Abstract
This article explores the institutions of the Chinese semi-planned administration under which the grassroots role of debtors has loomed large and made possible the transition of grassroots cadres from predators to debtors. The institutional features of the semi-panned administration—the institution of target responsibility, the legacy of cost shifting, and the paternalistic care provided by the socialist state—together with related policy measures explain the pathology of budget deficits and debt problems at the grassroots level across rural China. An investigation into the public finances of grassroots governments in Wenzhou, Wuxi, and Jianshi illuminates how the Chinese semi-planned administration has shaped individual cadres’ calculations and behavior, perpetuated their irresponsible spending, and reproduced local soft budget constraints. This article argues that without an outright revamping of the institutions of the Chinese semi-planned administration, the current practice of simply writing off rural debt through financial bailouts perpetuates soft budget constraints across the countryside.
Keywords
Since China turned into a world factory in its transition to a market economy and achieved spectacular success in attaining sustained economic growth, a puzzling phenomenon has emerged: since the 1990s fiscal ills have been pervasive among local rural governments. Local governments, down to the township and village levels, have encountered severe problems of irresponsible spending and borrowing, which has created a huge budget deficit and debt. The total debt of grassroots governments in rural China was estimated at 600 to 1,000 billion yuan in 2004 (Zhu, Tan, and Zhang, 2006: 2), equivalent to US$72.5 to US$121 billion. 1 If the debt of higher levels of government is included, over the period 2004 to 2009, the total debt in localities is estimated to have been US$1.6 trillion (Shih, 2010). 2 Moreover, this situation has prevailed not only in remote rural districts of the interior (Fang, 2004; Zhou and Yang, 2003), but in the most affluent rural districts of the coastal region as well. Local governments across rural China seem to suffer a fiscal pathology of soft budget constraints. In comparison with the transition economies in Eastern Europe in which macroeconomic depression, market reforms, democratic transition, and pay-as-you-go welfare reforms are viewed as the causes of budget deficits and debt problems (Wetzel and Rapp, 2003; Haggard, Kaufman, and Shugart, 2001; Tanzi, 2001; Campbell, 1996), the explanatory factors for rural China’s fiscal ills are unclear since it enjoys economic prosperity, a relative absence of political turmoil, nascent welfare reform, and three decades of successful market transition.
This article focuses on grassroots debt in rural China. Crippled by severe revenue shortfalls, since the late 1980s township and village governments across China have had to rely on extrabudgetary and self-raised funds, 3 so-called off-budgetary revenue, to maintain everyday administration and accomplish assigned policy tasks. In doing so township and village governments have had to impose numerous unauthorized fees, assessments, and surcharges on the local peasants or have even illegally seized their land for commercial purposes to raise off-budgetary revenue. Having long been victimized by the rural governments’ predatory extraction, Chinese peasants have given vent to their grievances through protests and even riots throughout the 1990s and up to the present (O’Brien and Li, 2006; Bernstein and Lu, 2003).
To restrain rural cadres’ predatory behavior and relieve the peasants’ heavy financial burden, the central government has enforced the prior policy targets of public security and social stability since 1988 (Edin, 2003), the tax-for-fee reform in 2001, and the rescission of agriculture tax in 2006 in order to build a “harmonious society” in the countryside (Kennedy, 2007). Apparently, these policy measures meant to circumvent cadres’ predation have simply aggravated local fiscal woes, facilitating the possible transition of local cadres from predators to debtors. To redress this pathology, a program of intergovernmental transfers was strengthened through allocating grants, subsidies, and funds earmarked to relieve local revenue shortages. In fact, as early as 1999 the State Council issued a document on clearing rural debts as well as documents prohibiting the acquisition of new debts in subsequent years. 4 Clearly, rural debt has become a recalcitrant problem. In recent years, both provincial and county authorities have instituted fiscal rescue programs of bailouts at the direction of the central state to relieve debt at the grassroots level, but it is unclear whether these bailouts have effectively enhanced grassroots fiscal discipline and hardened budget constraints.
Many scholars have focused on political, fiscal, and financial institutions in explaining the rise of soft budget constraints at the subnational level in developed and developing countries (Boadway and Shah, 2007; Vigneault, 2007; Rao, 2007; Sato, 2007; Rodden, Eskeland, and Litvack, 2003; Rodden and Eskeland, 2003). This soft budget constraint approach has been applied to specific countries in Eastern Europe (Haggard and Kaufman, 2001; Tanzi, 2001; Campbell, 1996) and China (Jin and Zou, 2003; Rodden and Eskeland, 2003; Rong et al., 1998). In the Chinese case, attention has often focused on soft budget constraints at the level of provincial and local governments (Duan and SOng, 2006; Zhu, Tan, and Zhang, 2006; Jin and Zou, 2003), but very little attention has been paid thus far to the institutional arrangements of the Chinese state administration that, as this article argues, can be conceptualized as a semi-planned administration and are responsible for fiscal pathology and the weakening of fiscal discipline at the grassroots level. Building on the theoretical insights of many scholars, this article further argues that the institutional features of the Chinese semi-planned administration—the target responsibility system, the practice of cost shifting, and state paternalism in particular—together with related policy measures have not only exacerbated dire grassroots fiscal debt problems and soft budget constraints, but have helped to make possible a grassroots-level transition from predators to debtors as well. 5
Although the Chinese economy has been steadily “growing out of the plan” in the era of market transition and gradually abdicating resource redistribution by the state bureaucracy (Naughton, 1995; Nee, 1996), the Chinese state has enforced local political conformity that resembles the way state firms were assigned production targets from above to fulfill on schedule in the annual production plan in the era of the command economy. Inheriting the spirit of the planned economy, the Chinese state executes a downward spiraling pressure on grassroots governments to meet annual policy targets. Failure of grassroots governments to fulfill policy targets imposed from above may result in punishment or downgrading for the responsible cadres in the annual evaluation of performance undertaken by the county authorities, thus forming a semi-planned administration.
This article aims to illustrate the institutional features of the Chinese semi-planned administration under which a transition of grassroots governments from predators to debtors has taken place across rural China. In particular, although the 1999 document issued by the State Council acknowledged the prevalence of rural debt, the state has failed to recognize the fundamental source of the problem: the institution of state paternalism embedded in the Chinese semi-planned administration, which facilitates the surfacing of the role of debtor, the weakening of fiscal discipline, and the reproduction of soft budget constraints at the grassroots level. To support this argument, the article presents data collected over eight visits from 2004 to 2009 to two of the most affluent coastal areas, Wenzhou in Zhejiang and Wuxi in Jiangsu, and a poverty-stricken inland area, Jianshi county in Hubei—in all, data covering six counties, nine urban districts, nineteen townships, eighteen villages, and six local industrial parks and development zones. The author has conducted in-depth interviews with local peasants and officials and cadres from various government functional departments at the village, township, and county level. Pseudonyms such as “K township” are used to refer to all localities in order to protect the identities of county, township, and village cadres, peasants, and entrepreneurs who cooperated as informants in the fieldwork. Before exploring the transition of grassroots cadres from predators to debtors in Wenzhou, Wuxi, and Jianshi, the institutional features of the Chinese semi-planned administration and its impact on cadres’ rational calculations and choices of action need to be elaborated. The debt situation among grassroots governments in rural China will be examined first.
