Fiscal relations between Shanghai and the central government

Compared with other provinces and municipalities, Shanghai’s fiscal remittances to the coffers of the central government have always been substantial. It is estimated that as much as one-sixth of total central government revenue used to originate from Shanghai. Some have attributed the relative economic decline of Shanghai during the 1980s to the excessive fiscal contribution of the municipality. Ironically, while Shanghai suffered a fiscal squeeze in the 1980s, it is also believed that Shanghai’s contribution to the central government declined rather rapidly during the 1980s. Did Shanghai decline economically, therefore leading to a shrunken contribution to the central government; or did the onerous tax burden on Shanghai imposed by the central government lead to Shanghai’s relative economic decline? Did Shanghai’s revenue contribution to Beijing 北京 in fact decline? It is the purpose of this chapter to demonstrate the complicated nature of intergovernmental fiscal relations in a planned economy, which certainly cannot be easily summarized by one or two statistics like remissions to the central government. We shall argue that Shanghai’s apparent fiscal contribution to the central government in the pre-reform era was archived with a great loss of efficiency. Economic reforms which apparently led to Shanghai’s loss of fiscal prowess actually offered the first opportunity for Shanghai to contribute positively to the development of the rest of the country. The next section will provide a historical review of Shanghai’s fiscal relations with Beijing. It will be followed by a discussion of the impact of the economic reforms on Shanghai’s fiscal relations with the central government and how this has affected Shanghai’s economic development. Then, Shanghai’s fiscal crisis and fiscal relations during the reform era will be traced. Finally, the chapter will conclude with a favourable preview of the prospects confronting the country in the second half of the 1990s.