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Informal institutions and financial burdens in rural China

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Title:
Informal institutions and financial burdens in rural China
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Smith, Michael Kevin
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English
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vi, 86 leaves : ; 28 cm

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Subjects / Keywords:
Informal sector (Economics) -- China ( lcsh )
Local government -- China ( lcsh )
Informal sector (Economics) ( fast )
Local government ( fast )
Rural conditions ( fast )
Rural conditions -- China ( lcsh )
China ( fast )
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bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )

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Bibliography:
Includes bibliographical references (leaves 84-86).
General Note:
Department of Political Science
Statement of Responsibility:
by Maichael Kevin Smith.

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|University of Colorado Denver
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ocn436869518
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LD1193.L64 2009m S54 ( lcc )

Full Text
INFORMAL INSTITUTIONS AND
FINANCIAL BURDENS IN
RURAL CHINA
by
Michael Kevin Smith
B.A., University of Colorado, Denver, 2003
A thesis submitted to the
University of Colorado Denver
in partial fulfillment
of the requirements for the degree of
Master of Arts
Political Science
2009


2009 by Michael K. Smith
All rights reserved.
i


This thesis for the Masters of Arts
degree by
Michael K. Smith
has been approved
by
Stephen Thomas
Chen Ji
ii


Smith, Michael K. M.A., Political Science
Informal Institutions and Financial Burdens in Rural China.
Thesis directed by Stephen Thomas
ABSTRACT
Rural unrest has been a major concern for the Chinese central government, as recent data
provides evidence of increasing discontent between villagers and local-level governments.
The cause of much of the discontent has been the increasing charges that villagers are
subjected to, in the form of formal central taxes and informal local fees, fines, and levies,
that together are often excessive and unrealistic for villagers to pay.
As local-level administrative duties have increased as a result of the decentralization
reforms, local-level officials have been forced to generate sufficient revenue to provide
public services and to meet development targets mandated, by the central government.
However, revenue in agriculture dependent regions has been scarce, and therefore local
officials have used their tax authority by extracting excessive and extra-legal amounts of
fees and levies to fund local level projects. In addition, many predatory officials have
abused their tax authority by embezzling or misappropriating public money and failing to
perform their assigned duties. In the 1990s the central government created institutional
changes in order to enhance local-level efficiency and to alleviate villager burdens. In
2003 the central government eliminated all local-level fees. The institutional reforms have
reduced local-level fiscal autonomy and made local governments more dependent on
revenue remittances from upper-level governments. These attempts to restructure
opportunities and incentives for corrupt behaviors have failed because upper-level fiscal
transfers have been unreliable and because local-level accountability and oversight
institutions have been inefficient due to Party and state particularistic interests. Officials at
higher-levels have manipulated elections in order to get compliant candidates who will
contribute to protection networks and by Party officials who seek to ensure Party control.
The cadre management system has been characterized by clientelism and cronyism in the
recruitment and promotion system. Without more central involvement in local-level
accountability and oversight, local governments will continue to govern through informal
means that will most likely hinder economic development and contribute to state-society
unrest.
This abstract accurately represents the content of the candidates thesis. I recommend its
publication.
Signed
Stephen Thomas


ACKNOWLEDGMENT
I wish to thank my advisor, Stephen Thomas, and my committee for their contributions and
guidance in my research. Also, I would like to thank Brian Geddes and Ralph Routon for
their numerous edits and ideas throughout the writing of this thesis.


TABLE OF CONTENTS
CHAPTER
1. INTRODUCTION.........................................................1
Purpose of the Study.............................................5
Arrangement of the Thesis......................................7
2. ANALYTICAL FRAMEWORK................................................13
Formal vs. Informal Institutions................................13
Why Informal Institutions are Created...........................17
3. POLITICAL, ADMINISTRATIVE, AND FISCAL
REFORMS IN RURAL CHINA.............................................23
Administrative and Political Decentralization...................23
Fiscal Institutional Reforms....................................26
The 1980s and The Household
Responsibility System...........................................26
1994 Fiscal Reform..............................................28
4. FISCAL REFORMS AND INFORMAL
INSTITUTIONS.......................................................33
Villager Burdens................................................34
Lack of Local Autonomy........................................38
Lack of Fiscal Incentives.....................................39
Policy Targets ...............................................42
Extra-budgetary Revenue and
Chinese Criminal Law............................................44
Tax-For-Fee Reform..............................................47
IV


5. ACCOUNTABILITY AND OVERSIGHT
50
Informal Rules and the
Cadre Management System........................................51
Monitoring and Disciplining..................................57
Democratic Accountability......................................58
Bureacratic Interference
In Village Elections.........................................64
Pre-election Procedures......................................65
Election Procedures..........................................66
Lack of Leverage.............................................70
Bureaucratic Monitoring, Discipline
And Punishment.................................................72
6. CONCLUSION, IMPLICATIONS AND
RECOMMENDATIONS....................................................74
BILBLIOGRAPHY ..............................................................81
v


TABLES
Table
3.1 Number of administrative units in the Chinese Government........................25
4.1 Chargers extracted from villagers contributing to financial burdens.............37
VI


CHAPTER 1
INTRODUCTION
In the 1980s Chinas central government implemented reforms that
decentralized local-level administrative, political, and fiscal duties. The reforms
were designed to provide more local level autonomy and to improve efficiency in
local governance. Throughout the 1980s local officials were the tax authority, but
as embezzlement and misappropriation of public funds became widespread, the
central government responded. The 1994 rural tax reform created a new set of
rules and procedures designed to ensure that local officials govern with more
discretion by recentralizing the authority to set tax bases and rates through a rule-
based system of revenue transfers, while requiring village and township officials
to fund their own expenditures through alternative, or informal means. The fiscal
reform followed the 1993 Law on Agriculture, which was designed to alleviate
financial burdens on farmers by limiting the amount of township and village
extractions to 5 percent of the previous years net income. As long as revenue is
generated within legal limits, local officials are allowed to levy fees and impose
fundraising drives.
The rural tax reform has made local governments more dependent on
fiscal transfers from above and on informal institutions of public finance to meet
expenditure requirements. However, the lack of formal rules to administer fiscal


transfers, and the absence of effective oversight of extra-budgetary extraction, has
subjected villagers to inefficient local governance characterized by corruption and
poor investment, resulting from attempts by local officials to generate revenue for
unfunded mandates from higher-level governments. Local level officials have
responded to inefficient formal institutions by creating informal rules in order to
achieve personal gains or to meet development mandates by the central
government. However, many of the informal rules created by local officials have
hindered local level elite-mass relations because local government officials are
imposing heavy financial burdens on villagers that are not sanctioned by the
central government.
This paper will analyze the institutions created to facilitate administrative
and fiscal efficiency between national and sub-national governments, and the
informal rules created by local officials in order to achieve local government or
personal goals. The institutions created by the central governments fiscal policy
have left less-developed regions of China scrambling for revenue sources, while
providing opportunities for predatory local officials to operate undetected because
of weak monitoring and accountability institutions.
The Chinese Ministry of Civil Affairs reported 87,000 protests of various
kinds in 2005, a six percent increase over 2004. Just a decade earlier, there were
only 10,000 cases reported. The increase is partly the result of policy-based


resistance by villagers attempting to defend their legitimate rights and interests.
More specifically, citizens are resorting to alternative behaviors because local
officials have imposed extra-legal or excessive taxes, fees, and fines, known as
villager burdens. Villager burdens have increased throughout the reform period
and are made possible by the decentralization reforms that the central government
implemented in the 1980s.
Through the reforms, local level officials have been granted the ability to
generate extra-budgetary revenue for public goods and services provision and
economic development mandates from the central government. But the ability to
generate extra-budgetary revenue to finance administrative projects has also
enabled local officials to impose predatory financial exactions on villagers
because there is no budgetary oversight of these funds. Officials in resource-
deprived regions have imposed excessive fees in order to generate sufficient
revenue to provide goods and services, because the central government has set
standardized tax bases and rates without considering revenue constraints in poorer
regions, and without providing reliable fiscal transfers.
Revenue shortages are not the sole incentive for excessive and extralegal
taxation. Because the funds are not subject to oversight though auditing work,
many officials are able to divert revenue away from public goods and services
provision and misappropriate the funds into unproductive investment schemes, or
3


into their pockets. In assessing these behavior patterns in the context of Chinese
criminal law, embezzlement of public assets, misuse of public funds, and
malfeasance of taxation all fit the definition of corruption. However,
anticorruption efforts are hindered by institutional overlap and bureaucratic
interference through patron-client and collusive behaviors, and therefore
enforcement has been ineffective.
The central government has failed to acknowledge the need for
institutional change in its fiscal policy to allow for more local level autonomy in
fiscal matters such as tax rates and bases. The central government has instead
attempted to restructure incentives by program elimination. The tax-for-fee
reform eliminated all local fees and taxes, therefore making local officials totally
dependent on upper-level units for assistance.
The central government created village elections' as a means of bottom-up
accountability to supplement the cadre responsibility system, a top-down
mechanism. However, local officials have manipulated the procedures of both
fiscal and electoral reforms through informal rules that essentially keep them in
power by doctoring accounting books and undermining electoral institutions
through bribery and procedural interference. By institutionalizing bottom-up
1 Through the Organic Law of Villagers Committees (drafted in 1987 and
mandated in 1997) villagers committees are popularly elected by villagers
through formal procedures and institutions.
4


accountability procedures, the central government assumed that local officials
would be accountable to the local populations, and therefore provide incentives
for local officials to govern more ethically and efficiently. In this paper, I will
argue that the formal institutions that have accompanied the administrative and
fiscal reforms have been insufficient at reducing incentives and opportunities for
corrupt behaviors and that because of weak accountability and oversight, local
official predation and financial burdens are likely to continue.
The 1994 rural tax reform created a new set of rules and procedures
designed to ensure that local officials govern with more discretion by
recentralizing the authority to set tax bases and rates through a rule-based system
of revenue transfers, while requiring village and township officials to fund their
own expenditures through alternative, or informal means. The fiscal reform
followed the 1993 Law on Agriculture, which was designed to alleviate financial
burdens on farmers by limiting the amount of township and village extractions to
5 percent of the previous years net income. As long as revenue is generated
within legal limits, local officials are allowed to levy fees and impose fundraising
drives. The rural tax reform also made local governments more dependent on
fiscal transfers from above and informal institutions of public finance to meet
expenditure requirements. However, the lack of formal rules to administer fiscal
transfers, and the absence of effective oversight of extra-budgetary extraction, has
5


subjected villagers to inefficient local governance characterized by corruption and
poor investment, resulting from attempts by local officials to generate revenue for
unfunded mandates from higher-level governments.
Accountability institutions have been ineffective because local officials
have created rules with diverging goals from the intended goals of the central
government, therefore hindering the legitimacy of both democratic and
bureaucratic accountability institutions. Village elections were introduced by the
central government in 1987 to supplement the cadre responsibility system, an
institution that requires supervision of policy target fulfillment by each level of
government over the level directly below. In theory, villagers are now able to
hold officials responsible, through a formal channel, for imposing financial
burdens or for failing to provide essential services. In practice, informal
institutions have developed in the bureaucratic accountability institutions, as
officials up and down the hierarchal structure collude to gain and retain access to
the markets. The opportunity to benefit from these rules has caused an increase in
procedural interference in village elections. Bribery and other questionable
practices in the nomination and electoral processes have resulted from the
informal behaviors of the participation institutions. The corruption that exists in
elections, and the embezzlement, misappropriation and negligence by local level
6