Debt at the Grassroots Level: A Symptom of Soft Budget Constraints
Throughout history rulers have endeavored to extract and maximize resources at their disposal to build armies and bureaucracies in order to defend national security and provide effective governance. They can therefore be regarded as predators in their pursuit of revenue maximization. The strengthening of extractive capacity was intrinsic to state building in the early modern era (Levi, 1988; Skocpol, 1979; Tilly, 1975). Many scholars regard the percentage of state revenue to GNP as a significant indicator for measuring the strength of the state’s extractive capacity (Wang, 1995; Migdal, 1988). However, despite a dispute over the validity of this indicator (Hood, 2003), the ratio of state revenue to GNP did indeed decline in China due to the institution of fiscal decentralization throughout the 1980s under the tax contracting scheme, falling from 35 percent in 1978 to 12 percent in 1996 (Rao, 2007: 333). The reason China adopted the fiscal contracting system at that time was to create an incentive for local governments to promote economic development in exchange for an increased share of local revenue (Oi, 1992). This scheme provided independent revenues to local governments but created incentives for them to avoid remitting taxes to the center.
To redress such fiscal distortion, revenue recentralization was reintroduced in the tax-sharing scheme adopted in 1994, which favors the center at the expense of localities. Under this scheme, each level of government in the administrative hierarchy followed the steps of the central government in recentralizing tax revenue without taking the fiscal needs and expenditure responsibilities at lower levels into account (Zhu, Tang, and Zhang, 2006; Duan and SOng, 2006; Song, 2004; World Bank, 2002). Since the late 1980s, without the authority to create new taxes, local governments have been forced to search for off-budgetary revenue to fulfill their fiscal needs. In the 1990s, they turned to levying unauthorized fees, assessments, and surcharges on the peasantry, sometimes reaching as high as over 80 items annually in certain inland provinces (Bernstein and Lu, 2003: 55). They also often illegally seized land, which they typically sold to developers, earning huge profits in the process.
But when, around the turn of the century, the state attempted to relieve the peasants’ financial burden and build a “harmonious society” to ensure rural stability through a series of reforms abolishing various unauthorized fees, surcharges, and even agricultural tax as well as prohibiting illegal land expropriation, these measures apparently eliminated the sources of off-budgetary revenue. As a result, the majority of rural governments have faced constant fiscal shortfalls and have fallen into perennial debt, exacerbating local fiscal woes. Such fiscal shortfalls have not stopped local governments from spending more than their revenues allowed but instead have provided a justification, with the expectation of co-financing and little punishment from higher authorities (Gamkhar and Shah, 2007: 247). This is similar to what Kornai conceptualized as the soft budget constraints that afflicted state firms in socialist systems—namely, firms’ survival was guaranteed through credits, subsidies, grants, and even bailouts provided by the socialist state’s paternalism, despite their heavy losses and inefficiency (1992, 1986). The concept of soft budget constraints has been applied by both economists and political scientists to local governments’ overspending and irresponsible behavior in explaining debt accumulation at the local level (Vigneault, 2007; Gamkhar and Shah, 2007; Rodden, Eskeland, and Litvack, 2003); this concept has also been applied to the Chinese case (Huang, 2005; Jin and Zou, 2003).
Although local debt loads appear to be heavy, Chinese scholars have observed that it is very difficult to discover the precise amount of fiscal debt across local governments because systematic official statistics on local government debt cannot be found in the official Chinese statistical yearbooks (Lin, 2003). The best one can do is estimate: the total debt at the grassroots level was estimated at 600 to 1,000 billion yuan in 2004, accounting for 5 to 10 percent of the GDP that year (Zhu, Tan, and Zhang, 2006: 185). The data that are available clearly show that not only are remote rural local governments suffering from very limited revenues, but even the most prosperous and affluent townships and villages suffer severe fiscal woes. Table 1 presents the debt amounts and average debt at the township level in selected provinces. It is very likely that the data presented here are underestimated.
The Debt Situation at the Township Level across China in Selected Provinces, 1998–2004
Source. Zhang and Liu, 2004: 52–61.
Zhongguo xinwen zhoukan (China News Weekly), Mar. 8, 2004: 40–43.
The Institutional Basis of the Pressuring State: The Chinese Semi-Planned Administration
Many scholars have attributed the severity of grassroots deficit and debt problems to the introduction of the 1994 recentralized tax-sharing scheme (Duan and SOng, 2006; Yang, 2004; Zheng, 2004; Lin, 2003; World Bank, 2002; Wong, 2000), the achievement of the policy goal of expanding rural education from six to nine years in the late 1980s (Fang, 2004; Song, 2004), the rampant borrowing of rural enterprises before their privatization in the mid-1990s (Oi and Zhao, 2007; Duan and SOng, 2006; Ong, 2006), the 2001 tax-for-fee reform, and the 2006 abolition of agricultural taxes (Kennedy, 2007; Oi and Zhao, 2007; Duan and SOng, 2006). Some scholars go beyond these explanatory factors and identify the main culprits for fiscal woes at the grassroots level as the fiscal institutional arrangements regarding the target responsibility system to ensure local conformity (Tsai and Wang, 2004; Edin, 2003; Rong et al., 1998) and the cost shifting from the center to localities in policy implementation, the so-called unfunded mandates (Oi and Zhao, 2007; Song, 2004; World Bank, 2002; Wong, 2000; Rong et al., 1998).
Moreover, some scholars in studying both developed and developing countries have wielded the soft budget constraint thesis to show how applying intergovernmental transfers in the form of financial rescue to redress vertical fiscal imbalances can easily lead to fiscal problems at the local level if they are combined with institutions of local borrowing autonomy, equalization and discretionary transfer, and overlapping responsibility among different levels of government (Boadway and Shah, 2007; Vigneault, 2007; Rao, 2007; Sato, 2007; Rodden, Eskeland, and Litvack, 2003; Rodden and Eskeland, 2003). Although the thesis of soft budget constraints suggests effective remedies in the form of market mechanisms and hierarchical supervision to strengthen local fiscal discipline, market discipline barely exists in China since the Chinese peasant constituencies in the local fledgling capital market have no effective way of voting out local governments experiencing severe deficits and debts, despite rudimentary democratic elections since 1988. Yet, one must ask why the hierarchical supervision of the Chinese bureaucracy fails to function well, despite the fact that the Chinese state has long enjoyed a monopoly of political power and has been able to deny local prerogatives to levy off-budgetary funds in recent tax reforms. The thesis of soft budget constraints is unable to explain the institution-making of the Chinese state’s fiscal and political administration.
