Economic Decentralization and Political Centralization: Implications for Poverty Alleviation

1
Economic Decentralization and Political
Centralization Implications for Poverty
Alleviation

• Xiaobo Zhang
• Yi Yao

2
Background

• Successful development-led approach for poverty
  alleviation
• However, the speed of poverty reduction has
  slowed down
• Therefore, calling for a paradigm shift towards
  more transfers and targeting.

3
Background

• In the eleventh five-year plan, the central
  government has committed to significant increase
  investment and transfers in the rural and
  interior regions
• Can the money reach the poor as expected?

4
A Brief Walk over the History

• Central planning to the market economy
• Opening up
• Decentralization
• Privatization
• Governance structure has changed little.

5
Chinas Fiscal Structure

• Fiscal decentralization
• Expenditures tie more closely to revenue
• Horizontally, inter-judiciary competition.

6
Chinas Political Structure

• Organization form.
• replicate, vertical hierarchy structure
• irrelevant of economic size and local needs.
• Strong central mandates.
• Family planning
• Social stability and occupational safety (no
  major accidents)
• Other central tasks

7
Hierarchy Structure

• Central
• Province
• Prefecture
• County 1500
• Township 1000
• Village 200
• ???????
• Source IFPRI Survey at Guizhou and Gansu

5000
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9
Number of Bureaus in Yingshan County

Source XU Yong, 2004
10
Uneven Fiscal Dependent Burden
11
Regressive Tax Rate
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Two Spirals

• Tax burdens are extremely high in poor regions
  with agriculture as the major means of
  production.
• Downward spiral small tax base, more extraction
  from limited agricultural surplus and nonfarm
  activities, worsening investing environment, and
  lowering public goods provision.
• They are low in developed regions initially with
  a large nonfarm sector.
• Virtuous cycle light tax burden for each
  enterprise, more public inputs, better investing
  environment.

13
Poor Region Race to the Top

• Big government and predatory investment
  environment.
• Devote most energy to obtain transfers from the
  upper level government.
• Keep the poverty county status (these counties
  are growing slower).

14
Coastal Region Race to the Bottom

• Less tax on capital
• Small governments and better investment
  environment
• but often under provision of public goods (such
  as crime problem)

15
Industrial Tax Rate, 1994
16
Conclusions

• Decentralization has hardened local budget. But
  due to differences in initial conditions, the
  ability to provide public goods and fulfill the
  mandates has become more varied over time.
• The differences in the levels of public goods
  provision in turn affect the investing
  environment for private and foreign capital.

17
Conclusions

• As more people migrate from interior regions to
  the coast, the actual fiscal burdens to support
  the government have become increasingly uneven
  across regions.
• The problem becomes more acute as China abolished
  the agricultural taxes.

18
Hierarchy Structure

• Central
• Province
• Prefecture
• County 1500
• Township 1000
• Village 200
• ???????
• Source IFPRI Survey in Gansu Province

5000
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Conclusions

• It is a good news that the government has focused
  more on the rural and poor areas.
• However, more transfers may not reach to the
  poor. There may be a large leakage in the
  trickling down process in the poor regions
  because officials are hungry and therefore are
  more likely extending a grabbing hand.

22
Implications

• Cautious note potential problems of soft
  budget and aid dependency associated with
  transfers when there are many redundant staffs in
  local governments.
• Increasing transfers alone is not enough!
• How to reduce the government size in the poor
  regions deserves more research. ---- Luos talk
  on entitlement exchange.

23
Entitlement Trading

• Land development right transfer within provinces
• Government staffing quota (borrowing police
  officers)
• Pollution permit

24
Economic Growth and Regional Inequality
Zhang and Kanbur (2005)
25
Distribution of Per Capita GDP, 1994 2000
Yao and Zhang (2006)
26
Coastal-Inland Inequality
Zhang and Kanbur (2005)
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