officials, has left governmental institutions in disarray throughout much of rural
China.
For the most part, the victims of official behavior have been the half
billion villagers who reside in what Kevin OBrien (1997) refers to as paralyzed
villages, and Thomas Bernstein and Xiaobo Lu (2000) refer to as agricultural
regions, because it is in these locales that are dependent on agriculture that
financial burdens are at their heaviest. County, Township and Village officials
impose heavy financial burdens on villagers because the fiscal reforms resulted in
a decrease in revenue, and left officials desperate to fulfill quotas without
assistance from above, and because accountability and enforcement remain weak.
Analyzing the role of informal institutions in rural China during the
reform period is important in understanding the obstacles for Chinas economic
development. First, informal institutions create networks and channels for
behavior patterns deemed to be corrupt by international standards. Reducing
corruption has remained a priority for the central government because of the
threat that excessive corruption poses to the legitimacy of the CCP. Corruption
exposes the weaknesses in state capacity and, when these weaknesses become
clear to citizens, regime durability is hindered (Sun 2004). When corruption is
not addressed, informal institutions subvert formal institutions, creating an
informal political system that lacks norms and social order (Manion 2004). Since
7


the onset of the reforms, the central government has created policies accompanied
by institutions to drive behaviors through formal rules. However, officials who
seek to gain access to local resources through election into public office by
creating informal rules to achieve these goals have been able to manipulate
accountability institutions to benefit their interests. Once in office, local officials
often collude with officials at higher levels of government to doctor accounting
records in order to continually impose excessive fees considered beyond the
legally sanctioned amount allowed (Tsai 2007).
Secondly, informal rules are undermining the economic growth objectives
of the central government by governing with self-interest. Strong local
governments led the way during Chinas during the early reform period in terms
of economic and capital development. The industrialization process that China
underwent in the 1980s and 1990s was paid for by rural agriculture and since
then, creative local officials have attracted township and village enterprises,
which have been responsible for much of the continued economic growth in
coastal regions. For these reasons the Chinese state has been described as a
developmental or entrepreneurial state. However agriculture dependent regions
have been characterized by informal rules created by local-level officials that
enable behaviors that resemble a predatory state. As local-level officials continue
to extract excessive and extra-legal fees and charges while investing in
8


unproductive businesses and malice behavior such as fraud and embezzlement,
Chinas future economic development is in jeopardy.
Lastly, financial burdens have been a major source of contention since the
reform period began, leading to protests and large-scale riots by villagers. The
rural unrest is arguably the most legitimate threat the CCP has dealt with during
the reform period, because the capacity to control their agents is called into
question. The central governments attempts to reduce incentives for local
officials to impose heavy burdens have been ineffective, because policies such as
the 1994 tax reform fail to address the real causes of the excessive tax and fee
extractions. The failure of the tax assignment system to address regional
disparities in resources has led to heavier burdens on poor farmers, because the
central government has not provided sufficient top-down revenue packages and
has failed to allow for tax rates and bases to be adjusted for poorer locales.
Therefore, the increasingly regressive nature of rural taxes and the heavier
burdens on agriculture dependent regions has persisted, as many local officials
have to rely on informal taxation. As regional and urban-rural income disparities
continue to widen, protests and riots are likely to continue.
This thesis will be divided into four chapters to assess how the fiscal and
political reforms have made informal institutions more attractive to local officials.
Chapter 2 will provide the analytical framework for the discussion of informal
9


institutions. The study of informal institutions is a relatively new field in the
social sciences that approaches the study of institutions from a perspective that
informal rules are created by local actors that have diverging intentions and
outcomes to those of formal institutions-some that enhance local level efficiency
and some that severely hinder both efficiency and elite-mass relations.
Chapter 3 will discuss the evolution of Chinas policy reforms, with an
emphasis on the fiscal reforms that were designed to enhance central-local
efficiency and to reduce incentives and opportunities for corruption by local
officials. Since introducing the decentralization reforms, the Chinese government
has been forced to adapt to numerous institutional structure issues. While
retaining a Leninist system, China first decentralized tax authority, then
recentralized it because of local-level abuses. In addition they have implemented
bottom-up accountability institutions in the form of village elections to
supplement the bureaucratic oversight provided in the cadre responsibility system.
These changes have been made to limit opportunities for corruption and official
malfeasance and to protect villagers from coercive behaviors by officials.
Chapter 4 will analyze the informal rules created by local officials in
response to the formal institutions created by the 1994 fiscal reform. Informal
rules have been the catalyst for financial burdens on villagers, but the reasons for
creating informal rules are the primary focus of the chapter. Because of the fiscal
10


reform local officials have found their jobs increasingly difficult to perform due to
the increase in central development mandates and decreasing sources of revenue
to carry out the ambitious projects contained therein. As a result, many local
officials have been forced to subject villagers to excessive financial extractions in
the form of fees and levies to generate adequate revenue. Because local officials
lack the ability to adjust the tax bases to reflect regional needs, their opportunities
are limited. But for many local officials, informal rules are created to increase
opportunities and incentives to behave with unethical or morally questionable
goals. As local officials have been granted access to local markets and property
rights to local revenues that are deemed local, informal institutions have been
created to line officials pockets with revenue intended for development projects
or public goods and services provision or for the central government.
Chapter 5 will discuss the ineffective accountability and oversight that has
enabled local officials to continue to impose financial burdens on villagers. The
access to markets that has accompanied political office since the reforms began
has provided incentives to retain office at all costs for personal gain. As a result,
party and government officials have resorted to whatever actions necessary to
gain and retain power through the institutions created to attract and retain high
performing officials. The cadre responsibility system has failed to curb arbitrary
fee extraction, because there are not adequate incentives for local governments to
11


perform supervision over subordinate units, and because officials from any two or
three levels of government collude to misreport data that is passed up to higher-
level governments. The doctored data is designed to make the fee extraction
appear within the legally sanctioned 5 percent of the previous years average net
income. Democratic institutions have not worked because election procedures
lack transparency, and because of bureaucratic meddling in the form of bribes.
Policies are implemented on a selective basis according to costs and benefits at
provincial, county and township levels.
The behaviors explored in this analysis are those of the peasantry (which I
refer to as villagers) and local-level leaders, particularly at the county, township
and village levels. John Bums (1988) defines peasants as, people living in
Chinas villages, both suburban and rural, whose primary occupation is
cultivating the land or engaging in subsidiary occupations, such as brick-making,
handicrafts, trading, or livestock breeding. It is important for the analysis to
mention that, since the economic reforms began, villager roles have drastically
changed. Because of the household responsibility system, millions of villagers
are now employed in industry, animal breeding, commerce, and service trades,
while still being tied to the land through household registration procedures. The
changes in employment are substantially related to the growing discontent in rural
12


China, because villagers now stand to benefit from leaders who are
administratively and fiscally responsible.
13


CHAPTER 2
ANALYTICAL FRAMEWORK
Formal vs. Informal Institutions
States with the capacity to implement and enforce their policies are
characterized by strong institutions, which are able to constrain and influence
public behavior (Sun 2004). Institutions enhance and guarantee norms and
practices between citizens and state organs to make decisions more predictable.
Simply stated, institutions constrain political behaviors of officials and agencies at
all levels of government. Institutions are usually created or transformed as a
result of revolutions, wars and other national crises. Constitutions, which
establish formal rules and norms for governments to follow, are usually created at
the conclusion of war or revolutions to establish formal institutions for the new
government. For example, the United States constitution was created shortly after
the conclusion of the American Revolution to establish the roles and relationships
between the three branches of government.
Institutions are regularized patterns of interaction that are known,
practiced, and accepted (if not necessarily approved) by actors who expect to
continue interacting under the rules sanctioned and backed by these patterns
(ODonnell). The rules of institutions are recognized and enforced by the state
because the rules are conducive with the states policy objectives (Joachim Lauth
14


2000). Formal institutions receive their legitimacy through the state and,
therefore, the disapproval of such institutions is sanctioned by the state (Helmke,
Levitsky 2004). The status of the regulations is contained not only in
constitutional clauses and laws, but also standing orders and norms actionable by
law. Because a formal institution does not exclude non-state actors, a more
inclusive definition is that formal institutions provide predictability and stability
in human interaction (Tsai 2007).
Institutions undergo changes when the state sees it necessary to restructure
incentives and opportunities for actors to govern unethically or inefficiently.
Institutional changes are supposed to reconfigure actors choice sets and alter
their incentive structures so that they will behave in more productive ways
(Wang 1997). States make the decision to alter incentive structures in order to
correct what can be considered economic or political inefficiencies. However, as
Wang notes, the changes to institutions are rarely created without flaws, but rather
face numerous obstacles. According to Shaoguang Wang (1997), actors involved
in or impacted by institutional change normally face three types of constraints.
First, it is difficult for actors to figure out their interests and therefore attempt to
foresee the future outcome resulting from the change in the institutions, requiring
that the actors must be flexible to adapt. Secondly, actors are only able to project
how institutional changes will affect them but, as a strategy, projection is
15


insufficient as real outcomes often differ from intended results. Lastly, and the
most difficult obstacle of institutional change, is that actors have diverging
interests and therefore institutions cannot be suitable to all involved actors.
The significance of institutional design is also frequently referred to in
corruption literature as an anti-corruption intervention strategy. According to
Melanie Manion (2004) effective institutional design restructures transactions to
lessen incentives and opportunities through program elimination and competitive
reorganization of bureaucracies. In the case of Chinas implementation of the
1994 tax assignment system, the central government hoped to recentralize tax
authority in order to reduce opportunities for policy manipulation by setting
standard revenue-sharing contracts and dividing state and local taxes.
When formal institutions fail to achieve their intended outcomes, or
outcomes that are not conducive with actors goals, actors respond by creating
informal rules to achieve either the intended or unintended outcomes, that are not
possible through formal institutions. The literature provides numerous
constructive definitions for informal institutions, however three key elements
stand out in all of the definitions. First, an informal institution is a set of rules or
norms created in response to formal rules and norms. Second, in order to be an
informal institution according to Helmke and Levitsky (2004), a behavioral
regularity that responds to an established rule or guideline is required, the
16


violation of which generates some kind of external sanction. Third, they are not
created by the state, and therefore are not sanctioned by the state. They are
characterized by acceptance by other actors (which lends them a certain level of
legitimacy) and the effectiveness of their existence (which can be assessed by
how goods and services are acquired). However, in contrast to formal institutions
that are sanctioned by the state, they are sanctioned by social mechanisms of
exclusion. Informal institutions arise out of recognition of potential incentives for
individuals or organizations due to opportunities provided by formal institutions.
While informal institutions are equally known and recognized publicly, they are
not established in writing.
The study of informal institutions is relatively new in political science. As
democratic states began to emerge out of the fall of the Soviet Union, institutional
analysis became a prominent theme in political science, as scholars have studied
how formal institutional arrangements affect political and economic outcomes
(Helmke, Levitsky 2004; Lauth 2000). But the problem with focusing on formal
institutions to explain political behavior, according to Hans-Joachim Lauth
(2000), is when institutions are unable to guarantee the order for which they were
created. Helmke and Levitsky (2004) warn that assuming that actors incentives
and expectations are shaped by formal rules can be problematic in assessing what
drives political behavior. Limiting research and analysis exclusively to formal
17


institutions limits the scope of understanding how incentives and opportunities
develop.
Kelle Tsai (2007) analyzes the macro effects of informal institutions on
stability, which states must consider when enforcing formal rules at the expense
of stability that is possibly created by informal rules. Tsai (2007) emphasizes the
importance of informal interactions between local state and non-state actors in
democratic development and regime durability. Regimes that adapt to the
informal behaviors that may be widespread at the local level are able to evolve to
meet the needs and demands of local actors. China has provided an ideal case
study for understanding the effects of local institutions as the authoritarianism has
persisted, primarily because of strong economic growth, on the states coercive
capacity, and social structures. But Tsai credits the regimes durability to the
processes by which Chinas formal institutions have continually changed without
crisis or external conflict (Tsai 2007).
Why Informal Institutions Are Created
According to Kellee Tsai, formal institutions not only constrain political
behavior, but they also enable informal rules to evolve. Formal institutions
provide opportunities and incentives for officials to adjust, ignore, or evade
formal rules and norms when the institution has overlapping jurisdiction and
inconsistent or unrealistic mandates (Tsai 2007). In Capitalism Without
18