The Chinese state can be characterized as a semi-planned administration that has, since the late 1980s, used the institution of the target responsibility system, cost shifting from center to locality, and state paternalism in ways that ensure local conformity. On the one hand, the state has enforced local obedience through the institution of target responsibility while shunning its fiscal duty, which precipitated the transformation of grassroots governments into predators in order to accomplish policy goals. On the other hand, the resultant local fiscal woes created by the practice of cost shifting from center to locality combined with related central policy measures that blocked the collecting of off-budgetary revenue were relieved by the state’s paternalistic care, which paved the way for the transition of local cadres from predators to debtors. Despite the fact that grassroots authorities existed as a mixture of predators and debtors for a long time, a tendency toward the role of debtor has loomed large at the grassroots level since the State Council issued a document in 1999 on debt clearance, which local governments viewed as a harbinger of state bailout programs.
In what way is the Chinese state a semi-planned administration? While China has long abandoned the planned economy in its market transition, policy implementation at the local level resembles the way in which the planned economy performed in the prereform era. In order to ensure local compliance, the semi-planned administration has demanded that county governments enact policy plans in accordance with policy tasks assigned by municipal and provincial governments, and in turn has imposed policy targets on township governments. For instance, the quota of annual population growth is first set up by each county government on the basis of national or provincial population plans, and then the county imposes the disaggregated quota on each township (Author’s interview of the party secretary of C township, Ruian city, Wenzhou, 2004. See also Rong et al., 1998: 28–35). 6 However, the point of this is not to achieve a macroeconomic equilibrium, as aimed for by the planned economy; rather, it is to ensure local political compliance with the schedule. Moreover, the county government seldom provides adequate financial resources for township governments to carry out policy targets, a practice of underfunded policy mandates that directs cost shifting from the center to the locality without taking local fiscal needs into account. Only when both deficit and debt problems hit hard at the grassroots level has socialist state paternalism in the form of intergovernmental transfers or financial bailouts come to the rescue, embodying an institutional legacy of classical state socialism in Mao’s era. Thus the institutional features of the Chinese administration are not “planned” in a real sense, only semi-planned.
Many Chinese scholars have emphasized the aspect of downward pressure by the Chinese state to ensure local conformity since the Mao era. A pressuring state was thus formed and further institutionalized into the target responsibility system and cost shifting from center to locality in the era of fiscal decentralization (Rong et al., 1998: 28–35). However, this article maintains that the pressuring aspect of the Chinese state mainly derives from its semi-planned administration. The institutional design of the Chinese semi-planned administration aims to materialize policy targets at localities, but the enforced local conformity inadvertently weakens grassroots fiscal discipline as the center shuns its fiscal duty. As a result, grassroots cadres’ expectations of fiscal rescue from above intensify unscrupulous borrowing and debt accumulation, pushing their role from predator toward debtor. The Chinese semi-planned administration presents the following three institutional features.
The Target Responsibility System
In the late 1980s the Chinese state introduced a target responsibility system, an institutional design intended to enhance central control over localities in the era of fiscal decentralization. This system intensified pressure on county governments by not only imposing policy targets on township governments but also implementing an annual evaluation of township cadres’ performance on the basis of the fulfillment of policy targets, classified as “prior,” “hard,” and “soft,” to ensure conformity. For instance, the top prior policy targets set by the State Council for each locality to implement include fertility control, social stability, and public security, while the local governments have a certain degree of flexibility in defining their own hard and soft policy targets in accordance with their own comparative advantages. With such measures the coastal regions in Jiangsu set foreign investment and welfare provision as the top hard policy targets throughout the 1990s, while Zhejiang gave top priority to fertility control, social stability, and enterprise production security. 7 Moreover, regardless of how well a township cadre performed in the policy domains of hard and soft targets, if she or he failed to meet prior targets all her or his political achievements would be negated (Tsai and Wang, 2004; Edin, 2003; Rong et al., 1998: 28).
Despite the differences in the order of policy assignments, the following policy targets also had to be pursued simultaneously at the local level: a system of nine years’ rural compulsory education since 1986, local economic growth, urban development, delivery of public goods and services, and infrastructure construction. 8 To ensure the fulfillment of policy targets at the grassroots level, township cadres are sometimes required to sign a performance contract with the county authorities in which a portion of the cadre’s salary is impounded, becoming in effect a reward to be received only if policy targets are met. If the cadre fails to meet the policy targets, she or he faces demotion and forfeiture of the impounded salary monies (Tsai and Wang, 2004; Edin, 2003; Rong et al., 1998: 32). This target responsibility system embedded in a semi-planned administration has not only strengthened central control over local governments but also ensured that policy targets are realized at the local level, a strategy crucial to recentralizing state power following the era of fiscal decentralization of the late 1980s.
The Legacy of Shifting Costs from the Center to Localities
Unlike a planned economy in which the center provides production inputs and needed resources for state firms to fulfill production targets, the semi-planned administration always shifts the fiscal burden of policy implementation downward, exacerbating fiscal woes at the grassroots level. In fact, since Mao’s era the higher level authorities have seldom provided adequate funding for policies implemented at the grassroots level. In the 1960s and 1970s campaigns calling for self-reliance in the rural sector, local governments were responsible for their own expenditures (Wong, 1997: 167). For instance, production brigades were financially responsible for the establishment of elementary schools and communes for middle schools. Under this cost-shifting strategy, brigades and communes had to search for off-budgetary funds to accomplish the imposed policy targets in, for example, education, health, commune and brigade industry, and infrastructure such as transport (Tian and Zhao, 2008: 35–42; Zhao, 2006; Bernstein and Lu, 2003: 42; Wong, 1997: 168). Therefore the peasants at the team, brigade, and commune level found themselves constantly struggling against the state over the division of agricultural surpluses, which the peasants viewed as self-generated assets to be retained at the local level to pay for local governance (Oi, 1989). Even the reform-era extension of rural education to nine years was funded mainly through education surcharges imposed by township governments on rural enterprises and the peasantry (Zhao, 2006; Fang, 2004).
