Some consequences of fiscal reliance on

extrabudgetary revenues in China

R.S. ECKAUS
*
Department of Economics, Massachusetts Institute of Technology, 77 Massachusetts Avenue,
Cambridge, MA 02139, USA
Received 10 September 2001; accepted 10 December 2002
Abstract
The central and especially the local governments in China have become increasingly dependent
on extrabudgetary revenues (EBRs), which, by 1996, were more than half as large as tax revenues.
These many thousand fees and levies are mainly ad hoc and disparate exactions that generate
microeconomic inefficiencies and counter economic growth and can become sources of corruption.
Regressions on a panel of provincial data indicate that the EBRs fall most heavily on the primary
producing sectors, which are mainly agricultural. The regressions also suggest that dependence on
these fees has also turned health and education public goods into fee-for-service sectors.
D 2003 Elsevier Science Inc. All rights reserved.
Keywords: Extrabudgetary revenues; Fiscal reliance; Fee-for-service system
1. Introduction
Chinas economic growth since 1978 has been characterized by a series of cautious
moves away from its previously planned and controlled economic system toward the
rationalization of its economic policies and the increasingly broader introduction of the
elements of a market economy. Although there have been few major missteps and the
transition has been remarkably successful, neither has it been completely smooth at either
the macroeconomic or the microeconomic levels. One misstep, which is now a source of
major, although somewhat hidden problems, has been its increased fiscal dependence on
the so-called extrabudgetary revenues (EBRs) and off-off budget revenues (OBRs).
This paper will provide evidence on the scope and magnitudes of the EBRs and OBRs and
1043-951X/03/$ - see front matter D 2003 Elsevier Science Inc. All rights reserved.
doi:10.1016/S1043-951X(03)00002-6
* Tel.: +1-617-253-3367; fax: +1-617-253-6915.
E-mail address: eckaus@mit.edu (R.S. Eckaus).
China Economic Review 14 (2003) 7288
discuss their macro- and microeconomic consequences and their effects on the provision of
education and health services.
There are several thousands of the EBRs imposed by the central and local governments
and by local administrative agencies.
1
Some are related to levels of economic activity,
though not to a uniform measure of such activity. They are often ad hoc and disparate
exactions from enterprises and individuals, which have little, if any, association with the
levels of their economic activities. Like China, most countries do employ some fees and
levies to recoup the costs of publicly provided goods and services that are consumed
individually and also to ration the availability of semipublic goods. But Chinas EBRs now
have a major role in its revenue system amounting to 56% of tax revenues in 1996, the last
year before a major revision in definition. One consequence of their use has been that in
effect the provision of important public goods has been converted from nearly free services
into fee-for-service operations.
The OBRs reside in a particularly obscure part of Chinas fiscal system. They include
what are sometimes called self-raised funds. These derive from land sales and rentals
and revenues from direct government undertakings, which may be as mundane as parks
and museums, and may also include partial or total ownership of cooperative enterprises,
but which do not, however, include revenues from state-owned enterprises (SOEs). The
variety and magnitudes of the OBRs are even more difficult to determine because evidence
of them seldom appears in official publications.
The next section will provide some overall data that will place the EBRs and OBRs in
the context of the entire fiscal system. That will be followed by a section reviewing the
consequences of the heavy reliance on these sources of revenues. Some simple econo-
metrics will then be used and other information assembled to investigate some of their
economic and social impacts.
2. An overview of Chinas fiscal system
Until 1984, the major source of government revenues was the profits of SOEs, which
were remitted directly to the government. This system was replaced by a corporate profits
tax on SOEs but, under the pressure of growing competition, pervasive inefficiencies, and
reputedly some outright corruption, SOE profits declined. This created the need for other
revenue sources. Subsequently, there were further changes in the tax system, with a major
reform in 1994. The value-added tax became the single most important source of tax
revenues. A new individual income tax, consumption taxes, and several minor taxes were
imposed, as well as a new enterprise income tax that was made uniform for all enterprises.
Although the Chinese constitution restricts taxing power to the central government,
some tax revenues are assigned directly to the provincial governments and other amounts
are allocated annually. The provincial governments also have limited power to change
some of the tax rates, including powers to grant tax exemptions and tax holidays, both of
1
There is no comprehensive public tabulation of EBRs. However, the Fees and Funds Administration
Manual of the Ministry of Finance, published in 1996, provided a list of approved EBRs.
R.S. Eckaus / China Economic Review 14 (2003) 7288 73
which are used to retain and attract enterprise. Until 1994, tax-sharing agreements were
negotiated with each provincial government separately by the central government, without
uniform standards. This was changed in 1994 to a tax-assignment system with greater
uniformity across provinces. Also, before 1994, tax collection (with a few exceptions) was
entirely in the hands of provincial governments, each of which forwarded to the central
government its agreed upon share. The central government has now established local tax
collection agencies, which are still not fully operational.
