The political economy of China's 1994 fiscal reform

China's reform has attracted widespread attention among scholars of economic transitions. A major reason for interest is the style of Chinese reform, which follows the gradualist approach as opposed to the "big bang" approach practiced in Eastern Europe and Russia. During the course of Chinese reform, reform policies for specific economic sectors were introduced at different times and at a different pace. This research argues that China's economic reform is also capable of important example of radical policy overhaul. Fiscal decentralization in the 1980s caused both the phenomenal economic growth and the centrifugal forces that had been developing in China. However, fiscal decentralization was suddenly abolished at the end of 1993 and in it place a centralized fiscal regime was established in 1994. The goal of this reform was to strengthen the fiscal position of the central government. As result of this reform, the central government was able to increase its share of total revenues from 38% in 1993 to 55% in 1994. Obviously the 1994 fiscal recentralization represented a major policy change.
This paper studies the policy making of the 1994 fiscal reform. The first part explores the problems of fiscal decentralization that characterized the earlier years of reform. It then examines the major policies of the recentralization package. The second part tries to explain how such a major policy change was pushed through the decision making system of China. Three factors are emphasized in this policy change: learning by policymakers, political realignment among central leaders, and the role of crisis situation. The conclusion assesses the consequences of the 1994 fiscal recentralization, especially its impact on the central-local relations and the future of Chinese politics.