This legacy of cost shifting resurfaced throughout the 1980s, when fiscal decentralization occurred side by side with the introduction of the target responsibility system. On the one hand, under the tax-contracting scheme, reminiscent of tax farming in traditional times, 9 localities were allowed to maintain own-source revenues after the assigned revenue quota was fulfilled. On the other hand, localities were responsible for their own expenditures, ranging from the construction of local roads, bridges, water facilities, lighting, parks, and television antenna stations, to the provision of public goods and services. Even when special grants or earmarked funds were provided from above, such funding always fell far short of what was needed to carry out the assigned policy tasks. Local governments consistently had to generate self-raised funding as a matched portion to supplement underfunded projects. Various unauthorized fees, fines, and assessments were imposed to add to grassroots off-budgetary funds, often beyond the limits that peasant households could bear. 10 While many township and village governments established a variety of rural enterprises as the main source of self-raised revenue to fund policy mandates in the 1980s, privatization in the 1990s severely squeezed the township coffers, forcing rural cadres to turn to land speculation and commercialization as revenue substitutes at the expense of the local peasants. All of these practices have apparently exacerbated grassroots predatory extraction.
Despite the state’s imposition of social stability as a prior policy target to ensure rural harmony as early as 1988, the 1994 tax-sharing reform that recentralized tax revenues at the expense of localities not only aggravated fiscal woes at the grassroots level (Chen, 2008; Zhu, Tan, and Zhang, 2006; Duan and SOng, 2006; Jin and Zhou, 2003; World Bank, 2002) but also weakened the effect of the 1988 policy target. Illegal eviction of peasants from their land for commercial and urban development became rampant, a practice that planted the seeds of rural unrest throughout the 1990s. Since the political costs of collecting off-budgetary revenue were high, the central government took bolder steps to prohibit illegal land seizure and abolished all surcharges in 2001 and agricultural taxes in 2006 to ease the financial burden on the peasants. Apparently all these measures—attempts to undercut the local cadres’ predatory behavior through obstructing the collection of off-budgetary funds—inadvertently paved the way for the transition of grassroots cadres from predators to debtors over the past two decades, all the while waiting to be financially rescued.
The Legacy of Socialist Paternalism: The Impact on Cadres’ Rational Calculations as Debtors
Township cadres’ tenure in office is short, normally three to five years. According to cadres’ rational calculations, the best way to get promoted after five years is to fulfill the assigned policy targets as much as possible, even at the expense of local fiscal health. Township cadres are aware that debt already exists before they take office. Even their superiors know that they are not responsible for the debt that has accumulated. If new debt is added under their tenure, it will hardly affect their later promotion. As a result, township cadres would rather pursue maximization of short-term utility to get promoted rather than projects for local long-term development.
The Hungarian economist János Kornai once argued that state paternalism, deeply rooted in the basic features of classical socialism, fostered softness of budget constraints on state firms and nonprofit institutions, and made them suck in the largest possible amount of input and money vertically and horizontally through bargaining (1992: 144; 1986: 59–60). The state paternalism deeply embedded in the Chinese semi-planned administration has had precisely this effect. Although the Chinese state now tolerates the shutdown of inefficient state firms under the new bankruptcy law, it will not allow this to happen to local governments, particularly if their financial woes are a result of trying to accomplish imposed policy targets. This explains why grassroots cadres continue to borrow unscrupulously—they can expect financial rescue from above. After acknowledging the existence of widespread debt across rural China, the central state, as already mentioned, issued a document in 1999 to enforce debt clearance and a series of related documents from 2004 to 2007 to prohibit the acquisition of new debt. The rampant debt across rural China apparently kindled a hope among grassroots cadres that the central state would come to the rescue. This fiscal rescue did indeed come in the last four or five years with earmarked funds granted from the higher authorities to help clear township and village debts. However, the institution of paternalism in the socialist state has pushed grassroots cadres to take on the role of debtor, thus making the transition from predator to debtor possible.
The following section examines this transition created by the institutions of the Chinese semi-planned administration at the grassroots level in Wenzhou and Wuxi in order to explain the failure of Chinese hierarchical supervision to harden local budget constraints. Jianshi county, a poor, mountainous area under the jurisdiction of the Enshi Autonomous Prefecture in Hubei province, serves as a supplementary comparison case.
Responding to the Semi-Planned Administration: The Transition from Predator to Debtor in Wenzhou, Wuxi, and Jianshi
Wenzhou and Wuxi, well known as examples of private and collective economic development respectively, are among China’s most affluent and prosperous areas. In contrast, Jianshi county, a remote, mountainous area in southwestern Hubei, is destitute. The urban and rural incomes per capita in Wenzhou, Wuxi, and Jianshi are shown in Table 2.
Income Per Capita in Wenzhou, Wuxi, Enshi Municipality, and Jianshi County, 2001–2010 (in yuan)
Sources. Wenzhou guomin jingji he shehui fazhan tongji gongbao (2010–2011); Wuxi guomin jingji he shehui fazhan tongji gongbao (2001–2010); Enshi zhou guomin jingji he shehui fazhan tongji gongbao (2001–2010); Hubei tongji nianjian, 2001–2011; Zhongguo tongji nianjian, 2001–2010.
During China’s fiscal decentralization in the 1980s, both Wenzhou and Wuxi grasped the opportunity to launch rural industrialization, and each created a local economic miracle. Grassroots governments in Wuxi took the role of local state entrepreneurs, becoming deeply involved in enterprise ownership, production, management, and marketing while guiding the course of development. Their counterparts in Wenzhou, which had a precedent of private business, kept their hands off business ownership and operations. However, Wenzhou grassroots governments, behaving as semi-entrepreneurs, made a business of securing the needed affiliations for private entrepreneurs (Liu, 1992). Following the reforms of the 1990s, private businesses in Wenzhou and elsewhere no longer needed to disguise their private ownership. Consequently, Wenzhou grassroots governments had to find new revenues to replace the income from business affiliation services.
Although successful at the early stage, government-led collective enterprises in Wuxi suffered heavy losses throughout the 1990s in their competition with the emerging private sector. Township and village collective industries had thrived in the 1980s with the aid of bank loans, but the resulting debt load and the inability of the collective enterprises to compete in the domestic market ended the collective industry boom. Higher authorities then imposed the privatization of debt-ridden, inefficient local collective firms in order to relieve the debt burden of the local governments (Liu, 2001). Like their counterparts in Wenzhou, grassroots governments in Wuxi found themselves needing new sources of revenue.
In contrast, Jianshi has long suffered poverty and backwardness because of its peripheral location and mountainous landscape. Despite its relatively rich mineral and agricultural resources, Jianshi had little industry or peasant sideline production. Even today many mountain villagers still pursue subsistence agriculture.