With relatively declining transfers from the central government and increasing demands
for their services, some of which have resulted from unfunded obligations imposed by the
central government, the EBRs and OBRs have become the prime revenue source to which
local governments could resort. That is because the EBRs and OBRs are, legally, not
considered to be taxes in China. Although, in principle, the imposition of the EBRs
requires prior approval from the Ministry of Finance, that requirement has often been
avoided. Moreover, the EBRs and OBRs have not until recently, and still only partially,
been a part of its regular budgetary processes. In addition, the EBRs and the OBRs used by
local administrative agencies and local officials may not be reported in full to the local
financial departments, so even their amounts are somewhat uncertain. It is widely believed
that the EBRs include many arbitrary exactions, often imposed on SOEs but also often on
individuals without recourse to official protection and are a prime locus of corruption (see,
e.g., Chen, Jefferson, & Singh, 1992; China News Digest, 1999; Jefferson, 1997;
Steinfeld, 1998, chaps. 23). Some of the OBRs involve major real estate transactions
and government initiatives to generate revenues that can then be used for public and,
Table 1
Tax and extrabudgetary revenues and their growth rates
Year Tax revenues EBRs EBRs/Tax GNP growth
Yuan
100 millions
Growth
rates (%)
Yuan
100 millions
Growth
rates (%)
revenues (%) rates (%)
1982 700.02 146.42 20.92 9.08
1983 775.59 10.80 163.67 11.78 21.10 12.37
1984 947.35 22.15 197.75 20.82 20.87 20.97
1985 2040.79 115.42 277.3 40.23 13.59 24.73
1986 2090.73 2.45 337.42 21.68 16.14 13.49
1987 2140.36 2.37 403.02 19.44 18.83 17.18
1988 2390.47 11.69 487.88 21.06 20.41 24.83
1989 2727.40 14.09 555.02 13.76 20.35 13.37
1990 2821.86 3.46 637.54 14.87 22.59 9.93
1991 2990.17 5.96 765.77 20.11 25.61 16.48
1992 3296.91 10.26 976.33 27.50 29.61 23.03
1993 4255.30 29.07 1432.54 46.73 33.66 29.67
1994 5126.88 20.48 1862.53 30.02 36.33 35.04
1995 6038.04 17.77 2404.18 29.08 39.82 23.19
1996 6909.82 14.44 3893.34 61.94 56.35 16.27
Sources: China Ministry of Finance Yearbook (1997, pp. 540, 541); China Statistical Yearbook (2000, pp. 257,
271), National Bureau of Statistics, Peoples Republic of China.
R.S. Eckaus / China Economic Review 14 (2003) 7288 74
possibly, private purposes. Their legal status is obscure and the occasional reports of their
amounts are murky.
Table 1 presents overall data on the structure of tax and EBRs in China for the period
19821996, with adjustments made in an attempt to achieve uniformity in the definitions.
There have been several major changes in the reporting of the EBRs in the last 20 years.
Until 1993, when they were reported separately, the largest components of EBRs were the
retained profits and depreciation funds of the SOEs. In order to create Table 1, state
enterprise profits have been subtracted from the reported EBRs to help achieve definitional
uniformity back to 1985. In 1997, some intergovernmental transfers were subtracted in the
reported data and it has not been possible to identify these separately so as to create an up-
to-date consistent series. Whereas an effort has been made to eliminate the other
definitional differences in the data reported in Table 1, the completeness and comparability
of the data for the individual years cannot be guaranteed. Thus, the results must be
interpreted cautiously. As shown in Table 1, except for 1984 and 1985, years of a major
tax reform, EBRs have consistently grown much faster than tax revenues and have become
an important element in government revenues.
In order to provide some perspective on the role of EBRs in China, Table 2 provides a
cross-country comparison, which also must be viewed cautiously. It shows, for each
country, the ratios of all government revenues to GDP, including for China, the EBR/GDP
ratios as well. Other than for China, data are taken from the IMF and World Bank sources,
both of which in turn rely on official country reports with some adjustments. As a result,
the data for the different countries are probably not fully comparable. For China, the data
are taken from the China Statistical Yearbook
2
for the various years. Even so, the overall
impression from Table 2 is quite clear. The comparison of official taxes suggests that
China is a relatively lightly taxed country. When EBRs are added to tax revenues, the
differences are reduced. Overall, India now stands as the most lightly taxed country.
Because the EBRs in China are likely to be underreported, the data still underestimate the
sum of taxes and EBRs in China. The OBRs in China are also not included. On the other
hand, nonbudgetary revenues may not be fully reported and included in the tax revenues of
the other countries as well.