Democracy, Kelle Tsai relates the creation of adaptive informal institutions
with ideal transformative environments characterized by multiple institutions
overlapping in their jurisdiction. As a result there is a trumping of one over the
other, and actors, usually local officials, react by choosing which institution
provides outcomes similar to their goals and ignores the rules and norms of the
other institution.
Federalist and unitary systems are prone to informal rules driving local
level politics. In a decentralized state, local actors quietly appropriate formal
institutions to serve their own ends because there is a gap between the original
intentions and the needs of localities (Tsai 2007). Formal institutions often fail to
reflect various regional resource shortages that exist in most developing countries.
For example, in China local officials in agriculture dependent regions have a
difficult time generating revenue because of fiscal policies created by the state
that fail to reflect the revenue source discrepancies of these regions. As a result,
local officials deliberately misinterpret rules and norms of the policy by
generating extra-budgetary revenue through excessive and extra-legal charges on
villagers. According to Tsai, such deviance is likely to occur where different
formal institutions have conflicting mandates; where policy implementation is
decentralized; and where local officials have convergent interests with local
19


citizens in a particular policy area (Tsai 2007) such as public goods and services
provision and hiding local revenues from higher level governments.
Adaptive informal institutions develop for two reasons. First, when formal
institutions created by various policies are inefficient in achieving the intended
results because they fail to cover all contingencies, actors create informal rules in
order to reach the intended result. When informal rules complement formal
institutions, they enhance the efficiency of performance of formal institutions.
These informal rules complement incomplete formal institutions by filling gaps
either by addressing contingencies not dealt with in the formal rules or by
facilitating the pursuit of individual goals within the formal institutional
framework (Helmke, Levitsky 2004). This occurs when actors operating within
a particular formal institutional context, such as bureaucracies and legislators,
develop norms and procedures created by gaps in the design of the institution to
allow them to accommodate or expedite their goals and objectives (Helmke,
Levitsky 2004). During reform and state building periods, institutions are created
rapidly and, as a result, oftentimes place conflicting expectations or unrealistic
mandates on bureaucracies and state agencies because of conflicts with other
institutions.
Secondly, informal institutions may act as a second best strategy for
actors who prefer a formal institution but are constrained in the creation of formal
20


rules by a lack of power or influence. Where formal institutions are written on
paper, but are ineffective in practice, actors view informal rules as a strategy to
substitute informal rules for the inefficient formal rules. When formal institutions
are ineffective, these informal institutions can achieve what formal institutions
were designed for, but failed, to achieve. While similar to complementary
institutions, substitutive institutions are employed by actors that seek outcomes
compatible with formal rules and procedures. While they do subvert formal rules
and procedures, they help to achieve results that formal rules fail to provide.
Because they lead to substantively similar outcomes, formal institutions and
adaptive and complementary informal institutions converge to create better
efficiency, and therefore can be considered functional.
The second outcome of informal institutions is that they can be
dysfunctional or they create problems because the have diverging goals from
formal institutions. Actors create informal rules to pursue goals that may not be
considered ethically or legally acceptable. In systems where illegal or unpopular
behaviors prevail, public scrutiny and enforcement are relatively low, therefore
allowing the behavior to remain inconspicuous throughout the general public.
Actors create accommodating informal institutions, by creating incentives to
behave in ways that alter the substantive effects of formal rules, but without
directly violating them (Helmke, Levitsky 2004). It is through informal
21


institutions that idiosyncratic and organizational corruption is able to persist. The
actors who create accommodating informal rules dislike the outcomes generated
by formal rules, but are unable to openly violate them because of the fear or
presence of enforcement and (or) punishment.
Both institutional design and the existence of widespread informal
institutions are frequently considered when analyzing reasons for widespread
corruption. Insufficient institutional design interventions create opportunities and
incentives for actors to adapt formal rules to benefit their personal or
organizational interests. Competitive institutions are able to exist where
ineffective formal institutions and weak enforcement of formal rules are present.
Actors who choose to exploit and adapt the weak institutional design structures
find that informal rules have minimal risk for exposure, and therefore continue the
behavior. According to Melanie Manion (2004), procedures to reduce incentives
and opportunities fail to consider the irrelevance of rules, which practically
defines situations of widespread corruption, and that assuming formal
institutions matter in constraining actions is itself an informal institution". The
competitive nature of these institutions severely undermines the legitimacy of new
formal institutions because they exploit structural weaknesses present in most
reform systems. As these informal rules become more institutionalized folklore
of corruption becomes ingrained in a community (Manion 2004).
22


Informal institutions created at the grassroots level can contribute to macro
institutional development. In decentralized political systems, the origins of the
most top-down decisions may be traced to interactions among various grassroots
actors, and therefore facilitating endogenous institutional change (Tsai 2007). In
attempting to explain the durability of authoritarian regimes such as Chinas, Tsai
focuses on institutions with intended goals that deviate from local actors
perceived needs and interests, and therefore local actors collaborate with ordinary
people by intentionally misinterpreting the formal institutions that they are
supposed to uphold. When numerous formal institutions have conflicting goals
and mandates, local officials disregard one set of rules for another, or create rules
that will provide them the outcomes they perceive as necessary. The macro
policy implications occur when the adaptive informal institutions are perceived by
the central government as less costly and possibly more efficient than formal
institutions, therefore provoking political or economic policy changes (Tsai
2007). Tsai argues that the persistence of authoritarianism in China may be
traced to the ability of formal institutions to adapt to innovations that originate
from informal interactions between state and nonstate actors at the subnational
level. It is when analyzing informal institutions from this constructive perspective
that informal institutions warrant a different, more productive assessment.
23


CHAPTER 3
POLITICAL, ADMINISTRATIVE, AND
FISCAL REFORMS
Following the death of Mao in 1976, Deng Xiaoping, began pondering
various ideas to stimulate rural economies. The result of numerous debates was
the decentralization of administrative, economic and political duties through
various reforms that have reshaped local level institutions. The central
government stood to gain from political and fiscal decentralization requiring local
level political units to use self-generated resources to implement central
government mandates that would decrease the strains on central resources.
Decentralization proponents believed that local governments needed to be
autonomous political units because they are informed of what citizens really need
and want. Making local officials responsible for providing roads, schools and
other infrastructure allows villagers to hold officials accountable for failures and
successes. However, local officials used the decentralized political and
administrative structures to cover for creating informal institutions that provided
new incentives and opportunities to govern by their own sets of rules.
Administrative and Political Decentralization
24


China is a unitary system where the party-state is divided into six different
levels: central, provincial, municipal, county, township (formerly communes).
Table 3.1 lists the number of administrative units at each level of government as
of2006.
Table 3.1. Number of administrative units in the
Chinese government (2006)
Level of Government Number of Units
Province 31
Municipalities and Prefectures 333
County 2,860
Township 41,040
Source: 2007 Statistical Yearbook, National Bureau of
Statistics, Bejing, China
While the village (formerly the brigade) performs the same administrative duties
as upper level local units, they are not an official level of government. As of 2004
there were 678,589 villages in China (Tsai 2007). Each administrative unit is
mandated to perform certain duties such as state tax collection, supervision of
lower level units, and provision of public goods and services. Each level from the
province down has a parallel structure of Party branches and state governments
that are appointed by Party officials at the next higher level. This thesis focuses
primarily on the two lowest administrative units (township and village) because
these units have experienced the most obstacles in generating revenue and the
25


weaker accountability, leading to increased corruption facilitated by opportunities
to create informal rules.
Village level units are governed by two formal organizations: the village
Party branch appointed by township Party branches and the villagers committee
(VC) consisting of elected officials. VCs are responsible for collecting state
taxes, enforcing state directives such as birth control policy, and providing village
public goods and services by generating extra-budgetary revenue. Villages are
responsible for constructing and maintaining all roads, bridges, irrigation, and
water infrastructure within the village. Primary schools were until recently
provided by villages until the central government permitted the merger of schools
in 2001. Most importantly for this discussion, villager committees are responsible
for dispute mediation and maintaining order.
In a majority of villages, Party branches have demanded authority over
industry as the central government imposed directives in the 1990s encouraging
industrial development in the countryside. A Party secretary heads the Party
branch with a deputy and a number of other officials responsible for working
closely with villager committees to fulfill local duties. In many villages the Party
secretary is also the elected village leader, which creates accountability
constraints that will be discussed in chapter 5.
26


Rebuilt after the dissolution of the commune system in 1982, the township
or town level is the lowest level of the Chinese bureaucracy. Townships are
responsible for funding roads connecting villages to the township seat and roads
connecting villages within the township to each another. They also provide
township medical clinics, junior secondary schools intended for all residents of
the township and security services and electricity infrastructure (Levy 2007). The
role that townships have in village governance is strictly consultative and
guidance. Townships essentially act as a link between the state and villages, and
in this role as enforcer of state policies at the lowest levels of the bureaucracy,
they monitor village performance through an institution known as the Cadre
Responsibility System. Through this institution, officials at all bureaucratic levels
assure that policy targets are met at the next level below and when they are not
met, then guidance in how to fulfill target policies occurs.
The central government made the decision to decentralize political and
administrative roles by providing local level units with autonomous decision-
making duties. Local level autonomy enhances efficiency through generating
local taxes and fees to fund local services through explicit functions decided
through constitutions. Governmental efficiency is related to the implementation
of central policies and provision of local services (Kennedy 2007) through the
27


authority to adjust tax rates and bases in order to provide adequate revenue to
carry out state policies and therefore enhance efficiency.
Fiscal Institutional Reforms
The tax system during the Maoist period was based around the collective
economy that existed since the 1950s. Through this institution controlled by the
central government, villagers were taxed through collectives, of which each
villager was a member. During the first thirty years of communist rule in China,
villagers were required to pay one state agriculture tax. The agriculture tax was
implicit in nature because villagers were taxed by collectives and the taxes were
based on agricultural output and product pricing directed by the government. It
was collected via the government procurement system in which taxes were taken
before grain procurement was paid to the collective. The implicit tax system
created opportunities for the central and local governments to impose arbitrary
fees because there was no public disclosure of state taxes or local fees.
The 1980s and the Household Responsibility System
The central government began reforming the tax system with the
introduction of the household responsibility system (HRS). The introduction of
the HRS gave villagers formal rights over how they managed their production by
leasing land to individuals and households to manage how they wanted. Instead
of working collective plots of land, villagers leased land for what is now 70 years
28


to produce non-agricultural goods. The central government eliminated the grain
quota system and replaced it with the grain contract system in which villagers
were contracted to meet a certain quota of grain output to be sold to the
government and anything above the quota amount could be sold on the open
market.
The most important aspect of the household responsibility system for this
discussion was the shift from collective rural taxation to taxation on individuals
and households in which individual households became responsible for paying
various taxes and fees. Two local tax categories were introduced by the central
government to alleviate the local revenue shortages. The five township-pooling
funds were to be paid to the township governments to cover education, public
security, law and order and civil service and to carry out state mandates such as
family planning and grain procurement. The Three Village Levies were to be
paid to village governments to provide for collective capital accumulation,
collective welfare funds and cadre salaries. This was the first time since the CCP
took control over China that local level governments possessed property rights
over local revenue. Villager burdens became widespread in the late 1980s as
local officials began to extract excessive taxes and fees justified by the two local
tax categories.
29