The Institutions of the Target Responsibility System and Cost-Shifting Strategy: The Transition from Predators to Debtors
Although the juxtaposition of the status of predator with debtor assumed by grassroots governments endured a long time across rural China, these governments have no longer had to hide their debt loads after the central state acknowledged the prevalence of rural debt and, in the 1999 State Council document mentioned above, demanded that rural debt be cleared up. Despite subsequent documents prohibiting the reemergence of debts, debt is rampant across rural China and has facilitated the transition of local governments from predators to debtors.
In spite of the long record of prosperity in Wenzhou and Wuxi, the majority of grassroots governments there, like local governments in poorer areas, suffered severe fiscal pressure and depression throughout the 1990s. The average debt of township governments in Wuxi reached 134 million yuan in 2004 (Statistics Bureau of Wuxi, 2005), in contrast to 17 million yuan at the national level in the same year. While no systematic statistics could be found on Wenzhou, data on the debt of individual townships are available. For instance, K township in Pingyang county had an accumulated debt of 140 million yuan in 2004; G township in Ouhai district had hidden and explicit debts totaling 5.7 million yuan in 2005; F township in Ruian city 11 had an accumulated debt of 15.17 million yuan in 2003; C township of the same city, 2.9 million yuan of debt in 2005 (Interviews in Wenzhou in 2004 and 2005). Even remote, mountainous Jianshi county accumulated a debt of more than 300 million yuan in 2008, and the majority of townships under its jurisdiction incurred debt as well. For instance, Ye township had accumulated a debt of 1.7 million yuan, Hua township over 1 million yuan, and San township over 2 million yuan (Interviews with Jianshi finance bureau cadres and finance office cadres in Ye, Hua, and San, 2008).
Many grassroots officials have pointed out that the target responsibility system and the tradition of cost-shifting in the form of imposed targets have helped to inflate both local deficits and debt. According to a cadre of Pingyang county in Wenzhou,
right now all the major policy targets for township governments to accomplish come from the county. They need to bear the responsibility for expenditures as well. For instance, Pingyang county has to win a provincial competition to be [ranked as] an advanced county in the development of rural education. In doing so, it needs to build at least an elementary school, a middle school, and a vocational school in two thirds of the townships under its jurisdiction. In addition, each township needs to build a nursing home for the elderly and an aid station for the homeless and beggars. All of these are supposed to be funded by the township. It’s no wonder that township cadres have no other alternative except to pursue debt in order to assure their performance. (Interview with a former cadre, Pingyang county, Wenzhou, 2005)
The party secretary from C township of Ruian city in Wenzhou stated that
our township is poor due to its remote location in a mountainous region, so we received a financial transfer of 700,000 yuan each year as our budgetary revenue from higher authorities to cover our payroll and the pension fund. Our off-budgetary revenue, mainly from urban maintenance surcharges and fines for violations of the birth quota, has been in steady decline. Since we constantly have a revenue shortage, we bear a debt of 2.9 million yuan at this point. Right now fertility control is set as the top prior policy target for us to fulfill, and we need to improve contraceptive usage among fertile women, raising the rate from the current 92.4 percent to 99.8 percent [the policy target] so that we don’t lag behind our neighboring townships. We need to enforce the collecting of off-budgetary funds in order to get things done. (Interview, 2004)
Many township governments in Wenzhou struggle to improve local infrastructure (paving roads and building bridges) to win the official designation of “a civilized township.” But what is the source of the money for these improvements? According to a cadre of F township in Wenzhou,
road construction projects in the countryside will be given earmarked grants from above if our submitted project is accepted, but in doing so we also need to provide a certain portion as matched funding. Last time, when we managed 10 million yuan as matched funding for road construction, we borrowed some of the cash from higher authorities, imposed assessments on peasant households, and used other channels to make up the rest. So far we have accumulated 15.17 million yuan of debt. Other than that, we are in arrears for 18.89 million yuan owed several construction companies. (Interview with F township finance bureau cadre, 2005)
In contrast, in Wuxi the policy goal of achieving a “well-to-do society” through providing health care, pensions, and unemployment compensation was set as an imposed hard target from above (Interview with a Wuxi city official, 2005). When rural suburbs were incorporated into the municipality of Wuxi in 2003, many surrounding townships and villages became urban administrative units and villagers were reregistered as urban residents. These new urban residents were considered on an equal footing with other urban dwellers and should have enjoyed the same social and economic rights. However, those rights of citizenship were not bestowed for free. Villagers had to pay for them, and the cost was very high in Wuxi. With Mao’s legacy of cost shifting, it was primarily the village governments that paid the costs of the urban transition. As the party secretary of Liu village in Wuxi observed,
in the process of incorporation into Wuxi municipality, we had to buy the rights of citizenship for 240 uninsured villagers with cash, so that they would enjoy the same quantity and quality of pensions as other urban Wuxi residents. Since the price is very high, villagers have to pay 10 percent of the total cost of 53,000 yuan, and the village committee pays for the other 90 percent, about 48,000 yuan for each. Other than that, the village committee needs to take care of those already insured elderly and retired villagers under the rural pension scheme, raising their monthly allowance per capita from the original 60 yuan to 315 yuan. In addition, the village needs to pay for health insurance for the elderly. That is, we have to manage more than 5 million yuan each year to cover the costs that come with urban transition. (Interview, 2005)
Fortunately, Liu village owns quite a few land-related assets that can be tapped to pay for the cost of urban transition. Despite this, it is barely able to meet welfare costs.
In Jianshi, the township debt results from underfunded mandates imposed from above in the past, such as the extension of rural basic education to nine years, and road, irrigation, and river drainage construction (Interviews in Y, Hua, and San township, 2008). Even the county government of Jianshi secured loans from local banks and the county credit cooperative to build a county industrial park and support infrastructure construction such as a county road. According to a county official in the finance bureau,
when a county road was built in Jianshi, the cost to construct each kilometer of the road was estimated as 180,000 yuan. The Hubei provincial government provided an earmarked fund to support 140,000 yuan per kilometer, and the Jianshi county government was supposed to provide the balance of 40,000 yuan per kilometer as matching funds. However, the county government was short of revenue, so it owed a great deal of money to the local construction company. (Interview, 2008)
In addition, the county credit cooperative, which was supposed to be independent from county government intervention and was supervised by the People’s Bank, the Banking Supervision Board, and the Provincial Credit Cooperative after the 2003 banking reform, in fact continued to work as the county’s virtual treasury, supporting a variety of the county government’s expenditures. For this reason, the county credit cooperative was in the red and frequently needed to be rescued by higher authorities. The membership of the party branch of the county credit cooperative was identical with that of the party network of the Jianshi county government (Lee, 2009). Due to the overlapping of party members, the county government controlled the flow of loans and credit of the county credit cooperative through the party system. Thus the county credit cooperative continued to loan money to debt-stricken county government units.