Table 2
Ratios of government revenues to GDP across countries (%)
China India Indonesia South Korea Pakistan Thailand
Revenues EBR Total
revenues revenues revenues revenues revenues
1996 10.68 5.61 16.29 12.43 17.42 21.62 17.11 18.19
1995 10.51 4.05 14.56 12.22 17.70 20.48 17.07 18.53
1994 11.08 3.95 15.03 12.36 18.16 19.97 17.37 18.72
Sources: China Statistical Yearbook (19951997), National Bureau of Statistics, Peoples Republic of China;
Development Indicators (2001), World Bank.
2
For China, the World Bank reported 38.2 billion yuan in nontax revenues, whereas the China Statistical
Yearbook amount for nontax revenues was 49.82 billion yuan and the EBRs were 389.3 billion yuan.
R.S. Eckaus / China Economic Review 14 (2003) 7288 75
3. The economic characteristics of EBRs
3.1. Macroeconomic effects
A flat rate tax on the value of output, which is the character of some of the EBRs, is a
proportional tax with an elasticity of one, and tax revenues will rise proportionally with
both real output and prices. The tax will, therefore, be neutral with respect to inflation,
taking a constant share of output value as prices rise. Some of the EBRs appear to be like
this. Others are like a head tax and are independent of the levels of output and income and
are in effect procyclical in nature, taking a constant amount of the value of output or
income. Still other types of EBRs are more difficult to characterize as they are ad hoc in
nature. Table 3 shows the results of a simple calculation of the realized elasticities of tax
and EBRs with respect to GNP. In neither case do these elasticities refer to a specific tax or
group of taxes or fees, because there were several changes in the tax system during the
period and, undoubtedly, even more changes in the composition and levels of the EBRs
that were imposed. In addition, there were several changes in the tax enforcement and
collection systems during this period. Thus, the computed elasticities are the outcomes of
the taxes, fees and levies, and collections systems that were current, reflecting the
continued revisions and additions to the tax and EBR systems as well as any changes
in the administration of the tax and EBR systems.
3
The differences in the realized elasticities of the tax and EBR systems are quite striking,
with the elasticities of the EBRs being nearly always greater than unity and the elasticities
of the revenues of the tax system nearly always less than unity. The very rapid expansion
of EBRs in 1996 is especially notable. Table 3 makes it clear that the tax revenue system,
itself, was procyclical, with taxes declining relative to output as GNP expanded. The EBRs
were strongly countercyclical, most probably because of the addition of new EBRs during
the period. The 1996 results are particularly interesting because overall growth began to
slow down in that year, which provoked the government to use offsetting economic
stimuli. Nonetheless, the rapid expansion of the EBRs tended to work against those
stimuli. That contrasts with the results for 1991, when the overall system tended to counter
the slowdown.
It has been argued that because the SOEs have been harassed and had their revenues
depleted by local exactions through EBRs, it was necessary for them to have recourse to
bank loans to maintain themselves. This recourse was, presumably, not confined to
exigencies created by EBRs, although it has been claimed that those were particularly
burdensome (Steinfeld, 1998, chap. 3). Because credit has been tight through most of the
reform period, bank loans to firms to cover both taxes and EBRs must have crowded
out other bank loans. Indirectly, therefore, the EBRs imposed on SOEs would have had a
dampening effect on loans for productive purposes.
Thus, both directly and indirectly, the EBRs have not been neutral in their macro-
economic effects, but appear to have dampened the expansion of the Chinese economy.
3
Because of the changing composition and enforcement of taxes, no econometric estimation of overall tax
and EBR elasticities is believed to be warranted.
R.S. Eckaus / China Economic Review 14 (2003) 7288 76
As long as their magnitudes were small, this effect was also small. However, as they
became a major part of the fiscal system of the Chinese economy, their influence must
have grown.
3.2. Microeconomic effects
There is a clear rationale for user fees on services supplied by public institutions to
enterprises and consumers when the services are private goods, consumed exhaustively by
the users. Of course, not all publicly provided services, including education and health, are
completely private goods. There is also a rationale for the imposition of taxes to finance
externalities, yet there is no evidence whatsoever that the extrabudgetary fees have this
function. Likewise there is no evidence at all that EBRs are used to correct market
distortions or to offset income inequalities. The Fees and Funds Administration Manual of
the Ministry of Finance in 1996 lists fees for many different types of activities, and the
tables themselves are not exhaustive. The surcharges that are added to national taxes by
provincial governments are among the largest of the fees and levies that constitute EBRs.