Implicit tax and property rights laws of revenues characterized the first
decade of the reforms laws. Local officials were the tax authority and cadres
collected taxes locally. A negotiated percentage was submitted upward and added
to the central governments coffer. Local governments had property rights over
the remaining amount for use in public goods and services provision and
reinvestment. This implicit system provided opportunities for local officials to
channel budgetary funds, to be transferred to the central coffer, into extra-
budgetary funds through informal rules such as the recategorization of funds and
granting tax privileges (Wang, 1997). Subnational governments strategically
manipulated and abused the upward-sharing institutions, impacting the central
governments revenue to GDP and the ration of central to general government
revenue.
1994 Fiscal Reform
Responding to macro financial issues, China introduced the tax-
assignment system in 1994, essentially overhauling the previous fiscal
institutions. The reform was created, according to Shaoguang Wang (1997),
because the massive decline of the governments extractive capacity enfeebled
its ability to exercise macro control. The ratio of government revenue to GDP
and the ratio of central to general government revenue consistently fell throughout
the first decade of Chinas reform period. While the GDP of China grew at 10%
30


per year between 1978 and 1996, the central government could barely sustain
itself because state revenue lagged behind GDP (Wang 1997). The ratio of total
government revenue to GDP fell from 31% to 11% and the central governments
revenue fell from two-thirds to one-third just before the reform was implemented
(Wang 1997). One of the causes of the central revenue shortage was that local
level officials governed without explicit duties and without bottom-up revenue
sharing contracts, therefore depriving the central government of its share of local
revenue. The fiscal reform provided explicit rules in the institutions to reduce
opportunities for corruption in the revenue transfer system and to improve
transparency and efficiency in relations between the national and sub-national
governments (Wang, 1997).
Four institutions were developed out of the tax-assignment system,
however as the next chapter discusses, the 1994 law failed to address the needs of
many local governments, therefore causing many local officials to lose confidence
in the system. In addition, the new institutions created by the assignment system
failed to address many of the institutional norms that corrupt local officials have
responded to by creating informal rules to gain access to public resources for
personal gain.
The tax-assignment system divided taxes into Central (state), local, and
shared, therefore creating a more explicit and transparent institution for revenue
31


sharing. Under the new system, a formal rule was established in which budgetary
revenue-central and shared taxes are passed up to the central coffer, and extra-
budgetary revenue-local taxes-are added to the local budget, typically 75% to
25% between the central government and the provincial governments respectively
(Wang, 1997). The sharing ratios were, for the first time, applicable to all
provinces and most importantly, non-negotiable, therefore reducing bargaining
costs between multiple levels of the bureaucracy.
The National Tax Service was created by the central government to collect
central and shared taxes while local taxes were to be collected by township and
village officials. Once shared taxes are collected the central government transfers
a portion after 60% to provincial governments for the use of further transfers
downward. According to Wang (1997) the re-centralization of tax administration
was the most important institution created in the tax-assignment system because it
enhanced rule enforcement by replacing upward-sharing with downward-sharing-
therefore depriving sub-national governments of opportunities to divert funds
from budgetary to extra-budgetary funds.
The formal state taxes established by the 1994 reform consisted of an
agriculture tax proportional to grain output and an agriculture product tax which
taxed villagers on such products as cash crops, fishing, tea, fruits, silkworm,
animal husbandry and aquaculture. The central government also levied a
32


slaughter tax, a farmland utilization tax and commercial taxes such as TVE
activities and value-added taxes.
Theoretically, revenue transfers from the central government supplements
extra-budgetary revenue in order to ensure that policies are fully implemented. In
addition to the township-pooling funds and the three village levies, the central
government permitted local governments to generate revenue through informal
institutions such as fundraising-fees on villagers without explicit regulations
which range from a dozen up to near one hundred items such as road and school
construction and charges for license plates and marriage licenses (Tsai, 2007).
Fines were collected by government agencies for infractions such as birth control
violations and numerous minor violations.
The tax reform eliminated local level fiscal autonomy and established a
system in which local officials could no longer negotiate tax rates or bases.
Believing the best road to development meant decentralization, the central
government gave local officials informal authority to impose taxes without the
central government intervening. To improve transparency through easier
monitoring of state agents and individuals, tax rates were universalized at 33 % to
be imposed on state-owned, collective, private parties (Wang, 1997). A year
earlier the central government passed the Law on Agriculture that set a cap on
local fees and levies at 5 percent of the average net per capita income for the
33


preceding year. Village and township governments are permitted to levy fees as
long as the amount of all combined fees does not violate this law. The goal of the
law was to reduce opportunities for revenue generating schemes by local officials
on villagers after two decades of implicit and questionable behavior.
34


CHAPTER 4
FISCAL REFORMS AND
INFORMAL INSTITUTIONS
The institutions created by the 1994 tax reform have failed to curb official
abuses in rural China. Throughout the 1990s and early 2000s, local governments
in regions dependent on taxes from agriculture had difficulties generating revenue
because of the central governments decision to set a standard tax rate and base
for all provinces. The recentralization of fiscal decisions such as tax rates and
bases deprived local officials of the ability to adjust extraction rates to reflect
local expenditure needs. According to Lily Tsai (2007), the top-down, revenue-
sharing mechanisms have failed to provide adequate supplemental revenue for
poor regions where funding is needed to offset low tax rates and bases. Transfers
have been unreliable because there was no constitutional arrangement created to
ensure the centers follow-through on fiscal transfers (Wang 1997). Most
concerning was the failure by the central government to address the ability of
local officials to generate extra-budgetary revenue. Predatory officials were able
to exploit this loophole because extra-budgetary revenue was not part of the state
budget and therefore was not subject to budgetary oversight or state management.
The result of the revenue shortages caused by the institutional
arrangements created by the 1994 fiscal reform was that local officials created
35


informal rules, through their ability to generate extra-budgetary revenue, designed
to gain access to additional revenue sources for expenditure requirements.
Motivated by the need to generate revenue to fund development mandates set by
upper-level governments, local officials have resorted to extraordinary behaviors.
Unfortunately, the strategy used by desperate officials to combat revenue
shortages has been to impose excessive, and often times extra-legal, fees and
levies. More problematic for local-level fiscal efficiency and the legitimacy of the
government has been local officials embezzling and defrauding villagers of funds
due to their ability to generate extra-budgetary revenue that is not subject to
oversight. The problem was not the existence of formal state taxes and township
and village levies, but rather the extraction of additional funds, that when
combined, exceeded the prescribed levels of 5 percent of the previous years
average net per capita income (Bernstein, Lu 2000). This section will discuss the
financial burdens placed on villagers due to revenue shortages and the predatory
responses to the shortages since the 1994 reform.
Villager Burdens
A brief discussion of what villagers consider financial burdens is
warranted before discussing why local officials relied so heavily on these sorts of
informal sources of revenue. Villager burdens are excessive because of extra-
legal extractions such as fees, nontax levies, assessments, or fundraising drives by
36


both political and administrative agencies. In rural areas, nontax levies, onerous
fees, assessments and according to Xiaobo Lu (2000) forced donations, have
continually increased since the early 1980s. According to Bernstein and Lu
(2000), the most resented fees imposed on villagers have been fees, assessments
and fundraising drives together known as the three unrulies or sanluan.
Table 4.1 presents the various formal taxes and informal taxes and fees extracted
by both the central government and township and village levels. As mentioned in
Chapter 3, state taxes and village and township levies were established and made
more explicit by laws and regulations. Because fees, assessments and fundraising
drives are informal charges, they are more implicit as local officials have imposed
them on an as-needed basis, which has contributed to resentment of such
extractions by villagers.
Table 4.1. Charges extracted from villagers contributing to financial burdens
Level of Government Formal Taxes and Fees Informal Fees and Levies
Central Agriculture Tax Agriculture surcharge
Local Township pooling fees User fees
(Township & Three Village Levies Penalties
Village) Appraisals Fundraising drives
37


Predatory extractions (financial burdens) are patterns of behavior that
Xiaobo Lu (2000) refers to as organizational corruption and what the central
government refers to as vocational misconduct. The revised criminal code
created in 1997 made the first mention of the central governments recognition of
organizational corruption. However, when these sorts of actions are investigated,
they are often considered by the procuratorates as vocational misconduct, which
carries a lesser punishment. The issues that exist within monitoring and
disciplining committees will be discussed in the Chapter 5.
In analyzing the literature, it is clear that since the 1980s, all essential
public services provided to villagers have been fee-based despite the taxes and
levies already paid to local governments. Family planning agencies demanded
2,000-5,000 Yuan if a second child was bom within five years of the first
(Bernstein, Lu 2000). Other long lists of fees were imposed for issuing of
licenses, road usages, power generation, police services, farm machinery and
environmental protection, all of which have reached unjustified heights (Lu
2000). According to Xiaobo Lu (2000) one provincial and city report exposed
89,000 fees being imposed on villagers, of which 53,000 were neither legal nor
authorized; and 13,000 imposed penalties, of which 12,000 violated local and/or
state regulations. The reasons for and the justifications used by local officials
38


must be assessed in order to understand why and how local officials are able and
willing to engage in such informal behavior.
While financial burdens have been prevalent throughout all of China, poor
villagers have endured the brunt of the taxation in comparison to wealthier
villagers. Predatory exactions are especially common in central and western
China where rural industry has grown more slowly than the industries in eastern
coastal regions (Bernstein, Lu 2000; Manion 2004; OBrien 1997). Coastal
regions have enjoyed the luxury of attracting both domestic and foreign
investments that have led to an increase in township and village enterprises
(TVE). The existence of TVEs has caused local officials in these areas to rely less
on informal taxes and fees to fund development projects and public goods and
services provision, therefore creating fewer financial burdens on villagers. The
result of the regional resource discrepancies has been a highly regressive rural tax
system.
The regressive nature of the rural taxation is reflected in Lin, Tao and
Lius study of 10 provinces (2007). Between 1986 and 1999, income inequality
increased significantly, but over the same time period, the incidence of rural
taxation among the different income groups did not change correspondingly.
When all formal taxes and informal fees paid by rural households were combined,
in 1986 the tax burden for the lowest income group was 10.5 percent of average
39


net income while the burden for the highest income group was 9.5 percent. By
1999 the same figures reached 25.6 percent and 2.2 percent, respectively.
The central government clearly understands the importance of resolving
the villagers burden issue. Throughout the first two-and-a-half decades, the
central government verbally sided with villagers on the issue of financial burdens
evident in the fact that the central government acknowledged and spoke out
against the problem as early as 1985 (Bernstein, Lu 2000), followed by the
implementation of the Law on Agriculture in 1993. However, even with the
implementation of the 1994 fiscal reform, villager burdens persisted throughout
the 1990s and into the 2000s.
Lack of Local Autonomy
As discussed in Chapter 3, the central government set standardized tax
rates and bases as a part of the 1994 fiscal reform. The goal behind the decision
was to reduce opportunities for local officials to provide tax breaks and favors to
individuals and businesses. However, by setting standard rates and bases, the
central government failed to take into consideration the regional discrepancies in
taxable sources. The result has been the regressive nature of the rural tax system
discussed earlier, as officials in poor regions have only been able to rely on a
decreasing agriculture base.
40


