Centralization and Decentralization in China's Fiscal Management

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Abstract
Dr Lardy (in The China Quarterly, No. 61, March 1975) denies that the economic decentralization of the late 1950s impaired the ability of the central government to control allocation of economic resources. If such impairment had occurred, he argues, “ More developed provinces with high remission rates in the period before decentralization would have vastly greater resources at their disposal which they could use to maintain or increase the level of health, education and welfare (HEW) services they provided to their populations. Because provincial remittances would be reduced the central government could no longer subsidize areas previously dependent on net central government subsidies. Thus I hypothesize that the level of HEW expenditures in these areas would decline after decentralization as compared with the previously less dependent provinces. Similarly I hypothesize that the share of total national investment in provinces with proportionately greater fiscal resources would have increased sharply while the investment shares of the less developed provinces would have declined” (pp. 33 and 36). Dr Lardy's calculations indicate that “the dependency variable is significant but its effect is exactly the opposite of that predicted by the ‘decentralization hypothesis.’ That is, provinces that were more dependent on the central government prior to 1958 experienced larger increases, on the average, than did the less dependent provinces” (p. 38). “These tests,” he continues, “do not support the view that the decentralization measures transferred resource allocation power to provincial governments ”(pp. 38–39). Dr Lardy draws the conclusion that “ The central government's continued control of the fiscal system assured that the level of social services provided in the less developed provinces did not decline compared to more developed regions.”

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