These are now required to be part of local government budgets as a result of the 1994 tax
reform. Because the surcharges change the effective rate of the tax to which they are
applied, they result in rates that vary among the provinces and localities and are distortions
in locational incentives. A fee may be imposed on the residents of a village to help pay for
a portion of a highway. That amounts to a localized and dedicated head tax, which creates
locational distortions. The tuition charges for children to attend school are selective taxes
on families for the education of each schoolchild, not on the community as a whole. A fee
to be connected to an electric power line is fixed charge on users. The irregular levies
imposed on corporations to pay for new public facilities may be tied to some measure of
their output, but may simply be flat fees or may be related to their profits. The fees
imposed on farmers to help support industry or on industry to help support farmers are
earmarked taxes imposed in an arbitrary manner. It appears that at the discretion of the
Table 3
Elasticities with respect to GNP
Taxes EBRs Taxes+EBRs
1983 0.873 0.953 0.887
1984 1.056 0.993 1.045
1985 4.667 1.627 4.142
1986 0.181 1.608 0.352
1987 0.138 1.131 0.276
1988 0.471 0.848 0.531
1989 1.054 1.029 1.050
1990 0.349 1.497 0.543
1991 0.362 1.221 0.520
1992 0.445 1.194 0.598
1993 0.980 1.575 1.116
1994 0.585 0.857 0.653
1995 0.766 1.254 0.896
1996 0.887 3.807 1.719
R.S. Eckaus / China Economic Review 14 (2003) 7288 77
village authorities, there may be some progression in fee rates, but there is no evidence of a
concerted effort to make the EBRs progressive.
Table 4 shows the composition of revenues of the approved EBRs in 1996. The fees
imposed by administrative units, such as highway and police departments, are far larger
than those imposed by finance departments and, among the administrative units, the
largest single category is administrative and social fees. The charge put on administrative
agencies to self-finance their own activities, expressed in the slogan eat in separate
kitchens, appears to have led them to impose EBRs on targets of opportunity. Fees to
fund specific projects and activities are, together, the next largest category.
A common complaint from both consumers and producers is that they are burdened by
the large number of EBRs that they have to pay and the costs of dealing with the number
of different government agencies that impose the fees, with each possibly requiring a
different kind of accounting statement. Perhaps the most well known example is that of the
McDonalds restaurant, formerly just off Tienanmen Square in Beijing, which was
reported to pay 31 different fees. Of these, according to a report commissioned by the
mayor of Beijing, 8 were questionable and 17 were illegitimate. The McDonalds
fees included contributions for river dredging and for flower displays, both in Beijing
(McDonald, 1997).
Another complaint is the unexpectedness of the imposition of fees because local
authorities may impose EBRs with little warning. That makes planning difficult. The
recourse of enterprises and individuals to the Ministry of Finance is distant and
questionable, particularly for an SOE, because the local government that sets the fee
may claim some degree of proprietorship over the SOE (Steinfeld, 1998, chaps. 23).
The additional information of Table 5 helps to clarify the purposes of the administrative
and social fees. The table shows that there were large surpluses of administrative and
social fees over the same type of expenditures in all the provinces except Guangdong. That
Table 4
Composition of local EBRs, 1995
Total
(billion yuan)
Share of current
EBR revenue (%)
Local finance department 17.165 8.22
Various surcharges 9.925 4.75
Centralized social programs 2.312 1.11
Specific projects 1.321 0.63
Others 3.607 1.73
Administrative units 191.727 91.78
Specific-purpose funds 12.684 6.07
Net income from services 5.487 2.63
Fees for administrative and social programs 123.169 58.96
Specific project funds 23.426 11.21
Income from elementary and high school students 3.729 1.79
Tax revenue sharing 1.637 0.78
Others 21.595 10.34
Source: Ministry of Finance Yearbook (1996, pp. 540, 541), National Bureau of Statistics, Peoples Republic of
China.
R.S. Eckaus / China Economic Review 14 (2003) 7288 78
might be explained if the provincial governments were providing private goods at prices in
excess of their costs to make profits or taxing relatively heavily for regulative purposes.
Neither explanation seems plausible. Rather, the substantial surpluses over expenditures
suggest that the administrative and social fees are, in fact, used to generate surpluses for
other purposes.
Although there is little to be said for the EBRs from the viewpoint of microeconomic
efficiency alone, political economy considerations must also be taken into account.
4
There
is a fiscal federalism argument that regional mobility of entrepreneurs and resources
will limit the ability of government agencies in any particular locality to extract taxes and
fees that are significantly different from those of any other locality (see, e.g., Oates, 1999).
4
Although the interesting paper by Bai, Li, Qian, and Wang (1999) does not try to justify the EBRs, its
arguments are relevant to an overall evaluation of the system of the EBRs.
