results for the case where the dependent

variable is per capita transfer 2, or transfers that exclude “returned revenue.” It reveals

almost an identical pattern as Regression (A). The only difference is that per capita

GDP is now positively related to per capita transfer. Other things being equal, the

poorer the county, the less it seems to receive in per capita transfer 2 from the

provincial government. This is quite puzzling, because equity concern is supposed to

weigh more in allocating transfer 2 than transfer 1. We cannot offer any plausible

explanation except pointing out that the coefficient is not statistically significant.

What interests us most is that Regression (B) reconfirms the importance of decision

makers’ political concern over national unity. At any given income level, the status of

being minority nationality autonomous counties may enable them to receive much

more per capita transfer 2 than others.33 There are altogether 642 minority nationality autonomous units at the county level,

including all autonomous counties and counties in autonomous prefectures and

autonomous regions. See National Bureau of Statistics, China Statistical Yearbook,

1999 (Beijing: China Statistics Press, 1999), p. 37.

30

Table 1.1: Provincial-County Transfers, 1998

(Unit: Million Yuan)

Return

Old

Subsidies

Old

Remittance

New

Subsidies

New

Remittance

Transfer

I

Transfer

II

Nation 54875.65 10722.11 18317.25 46863.87 10426.3 83718.08 28842.43

Beijing 1028.75 0 0 860.98 36.69 1853.04 824.29

Tianjin 0 149.8 0 87.8 8.66 228.94 228.94

Hebei 2612.24 113.15 871.94 1952.34 517.08 3288.71 676.47

Shanxi 1646.17 256.26 1093.01 1379.31 0 2188.73 542.56

Inner Mongolia 967.52 1153.58 235.62 2017.37 363.57 3539.28 2571.76

Liaoning 1535.29 570.84 98 1527.83 549.67 2986.29 1451

Jilin 1437.34 212.69 177.02 1125.07 0 2598.08 1160.74

Heilongjiang 1520.6 80.48 322.04 2062.19 467.21 2874.02 1353.42

Shanghai 1083.47 0 805.6 1004.58 47.61 1234.84 151.37

Jiangsu 6928.8 27.55 3998.28 2255.66 1940.23 3273.5 -3655.3

Zhejiang 5571.09 0 3371.2 2584.95 842.52 3942.32 -1628.77

Anhui 1355.75 55.39 437.41 1061.29 464.65 1570.37 214.62

Fujian 1260.72 0 808.59 1402.83 207.05 1647.91 387.19

Jiangxi 1462.67 11.31 795.17 1680.23 193.66 2165.38 702.71

Shandong 4249.66 316.94 1385.99 2176.34 313.52 5043.43 793.77

Henan 2511.45 0 0 1928.12 367.4 4072.17 1560.72

Hubei 2060.77 22.71 378.33 1482.24 732.43 2454.96 394.19

Hunan 1930.65 297.83 462.57 1523.28 956.89 2332.3 401.65

Guangdong 5024 34.74 0 2763.11 99.53 7722.32 2698.32

Guangxi 1683.24 548.87 238.41 2048.82 529.3 3513.22 1829.98

Hainan 281.31 119.11 29.07 433.77 29.73 775.39 494.08

Chongqing 940.18 81.34 306.34 1157.05 22.94 1849.29 909.11

Sichuan 2811.64 361.73 1396.83 2496.86 634.29 3639.11 827.47

Guizhou 787.68 155.47 29.11 1362.69 54.4 2222.33 1434.65

Yunnan 1698.51 2925.25 155.07 4419.11 624.21 8263.59 6565.08

Tibet 30.19 499.76 0 248.28 0 778.23 748.04

Shaanxi 910.28 301.84 310.54 1052.53 240.18 1713.93 803.65

Gansu 560.86 419.71 118.02 1326.37 73.67 2115.25 1554.39

Qinghai 187.18 178.65 19.31 393.21 11.96 727.77 540.59

Ningxia 103.92 228.59 0 458.17 4.79 785.89 681.97

Xinjiang 693.72 1598.52 473.78 591.49 92.46 2317.49 1623.77

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Table 1.2: Explaining Provincial-County Transfers, 1998Variables Per Capita Transfer 1

(A)

Per Capita Transfer 2

(B)

Central concern over equity

Per Capita GDP -5.9E-03 (-4.169)*** 2.1E-03 (1.281)

% Agriculture in economy 148.03 (9.780)*** 105.08 (5.854)***

Other political concerns

Whether an autonomous

area

96.64 (12.311)*** 103.19 (11.090)***

Regions’ bargaining power

Population -1.75 (-11.514)*** -1.76 (-9.751)***

GDP 1.2E-05 (0.522) -3.3E-07 (0.012)

Constant 111.32 (8.692)*** 129.94 (8.568)***

R2 0.380 0.260

Adjusted R2 0.379 0.258

N 2133 2133

Notes: t-ratios in parentheses; *p<0.1; **p<0.05; ***p<0.01 (all two-sided)

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