would be able to keep the amount of taxes that, a local government would be able to
keep the amount of taxes that it raised in years two and three.
Because it would have to give the level.
The first year was kind of fixed, and
that was the fixed level that it would have to remit.
So they were really fantastic opportunities for
local governments to make money.
And the local governments still at various levels, province,
city as we were talking about even down to the township, right, and the village.
They had enterprises, and so
they had a strong incentive to promote economic development and entrepreneurship,
because they would get the taxes, the tax base, from these firms.
And so what we see is between 1978 and 1995,
the central governments share of the revenue dropped
dramatically from 33.8% to 10.8%.
Now overall the central government was still getting more money,
because the economy continued to grow.
But if you look at the share of GDP that went to the central government and
the amount that went to the local government, the local governments
were getting a lot more money, and they were hiding that money.
The way they hid it was through what we called extra-budgetary funds.
So these local governments would report a certain amount within their budget,
and then hide the surplus in extra budgetary funds.
And I recall going down to visit when I was doing my field research once.
I went down and I was talking to some local officials, and
they told me that in fact the amount of money in the extra-budgetary fund
that the central government didn't get its hands on, was larger than the amount
of their budgetary funds, which the central government could tax.
Now this situation became somewhat intolerable with so
much money being in the hands of the local government.
And the central government really starting to, to feel that it was losing control.
And so in 1994, the then Vice Premier, I think the slide says Prime Minister,
but at that point he was a Vice Premier, Zhu Rongji.
He introduced a new system, where he sat down with the Provinces and
renegotiated their tax level, and so
he increased the taxes paid by the Province to the central government.
And then the Province looked at the level below them to municipality,
the municipality looked down.
And everybody started to put greater pressure on
governments at the local level.
Furthered the one level below them to start to cough up the money
that was in their extra-budgetary funds.
And in this way the money started to move up the system.
And so what in fact followed,
was that many local governments actually became impoverished.
And we know that many of them could not even pay teachers salaries.
And, unfortunately, at the same time the central government decided to impose new
tasks on local officials, running schools, they wanted
to re-establish a healthcare program that had ended during the reform period.
They wanted new roads, so they put pressure on local governments,
gave them these responsibilities without giving them a chance to raise more money.
And in fact was taking money away from them.
And so local officials had no real choice but
to start to impose what were called arbitrary taxes.
And the peasants saw as illegal fees on the peasants, for activities such as
slaughtering pigs or chickens, or the local government was told to build a new
road, where they want to build a new road they have no money, what did they do?
They went around to all the villagers and they said a-ha.
You know, everybody has to give us a certain amount of money so
that we can afford to build the road.
And these financial burdens, and the improper behavior
carried out by the officials really led to an upsurge in rural protests.
And so we see this very much in the 1990s.
And it really becomes a problem.
And a degree of instability started to emerge in the countryside,
because of this policy.
Nevertheless, from the overall national perspective it didn't work out to
badly for Beijing, because the re-centuralization of taxes put
a lot more money in their hands, and they were able to invest in infrastructure.
Railroads, harbors, and
other public facilities that are really important for a modern economy.
And if you look at China today, in the last 10 years everybody talks about
high-speed railway, and harbors, and all this stuff.
And as we'll see later on, it really was beneficial for
China as they tried to move into the export sector as well.
So the Hu Wen, Hu Jintao and Wen Jiabao during
their period when they were running China from about 2002 to 2012.
They were able to spend more money in a way a kind
of redistribution of wealth, putting more money back in the countryside.
And particularly spending more money up in Northeast China,
which had become a kind of rust belt.
The enterprises up there had become old.
The workers had been laid off, right, and they needed to reinvigorate this area.
And all of a sudden, the central government had the money to do it,
because previously, they didn't have it.
Even more fortuitous, even more beneficial for Beijing and
for the central government, was when 2008 came along and
there was the global financial crisis.
The central government had all kinds of money.
And they had in fact invested $4 trillion RMB, the equivalent of just about
the same as the United States spent in it's a stimulus package, $585 billion.
But they could do it really quickly because they had the money.
They didn't have to get the money from Congress like President Obama did.
They had the money and they just pushed that money out, and
started to develop more and more of the economy.
Some of the money went into the rural areas, and
overall they were able to avoid falling into this huge financial crisis.