Table 5
Administrative and social fees and expenditures across provinces, 1995 (billion yuan)
Provinces Administrative and
social expenditure
Administrative
and social fees
Surplus of fees
over expenditures
Surplus as percentage
of expenditures
Anhui 1.6932 42.15 40.4568 106.12
Beijing 8.2618 24.22 15.9582 78.73
Fujian 12.9536 34.04 21.0864 35.55
Gansu 5.1238 17.3486 12.2248 36.50
Guangdong 20.1277 11.48 8.6477 35.58
Guangxi 13.0673 48.26 35.1927 36.46
Guizhou 3.6316 14.9 11.2684 32.55
Hainan 2.5038 11.48 8.9762 18.88
Hebei 25.6949 66.48 40.7851 78.52
Heilongjiang 12.9710 36.74 23.7690 28.65
Henan 18.5897 32.9 14.3103 16.82
Hubei 7.7255 49.25 41.5245 170.29
Hunan 16.0924 99.52 83.4276 174.86
Inner Mongolia 6.7998 19.63 12.8302 46.98
Jiangsu 31.4146 100.92 69.5054 79.13
Jiangxi 7.7497 80.33 72.5803 153.37
Jilin 10.5685 31.69 21.1215 67.55
Laioning 27.0991 77.34 50.2409 96.55
Ningxia 1.0909 3.8769 2.7860 3.05
Qinghai 0.8964 5.0062 4.1098 48.04
Shandong 28.7230 55.93 27.2070 77.92
Shanghai 10.3301 41.32 30.9899 45.34
Shanxi 8.2636 40.53 32.2664 226.98
Shanxi 7.9098 20.5739 12.6641 38.64
Sichuan 21.7987 80.13 58.3313 11072.76
Tianjin 4.3468 18.96 14.6132 52.50
Tibet 0.2688 0.3151 0.0463 0.26
Xinjiang 3.0041 25.3731 22.3690 493.17
Yunnan 9.0381 33.17 24.1319 593.45
Zhejiang 22.9291 45.75 22.8209 86.22
Source: Ministry of Finance Yearbook (1996, p. 542), National Bureau of Statistics, Peoples Republic of China.
R.S. Eckaus / China Economic Review 14 (2003) 7288 79
If this were true, then the EBRs, although not contributing to economic efficiency, would
not be important because finally resource mobility and interregional competition would
make them irrelevant. Although there is significant labor mobility and even some capital
mobility in China, there is little evidence of significant interregional economic competition
or major interregional capital flows and, in any case, except for labor, factor markets are
still quite limited. So for China, the potential irrelevance of regional fiscal differences is
not yet a reality.
There is also an argument that when there is interest group politics, those groups will
effectively limit the taxes imposed on them, which, if true in China, would also make
EBRs insignificant. It is difficult to imagine any polity that does not, to some extent, have
interest group politics, even in China. But, there are few (if any) reports of the different
interest groups aligning themselves on tax policies.
Finally, suppose that efficient methods of direct taxation cannot be used to achieve
redistributive goals because of incomplete information about the activities of firms or
individuals, or because of political or institutional constraints on imposing direct taxes. In
these circumstances, indirect taxes that would otherwise be inefficient may lead to higher
levels of social welfare. Although this has never been mentioned in official statements as a
reason for the heavy reliance on EBRs in China, it may be the fundamental justification.
The national authorities can, perhaps, simply not bring themselves to impose additional
direct taxes, even though there is substantial evidence of rural protest against the local
EBRs. No final explanation for the Chinese dependence on EBRs will be attempted here,
as it would go far beyond the scope of this paper.
4. A simple econometric investigation of the sources and uses of the EBRs
The price and quantity data that would permit a careful microeconomic analysis of the
effects of EBRs on firms and individuals are not available. The official reports on the
EBRs are highly aggregated and provide virtually no details, so it is almost impossible to
penetrate below the aggregate statistics. Thus, it is difficult to put numbers on the
microeconomic effects of the EBRs on resource use and income distribution. Yet some
general inferences are possible as to the factors determining the EBRs collected and how
they are employed, using information from the sections on government finance, education,
and health in the yearbooks of the provinces of China for 1993, 1994, and 1995. These
provide a panel data set of 90 observations to which some simple econometrics were
applied to help explain the differences in the determinants and the uses of tax revenues and
EBRs.
To gain greater insight as to the sectoral incidence of both taxes and EBRs, the
components of GDP in the provinces were separated into their sources in the primary
sector, the industrial sector, and the tertiary sector. These variables were used in time
series/cross-section fixed effects regressions for tax revenues and EBRs. The results are
shown in Table 6. Except for population, all of the coefficients estimated for the
independent variables are significant in the explanation of tax revenues, although that
for tertiary GDP per capita is barely so. The estimated coefficients for primary and tertiary
GDP are negative in the tax regression, whereas industrial GDP per capita and urban-
R.S. Eckaus / China Economic Review 14 (2003) 7288 80
ization are positive. By comparison, in the regression for EBRs, only the estimated
coefficient for primary GDP per capita is positive and significant, whereas the estimated
coefficients for industrial and tertiary GDP per capita are negative and not significant. In
both regressions, the degree of urbanization is a powerful variable.
