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Decremental Budgeting in An DECREMENTAL BUDGETING IN AN INCREMENTAL ERA: A STUDY OF THE CENTRAL-PROVINCIAL BUDGETARY RELATIONSHIP IN THE PEOPLE'S REPUBLIC OF CHINA AFTER 1978 by BAI YAN, B.A., M.P.A. A DISSERTATION IN POLITICAL SCIENCE Submitted to the Graduate Faculty of Texas Tech University in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY Approved May, 1995 Sol A^O^^' T5 ^ ACKNOWLEDGEMENTS })0 lSh-:> ^\. I am greatly indebted to Professor Mark Sorama whose genuine efforts, direction, encouragement, and sincerity made this study a reality. My gratitude goes to the other members of the committee—Professor Siegrun Fox Freyss, Professor Aman Khan, and Professor Aie Rie Lee—for their thoughtful suggestions and criticisms. All my committee members have been generously supportive in providing me wit: encouragement and specific comments through my writing. I am thankful to the Department of Political Science for its support of my entire graduate work. I would like to dedicate this study to my wife Anling Lai and my son Bai Ou, whose faithful support and understanding have been indescribable. 11 TABLE OF CONTENTS ACKNOWLEDGEMENTS ii ABSTRACT vi LIST OF TABLES ix CHAPTER I. INTRODUCTION 1 General Introduction 1 Organization of the Study 10 II. LITERATURE REVIEW, RECONCEPTULIZATION, AND METHOD 13 General Survey 13 The Caiden and Wildavsky Model of Poverty-Uncertainty 18 The Development Theories 25 Dichotomous Mode of Thinking 29 From Single Factor to the Context 31 The Caiden and Wildavsky Model Reconceptualized 32 Seeking A Common Point of Departure. ... 32 Uncertainty Reduction and Avoidance. ... 35 State Capacity 39 Method 42 III. CHANGES BEFORE AND AFTER THE 1978 DECENTRALIZATION 47 The Imperial Period 48 The Republican Period 51 The Socialist Period to Present 52 111 Prior Decentralizations 54 1978 Fiscal Decentralization 61 Changes After the 1978 Decentralization. .69 The Decline of Extractive Capacity 75 Fiscal Decline as a Result of Decentralization 77 Action-Reaction Syndrome 83 IV. CHINESE BUDGET SYSTEM AND PRACTICE 95 Budget System: A General Introduction 95 Components of Budgetary Receipts 99 Taxation 100 Central Taxes 104 Local Taxes 112 Shared Taxes 114 The Coercive Draft 116 Revenue Sharing 116 Retention System 121 Borrowing 126 Domestic Borrowing 127 Foreign Borrowing 130 Components Of Budgetary Expenditures 134 Tax Transfer 136 Subsidies 141 Provincial Expenditure 144 V. A TYPOLOGY OF CHINESE BUDGETING POLITICS 155 iv Central Planning-Mass Movement 156 Authoritarian-Party/State 162 Bargaining-Decentralization: Current Fiscal Politics 166 The Provincial Extra-Budget 169 Tanpai 173 Foreign Capital 177 Bank Loans 182 Rent Seeking 188 The Decline of State Capacity 193 National Deficit 195 Inflation 200 VI. SUMMTIRY AND CONCLUSION 208 Unintended Consequences 210 Decentralization and Fiscal Politics 216 Outlook for the Future—Unitary or Confederate? 219 Possible Contributions and Limitations. .227 BIBLIOGRAPHY 228 V ABSTRACT The Caiden and Wildavsky work of 1974 postulates a model of poverty-uncertainty: the governments of poor countries face disappearing and decremental budgets in financing public programs because of a lack of economic growth or poverty. The core argument is that economic development, as a critical variable, determines increments in budgeting practices. In other words, budgeting is incremental, and incremental budgeting results from the growth of GNP. This model has since become a set of principles with identifiable attributes to explain the budgetary processes in poor nations. This study is about application of that model in China's budgeting. China has a unitary budget system. The central government used to draw most of its revenues from provinces and its budget includes those of 31 provinces. Provinces thus play a dual role of collecting revenues from within and remitting them to the center in the name of revenue sharing. In 1978 China decided to open to the world, reform its economy, and decentralize budget to provinces. But the original intent of decentralization was to give incentives so that provinces accumulate more resources for VI further central extraction. The decentralization, however, has led to fiscal decline not anticipated by the reformers. Data shows a declining ratio of government budget to the fast growing GNP in the post-Mao China, and a declining central government's share to the province budget revenue. Why decremental budgeting in an incremental era of economic development? To explain this variation, this case study brings in the budgetary system and operation in China and explores the fiscal relations between the center and the provinces before and after 1978, the year China began to decentralize. The proportions retained by provinces have increased