Post on 21-Jan-2018
China: the Challenge of Fiscal
Decentralization in a Modernizing
Economy
Christine Wong
Centre for Contemporary Chinese Studies
OECD-Asian Senior Budget Officials Annual Meeting
Bangkok, Thailand
14-15 December, 2017
Start with a few stylized facts
• China has urbanized rapidly over the past three+ decades, and many
people in the cities are new migrants
• The new migrants find it often difficult and expensive to send their
children to school – especially state schools, in the cities
• This is in spite of the fact that the Education Law (2006) guarantees
every child the right of to receive nine years of education, and made it
free and compulsory
• This is a divisive issue in the debate on citizenship and social rights of
migrants, and one that is shaping the development of China’s labor
markets and intergenerational mobility
Background
China is a large country with great diversity across regions
Per capita income ranges from $4100 in Gansu to $17,000+ in Beijing
The fiscal system is highly decentralized, with responsibilities
disbursed throughout the administrative hierarchy
• Revenue-sharing is by tax assignment,
and local revenues come from local
taxes, shared taxes, and transfers
• The central government collects roughly
half the revenues but spend only 15% of
the national total.
• Transfers fill the large vertical fiscal gap,
but are not specifically designed to meet
expenditure requirements for any
services
• Responsibility for basic education is
assigned to local governments at the
grassroots level – counties and districts,
and it is the largest component of
expenditure at these levels
This framework of decentralized financing produces large
regional disparities in public expenditures
• Henan spent just ¥620
per student in the
budget, while Shanghai
spent ¥5225, a ratio of
9.6
Provincial average per student expenditure in primary school, 2004
China began to urbanize rapidly with market
reforms
• Since market reforms started in 1978, China’s urban
population has grown by 600 million
• The scale and pace of urbanization have been
unprecedented in human history
Urban
population
(million)
Increase
(million)
Urbanization
rate
1978 172.5 -- 17.9%
1990 302.0 129.5 26.4%
2000 459.1 157.1 36.2%
2010 669.8 210.7 49.9%
2015 771.2 101.4 56.1%
Salient characteristics of China’s urbanization
• It coincided with a steep fiscal decline in the 1980s that continued through
the 1990s, and transfers fell to just 1% of GDP in the mid-1990s
• Cities faced extraordinary pressure to provide infrastructure and services to
growing populations, while also absorbing the transfer of quasi-fiscal
functions from SOEs
• The process of urbanization was financed and managed by local
governments, with little assistance or guidance from higher levels
• To curb costs, cities limited eligibility for urban services to those with hukou,
excluding migrants.
• The 2010 census found that one-third of urban residents did not have local
hukou
– In Beijing and Shanghai the share was 40%
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Urbanization had begun in an extremely harsh fiscal
environment
Fiscal decline from start of
transition to mid-1990s (% GDP)
Transfers dwindled with fiscal
decline
Since the turn of the century, the central government began
efforts to reverse these inequalities
• Education policies began to change:
– 2001-2007: migrant children gradually given expanded rights to
schooling in cities, and in public schools whenever possible, but still
on a discretionary basis, and self-financed
– Since 2008: migrant children have full rights to urban schools, with
entitlement now residence-based
• Third Plenum decisions in 2013 committed to providing
education rights to all urban resident, and gradually extend
other services
• But problems persist..
The paradox: the government is rich and powerful, and has
provided increased funding through transfers
• During 2000-2012, China’s real GDP grew at annual rate of
13.4%, and revenues grew 18.9% p.a.
• Central government has large fiscal surpluses to fund
initiatives. It has also increased transfers to more than 7% of
GDP, to ¥5.2 trillion in 2016
• Budget expenditures on education have grown at 24% p.a.
since 2000, and the national average spending per student in
primary school has risen from ¥1443 to ¥9181 in the decade
from 2004-2014
• Today central transfers finance roughly 40-50% of total
expenditure in compulsory education nationwide.
Implications of this framework for migrant children
Municipal governments are unwilling to take on “non-
citizens”:
• To curb the growth in demand for a costly service
• The much higher level of financing in urban schools spawns
fear of “benefit-migration” if doors are opened
• Under the current regime of central transfers, education for
migrant children remains an unfunded mandate for the
recipient cities
• The “hukou” identity provides a convenient mechanism for
discrimination
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Salient characteristics of current transfers
• Strong regional targeting toward the poorer provinces in the
western and central regions
• Targeted almost entirely at rural schools. Urban schools are
considered municipal responsibility
• Big cities in coastal regions receive few transfers
• None were earmarked for migrant children until 2008 – only a
small incentive scheme
• The majority of transfers are to support teachers’ wages and
benefits, and not easy to move even when students have
moved to cities
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The burden of financing migrant children education is unevenly
distributed, and heavily concentrated in big cities in coastal regions
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In 2012, 23% and 20% of migrant workers were in Yangzi River Delta
and Pearl River Delta.
City
Education in
budget
expenditures
(2011, %)
Share of migrant
children in CE
(%)
Year of
enrolment
data
Dongguan 23.7 71.4 2010
Foshan 21.5 45.0 2011
Ningbo 15.7 42.6 2012
Beijing 16.0 40.0 2009
Hanghzou 17.7 38.9 2009
Shanghai 14.0 36.0 2009
Guangzhou 14.8 30.0 2011
Tianjin 17.2 17.9 2011
Chengdu 13.7 16.0 2010
Policy choices facing Chinese government
The cost of absorbing 200+ million migrants in urban public services is
daunting:
• The “overhang” of migrant children not currently in urban state schools may
be as large as 15 million, one-third of current urban enrolment
• Coverage of migrants in social insurance programs is currently less than
25%, compared to 85% for urban residents
• The rural cooperative medical scheme is funded at much lower levels than
urban health insurance schemes
• Rural pensions are currently 60 yuan/mo, a small fraction of urban pensions
Accepting decentralized solutions to emerging issues earlier has now left the
central government facing an inequality it does not want, and is finding very
difficult to reverse
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