China’s Inclusive Public Finance System: Based on an Examination of Irregular Revenue

Abstract

China’s achievement of miraculous economic growth is a theoretical proposition that calls for an explanation. The key to understanding the logic of China’s economic reform is a rational explanation of the logical paradox between irregular local finance and the incentive compatibility of central and local governments. Based on the fact that autonomous local financial resources have long been dependent on irregular fiscal revenue, this paper constructs an inclusive public financial system analysis framework from the dual perspectives of the central and local government. This analytical framework offers an explanation of the long-standing implicit fiscal decentralization contract in which irregular fiscal revenue is the carrier in the reform process, together with a description of the central-local interaction process and institutional space underlying the behavioral motivations of central finance tolerance and local financial autonomy. It demonstrates the logical consistency of irregular fiscal revenue, central and local incentive compatibility, economic growth and market-oriented reform. The inclusive public finance system, which takes into account both local dynamism and central control, provides the important institutional logic that has enabled China to reach the dual goals of economic growth and market-oriented reform.