In the regression for EBRs, the significant positive coefficient on the primary industry
variable, which is mainly agricultural output, can be interpreted as lending credence to
reports that these bear particularly heavily on farmers. Another interpretation is that the
EBRs are the devices with which central and local governments tax the agricultural sector,
which they cannot do effectively with ordinary taxes, as indicated by the negative
coefficient on the primary industry variable in the regression for ordinary tax revenues.
On the other hand, as noted, how the EBRs are imposed make them likely to be, at best,
flat taxes on revenues or head taxes. The positive and significant coefficients on urban-
ization indicate that the EBRs do not fall only on rural areas. The negative coefficient on
population, although not significant, suggests that large provinces are taxed relatively less
heavily than small provinces.
The results provide some insight into the issue of the farmers burden of taxation and
EBRs, which have been a matter of special concern in China. In 1995, a set of reforms
were enacted to ameliorate this burden by eliminating several EBRs imposed on farmers.
The issue remains, as there have been reports of incidents of rural unrest sparked by the
burdens of fees and taxes.
5
Additional regressions, which will not be reproduced here, were estimated with dummy
variables for each of the provinces. These variables were often significant, indicating that
the collection of tax and EBRs were uneven across provinces even when the overall
determinants of those revenues were taken into account.
4.1. Effects of educational and medical fees
As noted, EBRs have been used by individual government agencies at both the central
and local levels to increase their financial self-sufficiency. This has in effect put prices on
the services of those agencies, which in turn raises questions about both efficiency and
Table 6
Determinants of tax and EBRs
Variables Taxes per capita EBRs per capita
Constant 64.940 (0.94) 30.485 (0.566)
Primary GDP per capita 0.089* (3.48) 0.053* (2.652)
Industrial GDP per capita 0.116* (4.35) 0.004 (0.176)
Tertiary GDP per capita 0.700* (2.16) 0.160 (0.635)
Urbanization (%) 811.929* (4.01) 501.646* (3.179)
Population (millions) 0.800 (1.01) 0.616 (0.998)
Adjusted R
2
.684 .430
t statistics in parentheses; n=87.
* Significant at 5% level.
5
See Jan. 16, 1999 report in China News Digest from South China Morning Post.
R.S. Eckaus / China Economic Review 14 (2003) 7288 81
equity in those prices. Information about these prices and their effects has for the most part
been confined to anecdotal evidence and surveys of particular provinces or localities (West
& Wong, 1995). The relative magnitudes of funding for education from government
appropriations, tuition payments, donations, payments by social organizations, and other
sources from 1991 to 1998 are shown in Fig. 1. Although government budgetary
allocations remain the largest source of funding for education, their relative importance
has declined. The share of government funding for education fell about 10% over this
period, while tuition fees and other funds rose rapidly, increasing by almost three times
in 7 years. The sources of government nonbudgetary funds are not clear, since tuition
fees are identified separately.
Fig. 2 contains data from the annual household surveys that provide further evidence on
the growth of private spending on education. As shown in Fig. 2, the share of per capita
private spending on education in total urban household expenditures increased more than
seven times from 1983 to 1989. This reflects a very high elasticity of demand for
education, as a large part of the burden of the costs of education has been shifted to
individuals.
The changing patterns of funding of health care are shown in Fig. 3. Government
expenditures have been relatively constant, whereas health society expenditures and
private urban and rural expenditures have all grown relatively rapidly. It is striking that
private expenditures and social insurance payments are now much larger than current
government expenditures on health care. The rapid growth in the share of total household
expenditures on medicines and medical care are also shown in Fig. 2. Again, this might be
explained by income changes if the income elasticity of personal demand for medical
services were much greater than unity. If this elasticity is around unity or slightly higher, as
Fig. 1. Sources of Educational Expenditures, per cent.
R.S. Eckaus / China Economic Review 14 (2003) 7288 82
is commonly thought, income increases alone would not account for the large increase.
Thus, the increase in household expenditures on health care also reflects a shifting of the
cost burden.
Fig. 2. Medical and educational shares in rural and urban per capita household expenditure.
Fig. 3. Composition of health and medical expenditures.
R.S. Eckaus / China Economic Review 14 (2003) 7288 83
To provide some overall insights, provincial data for the years 1993, 1994, and 1995 have
been used again in simple panel regressions of 90 observations to investigate the significance
of private payments for both education and medical care. First, in the regressions for
education, three indicators of provincial educational quality are used: the elementary
student/teacher ratio, the secondary student/teacher ratio, and the rate of progression of
students from primary to secondary schools. The independent variables are government
appropriations for education in each province, tuition payments, donations, contributions of
social organizations, all on a per capita basis, and the degree of urbanization of each
province. The donations and social contributions variables are open to suspicion
because of reports that these payments are often in effect ad hoc taxes or, when they are
intergovernmental transfers, they are financed to some degree by EBRs.