Throughout the first decade of Chinas economic reforms, villagers were
still primarily farmers. Taxes on rural households were predominantly agriculture
taxes levied on arable land. Starting in the 1990s, the central government began
mandating more local-level, development-based projects as part of the rural
economic growth plans (Tsai 2007). Coastal regions were able to attract more
investment from both domestic and foreign sources in order to create township
and village enterprises to offset and lessen the dependence on household taxation.
Central and western regions were unable to attract the amount of investment that
coastal regions could and therefore continued relying on individual taxation as
their main source of revenue generation.
For local governments in agriculture-dependent regions, meeting the
expenditure requirements for these expenses has been a difficult task because they
lack industrial resources and township and village enterprises as a substantial
revenue source (Tsai 2007). As expenditure requirements have increased, local
officials have relied on informal rules to generate revenue in order to pay
economic development costs, basic operating costs such as wages, and public
goods and services provision. Because the central government recognizes that
formal revenue amounts are insufficient for local governments, it has given local
governments freedom to generate extra-budgetary revenue through informal
institutions. In addition to locally established levies, fees and fines, local
41


governments are also resorting to loans and the sale or rental of public assets. The
informal nature of these institutions shields them from the monitoring of high-
level governments because the funds are not part of the state budget. The lack of
clearly defined oversight of extra-budgetary revenue generation does not
necessarily mean that the central government has officially encouraged such
methods, however, the central government has not explicitly made them illegal
(Tsai 2007).
Lack of Fiscal Transfers
When the central government implemented the 1994 fiscal reform, the
expectation was that increased fiscal transfers would adequately make up for the
revenue lost by local officials inability to adjust local tax rates and bases. After
local governments made remittances to provincial governments, provincial
governments were to make remittances to the central government, at which point
the central government made transfers back down to needy locales. However,
local governments have been unable to depend on fiscal transfers for various
reasons; therefore, continued revenue shortages resulted.
In Tsais research of 316 villages (2001), 59 percent of the village leaders
stated that they had received no financial assistance from township or county
governments, and another 23 percent reported that funding from higher-level
governments made up less than half of their total revenue in 2000. Central
42


funding that is allocated to local governments is not always allocated sufficiently.
Funds from higher levels are more likely to be allocated to wealthier villages
because the funds are earmarked, requiring villages to match the amount allocated
out of their own budgets, therefore preventing poorer villages from qualifying for
such funds (Tsai 2007). The process of singling out needy locales is part of the
one-level-down management system in which local governments request funding
for the next level down in order to alleviate the revenue shortages. But because
these arrangements are not officially mandated by the central government, county
and township governments ignore requests for funding by village governments.
When provincial governments require that county governments single out
needy villages for funding development projects, the unreliability of
administrative bureaus and governmental organizations entrusted to pass the
funds down to the local governments collude to siphon off funds (Tsai 2007). By
the time the funding reaches the targeted locales, there is inadequate capital
available to proceed with the development program. The decentralized
supervision, discussed in Chapter 5, has enabled this sort of behavior by officials
at every level of government, and the result has been that townships and villages
rarely receive adequate funding to carry out mandated development projects or to
provide efficient goods and services.
43


The further away from provincial governments the funds are targeted for,
the more likely it is that funds will be siphoned (Tsai 2007). Governmental units
that siphon money during the top-down revenue-sharing process justify their
action as administrative fees. The siphoning of funds at each level is a
questionable act, but because anti-corruption interventions are weak as
discussed in Chapter 5 government officials who engage in such acts are rarely
sanctioned or prosecuted.
The inability to rely on fiscal transfers or adjust tax bases and rates,
combined with the increase in administrative duties, forced local officials not only
to use informal sources for revenue, but to rely on such sources to meet
development targets and provide public goods and services (Tsai 2007). The
central government continued encouraging local-level development but failed to
provide revenue transfers to poor, agriculture-dependent regions, leaving local
officials scrambling for ways to generate adequate revenue to carry out ambitious
central mandates.
Policy Target
In addition to inadequate funding due to constraints resulting from the
1994 fiscal reform, the incentive to meet target mandates from upper-level
governments has also caused local officials to impose excessive and extra-legal
charges on villagers. The cadre responsibility system requires officials at all
44


levels of government to supervise subordinate-level officials at the next level
down through the fulfillment of policy implementation targets. Contracts
prioritize policy targets as mandatory, hard and soft targets. Mandatory
targets are required policies such as social order and birth control goals. Hard
targets are centered on economic development and tax collection, and soft targets
are those that encourage public goods and service provision. Officials at the
township and county levels who successfully fulfill hard targets are rewarded with
promotions for meeting unpopular target policies. Village officials are not
typically awarded political promotions, but are entitled to bonuses, which
theoretically provide incentives to strive to increase economic development. If
mandatory targets are not met, officials may forfeit bonuses or even lose their
jobs. If mandatory and hard targets are met, officials are awarded points based on
the targets they fulfill. For each point they receive another 20 Yuan in bonuses
with a possible maximum bonus of 2,000 Yuan but, as is stated by Tsai, if even
one birth over the villages quota, they receive only their basic wage of 1,000
Yuan, regardless of how well they performed in other areas (Tsai 2007).
Many of the development targets in the 1990s were centered on
investment into township and village enterprises. In regions that lack market
access, proximity to large cities, sources of investment, and a lack of officials
with business skills and even places that had these advantages overly eager
45


officials made bad investments. During the mid-1990s, driven by TVE
development mandates set by upper-level governments, and insufficient revenue
generated from formal taxes that could be reinvested, many local governments
borrowed huge amounts of funds from informal sources such as banks and private
individuals. In 2000 the average village debt was 170,000 RMB and the average
township debt was 2.98 million RMB (Oi 2007). As village governments make
poor investment decisions using revenue generated from both formal and informal
revenue sources, the village suffers from weak public goods and services
provision while bureaucratic accountability to ensure that village leaders make
informed investment decisions remains absent.
Revenue shortages have meant that local officials in agriculture-dependent
regions must decide how the limited revenue will be spent. The increased
expenditure requirements and reduced revenue sources have created a need for
more entrepreneurial governance by local officials. However, as Jean Oi argues
(1997), if local officials are to be residual revenue-maximizers, there is little
reason for them to fund public goods and services such as repairs of the schools or
constructing running-water infrastructure because these expenditures do not
produce revenue returns. There are also minimal incentives for local-level
officials to evaluate subordinate officials for soft-target fulfillment.
46


Extra-budgetary Revenue and Chinese Criminal Law
In introducing the 5 percent provision, the central government hoped to
alleviate much of the arbitrary and excessive financial burdens on villagers that
have persisted even after the reform was implemented. However, local officials,
governments and administrative agencies have made the decision to create
informal rules imposing arbitrary or excessive fees and taxes exceeding the 5
percent sanctioned amount to carry out their job duties such as public services
provision and mandated development projects, therefore enhancing local-level
efficiency if the revenue is in fact used for development projects. These
institutions are what Helmke and Levitsky (2004) refer to as complementary
informal institutions because they fill the gaps insufficient revenue sources
created by the tax assignment system by enhancing efforts to generate revenue
through informal sources of revenue.
As discussed in Chapter 2, one reason that actors create informal rules is
most likely deemed to be publicly unacceptable motives such as personal gains.
Since the 1994 tax reform, predatory officials and governments have used their
ability to generate extra-budgetary revenue to benefit personally from their
authority. When the revenue extracted is for personal gain, government
efficiency is hindered and therefore the informal institution is considered to be
competing informal institutions (Helmke, Levitsky 2004). The central
47


government has permitted local officials to generate extra-budgetary revenue
through informal taxes, fees and levies. But because extra-budgetary revenue is
not part of the state budget, the revenue is not subject to oversight from the central
government or higher-level local governments and can be used at the discretion of
local officials.
The patterns of behavior discussed in the previous section whether
motivated by necessity due to budget shortages or personal gain are acts of
corruption according to Chinas Criminal Law2. When such misbehaviors are
discovered, these officials justify their behaviors as necessary to make up for
revenue shortages (Tsai 2007). Anti-corruption work is further undermined by
the fact that the infractions mentioned in the previous section are deemed
insignificant in scope and state losses and therefore are not prosecuted or deemed
to be vocational misbehavior rather than corruption (Sun 2004).
The problem with such informal behavior patterns is that extra-budgetary
revenue is not subject to oversight, and therefore not used with great discretion
(Tsai 2007). As a result, township debts have reached substantial proportions due
2 Corruption criminal codes passed in 1979;
Embezzlement of public assets-Article. 155
Revised in 1997:
Embezzlement of public assets-Articles. 382, 396
Misuse of public funds-Articles. 384,185, 272
Malfeasance of taxation-Articles. 404, 405
48


to unproductive loans and interest rates that make it nearly impossible to pay
down (Oi 2007). Nevertheless, whether the informal institutions created by local
officials in response to the flawed institutional design of the 1994 fiscal reform
are complementary or competing in nature, the behavioral patterns are considered
by Chinas Criminal Law as corrupt.
When attempts to extract such fees are ignored by peasants, local officials
resort to coercive behavior to extract illegal fees and fines. Accounts by Chinese
and foreign media depict officials who have bullied and beaten villagers, forcing
them to comply with payment demands (OBrien 2004; Bernstein, Lu 2000). In
other cases, additional fines and land confiscations have also been used either as
threats or actions to deter villagers from paying township governments.
Tax-for-Fee Reform
The central government has taken steps to reduce opportunities and
incentives for local officials to exploit the use of informal rules to generate
revenue while alleviating the financial hardship of villagers that results from
predatory officials. In 2002 the Tax-for-Fee reform was introduced, removing the
long list of village and township taxes and fees, therefore relieving the villagers
burdens and providing a system of transparency to eliminate arbitrary behavior by
local officials. In exchange for eliminating local taxes and fees, the central
49


