billion yuan in I992. The 1992 borrowing is equivalen **t** o 28 percent of the total government revenue.

The central-local fiscal contract system has affected the stabilization role of the center's fiscal policy in two ways. First, fte contract system has built in a tendency of declining share of the cente's revenue in total govemnment revenue, while at the same time the center has not decentrlized the expenditure responsibility to a similar extent. One reason for the center's declining share of revenue explained in the previous section is that the localities react strategically to the center's dicretionary policy hnge by lowerng hdir tax efforts and shifting budgetary funds to exabudgety funds. Besides this, the revenue-sharing formulae between the center and many provinces imply that the center's revenue growth must be lowar tan that of the provinces' retined revenues. For example, between 1988 and 1993, ten provinces adopted type I contract named "con ted revenue increase" (see Secton 2.1), which let the provinces retin a specific porion of the revenue if the revenue growth ates range from 3.5 percent to 6.5 percent. Any revenue above the _6.5_ percent growth is fuly retained by the provinces. Such a contract says that the share the center rceives will continue to shink as long as the provinces' revenue growth exceeds 6.5 pent. While the share of fiscal resources available to the center has fallen rapidly, the center's has retained much of the expenditure responsibilities that are supposed to be decentralized to localities and enterprises, mainly in the ftrm of "capital construction." The center's expenditure plan is always overwhelmed by shortterm objectives other than stabilization, such as financing "key" investment projects, paying wage bills for rapidly expanding government employees, and subsidizing loss-making state enterprises. The center constantly finds itself in a very difficult position in balancing various demands for expenditures, and there is very little room for using expenditure policy to stabilize the economy.

Second, the central-local contract system detrmines that the center's revenue is unliely to be strongly pro-cyclical. In the 1988-1993 fiscal contract (Type 5 contract) with Shanghai, the single largest revenue source of the center's revenue, the tansfer from Shanghai to the center is fixed regardless of Shanghai's actual income (see subsection 2.1). Type I contract (contracted income increase), adopted by ten rich provinces (1988-1993), yields a less than unity elasticity of the center's revenue relative to the provinces' revenue collecion. Although some other provinces share revenues with the center at a fixed propordon C(ype 2 contract), the provinces' revenues themselves may not be clearly pro-cclical due to their inadequate tax efforts for reasons discussed in the previous section. As a msult, revenue growth rate has not always moved in the same direction as that of national GNP.24 _Fscalpoicy and redistnbution across regions._ The central govemment's redistributive role has been substantially weakened over the course of decentralization, mainly due to the sharp

# 3 People's Bank of China (1993).

> 2 Using data from 1979 to 1992, a simple regression of **_GNP_** growth rate on revenue growth rate shows only mild correlation between the two variables. The R-square is 0.366.

15