China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [105]
In addition, China’s agricultural infrastructure built in the prereform era steadily deteriorated due to a lack of funding. Spending on agricultural infrastructure fell from 18 percent of total government spending on infrastructure in the 1970s to less than 6 percent by the mid-1980s. Particularly hard hit has been the rural irrigation system. Of the nation’s 84,300 reservoirs, one-third were classified as “unsound and dangerous” in the mid-1990s. The total capacity of these reservoirs had been cut by 30 to 50 percent, dramatically reducing the country’s ability to fight floods and drought.52 The combined effects of environmental degradation and the severe deterioration of much of the agricultural infrastructure built before the 1980s may have exacerbated the devastation of natural disasters. Grain output losses resulting from natural disasters more than doubled from the 1950s to 1990s, from 2.1 percent to 5 percent of total grain output. Output losses accelerated mostly in the 1990s. Whereas average annual losses from natural disasters ranged 50 billion to 60 billion yuan (in constant prices) from the 1950s to the 1980s, they had doubled to 120 billion yuan by the mid-1990s.53
Crisis in Rural Public Finance
The erosion in the fiscal capacity of the Chinese state in general, and the crisis in rural public finance in particular, have severely undercut the government’s ability to fund public services. In addition, the consequences of a dysfunctional fiscal system have been made much worse by a deeply flawed political incentive structure that motivates local officials to devote limited resources to projects that promise to maximize their individual political gains but yield low social returns. Thus, projects and services that can deliver high social returns, such as environmental protection, education, and public health, are neglected.
China’s fiscal problems have been extensively studied.54 The deterioration in the state’s extractive capacity, if measured by official data on the performance of China’s fiscal system, seems dramatic, if not precipitous, as the government’s tax receipts fell from 31 percent of GDP in 1978 to 14 percent of GDP in 1999.55 The truth, however, is quite different. Aggregate government revenue during the last two decades has remained at the same level of about 30 percent of GDP. Erosion of the state’s fiscal capacity may be modest. As discussed extensively in Chapter 4, what has changed is the massive diversion of revenue from the government’s official budget. The explosion of various forms of revenue collected by the government but not entered into the budget has squeezed the on-budget tax revenue streams. At its peak, such off-budget revenue exceeded budgeted tax revenue by a two-to-one ratio. For example, in 1995 and 1996, budgeted tax revenue was about 11 percent of GDP, but off-budget and other types of unrecorded government revenue was about 20 percent of GDP.56
Provincial and municipal governments are the primary beneficiaries of this dysfunctional fiscal system because it allows them to raise revenue outside the normal tax streams. Even after the implementation of the 1994 fiscal reform, which is generally regarded as a measure to strengthen the central government’s fiscal capacity, provincial and municipal govcrnmcnts were able to increase their share of the revenue. One study of the changes in the effective share of government funds claims that the share of provincial governments rose 2 percent each year between 1994 and 2000, from 16.8 to 28.8 percent, while that of the central government actually fell slightly in the same period, from 55.7 to 52.2 percent. 57 The relative decline in the central government’s revenue has significantly reduced Beijing’s ability to invest in social services.
As a result, the central government increasingly relied on unfunded mandates—by ordering subnational