As shown in Table 7 the negative coefficients on government appropriations indicate,
as would be expected, that higher levels of these appropriations are associated with lower
student/teacher ratios at both the primary and secondary school levels, but they are also
associated with a lower rate of progression of primary students to secondary schools. This
suggests that government appropriations are concentrated on primary schools that have
higher rates of enrollment. This could not be checked because government appropriations
data were not available separately for the different school levels. It seems odd, however,
that higher per capita levels of tuition are associated with higher student/teacher ratios. In
Table 7
Determinants of primary and secondary educational quality
Variables Elementary
student/ratio
Secondary
student/ratio
Primarysecondary
progression
Constant 27.049* (19.91) 18.212* (21.87) 85.591* (29.24)
Government appropriations 0.013 (1.53) 0.012 (1.74) 0.055* (3.92)
Tuition 0.216* (3.29) 0.208* (4.42) 0.385* (3.39)
Donations 0.079 (1.75) 0.149* (3.55) 0.065 (1.02)
Social organizations 0.062 (0.67) 0.047 (0.55) 0.172 (1.30)
Urbanization 20.773* (4.21) 13.197* (4.02) 23.350* (2.51)
t statistics in parentheses; n=87.
* Significant at 5% level.
Table 8
Determinants of the quality of health care
Variables Medical personnel
per capita
Hospital days
per capita
Bed turnover
Constant 0.002* (8.11) 13.501* (36.49) 15.890* (29.71)
Government expenditure 53.4e06* (3.39) 0.073* (2.99) 0.026 (0.75)
Urban private expenditure 3.5e06 (1.39) 0.013* (3.28) 0.002 (0.32)
Rural private expenditure 3.3e06 (0.58) 0.015** (1.68) 0.029* (2.33)
Social insurance payments 7.1e06* (3.52) 0.036* (11.43) 0.021* (4.59)
Urbanization 3462e06* (7.45) 1.668* (2.31) 1.859** (1.78)
Adjusted R
2
.710 .808 .331
t statistics in parentheses; n=87.
* Significant at 5% level.
**Significant at 10% level.
R.S. Eckaus / China Economic Review 14 (2003) 7288 84
general, urbanization is significantly associated with higher quality schooling, another
suggestion of the uneven treatment of urban and rural areas.
A similar econometric exercise was carried out for indicators of the quality of health
care: medical personnel per capita and hospital days per capita, with government
expenditures, urban and rural private expenditures, social insurance payments
6
, and
urbanization used as right-hand side variables. Government expenditures were signifi-
cantly associated with increased numbers of medical personnel per capita, but decreased
hospital days per capita. Urban private expenditures were negatively associated with both
dependent variables, but only the coefficient for hospital days per capita was significant.
Table 9
Revenues from sale and lease of land as percentage of total provincial revenues
Provinces Land revenue/
total revenue
(%)
Land acquisition
fees/land revenue
(%)
Development
fees/land
revenue (%)
Lease fees/
land revenue
(%)
Other fees/
land revenue
(%)
Total 8.85 18.87 13.63 51.86 15.63
Anhui 3.6 15.1 9.15 70.96 4.79
Beijing 21.23 0.69 0.03 99.19 0.1
Fujian 5.56 35.03 16.96 46.65 1.36
Gansu 2.24 25.99 6.13 60.49 7.39
Guangdong 9.83 11.65 16.71 56.38 15.25
Guangxi 7.65 17.78 23.15 9.69 49.38
Guizhou 5.12 17.65 6.18 74.55 1.62
Hainan 40.54 23.21 20.08 53.61 3.1
Hebei 4.85 47.94 29.89 18.27 3.9
Heilongjiang 1.59 4.88 0.02 94.25 0.85
Henan 5.01 25.2 6.71 65.09 3
Hubei 4.4 22.13 4.77 68.35 4.75
Hunan 7.58 33.66 31.49 25.83 9.02
Inner Mongolia 1.25 60.7 0.21 35.26 3.83
Jiangsu 7.79 0 0 100 0
Jiangxi 1.5 19.12 8.45 62.75 9.68
Jilin 7.81 13.54 38.36 30.28 17.81
Liaoning 6.94 37.43 45.78 16.79 0
Ningxia 2.77 56.58 7.92 35.47 0.03
Qinghai 2.35 7.63 0 92.37 0
Shaanxi 4.59 18.41 1.29 79.27 1.04
Shandong 7.81 48.79 6.66 42.05 2.5
Shanghai 19.26 1.24 3.58 33.48 61.69
Shanxi 5.48 37.42 6.42 55.67 0.49
Sichuan 3.15 30 29.8 36.45 3.75
Tianjin 9.97 4.35 12.9 80.62 2.12
Tibet 7.44 0 0 20.95 79.05
Xinjiang 2.8 5.85 2.04 90.66 1.46
Yunnan 2.42 36.42 14.58 45.56 3.44
Zhejiang 31.89 34.95 20.29 38.08 6.68
Source: China Statistical Yearbook (1997, p. 7), National Bureau of Statistics, Peoples Republic of China.