The Budgetary Structure of Township Governments: Underplaying the Role of Debtor
Since the end of the Mao era, township governments have taken the path of predatory extraction to make ends meet. This “path dependence” has inadvertently been reinforced by the semi-planned administration since 1988. During the 1990s push toward urbanization, township governments discovered that commercializing and speculating on land through real estate development could generate windfall profits in the form of off-budgetary revenue. Despite the ensuing strengthened enforcement of the Land Law, illegal seizure of land for commercial purposes by grassroots governments along with rapid urbanization became rampant.
Table 3 illustrates the 2004 budgetary structure of K township in Wenzhou. It should be noted that all township government surcharges and fees were supposed to have been revoked in the 2001 tax-for-fee reforms. However, as Table 3 shows, certain surcharges and unified levies are still included as budgetary and off-budgetary revenues. Since state tax (A) is submitted in full to the center, it is not included in the township’s total real revenue. Only a fixed percentage of local tax (B)—about 20 percent of the total—remains in the township coffers. 12 This comports with revenue recentralization at the county level, which took the bulk of local tax revenue. The figure for total township real revenue (79.656 million yuan) in Table 3 includes budgetary revenue, extrabudgetary revenue, and self-raised revenue. The latter two items are off-budgetary revenue. It is clear that K township relies heavily on off-budgetary revenue; it accounts for more than half of the total revenue (see Table 4). More importantly, the main item in the off-budgetary income comes from the windfall profits of land sales, shown in Table 5.
Total Revenue of K Township, Wenzhou, 2004 (in millions of yuan)
Source. Financial documents provided by K Township Finance Bureau, 2005.
Note. K township’s revenues do not include the item of tax rebates because the division of tax revenue between K township and Pingyang county was based on the revenue contracting system rather than the 1994 tax-sharing scheme.
Budgetary, Extrabudgetary, and Self-Raised Revenue of K Township, Wenzhou, 2001–2005 (in millions of yuan)
Source. Financial documents provide by K township, Wenzhou, 2005.
Note. “—” indicates missing data.
The estimated total revenue and the estimated total expenditure are proposed each year by the township government and submitted to the Township People’s Congress for approval.
Not approved by the Township People’s Congress.
Extrabudgetary and Self-Raised Revenue of K Township, Wenzhou (in millions of yuan)
Source. Financial documents provided by K township, Wenzhou, 2005.
Note. “—” indicates missing data.
Before the 2001 tax-for-fee reform, an education surcharge was levied by the township as an extrabudgetary item, whereas after the reform the education surcharge was supposed to be abolished. However, K township kept this levy and put it in the category of budgetary revenue.
Status change from rural to urban.
Estimated total revenue and expenditure (see Table 4) are proposed annually by the K township government, and then submitted to the township people’s congress for approval. However, such approval is purely a rubber-stamp procedure (Huang, 2005). The mechanism of hierarchical supervision over the township budget and expenditures is only pro forma. In fact, much of K township’s off-budgetary funds derive from informal sources that completely escape monitoring and control by higher authorities. Thus, the term “fiscal accountability” as applied to K township is essentially meaningless. As Table 5 illustrates, the profits from land sales accounted for a high percentage of the total off-budgetary revenue of K township, varying from 83 percent in 2002 to 96.7 percent in 2003. This serves as a good indicator of the predatory extraction by township governments.
Taking a closer look at Tables 3, 4, and 5, it is difficult to find any item of debt in the official budgetary structure of K township. The records of debt exist in the internal financial report of the township government. This explains why the official statistics on local government debt are nowhere to be found in statistical yearbooks—but local debt has been an open secret among local governments. Since borrowing from banks is officially prohibited, township governments have long concealed their debt, although the state has been aware of this since the late 1990s. However, in a rare case, prosperous K township revealed its past borrowing records—the result of imposed underfunded mandates—in separate pages of the township financial reports. According to a K township cadre in the local finance office,
while we have off-budgetary revenue from land sales, it’s not as much as we need so we have to borrow to make ends meet. The local banker is my old friend from school, so I established a township investment company to borrow from the bank. So far we owe a debt of 70 million yuan to the bank, and if other payments in arrears are included, the total debt reaches 300 million yuan, far beyond the debt of 140 million that appeared in the internal fiscal report. (Interview, 2005)
Borrowing from financial institutions is prevalent among townships in Wenzhou, despite official prohibition. In this case the personal network between the township government and the local bank seems to work well. Table 6 shows that K township borrowed from various banks, a local company, and the county land and finance bureaus in recent years, using the name of a sham investment company in order to skirt legal prohibitions. The sham company received loans from banks, and then transferred the money to the township coffers. Sometimes the sham company borrowed from one bank to service K township’s debt to another bank.
Credit and Loans to K Township, Wenzhou, 2001-2004 (unit: 10,000 yuan)
Source. A document provided by K township, Wenzhou, 2005.
In Wuxi, L township under the jurisdiction of Huishan district was merged with two adjacent townships in 2004 to relieve the financial burden on the peasants. According to the head of L township,
the official budgetary revenue of our township was 52 million yuan in 2003, accounting for only 13 percent of the total tax revenue submitted to Wuxi municipality. However, the total revenue of L township was 154 million yuan, of which 102 million was off-budgetary income, accounting for 66 percent of the total. Our debt to the local banks came from the frequent borrowing by the township enterprises in the past, and the unpaid loans and credits from banks for local infrastructural construction. (Interview, 2004)
It is obvious that the degree of revenue recentralization in Wuxi is even higher than in Wenzhou. In contrast to 20 percent in K township in Wenzhou, L township kept only 13 percent and Yang township in Nanchang district of Wuxi only 10 percent of their remitted tax revenue as the total fixed share because they received a large quota of revenue remission from above to meet hard policy targets each year—348 million yuan for L township in 2003, 500 million for Yang township in 2008, and 450 million for He Street of Binhu district in 2009, to name just a few (Interview with the party secretary of L township in Wuxi in 2004 and those of Yang township and He Street in Wuxi in 2009). Thus many township governments in urban Wuxi have to rely on off-budgetary revenue, including rents and fees from commercialization of land, real estate development, and industrial and commercial firms under their jurisdiction, to cover administrative and other expenditures, which account for about 50 percent in Yang township and 66 percent in L township (Interview with party secretary of L township, 2004; and interviews with officials of Yang township, 2009). This situation is duplicated in many other townships and villages in Wuxi. 13
In contrast, destitution in Jianshi makes it the beneficiary of intergovernmental transfers and subsidies. For instance, Hua township under its jurisdiction received 6 million yuan annually as its official revenue through transfers, and the regular township expenditures are well taken care of by the county (Interview with Hua township officials, 2008). As a late developer, Jianshi has also built an industrial park to attract both domestic and foreign capital to promote local economic development, a measure designed to earn a good performance evaluation from higher authorities. However, Jianshi needed to find financial resources of its own to construct the industrial park. Table 7 presents Jianshi’s total revenue in 2007 (Interview with a cadre of the Jianshi county finance bureau, 2008). According to a cadre of the industrial park in Jianshi,
Total Revenue of Jianshi, 2007 (in millions of yuan)
Source. Interview with an official of Jianshi County Finance Bureau, 2008.