government consolidated all taxes and fees (village levies and township funds)
into one single agriculture tax set at 7 percent of income per capita.
The second wave of the Tax-for-Fee reform was to eliminate the
agriculture tax in 2006. The central governments objective in introducing the
TFR was to eliminate the primary source of villagers burdens, improve local-
*
level efficiency and streamline local revenue collection. Even though local
governments are still allowed to levy villagers through fund-raising and
administrative fees such as vehicle license-plate fees, marriage certificates, and
user charges for residential land, local governments are now more dependent on
fiscal transfers from the central government in order to perform central mandates
efficiently, and it is assumed that fiscal transfers would increase to reflect the
increased expenditure requirements and compensate for the lost revenue
previously generated before the TFR implementation.
The full impact of the Tax-for-Fee reform and the elimination of the
agriculture tax has yet to be seen; however, these reforms severely jeopardize the
efficiency of local governments as they are either unable to provide services or
continue to impose heavy financial burdens on villagers in order to perform their
required job functions. An initial assessment of the impact of the TFR suggests
that villager burdens have decreased by 30 percent and the central government has
increased financial transfers from 17.9 billion Yuan in 2002 to 66.4 billion Yuan
50


in 2005 in order to compensate for local revenue shortfalls (Lin, Tao, Liu 2007).
However, the elimination of the agriculture tax and local fees meant a loss of 150-
160 billion Yuan, reflecting an inadequate amount of revenue transfers by the
central government (Lin, Tao, Liu 2007). However, the benefits that the reforms
provide (lessening financial burdens) will be overshadowed by the costs
(inefficiency). According to John James Kennedy (2007), the immediate result
has been a dramatic reduction in the autonomy of township governments as well
as the provision of public services. The revenue losses and the unreliability of
central fiscal transfers have produced a number of administrative shells at the
township level, and in Northwest China, provision of education and medical
services has been cut.
The decision to reduce opportunities for arbitrary and excessive taxation
by implementing the tax-for-fee reform will jeopardize the local-level efficiency
by the decrease in township autonomy and reduction in revenue. According to
Kennedy (2007), the decrease in autonomy at the township level has meant that
counties take a more active role in governing, but efficiency is likely to suffer
because townships operate without direct knowledge of small locales needs,
therefore failing to provide services. Only by relying on revenue transfers can
townships effectively govern, and without a more systematic and transparent
method of county remittances, villagers will likely receive inadequate services in
51


place of financial burdens. If the inefficiency continues, then there may be even
greater discontent and unrest over the loss of basic services than there was over
villagers burdens (Kennedy 2007).
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CHAPTER 4
ACCOUNTABILITY AND OVERSIGHT
As mentioned in Chapter 1 informal rules and behaviors are common in
decentralized political structures where disincentives such as bureaucratic
oversight and political participation are weak and costs and the risks of arbitrary
behavior are low. Since the economic reforms began, Chinas central government
has actively pursued policies that have decentralized monitoring and
accountability, therefore enabling local officials to create rules and behavior
patterns that undermine central goals. This chapter will discuss the informal
behavior patterns that have plagued local level monitoring and accountability
institutions.
Local officials have created informal rules in response to the 1994 fiscal
reform because of the absence of effective enforcement and accountability
institutions. Local officials have exploited opportunities in the state and party
enforcement mechanisms designed to monitor and punish local level
misbehaviors by creating rules that enable appointment, election and the
promotion of officials who are unqualified and, or who have participated in
questionable behaviors in the past. The result of weak enforcement and
accountability has been a revolving informal political system that lacks
53


recognition of central policies. Without effective accountability and enforcement
of Chinese law, informal behaviors that undermine state policies and hinder
economic and political growth are likely to continue.
Incentives and opportunities for corruption have multiplied since the
reform period began, while disincentives have weakened (Sun 2004).
Structurally, the cadre management system is plagued by nepotism and cronyism,
therefore allowing incompetent and corrupt officials to be appointed and later
promoted when past personal behaviors suggest that the candidate or official
governs through informal behaviors that diverge from state and societal interests.
Administratively, agencies responsible for regularized monitoring of local
government officials and Party members are dependent on the offices they are
appointed to monitor for resources, expenditures and staffing, and therefore are
unreliable at exposing malfeasance to upper-level governments and
procuratorates. Lastly, village elections mandated in 1997 have failed to curb
abuses of power because of Party and bureaucratic interference in the procedures
designed to provide fair and competitive outcomes.
Informal Rules and the Cadre Management System
As a top-down, bureaucratic mechanism to monitor cadre performance,
the cadre management system has evolved as part of the central governments
plan to divert supervisory duties away from central resources to local Party
54


officials. The system was inherited from the Soviet nomenclatura system in
which Party officials at each level of the vertical structure monitor the
performances of officials at the next level down. The system provides the state
access to all levels of the state beauracracy and Party branches down to the
township level without direct involvement in the process.
Successful implementation of hard and mandatory central policies means
that cadres are rewarded-economically through bonuses and politically through
promotions. The system classifies tax extraction and economic development as
hard targets and public services provision as soft targets. Hard targets are
typically less favorable to villagers and the most difficult for local officials to
implement. However, the system theoretically provides an incentive mechanism
for local officials to govern efficiently and ethically.
The problem that has persisted throughout the reform period is that local
officials have favored tax extraction and paying for massive economic
development projects that are often times impractical (Sun 2004). The selection
and promotion of officials has become an issue of economics in command when
the decision by upper-level officials is made. Individuals who fulfill economic
targets, bring projects and funds and find investors or locate other creative sources
of revenue are considered competent officials (Nengren) (Sun 2004). However,
many of the creative methods for generating revenue by increasingly
55


entrepreneurial officials are through informal rules such as extra-legal and
excessive charges on villagers.
Because local officials are promoted through the system based on
economic development projects, there is incentive to divert funds meant from
public goods and services to elaborate projects that will please superiors and get
them noticed. Yan Sun presents examples of projects that were extremely
impractical and draining on local resources. One example is an international
airport that was built in a poor city in Northern Anhui province where according
to Sun not only international but domestic travel would be scanty (Sun 2004).
This sort of behavior is present from provincial level governments down to village
governments. Local officials are less concerned with carrying out difficult
administrative work and public goods and services provision than establishing
connections, finding patrons and pleasing the few people that are key in the
promotion processes (Sun 2004). That means sacrificing local level efficiency for
predatory and inefficient actions.
Higher-level governments are unable to obtain accurate information from
lower-level governments about local affairs because local governments and
officials do whatever is necessary to hide unfavorable information that would
potentially hinder promotion. In many cases, village or township officials collude
in the doctoring of information; therefore county governments receive
56


misreported information. Ultimately the inaccurate information is passed all the
way up the provincial governments (Tsai 2007). The misreporting of information
from one level up to the next level severely undermines the institutionalization of
cadre responsibility system.
Due to the lack of institutionalized mechanisms for county governments to
directly monitor villages, the collusive behavior between township and village
governments acts as a protective network. As mentioned in Chapter 4, township
officials who are successful at fulfilling mandatory and hard targets are promoted
to higher level positions and therefore township officials have strong incentives to
misreport not only information on their own targets, but those of the village as
well. The misreporting of information has negative implications in the
information that higher-level governments receive surrounding fee and tax
extraction at the local level. Village governments exaggerate or misreport the
real income per capita to township governments to meet their objective of
levying excessive fees on villagers; therefore villagers burdens are assessed on
such figures. On average, township and village officials inflate the figures by
one-third of the true income per capita (Tsai 2007). Township governments dont
find it necessary to penalize village officials because the county does not
intervene.
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The states agencies that are responsible for administering local audits
have been ineffective because they are dependent on the local governments that
they are supposed to audit. The National Bureau of Statistics (NBS), the General
Auditing Administration (GAA), and the Ministry of Supervision (MOS) act as
governmental organizations to assist in assessing the validity of information
provided by lower-level governments. In addition to the auditing agencies, The
Discipline Inspection Commission and the Ministry of Supervision (discussed in
the next section) are responsible for monitoring misconduct of Party and state
officials. However, these organizations are often filled with officials appointed by
local governments, are funded or paid by local governments, and are only at the
county level and higher, and therefore the scope of their duties are constrained in
the ability to monitor local officials (Sun 2004; Manion 2004).
Local level officials are also unlikely to thoroughly or consistently
implement evaluations of lower-level governments because of the cost and
resources that are required do so. Annual evaluations require extensive time and
resources to carry out the process of auditing and penalizing lower-level officials,
therefore reducing incentive to follow through on required duties. Since the mid
1990s, township and village governments in agriculture dependent regions have
battled high levels of debt accrued from poor investment (Oi, Shukai 2007). The
result has been township governments that conserve resources for
58


industrialization projects and other expenditure duties such as the paying of
cadres (Tsai 2007). A common theme throughout the literature is that officials
rarely visit villages because they dont care about village affairs but rather
promotions (Sun 2004; Tsai 2007; Manion 2004; OBrien 2004). Township
officials choose to monitor villages by assessing the fulfillment of mandatory and
hard targets because they dont require the extensive evaluations process that
public goods and services provision assessment does.
The result of the selective policy implementation in the one-level down
evaluation system is the continued promotions of mid-level cadres and
government officials determined by cronyism, nepotism, or office-for-sale
relationships that continue to develop because of an officials abilities to extract
large sums of taxes and fees and carry out development projects, which often turn
out to be worthless because of minimal returns. It is easier for local officials to
appoint and promote officials on the basis of these sorts of relationships rather
than carrying out evaluations that are costly for local governments and
administrative agencies.
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Monitoring and Disciplining
The states monitoring agencies have also been ineffective disincentives
against misconduct by local officials. The Partys Discipline Inspection
Commission (DIC) and the States Ministry of Supervision each have parallel
responsibilities; the DIC is responsible for monitoring and disciplining within the
Party ranks; the MOS is responsible for monitoring state officials. The party-state
monitoring systems, like all other state and party organs, have parallel structures
at the central, provincial, city and county levels, however they are not accountable
to the authority of the next-higher level, but rather are based on dual leadership
(Sun 2004). It is important to note that the monitoring agencies only reach the
county level-therefore their scope is limited when dealing with township and
village monitoring and disciplining.
When the monitoring agencies expose a possible infraction, they are
expected to resolve the issue at the same level where the infraction occurred with
the assistance of the Party committee and to seek approval before opening
investigations (Sun 2004). The first problem with the procedures is that, similar
to the account auditing agencies mentioned in the last section, the two monitoring
agencies depend on local governments and party branches for their budgets,
therefore undermining the idea that monitoring and disciplining occurs through
independent channels for enhanced exposure of misconduct. In addition to this
60


dependence on local governments, high-ranking officials in monitoring agencies
are vetted by local officials (Manion 2004). Therefore the likelihood is high that
officials are appointed who according to Sun (2004), are hearing-impaired
when it comes to exposing local malfeasance.
The central governments reliance on the cadre management system has
allowed for the mismanagement of local level resources and revenues while
allowing for predatory behavior to continue un-detected. The informal rules
created as a response to the management system have enabled corrupt officials to
be recruited and promoted through both the party and state ranks because of the
classification and favoritism resulting form the policy target classification. It
remains difficult for the central government to obtain accurate information about
local affairs due to official behaviors.
Democratic Accountability
Village level elections were mandated in 1998 to supplement the top-down
bureaucratic accountability with bottom-up accountability institutionalized
accountability. The Organic Law of Villagers Committees established an
accountability institution that villagers use to elect 5-7 officials into Villagers
Committees (VC) to serve for three years. The OLoVC also established the duties
of VCs, consisting of welfare services, dispute management, maintenance of
public order, and the communication of villagers concerns to township
61


