| Since the late 1970s, China has undertaken a series of fiscal reforms, which have greatly changed the distribution of fiscal power between central and local governments and contributed to China's transition from a highly centralized unitary state to a quasi-federal state. Unlike some other transitional countries where decentralization weakened central control of local states, the Chinese central government took effective control of the localities. Moreover, it achieved what it had failed to do under tight Maoist rule, i.e. economic efficiency and development. How did the Chinese central government manage to enjoy the benefits of decentralization, while at the same time keeping the deviant behaviors of local governments in check?; I treat both central and local governments as rational decision-makers that interacted with each other strategically within a principal-agent framework. Both central and local governments had their own agendas, and they tried to maximize their interests. Unable to fully control the local agent, the central principal needed to construct an optimal incentive structure to reconcile the often-conflicting central and local interests and to achieve an optimal outcome for both parties.; In this dissertation I study China's fiscal reforms since the late 1970s with a focus on the 1994 Tax Reform. By scrutinizing both budgetary and extra-budgetary fiscal arrangements, I delineate the institutions that constrained central and local behaviors and the incentive structure that induced largely productive central-local interactions. I argue that under the formal budgetary management system, the center used its agenda-setting power to alter central-local revenue sharing schemes so that it could motivate local economic and fiscal efforts and take fiscal power and revenue under control. On the other hand, the informal extra-budgetary management system endowed local governments with great discretion and enabled them to advance their interests against the center's will, but the center used its veto power shrewdly and selectively to check local deviant behaviors in a way that fostered economic development. |