6
These payments are from pensions, welfare payments to retirees, and health insurance by employers,
mainly SOEs.
R.S. Eckaus / China Economic Review 14 (2003) 7288 85
Rural private expenditures were positively associated with both indicators of health care
quality, but only the coefficient for hospital days per capita was significant. The health
insurance payments were positive and quite significant for both health care indicators as
was urbanization (Table 8).
Overall, the econometric results for both education and health care suggest that on the
margins, both education and health care, which were notable achievements in prereform
China, when not damaged by disruptive policies such as the Great Leap Forward and the
Cultural Revolution, have, to a considerable extent, become fee-for-service systems.
4.2. Off-off budget land revenues
There is little information about the composition and magnitude of the so-called OBRs.
As noted, they include both revenues from land sales and rentals and income from
activities under the direct control of governments, as distinguished from incomes from
SOEs, which are separate entities, although still responsible to central and local govern-
ments. However, the 1997 edition of the China Statistical Yearbook included a table
showing the revenues of the provincial governments from selling, leasing, and otherwise
allowing the use of state-owned lands. The main features of this table, converted to shares
of each provinces total revenues, are shown in Table 9. It is clear that land revenues are, in
total, a substantial part of total revenues, and in four provinces they were almost 20% or
more. In 13 provinces, the ratio is less than 5%. Thus, the provinces differ greatly in the
degree to which their revenues are from land sales, lease, development, or other uses.
Although the information is available only for 1996, there is nothing in the data to suggest
that the year is unusual, because the practice of depending on these revenues is so
widespread among the provinces.
5. Conclusions
The data clearly indicate that EBRs and OBRs have become an increasingly important
part of the fiscal system of China. Yet, there is little to be said in favor of these significant
features of Chinas fiscal system except for the questionable virtue that they have been
easy to impose and use. From a macroeconomic point of view, perhaps their worst feature
is that although there have been attempts to bring them into the regular budgetary process,
they remain largely outside the regular fiscal systems of the national and provincial
governments. That means that they cannot be part of the overall fiscal budgeting at the
national or local levels. Ex ante, they are not part of the projections of revenues at the
national or local levels and, ex post, they are not fully accounted for. In addition, the EBRs
have been strongly countercyclical or countergrowth. The imposition of EBRs by local
governments are reported to have forced the SOEs to have recourse to bank loans to
maintain their operations. These loans crowd out other types of credit and, as they
accumulate, their repayment is beyond hope, adding to the bad debts and weaknesses of
the banking system.
There is little hard evidence on the microeconomic impacts of the EBRs and OBRs and
their effects on efficient resource allocation. However, they are suspect on a priori
R.S. Eckaus / China Economic Review 14 (2003) 7288 86
grounds. When the EBRs are users fees, they are typically not related to costs, either
direct or indirect, or to market valuations. They are often applied arbitrarily and the
suspicion of association with local corruption hangs over them. The econometric evidence
presented here indicates that the EBRs impact the rural sectors particularly heavily. That
may, to some extent, be justified by the lack of success of the government in applying
conventional taxes to the rural sector, but the complaints of perversity and multiplicity are
warranted.
The application of EBRs to social services as flat fees suggests that they are inequitable
in their impacts. The imposition of fees, which are part of the EBRs, has transformed the
educational and medical systems into fee-for-service systems. On the margins, the EBRs
have become more important than tax revenues in supporting primary and secondary
education and the health system as well. That is consistent with other evidence that the
EBRs are regressive in their incidence.
The OBRs are even more mysterious. Although they have become a significant part of
the total revenues of local governments, their sources, uses, and economic effects appear
not to be fully documented, either in the public record or by fiscal authorities.
The overall conclusion is that the Chinese fiscal system has become heavily dependent
on a set of revenue sources that are arbitrary and inefficient and often regressive and
inequitable and whose application contributes to the instability of the banking system. The
heavy dependence of the Chinese fiscal system on these revenues must certainly be one of
the major problems to be faced in further economic reforms. The problem can only be
resolved in the context of major revisions of the fiscal system because, if the EBRs and
OBRs are phased out, the funds that they provide must be replaced from other revenue
sources.
6. Uncited references
Becker & Mulligan, 1998
Jin et al., 1999
Wong et al., 1995
Acknowledgements
The author is indebted to Elaine Liu for her assiduous and resourceful assistance and to
two anonymous readers for useful comments.
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