Paying for Urbanization in China: Challenges of Municipal Finance in the Twenty- First Century 273 CHRISTINE P
Total Page:16
File Type:pdf, Size:1020Kb
Financing Metropolitan Governments Bahl Linn in Developing Countries Wetzel Edited by Roy W. Bahl, Johannes F. Linn, and Deborah L. Wetzel Financing Metropolitan Governments Governments Metropolitan Financing or the first time in human history, more people live in urban rather than rural Fareas; the number of metropolitan cities in developing countries far exceeds those in advanced economies; and the governance of megacities is of greater importance as national finances have become precarious. This book skillfully weaves together the theory and history of metropolitan finance with illustrative case studies, which offer deep insights into metropolitan financial governance in Brazil, India, and China, among in other countries. The authors address the politics of metropolitan government, the mys- Developing Countries Developing teries of the underutilized instrument of the property tax, and the question of financ- ing urban infrastructure. This is an indispensable volume for policy makers and for those who care about the future of metropolitan cities. — Rakesh Mohan Executive Director, International Monetary Fund he economic and political future of the developing world depends crucially on the Tongoing processes of urbanization. The essays in this volume, by leading scholars Financing Metropolitan intimately associated with these issues, provide a deep analysis of the critical role of metropolitan governance and financial structure in urbanization. It is the best treatment available: a wide-ranging and penetrating exploration of both theory and practice. Governments in — Wallace E. Oates Professor of Economics, Emeritus Developing Countries University of Maryland Edited by his well-written and informative book will put local governments, especially in Roy W. Bahl, Johannes F. Linn, and Deborah L. Wetzel Tmetropolitan areas, on the map of public finance, where they belong. The impor- tance of global and local public finance has grown world-wide along with national pub- lic finance, which has received most of the attention in the past. This book will surely contribute to that change. It contains a wealth of hard-to-get information on issues that range from how particular cities are financed to the complex fiscal arrangements in China. It is definitely a must-read book for public finance scholars. — Vito Tanzi Former Director of Fiscal Affairs, International Monetary Fund Cover design by Joyce Weston Cover photographs (top): iStockphoto/Celso Diniz Photography ISBN 978-1-55844-254-2 (bottom): iStockphoto/Dominique Landau Financing Metropolitan Governments in Developing Countries Edited by Roy W. Bahl Johannes F. Linn Debor ah L. Wetzel © 2013 by the Lincoln Institute of Land Policy All rights reserved. Library of Congress Cataloging- in- Publication Data Financing metropolitan governments in developing countries / edited by Roy W. Bahl, Johannes F. Linn, Deborah L. Wetzel. pages cm Includes index. ISBN 978- 1- 55844- 254- 2 (alk. paper) 1. Municipal fi nance— Developing countries. 2. Finance, Public— Developing countries. 3. Local taxation— Developing countries. 4. Municipal government— Developing countries. 5. Municipal fi nance— Developing countries— Case studies. 6. Finance, Public— Developing countries— Case studies. 7. Local taxation— Developing countries— Case studies. 8. Municipal government— Developing countries— Case studies. I. Bahl, Roy W. II. Linn, Johannes F. III. Wetzel, Deborah L. HJ9695.F663 2013 352.4'216091724—dc23 2013001063 Designed by Westchester Publishing Ser vices Composed in 10.5/13 Minion, by Westchester Publishing Ser vices in Danbury, Connecticut. Printed and bound by Puritan Press Inc., in Hollis, New Hampshire. Th e paper is Rolland Enviro100, an acid- free, 100 percent PCW recycled sheet. MANUFACTURED IN THE UNITED STATES OF AMERICA Contents List of Illustrations vii Foreword xi DOUGLAS H. KEARE 1 Governing and Financing Metropolitan Areas in the Developing World 1 ROY W. BAHL, JOHANNES F. LINN, and DEBORAH L. WETZEL 2 Metropolitan Cities: Th eir Rise, Role, and Future 31 SHAHID YUSUF 3 Metropolitan Cities in the National Fiscal and Institutional Structure 57 PAUL SMOKE 4 Th e Decentralization of Governance in Metropolitan Areas 85 ROY W. BAHL 5 Institutions and Politics of Metropolitan Management 107 INDER SUD and SERDAR YILMAZ 6 Metropolitan Public Finance: An Overview 135 RICHARD M. BIRD and ENID SLACK 7 Property Taxes in Metropolitan Cities 159 WILLIAM J. MCCLUSKEY and RIËL C. D. FRANZSEN 8 Local Nonproperty Revenues 183 JORGE MARTINEZ- VAZQUEZ 9 Grant Financing of Metropolitan Areas: A Review of Principles and Worldwide Practices 213 ANWAR M. SHAH 10 Metropolitan Public Finances: Th e Case of Mumbai 243 ABHAY PETHE 11 Paying for Urbanization in China: Challenges of Municipal Finance in the Twenty- First Century 273 CHRISTINE P. WONG vi n Contents 