September 6, 2006
LOCAL GOVERMENTS in China have been given a lot of stick recently for disobeying the edicts and guidelines of the central government. The common complaint is that while Beijing issues perfectly sensible orders about curbing debt, regulating industry, reducing pollution and creating more sustainable ways to develop the economy, the officials in the sticks prefer to build luxurious office blocks and allow ruthless industrialists to dump toxic chemicals in local streams in order to boost GDP figures.
As we have explained before, it suits the leadership very well to say that everything that has gone wrong in China in the last few years has been the fault of local governments. While Beijing has implemented the policies, the local governments have ignored them. Cheng Li, writing in a recent edition of the China Leadership Monitor, explained that it is in the interests of Hu Jintao to "localize the social unrests and blame local leaders", a strategy designed to protect the leadership from the excesses of their predecessors.
Thus, in an exemplary article, The New York Times can juxtapose the new environmentally-friendly verities of Beijing with the appalling acts of administrative neglect that have blackened the waters of Inner Mongolia. Meanwhile, as the regime faces up to a devastated environment and a disgruntled population, many intelligent observers of China's political scene have suggested that the biggest challenge facing the central government is the issue of compliance on the part of the provinces. It is all very well drawing up well-meaning laws aimed at reducing pollution or protecting land rights, but they mean nothing when local officials treat their counties and villages as their own personal fiefdoms.
Nevertheless, independent scholar Kong Shanguang writes in New Youth Magazine this week that the big problem is not so much the fact that the local authorities are disobeying the central government, but rather, that they just do not have enough power to make ends meet. While they are regarded as the "bad child" responsible for "violating the economic order" of the country, the crucial question is what made them bad? After all, even local governments are "economically rational".
Kong blames the taxation system, which was separated into local, regional and national taxes 12 years ago. When the system was reformed in 1994, central government revenues grew immediately by 200%. The proportion of tax revenues allocated to the central government rose from 22% to 56%, but central government expenditure rose by only 2 percentage points. At the same time, local revenues fell by 32%, and the proportion of the total fell from 78% to 44%.
It doesn't require a great stretch of the imagination to see how the burden on local governments has increased as a consequence. In dirt-poor Shaanxi Province in the late 1990s, the local government was so desperate to boost its coffers that it chose to "privatize" its local oil industry rather than let it be gobbled up by central-government owned monopoly enterprises, which would pay tax directly to Beijing. The central government, of course, was spending little on local infrastructure and social services, and Shaanxi took matters into its own hands. In the ensuing stand-off, Beijing pulled rank and ordered Shaanxi to confiscate all the private wells, leading to a series of well-publicized protests. As a compromise measure, Beijing allowed the provincial government to keep the wells for itself and therefore enjoy a more healthy share of the tax revenues, but local residents still find it appropriate to pilfer oil from state-owned concessions and sell it on.
Meanwhile, in Suqian in northern Jiangsu, the Communist Party chief Qiu He became something of a folk hero for riding roughshod over central government pieties in order to stimulate the local economy. He has now been promoted to vice-Provincial Governor.
Other local authorities have cut corners, struck deals with local mafia organizations and turned a blind eye to the despoliation of the local environment or the flagrant violation of central government laws.
Since 1995, Kong explains, the central government's average share of total revenues stood at 52%, but its spending accounted for only 30% of the total. Local government income stood at an average of 48% of the total, but their spending amounted to 70%.
In fact, the local government share of revenues has fallen steadily over the decade. In 2004, the local authorities had 45% of total government revenues at their disposal, while its outlays made up 72%. With the central government constantly issuing orders about compulsory education, work safety, cleaning up water supplies or shutting down local enterprises, the burden has been getting worse.
Kong gives an example. Although the central government reaped 55% of the total administrative income in 2004, it paid only RMB 21.964 billion of educational costs, while local governments, with 45% of the share, spent RMB 314.63 billion on education. The discrepancy might explain why there are so much "random costs" imposed on students, but while the central government campaigns against the fleecing of impoverished children, it does not put the money where its mouth is. Meanwhile, the local governments pay seven times more money for social security and ten times more money to support farmers than the central government. According to figures from the State Council's Development Research Council, the central government pays 2% of the costs of compulsory rural education, provincial governments pay 11%, county governments pay 9%, while 78% of the burden is borne by villages and towns, which is to say, predominantly by the villagers themselves. The central government offers to treat you, but the locals pay the bill, says Kong.
So, local governments are in a parlous position. According to 2004 statistics, local government debts stood at more than RMB 1 trillion and are increasing by about RMB 20 billion per year. Grass roots authorities owe RMB 220 billion. The local authorities have no money to pay for public services or even to pay salaries. As a result, they levy lots of random charges and fees from the peasants.
Furthermore, because of the skewed taxation system, many local are heavily dependent on local land taxes. They therefore have a perverse incentive to seize as much land and property as possible and, in the effort to attract investment, convert it into an industrial park or a fancy new apartment block. When Beijing talks about "mass incidents" (otherwise known as protests or riots) it takes care to blame them on the misrule of local officials. Kong says that the system is to blame.
