Victor Shih

I think for a while, China was quite decentralized.

So this is kind of from the mid-1970s all the way until the mid-1990s.

China was very decentralized where local governments generated a lot of revenue, but they also spent a lot of money.

And it incentivized them to do kind of

basically good things such as trying to attract as much FDI as possible, trying to attract as much local investment as possible, give tax breaks and so on and so forth.

So I think, you know, China had a very good period of mainly sort of private sector driven growth.

because of this fiscal decentralization.

And that's the understanding of, I think, most economists.

But then there was a tax centralization in 1994, basically, where the central government basically said, okay, this is ridiculous.

We don't want to end up like the Soviet Union and fall into different pieces.

We need to control fiscal income.

So then they grab the most lucrative source of taxation at that time.

And it continues to be the case, which is the value-added tax.

And so the collection of value-added taxes – and then also in subsequent decades, pretty much all other tax categories are now collected by the central government.

Then they reimburse part of the money to the provinces.

And then supposedly they say, okay, now you can spend the money as you wish.

But in reality, that's not the case.

So in reality, it's kind of like, well, if you do this thing, then I'll give you a little bit of money.

But you have to do the thing that I want you to do to get this money, to get this grant basically.

So then the fiscal autonomy, I would say, has been falling since 1994.