governments. VCs are required to answer to village representative assemblies
(VRA) composed of all adult villagers or a representative from each household.
To date 80 percent of Chinas 678,589 villages have had conducted elections.
The OLoVC offers two possibilities that theoretically address the crisis in
rural authority as China seeks to improve governmental efficiency and act as a
disincentive for corruption such as excessive and extra-legal fee exactions.
Villagers are able to hold officials accountable by electing them out of office for
poor performance. The new administrative and fiscal demands discussed in
Chapter 3 have made being a cadre a significantly more difficult post to hold
down. Villagers with brains or imagination, proponents say, have steered clear
of official positions and instead have jumped into the lucrative fray of the rural
economy and that leaves the dullards who only want a sinecure to hold down
government and Party posts (Kalliher 1997). As China has become a more
competitive market, talented citizens are taking exams to gain entrance into
universities or trades. This has left a cadre system lead by an increasing amount
of old and uneducated people.
The alternative to electing unqualified officials is electing officials who
are interested in achieving personal business or economic gains by gaining access
to local resources and social wealth just before leaving office. Elections should
act as a tool to hold corrupt and incompetent officials accountable for failing to
62


perform their jobs with the interests of the village prioritized. According to
Daniel Kalliher (1997), the argument for elections is purely practical: if you want
to get younger, educated, technically able people into office, then let villagers
make the selection from their own ranks. They are bound to choose more
intelligently than the bureaucratic hacks that have appointed village cadres in the
past. Elected officials will govern with pride and remain loyal to their
constituents demands because they feel that it is their obligation to do so. The
argument for elections is not to address rights of villagers, rather to produce
leaders who can seize control of collapsing villages.
The second theoretical argument for village elections is that they are a
better means for getting villagers to comply with unpopular state policies. As
mentioned earlier in throughout this paper, mandatory and hard targets such as
birth control and taxes have always been a point of contention between villagers
and cadres. Chinas election proponents believe that elections are the only way to
gain compliance from villagers on such policies. When an increase in taxes is
mandated from the top, village officials often lack the ability or incentive
offerings to extract the increased amount because villagers refuse to pay them,
therefore causing cadres to act by means of coercion and violence. Elections
create a system in which villagers are more likely to hold themselves accountable
for undesirable new policies. The fact that villagers choose their own leaders
63


implicates them in whatever follows (Kalliher 1997). Proponents also suggest
that tax exactions are more likely to occur because elected officials are more
powerful than appointed ones. By virtue of being elected, they essential have
been entrusted to make decisions that best meet the needs of villagers and
therefore when reelected, they can assume they have chosen the right candidate.
The impact of village elections in creating disincentives has been limited
for numerous reasons. Similar to the information obstacles that the cadre
management system is subjected to, villagers are deprived of accurate information
on village expenditures and the incumbents performance while in office. When
information is presented pertaining to the incumbents performance, they are
unable to know if the official overtaxed villagers to line their own pockets or if
the candidate lacked resources from high-level governments (Tsai 2007; Kelliher
1997).
Measures have been taken by numerous provinces and The Ministry of
Civil Affairs to improve institutions designed to provide better democratic
management. Efforts to control corruption in fiscal management, finance
disclosures and elections have produced laws and regulations in provinces that
possess necessary resources to enforce policy implementation. Guangdong,
Chinas most wealthy province, now requires that various organizations such as
financial management committees and transparency supervision committees, are
64


responsible for various data publications (Levy 2007). However for provinces in
poor, agriculture-based regions, villagers committees administer such
responsibilities.
Because provincial governments fail to enforce laws and regulations that
require transparency work and accounting audits, local governments have been
successful at covering up information on fees and taxes that could be used by
villagers. Provincial governments have consistently addressed weak transparency
institutions by requiring that transparency work be administered in one fashion or
another, however provincial governments do not require a certain type of
committee to carry out the work. Wealthy townships and villages have
sufficiently provided methods that provide information to villagers. In
Guangdong province, financial management committees have been set up to
review expenditures and to approve spending requests prior to disbursement of
funds and transparency supervision committees to oversee local transparency
systems (Levy 2006). One village in Guangdong presents a bulletin board outside
the VC office showing each VC members monthly expenses for entertainment,
cell phones, gasoline, parking and total village expenditures. Other wealthy urban
villages have even provided computers for each village member to encourage
interest in village affairs.
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Poor local governments do not enjoy equal resources as locales in
Guangdong and therefore fail to provide adequate transparency work. Inland
agriculture-dependent provinces have failed to mandate the establishment of
committees designed to oversee transparency work throughout the provincial
villages. Others have bulletin boards that are empty or have information that is
difficult for villagers to decipher. An institution known as the rural levy card was
established in numerous provinces to increase transparency and reduce arbitrary
taxation, but according to Lily Tsai (2007), the institution has perversely helped
local governments impose unsanctioned levies. Village and township
governments are required to list all their levies on the card and hand them out to
each villager, however local officials doctor the information in a collusive manner
to make villagers believe that they are paying formal state taxes that are in reality
informal local levies.
As mentioned in the last section, local officials manipulate figures to
reflect higher levels of expenditures than actually exist. Villagers are unable to
vote with an informed understanding of the true performance of incumbents due
to the absence of transparency work to provide villagers with an assessment of
cadre performance. As mentioned in the last section, Chinas legal system does
not provide effective administrative organs to monitor and provoke investigations
of malfeasance reported by villagers.
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Procedures such as pre-election accounting audits required in
Guangdongs provincial government provide detailed information to villagers
pertaining to village expenditures. Audits prior to elections theoretically improve
democratic supervision by preventing or uncovering corruption and waste,
therefore providing peasants with formal evidence to use against electing
incumbents who have been corrupt during their terms. Provincial governments
have generally neglected to mandate that villages provide pre-election audits and
therefore when they do occur, the township level typically administers them.
Many of the hired accountants are from outside of the assigned village and are not
willing to confront village leaders on faulty accounts.
Bureaucratic Interference in Elections
Informal rules and behaviors are particularly prevalent in the democratic
procedures throughout much of rural China. Party branches at the township and
county levels have selectively implemented procedures that will provide them
with election outcomes that they wish to see and have chosen to exclude or ignore
other centrally mandated procedures. Local level officials interests fall in line
with the economics in command approach that is present in cadre recruitment.
Candidates are usually favored that will not work with higher-level officials to
ensure the fulfillment of hard targets (particularly tax extraction and economic
development projects). In addition, Party officials attempt to retain control of
67


local affairs by coercively excluding non-Party members from elections.
Widespread reports from various provinces discuss Party organs simply
appointing village committees (often consisting of Party members) that are
supposed to be elected and blatant attempts at rigging the nomination process are
just as common (Kelliher). In other cases, the local Party restricts free choice
through non-secret ballots, with voting by clapping or the raising of hands, and
through indirect elections and lastly vote buying. These patterns of informal
behavior through local created rules have been successfully concealed in many
cases because of the lack of democratic education provided to villagers.
Pre-Election Procedures
According to the OLoVC villagers must be permitted to nominate
candidates openly, and the number of candidates must exceed the number of
positions available. Because of weak bureaucratic oversight, the nomination
process has varied widely in the 80 percent of villages that have conducted at least
one round of elections (Levy 2007). In many villages, the village Party branch or
township officials have attempted to take control of the nomination process,
therefore depriving villagers of their right to nominate candidates who they see fit
to hold positions in villagers committees.
The system of one-level-down management mandated in the cadre
management system has caused township officials who have an interest in who is
68


elected to turn their backs on their evaluation duties or to manipulate election
procedures to gain an outcome that benefits them. Township, and often officials
all the way up to the county level seek to influence elections to get their ideal
candidate, who will enforce hard targets into office. Officials who are nominated
by external sources are more likely to govern as agents of the local Party branch
or the township government with the objective of meeting hard targets such as
development projects and birth control policies rather than providing services
(Tsai 2007). When villagers determine village nominees, provision of public
goods and services is more likely to be a priority of those elected because they
feel an obligation to provide these basic services to those who entrusted them.
Election Procedures
Elections have also been subjected to increased vote buying, which is
considered corruption by Chinese law. When villagers are genuinely interested in
voting corrupt or incapable officials out of office, they often find that the elections
are manipulated by stakeholders who have an interest in retaining leaders based
on their success at meeting hard targets. The decisions and behaviors by township
and county officials often determine the resource assistance allocated to villages,
and therefore village officials are essentially scapegoats to systemic
accountability flaws.
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Local candidates buy votes from villagers by distributing cigarettes, small
gifts, and free meals, and even directly paying for votes and or making promises
to do certain things for the village or villagers using private funds...is facilitated
by the lack of any transparency requirements for campaign financing (Levy
2007). Vote buying has proven to be a cost effective strategy for candidates
because of the access to public assets that is entrusted with election to public
office. Because there is no legal framework that addresses what corrupt elections
entail and a lack of penalties and punishments (discussed in the next section) in
the Chinese legal system, wealthy candidates are likely to continue resorting to
such tactics. If an election is invalidated due to vote-buying tactics, accused
candidates cannot be excluded from a run-off election, which according Richard
Levy (2007), frequently requires only 33 percent of the vote to win, but those
officials that tried to buy the initial election have a clear advantage because voters
are likely to remember their incentives for voting for the same candidate.
The OLoVC stipulates that voting must take place at a fixed location. In
many villages throughout China, villager committee elections have been carried
out entirely through mobile ballot boxes. The use of mobile ballot boxes has
enabled the use of proxy voting in which family members cast ballots for
themselves as well as on behalf of absent family members (Tsai 2007). Chinese
law permits voters the right to entrust friends or relatives to vote on their behalf if
70


they are unable to be present at one of the voting locations. Many villages lack
the resources to provide secret ballot stations and often resort to electing officials
by the raising of hands. These procedures have enabled fraudulent behavior by
local officials and Party members, therefore undermining accountability.
The use of mobile ballot boxes reflects transparency issues throughout
much of rural China. In Lius study of 15,454 villages in Hunan province, 10,663
(69%) allowed the use of mobile ballot boxes. 2,259,953 votes were cast using
mobile ballot boxes. In Tsai's (2007) analysis of 316 villages, only 46 percent
reported the use of ballot boxes in fixed locations. When voting is administered
through the use of mobile ballot boxes, it is difficult to prevent voting fraud
because there is no consistent oversight of the boxes as officials in charge of
obtaining the ballots are constantly moving around.
In-trust or proxy voting is used in China to allow for citizens who are
unable to attend an election meeting or a fixed location used for voting. A
method that experienced widespread usage during the initial phase of elections to
increase voter turnout, they are still used throughout China. Proxy voting
undermines the importance of the use of secret ballots. While Chinese law
stipulates the entrusted relative or friend permits that only one proxy vote,
research suggests that many villages do not implement this regulation. In Long
and Tongs research of 40 villages in Jilin province, in-trust voting occurred in 14
71


