23
is much larger in terms of volume. There is considerably more variation in the amount of central
transfer across regions.
In the central allocation of fiscal transfers, efficiency stands out a prominent explanatory
factor. My study on fiscal data from 1995 to 2002 suggests that to encourage local fiscal efforts,
the center transferred more revenue to well-developed regions and those that made efficient use
of their revenues. A major part of the central transfer, tax return, was established exactly for this
purpose. The formula of tax return decided that those regions that achieved higher fiscal growth
would receive more tax return from the center. And the other types of non-return central transfers
were also distributed across regions in a manner that rewarded productive local expenditures.
The more a province spent on local construction and public service, the more central transfer it
tended to receive.
Meanwhile, central transfer also addressed the problems that were ignored under the
fiscal contract system, such as increasing spatial inequality and fiscal difficulties in poor regions.
Those regions with more fiscal deficits would receive more central subsidies. These measures
helped ensure a smooth shift of the fiscal system by carrying over some virtues and also
remedying some deficiencies of the old system. They enabled the center to reclaim its control
without hurting local incentives in economic development and to push for a more unified
national economy.
Ethnicity was also important in determining central-local fiscal transfers. Controlling for
other variables, ethnic minority areas tended to remit less revenue to the center but to receive
more central subsidy. Such favorable treatments can be seen as the price the central government
paid in exchange for national unity.
42
Fortunately, this price was affordable for the center due to
the relatively small and geographically concentrated minority populations. There were only five
out of thirty-one provinces that enjoyed the special status, so the favorable policies towards
ethnic minority areas did not incur discontent among other regions or cause adverse incentive
structure, under which localities would rather bargain for favorable central treatments than
making constructive efforts by themselves. At the same time, local political bargaining power
did not play much role in determining central-local fiscal transfers. The lack of local political
influence enabled the center to adopt economically sound policies without being disrupted by
contending local interests, and it allowed revenues to flow between the center and provinces in a
productive way that facilitated the development of national economy.
In a word, this paper partially supports some earlier arguments that aim to explain the
interregional variation in central-local fiscal transfers, including the equality-driven argument
and the bargaining-driven argument. However, these arguments fall short of telling the whole
story. My statistical analysis highlights an efficiency-driven logic of central-local transfers: the
central government tended to make larger fiscal transfers to localities that used their revenues
more efficiently and achieved higher economic development level. In this way, fiscal transfers
essentially functioned as investment: By transferring more fiscal revenues to where they could be
efficiently used and yield high returns, the center could harvest more fiscal revenue in the future.
42
Wang, ibid., 2001 and 2005.
Convention