we have so far invested 99.4 million yuan to finish the construction of section A in the industrial park. The money mainly came from the urban construction company owned by the county government, an enterprise that monopolizes the construction of all commercial housing in Jianshi. The second source of money was bank loans. To construct the park we first expropriated a large piece of farmland collectively owned by a village, and then changed its ownership to state-owned for commercial purposes. Afterward we sold the land to the urban construction company to build commercial housing for sale. This is how we generate money to partially cover the expenses for building the industrial park. (Interview, 2008)
Since the building of commercial housing is monopolized by the government-owned urban construction company in Jianshi, the unit price of housing is very high, which generates a fat profit for the county government (Interview with the head of the Jianshi land bureau, 2008). Thus the entry of extrabudgetary revenue in Table 7 is highly underestimated, and no debt is reported in Table 7.
In Wenzhou, Wuxi, and Jianshi, while grassroots cadres are unwilling to provide official records of debt as evidence of their role as debtors, they are more than willing to talk about it when asked, particularly after the central state acknowledged the prevalence of rural debt and demanded its clearance in the late 1990s and again around the turn of the century. However, new debts continued to emerge after their clearance, which has caused the state to continue the issuing of related documents in subsequent years. Despite this, township governments are still reluctant to reveal their debts in official written records. The underfunded mandates shaped by the target responsibility system and the cost shifting strategy have intensified overt revenue shortfalls and covert debt at the grassroots level. They have also helped to illuminate grassroots cadres’ role as predators but have obscured their role as debtors. Even if the transition from predator to debtor is underway, it hardly means a weakening of grassroots predatory behavior so long as perennial revenue shortages exist.
Stage I of State Paternalism: Intensified Intergovernmental Transfers
After realizing the prevalent fiscal woes at the grassroots level in the second half of the 1990s, the central state has strengthened the use of intergovernmental transfers to provide earmarked funds, grants, and subsidies to fund policy mandates and improve the function of the semi-planned administration. Grassroots governments have capitalized on these intergovernmental transfers to their own advantage.
Particularly after the issue of the 1999 document, the 2001 tax-for-fee reform, and the 2006 abolition of agricultural tax, township cadres in Wenzhou have been expecting imminent fiscal rescue from above. The majority of them deeply believe that although the central government has allowed state enterprises to go bankrupt, it will never allow that to happen to local governments. In fact, China’s higher authorities have ignored the severity of grassroots debt and loosened their supervision and evaluation of grassroots fiscal discipline. The head of the finance office of F township in Wenzhou is candid about the situation:
The Wenzhou municipal government is very clear about the intractable fiscal strains among the grassroots governments, so those problems were given very little consideration in the evaluation of grassroots cadres’ political performance. For example, the municipal government counted the township budget balance as just 50 points [5 percent] in the total cadre evaluation score of 1,000 points. Therefore grassroots cadres do not take the local fiscal balance seriously. (Interview, 2005)
According to the deputy party secretary of C township in Wenzhou,
the per capita income for C township cadres was originally 20,000 yuan on the official payroll, but it was too low in comparison with that in Wenzhou municipality. The C township party secretary decided to add another 20,000 to make it 40,000 yuan for each top township cadre from off-budgetary funds. In this case we need 1.5 million yuan each year to cover payroll, retirement pensions, and administrative costs, but we only receive 700,000 yuan as budgetary revenue through transfers, so we have an annual shortage of 800,000 yuan. We can’t use funding from intergovernmental transfers to supplement cadres’ salary. So we then turned to the local credit cooperative for help. We township cadres take turns as either guarantors or borrowers to receive loans from the credit cooperative. In this way we have accumulated more than 2.9 million yuan of debt so far. You know, C township is not the only one to bear debt in Ruian city, Wenzhou. As far as I know, every township here, regardless of whether it’s rich or poor, is in debt. (Interview, 2004)
It seems that safety in numbers—the prevalence of debt in every township under the jurisdiction of Ruian city—encourages C township to borrow, even in order to subsidize township cadres’ salaries without official approval. C township even intercepted grants from Ruian city for Wan village under its jurisdiction for its own purposes. The party secretary of Wan village observed,
Our village has been very poor. After abolishing unified levies and other surcharges, we didn’t have a penny for the village cadres’ payroll, administrative fees, and social expenses. As the village party secretary I always go to the higher authorities for help. Thanks to my good personal connections, I often succeed in getting cash transfers or grants from different units of Ruian city government. The problem is that when the money is transferred to us through C township government, the township officials always intercept it. Last time I had a big fight with the township party secretary in order to retrieve the money. At this point the township has still withheld 10,000 yuan. (Interview, 2004)
In addition, C township diverts funds earmarked for other emergent purposes. For instance, it received an earmarked grant of 500,000 yuan from the provincial government to relieve flooding after a disastrous typhoon hit the area in 2004. The township government distributed just 10,000 yuan (2 percent) to the affected villages for this purpose, and diverted the remaining 490,000 yuan (98 percent) to other projects. 14 On another occasion, C township received 39,800 yuan through negotiations as a special grant from Ruian city to subsidize local cultural activities in conjunction with the 2004 Lantern Festival. But the township government provided only 10,000 yuan each to two nearby villages, and withheld 19,800 yuan for other purposes. 15 Some better-off villages under the jurisdiction of C township, such as Cao 1 and Cao 2 villages, have been forced to loan money to the C township government to help relieve its debt crisis (Interviews with party secretaries of Cao 1 and Cao 2 villages, 2004).
In contrast, the average debt of township governments in Wuxi reached 134 million yuan in 2004 (Statistics Bureau of Wuxi, 2005). Some townships even rob land compensation for the villages under their jurisdiction when confronted with a dire fiscal situation. According to the party secretary of He Street in Wuxi,
When the farmhouses of Jing village under our jurisdiction were demolished, including some village-owned buildings, the total of 39.3 thousand square meters of the subsidized apartment units were given as compensation for the demolished village property. But we, the street government, took them over. (Interview, 2009)
16
The party secretary of the He Street government insisted that once ownership of the land changed from collective- to state-owned, the subsidized apartments as compensation no longer belonged to the village. In this case, no peasant protests took place when the robbery occurred. However, peasant grievances have led to protests against the embezzlement of village assets and other corrupt behavior by village cadres in Wuxi. In 2006 an incident began with a peasant grievance over the use of shabby apartment buildings as compensation for land expropriated in O district in suburban Wuxi, but developed into organized protests that lasted for over two years without a satisfactory ending (Tao, 2008).