12 Metropolitan Governance and Finance in São Paulo 309 DEBORAH L. WETZEL 13 Metropolitan Infrastructure and Capital Finance 339 GREGORY K. INGRAM, ZHI LIU, and KARIN L. BRANDT 14 Slum Upgrading 367 MARIA E. FREIRE 15 External Assistance for Urban Finance Development: Needs, Strategies, and Implementation 393 HOMI KHARAS and JOHANNES F. LINN Contributors 421 Index 423 About the Lincoln Institute of Land Policy 431 Paying for Urbanization 11 in China Challenges of Municipal Finance in the Twenty- First Century CHRISTINE P. WONG hina is urbanizing, and the pace is accelerating. Th e National Bureau of Statis- Ctics (NBS) reported a population of 1.34 billion at year end 2010, fully half of them living in cities (CSY 2011). Rapid urbanization is a recent phenomenon that was unleashed by the country’s transition to a market economy (fi gure 11.1). Start- ing in the early 1980s, the dismantling of agricultural collectives freed rural labor to leave the land. Since then, rural- urban migration has steadily accelerated as government restrictions on population movement were eased, and plenty of jobs were created in cities by economic growth that has averaged more than 12 percent per annum in real terms since 1990. Th e scale of China’s urban transformation is unpre ce dented in human history. During the 1980s, urban population grew by 110 million; this accelerated to 157 million during the 1990s and 210 million during the fi rst de cade of the twenty- fi rst century. Nationwide, the current urban population of 670 million is more than three times that in 1980, an increase of 480 million in just 30 years. Th e population of metropolitan Shanghai, China’s largest city, grew from 16 million to 23 million between the 2000 and 2010 censuses, a 44 percent increase (Shanghai Statistical Yearbook 2011). During 2008– 2011 alone, Beijing reportedly absorbed 500,000 new people each year (Green 2012). Providing infrastructure and public ser vices to accommodate urbanization of this scale and pace is a gargantuan task that would strain any government. In China, the challenge was all the more daunting as the ongoing pro cess of transition from a planned economy to a market economy transformed virtually all aspects of social and economic or ga ni za tion and brought a catastrophic collapse in the govern- ment’s revenue mechanisms that caused the bud get to plunge from one- third of gross domestic product (GDP) in 1978 to a nadir of 11 percent before a new tax system began to restore fi scal health from the late 1990s onward (Wong and Bird 2008; World Bank 2002). Th e upturn in urbanization thus began in a diffi cult fi scal n 273 n 274 n Christine P. Wong FIGURE 11.1 Urbanization rates in China 60 50 40 30 Percent 20 10 0 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 source: CSY (2011). environment that worsened through the fi rst two de cades. Th e fi nancial mechanisms and strategies for Chinese municipalities were forged in this harsh environment. Despite this inauspicious start, China’s spectacular economic growth per for- mance over this period seems to provide prima facie evidence that the government has managed the urbanization pro cess well enough. New cities have cropped up: the latest count shows 657 cities and nearly 20,000 towns, compared with 233 cities and 2,600 towns 30 years ago. Existing cities have expanded. City centers have been renovated and modernized, infrastructure has been built, and urban facilities appear to be keeping up with demand. Visitors to China typically fl y into world- class airports and are whisked into town on multilane expressways. Cities and even modest county towns are crisscrossed by wide boulevards, and Chinese cities are setting world rec ords in the pace at which subway lines are being built (National Development and Reform Commission and World Bank 2010). In fact, a good deal of evidence points to an outstanding per for mance in provid- ing growth- supporting infrastructural investments during this period. In 2010, for example, China was ranked 27th among 155 countries in the World Bank’s Logis- tics Per for mance Index (LPI), a mea sure of a country’s effi ciency in moving goods to and from international markets. With an overall LPI score of 3.49, China is ap- proaching the average of 3.55 for high- income countries, substantially outperform- ing its peer group of upper- middle- income countries (table 11.1). Th e picture is more mixed on the provision of ser vices. A 2006 survey of 5,000 house holds in fi ve cities found citizens generally pleased with urban public ser vices but worried about their high costs, with basic education per child taking up 10 per- cent of house hold income and per capita out- of- pocket payments for health care another 10 percent. Th e survey also found the provision and pricing of ser vices to be highly regressive, with lower- income house holds receiving poorer- quality ser vices but paying signifi cantly larger shares of house hold income for them (Brixi 2009).