sharply. Extra-budgetary funds kept by provinces have skyrocketed, which can be easily converted into political strength. At the same time as the central extractive capacity is in decline, central control over consumption also became so loose that the expanded expenditures resulted in less redistributions from rich to poor provinces, and less allocations to the national infrastructures. Moreover, the expanded expenditures spurred inflation. Though the center, no longer an imperial emperor relying upon provincial extractions, tries to regain its budgetary leadership, it has found itself already so vulnerable in the face of emerging confederacy. There are as vii many emperors as provinces. Wealth does not render increments in the Chinese budgeting, but provides impetus to provincial initiatives to be independent. As a result, China's budgeting is decremental in an incremental era. VI11 LIST OF TABLES 1. GNP (Billion Yuan) and Government Revenue, Expenditure as Percentage 45 2. GNP per Capita (constant 1987 yuan) 46 3. China: Administrative Divisions 85 4. Indicators of Financial Decentralization 87 5. Sectoral and Demand Linked Sources of Growth 1980-88 88 6. Provincial Per Capita in 1977 and Average Annual Growth Rates 1978-88 89 7. State Budget Share of National Income, 1952-89. .91 8. Sources of Revenues by Sector (%) 93 9. Revenue-Sharing Rates of China's Provincial Units, 1980-1983 147 10. Central-Local Shares of Budget Revenues 149 11. Foreign Capital Flow into China, 1979-1987 150 12. China's Total Debt and Debt Indicator, 1980-90. .151 13. Sources of Government Financing 152 14. Government Expenditure by General Categories. .153 15. Extra-budgetary Revenue and Expenditure of Central & Local Governments 206 16. Central Government Budget Deficit and China's Inflation Rates 207 IX CHAPTER I INTRODUCTION General Introduction A government budget implements the functions of the public sector—allocation, redistribution, stability, and growth. It symbolizes the authoritative allocation of priorities and determines who gets what, when, and how. In this sense, budgeting is the life-blood of government, the medium through which flows the essential life-support systems of public policy (Wildavsky, 1988). Budgeting, however, is subject to many constraints, and one of them is economic development. According to the conventional wisdom of incrementalism (Wildavsky, 1964), budgetary decisions are premised on last year's budget. Since only a small portion of the budget is examined, a change is only marginal from year to year. "Annual increases in spending in the range of 5-10 percent were cited as confirmation of the inherently incremental nature of budgeting" (LeLoup, 1988:21). As a decision making model, incrementalism is preferable because it moderates conflict, reduces search costs, and saves the amount of time that budget makers must invest in budgeting (Lindblom, 1968). What underscores and enables incrementalism in budgeting? "Incrementalism depends on increments, that is, on an increase in the resources available for distribution through the budget process. These increments can come from economic growth or from an enlargement in the relative size of the public sector" (Schick, 1992:410). To paraphrase, the increments are the base of incrementalism. First, budgetary increments grow in proportion to economic growth as measured in GNP (gross national products) or GDP (gross domestic products), which constitutes the base for annual expansion in government spending. Allen Schick, a well- known scholar in this field, compares budget outlays with growth in GNP to indicate incrementalism. In his "Incremental Budgeting in a Decremental Age," Schick (1992) discovered that the economy in the United States in the 1970s did not grow fast enough to accommodate the demands on the budget. While the economy had 3 percent annual growth, the federal budget was growing at a 4 percent rate. The U.S. economy was stagnant during the 1970s, but the momentum of incrementalism could not be slowed down because of sluggish growth. Since the budget process was programmed for growth, it could not easily adapt to the changed circumstances. Although the difference between these growth rates seems small, over the course of the decade it impelled a substantial shift in resources from the private sector as well as big and persistent deficits. Second, increments come from the redistribution of resources. The size of government expenditures changes in relation to other sectors, which are defined by the source of flow as consumer, investment, and foreign trade balance. Using the first letter of these four sectors, the equation should go like C (consumer) + I (investment) + G (government expenditure) + F (foreign trade) = GNP. Resources can be redistributed so that
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