In contrast, in Jianshi the receipt of funds through intergovernmental transfers seems to be at the mercy of the authorities’ wide range of discretion. According to the party secretary of Shi village in Jianshi,
We applied for a grant to build a village garbage processing facility, road lights, and gymnasium to improve the public image of our village. We received 200,000 yuan from the construction bureau of the county government. I was told that the money was originally supposed to go to the neighboring village of Pan, but it ended up in our pockets. Pan village was furious with us. (Interview, 2008)
Apparently, when intergovernmental transfers combine with discretion and borrowing autonomy, the result is often a weakening of grassroots fiscal discipline and an entrenchment of soft budget constraints.
Stage II of State Paternalism: The Role of Debtor Surfaces through Financial Bailouts
Despite the intergovernmental transfer program to finance policy mandates and relieve fiscal woes, the grassroots governments continued to suffer more severe debt loads at the turn of the century, particularly with the 2001 tax-for-fee reform and the 2006 abolition of agricultural tax. This resulted in the repeated issuing of documents by the State Council from 2004 to 2007 prohibiting the emergence of new debts. 17 In 2007 several work teams were even sent out by the State Council to selected provinces to ensure debt clearance at the grassroots level (for details, see http://blog.sina.com.cn/s/blog). Two years later Dongtou county in Wenzhou began to follow the order to issue a document based on those issued in 2006 by the State Council and the Zhejiang provincial government, demanding that all the township governments under its jurisdiction clear their debt with a county rescue program before 2011 (for details, see www.audit.gov.cn/n1057/n1072/n1207/1830590.html). In fact, in the last three years county officials did write off accumulated debt at the grassroots level, at least in many townships that I visited. A cadre of the finance office in Hua township in Jianshi county observed,
We inherited a debt of 2 million yuan from our predecessors. In the past two years, the county government has begun to provide financial bailouts to relieve our debt. We receive 200,000 yuan extra each year through intergovernmental transfers to cover part of the debt. We’ll finally be clear of debt for quite a few years to come with the assistance [in the form of intergovernmental transfers] of the county authorities. (Interview, 2008)
After the county was authorized by the State Council in 2006 to provide financial bailouts through transfers to write off township debt, township governments’ budgetary autonomy was outright denied in order to prevent the emergence of new debts. 18 Simultaneously, a center for township financial regulation and management was set up as a new unit of the county government to strengthen its capacity to supervise the lower-level governments under its jurisdiction. 19 With this new institutional design, the county government was expanded to supervise township financial affairs, preempt policy initiatives from below, and inspect each item of township expenditures. In other words, since then the county has been held accountable for the health of public finance and rural governance at the grassroots level. Despite this, county governments still face the problem of grassroots revenue shortage embedded in the Chinese semi-planned administration. Thus it is hard for them to punish the township cadres responsible for incurred debt. As the head of M township in Wenzhou observed,
You know, the party secretary of our neighboring C township who borrowed so much from the local credit cooperative to subsidize cadres’ salary was considered to be violating the rules by many city officials in his performance evaluation. Despite this, he was still promoted to the vice deputy chair of the propaganda department of the city government. (Interview, 2008)
This demonstrates that the institutions of the Chinese semi-planned administration have long shaped township cadres’ rational calculations resulting in an insatiable appetite for revenue in order to fulfill their policy tasks and get promoted. The head of M township continued,
The Ruian city government has helped us to clear our debt in the last two years. However, we’re still short of money to carry out policy mandates. I always need to figure out ways to search for extra money. The old practices such as bending the rules to receive subsidies from above are widely used these days.
After the expected financial rescue from the paternalistic state in recent years, theoretically the higher authorities allow no new debts at the grassroots level. Now the county authorities prescribe that whoever borrows money will be responsible for paying it back (Interviews with head of the finance office of Hua township and head of the head of the finance office of San township, 2008). With a seemingly strengthened capacity to supervise and manage township finance, the county government recentralizes its own revenue and ignores policy initiatives and fiscal needs from below. So long as the target responsibility system in the form of underfunded policy mandates continues, fiscal bailouts and new repayment rules will not help to strengthen fiscal accountability at either the county or grassroots level. Both township and village cadres still need to search for funding through personal networks to fulfill policy targets, as before. Consequently, bailouts hardly enhance fiscal discipline and seem to reproduce soft budget constraints at the grassroots level.
Conclusion
This investigation into the public finances of township and village governments in Wenzhou, Wuxi, and Jianshi illuminates the ways, over the past two decades, that the institutional features of the Chinese semi-planned administration together with related policy measures have worsened grassroots fiscal woes and turned grassroots cadres from predators to debtors. The imposition of underfunded mandates by the state through the institution of target responsibility without adequate funding has distorted the budgetary process and weakened fiscal discipline at the grassroots level. This flawed institutional design of the semi-planned administration, in particular its paternalistic stance embodied in intergovernmental transfers and fiscal bailouts, has stimulated the unscrupulous borrowing of local cadres. Despite the recently strengthened capacity of hierarchical supervision at the county level, this article demonstrates that diverting earmarked funds, manipulating debt accounts through persistent borrowing, seeking windfall profits and rents through land expropriation, and seeking transfers and grants through personal discretion and connections have taken the place of fiscal accountability in both township and village governments, and led to a perpetuation of soft budget constraints as the modus operandi of local governments in rural China. With no outright revamping of the institutional contradictions embedded in the Chinese semi-planned administration or taking the fiscal needs of grassroots government into account, the current practice of simply writing off rural debt through financial bailouts both dampens the vigor of local initiative and reinforces the role of debtor, further weakening the county authorities’ capacity for hierarchical supervision as well as exacerbating the path dependence of soft budget constraints across rural China.
Footnotes
Acknowledgements
The author is grateful to the two reviewers (Jean Oi and anonymous) of Modern China for their keen insights and comments. Thanks also to Yusheng Peng, Philip Hsu, Su-Jen Huang, and Hairong Lai for their insights and helpful comments, and to Chi-Hung Huang for his data collection.
An early version of this article was presented at the 2006 annual meeting of the Association for Asian Studies, San Francisco.
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article:
This work was fully funded by the National Science Council ( NSC 93- 2412- H- 004 - 008; NSC 95- 2420- H- 004- 050- MY3), Taiwan.