villages (35%) and represented an average of 12.5% of total votes. And in one
village, in-trust votes represented 36% of total votes cast. In some of the areas
that Tsai researched, the total amount of in-trust votes exceeded 20 percent of the
total votes cast.
The figures that represent the amount of proxy voting and mobile ballot
boxes present a lack of transparency in the voting process. While local officials
argue that the use of mobile ballot boxes is necessary to increase voter turnout by
reaching citizens who are unable to attend fixed locations because of physical
disabilities, the movement of ballot boxes makes it difficult to monitor the
location of the boxes and therefore it is easier for officials to tamper with them.
In addition to tampering with mobile boxes, the behaviors of officials who are
responsible for going house to house use coercive measures to get favorable votes
(Tsai 2007). Township officials personally bring ballot boxes to each house with
the candidates they favored (Tsai 2007).
The Organic Law of Villages Committees does not mention proxy voting
and therefore it is the responsibility of provincial governments to regulate the use
of such practices. Without strict regulations, entrusted residents can vote for as
many absentees as possible but there is no guarantee that these relatives and
friends votes faithfully represent the choices of absentee voters. This sort of
voting behavior undermines the idea of secret ballots present in highly
72


institutionalized democracies. Without the use of procedures that produce secret
balloting, it is hard for peasants to personally hold village officials accountable
for their performance.
Lack of Leverage
In order for village elections to work effectively in curbing official abuses
and ensuring strong local level governance, villagers must have leverage over the
officials who seek posts in villages committees. Many elected officials dont
care if they are re-elected because the benefits of holding office arent what they
believed or because once wealthy officials improve social capital, they see no
benefit in retaining a post that pays less than they made before being elected. If
village elections are to be effective at providing bottom-up accountability,
officials have to care about being re-elected into office.
In less-developed areas the main incentive to become a village leader is
that the wages are often relatively high and guaranteed by the state. Village
governments are supposed to be self-financing and therefore, guaranteed wages
arent always the case. Low morale has resulted because village cadres are often
not paid or find it difficult to perform their jobs because there are not sufficient
resources to implement mandates from above. According to Lilly Tsai (Tsai
2007), 48 percent of her 316 villages surveyed had cadres who made less than the
village income per capita. 40 percent reported that cadres did not receive any
73


wages because of a lack of village revenue. After holding office for a short time,
these officials lose incentive to embark on ambitious public projects that would
better the livelihoods of villagers and instead, they ride out the remaining years of
their terms or resign mid-term.
Many local officials are local business owners who take time away from
their businesses to hold public office, but in poor villages where there is no
potential for private benefit, they decide to leave office because they make less
money than running their private businesses. Tsai (2007) discusses one case in
which two consecutive village leaders in Fujian quit in the middle of their terms
because their bamboo bead-making enterprises started to fail because they had to
focus on their public posts.
Because of bureaucratic meddling in the election process and the
inaccurate or indecipherable information provided on the performance of VC
members, villagers doubt the genuineness of elections. They believe elections are
rigged and the restrictions on cadres outlined in codes of conduct and charters are
ineffective. As a result, villagers do not subscribe to the idea of villagers
committees and rarely participate in VRAs (OBrien 1997). These pessimistic
views by villagers may be the result of decades of policies prescribed by the
central government during the Maoist era, which rarely created any positive
changes for peasants and peasants frequently note according to OBrien (1997),
74


that under the economic reforms, they have witnessed cadres who pursue private
interests, eating and drinking well at public expense, engaging in nepotism, and
usurping contractual rights (OBrien 2004). Without positive relations between
villagers and local officials, villagers are likely to remain pessimistic about
elections and accountability. 19 percent of villagers in Tsais 316 village survey
(2007) believed that the last round of elections, were in fact, rigged. The absence
of effective villager representative assemblies contributes to the lack of oversight
in village elections.
Bureaucratic Monitoring, Discipline
and Punishment
In both the bureaucratic and democratic mechanisms for monitoring and
accountability, the prosecutions and penalties for local officials have been
inconsistent and inefficient. Corruption in China remains an issue at all levels of
government because of the absence of punishment and disciplining of local
officials in a time of increased opportunity to state and public resources since the
economic reforms began. The dependence of monitoring and disciplinary
agencies on local governments hinders the exposure and potential for punishment
when local officials are suspected of misconduct. The legal system gets most of
its cases from the referral of the DIC and the MOS, therefore, by itself not a
strong deterrent (Sun 2004). If the two agencies resolve issues of misconduct
75


through their own channels, local officials are not subjected to double or triple
jeopardy through punitive measures taken by one of the remaining two bodies.
The punishments that Party and state officials are subjected to for
misconduct are insufficient in terms of necessary disincentives for deterring local
level abuses. The punishment for misconduct in the state sector is demotion or
termination of employment, while the most severe punishment for administrative
officials is termination, but only to be carried out by local Party or state
executives (Sun 2004). As mentioned earlier, when the subordinate suspect has
successfully met hard and mandatory policies, strong professional relationships
are established with upper-level officials and therefore, the choice to punish
becomes an economic decision.
The punishment of party members is equally soft and often times
ambiguous. The communist party has its own system of adjudication and
punishment different from the system for state administrative officials.
According to Sun (2004) and Manion (2004) DIC penalties of Party officials are
often not thorough because of over-lapping jurisdiction in which government
procurators lack the authority to administer investigations that coincide with Party
investigations. DICs complete investigations before they are transferred to
procuratorates open up criminal investigations. The coordination of
investigations leaves open Party obstruction in cases and according to Manion
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(2004), many cases of criminal corruption are not transferred at all, but are
appropriated by Party organization, with officials punished only for party
discipline infractions.
To contribute to the inefficient monitoring and disciplining of state and
Party officials, these agencies do not exist below the county level, therefore
leaving township and village officials with ample opportunity for misconduct
(Sun 2004). Because township and village officials are outside the scope of
monitoring agencies, the doctoring of accounting books and misappropriation and
embezzlement are made easier. The township and village officials are the
buaureacratic levels that have been, up until the tax-for-fee reform, responsible
for a majority of the tax exactions. Keeping the township and village level
governments out of sight from the MOS and the DIC leaves open misconduct in
tax and fee levels. The central government has sent contradictory messages in its
goals and the structural incentives and opportunities for combating local level
abuses.
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CHAPTER 5
CONCLUSION, IMPLICATIONS AND
RECOMMENDATIONS
Rural China has been characterized by informal rules dictating the
direction of governance. Local officials have found it increasingly difficult to
govern efficiently because of the lack of revenue for public goods and services
provision and central and provincial development mandates. The 1994 fiscal
reform failed to address essential elements of local-level governance, and more
recently the tax-for-fee reform has severely constrained local officials abilities to
generate revenue and therefore local level efficiency has been severely hindered-
the opposite of what the central government wanted when fiscal and
administrative duties were decentralized. In addition, the institutions have
enabled predatory officials to impose excessive and extra-legal fees, fines and
apportionments that are easily diverted away from government use to line their
own pockets.
While the central government implemented the 1994 fiscal reforms and
the tax-for-fee reforms in order to restructure incentives and reduce opportunities
for corrupt payoffs, the reality has been that local officials have created informal
rules that they see as the best means for generating revenue in response to the
institutions created under the reforms. The local-level monitoring mechanisms
78


and accountability institutions have failed to provide disincentives for the
informal behavior because structural flaws and jurisdictional overlap plague them.
Elections have been unsuccessful due to the lack of information provided to
villagers and because elections have only been mandated and implemented at the
village level.
While the long-term impacts of the tax-for-fee reform are yet to be
presented due to the relatively recent implementation, it will most likely prove to
be the wrong institutional change because fiscal transfers from the central and
provincial governments will remain unreliable due to institutionalized
mechanisms to ensure their transfers. As mentioned in Chapter 4, local officials
rarely receive central transfers because of the siphoning of funds during the
transfer process and because needy villages are unable to match the earmark
requirements that funds carry with them. Because there was no constitutional
arrangement made between the central government and the provincial
government, the centers role in the revenue sharing is implicit.
The central government should address some of the institutional
arrangements created by the 1994 fiscal reform instead of eliminating local level
fiscal autonomy. First, a formula-based system of inter-governmental transfers is
warranted to ensure poorer regions that lack revenue sources are able to function
govemmentally. If the central government truly favors economic development
79


and decreased fiscal autonomy necessary for increased efficiency, they are
obligated to increase transfers to agriculture dependent regions. Local officials
lost confidence in the transfer system created by the 1994 reform and therefore
acted strategically by creating complementary informal rules to meet their own
interests of generating revenue for their locales. The decision to withhold revenue
from the shared category and the conversion of budgetary revenue to extra-
budgetary revenue continued, therefore hindering macro-economic growth and
central governments revenue generation.
In order for local officials to govern efficiency, they must be allowed
autonomy to set tax bases and rates. The 1994 fiscal reform divided taxes into
central and local however, sub-national governments had no control over the
rates and the base of their assigned taxes and therefore could not determine the
aggregate size of their budgets. The revenue generated from the central
established tax rates and bases fell far short of expenditure requirements, leaving
local officials no choice but react strategically by imposing informal and
excessive fees on villagers to supplement the revenue shortages.
Possibly the most important institutional design flaw created by the 1994
fiscal reform was the failure to consolidate extra-budgetary revenues with
budgetary revenues. Allowing local officials to generate revenue that was not
subject to budgetary oversight enabled local officials to create informal
80


institutions in order to gain access to additional sources of revenue, much of
which contributed to excessive financial burdens. The rule to generate extra
extra-budgetary was an adaptive approach for local officials in order to generate
revenue for expenditure requirements and therefore the central government should
adapt by integrating extra-budgetary revenue into the state budget. By integrating
such revenue sources into the state budget, the money will be subject to oversight
and therefore, eliminating the opportunity for local officials to divert money for
personal use.
Informal institutions will most likely continue even with fiscal
institutional reforms such as the tax-for-fee reform until there is effective
monitoring and accountability mechanisms in place that act as disincentives for
misconduct by local officials. Local officials must have incentives to hold
officials in lower level governments for excessive taxation and misuse of public
funds rather than rewarding them for such behaviors, which has been the case
during the reform period because of the cadre management system.
Monitoring and discipline agencies should be independent from relying on
local government and party branches for resources and staffing. If staffing of
these agencies is at the discretion of local governments and party branches, they
will most likely be staffed by like-minded individuals that lack the willingness to
investigate the officials that provide them with the job. In addition, the
81


coordination of investigations should not favor party discipline inspection
committees but rather the procuratorates responsible for investigating the criminal
nature of actions by party officials.
Elections should be further implemented and implemented with increased
monitoring by the central government to show that the institution is actually
respected. Up to this point, elections have provided mixed results due to local
officials who have a vested interest in who is elected creating informal rules that
manipulate the pre-election and election procedures. On the surface, elections
appear to be a way to divert attention from central and provincial officials
regarding mismanagement and corruption to the local governments. With more
involvement by the central government in the monitoring of elections, democratic
governance will play an effective role as a disincentive for corruption and
mismanagement. In addition, the central government must enhance the
democratic process by implementing mandatory elections up to the county level
because township and county governments that are responsible for revenue
transfers and guidance often determine the efficiency of village governments.
While further research is necessary as the impact of the tax-for-fee reform
comes to fruition through increased research of the subject, it is likely that the
inability by local officials to generate local revenue accompanied with unreliable
fiscal transfers will create two possible scenarios. First, local level economic
82


development will suffer and public goods and services will be neglected, therefore
limiting job growth and standards of living. In addition, attracting competent
local officials will be difficult because of a lack of local revenue that has
historically paid the salary of the local officials. Second, local officials will be
forced to look elsewhere for inadequate revenue. This may mean that increased
land seizures occur as local officials seek to sell off public land for revenue and
investment schemes. In general, more central involvement is necessary in local
affairs as Chinas economic transition moves forward.
83


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