This 1988 fiscal contract system further increased the revenue share retained by the localities, particularly those major contributors to the central government's revenue. 1.owever, the contracts were not strictly adhered to, and were revised repeated for some regions. li, 1991, when the 1988-1990 system was supposed to expire, the central govemnment found it unable to negotiate satisfactory replacements, as a result, thle 1988-90 system was extended until the end of 1993, with limited modifications on revenue-sharing ratios and quotas.

Since 1978, both the total government revenue as a percentage of GNP and the share of central govemnment revenue in total govemment revenue have declined rapidly. From 1978 to 1992, total government revenue/GNP ratio declined from 34 percent to about 17 percent; the central government revenue (after revenue-sharing) declined from 51 percent to 41 percent. These trends are clearly related to the fiscal decentrlization process starting from 1980, and have serious implication in terms of the effectiveness of central government fiscal policy. These issues will be taken up later in this paper. Since the late 1980s, the centml government has been increasingly concemed with the potendal political and economic consequences of its weakening fiscal power, and has repeatedly expressed the intention to increase two ratios--the govemment revenue/GNP ratio and the ratio of central government revenue to total government revenue.' Although this proposal was written into the 8th Five Year Plan for 1991-1995, the trend of declining two ratios continued between 1990-1993. At the end of 1993, the central government announced a major reform plan which was to change the fiscal contract system into a tax assignment system in 1994. The main objective of this reform is to reverse the trend of the declining two ratios, particularly the ratio of central government revenue to total government revenue, by replacing a negotiation-based system with a rule-based system.

# 2.2. DiMsion of central-lol emenditure responsibilily

Before 1980, almost all revenues collected by the localities were submitted to the center and all expenditures were financed by central govemment transfers. Since 1980, as a part of the decentralization in fiscal management, the central government no longer stipulates individual items of expenditures in provincial budgets but continues to formulate the guidelines indicating the acceptable level of expenditure for each province.' The allowed expenditure of each province is formulated based on the 'base figure"-the expenditure of the province in a certain I A referee says that the loss in revenue [declining revenue/GNP ratio] was most likely deliberate [a result of the center's deliberat **e** ffort]." This was true to some extent in the early stages of the fiscal decentralization. However, since the 1988, the reveir e-sbaring methods were largely designed for the purpose of increasing loca revenue collection. The central government has repeated expressed concems about the declining trend of revenue/GNP ratio and almost all the efforts made in the last few years to reform the central-local fiscal relations were aimed at correcting this trend.

' "Provisional Regulations Concerning the Introduction of a Fiscal Management Systen by Which the scope of Revenues and Expenditures is Defined for the Central and Local Governments, Respectively, and Each is Responsible for the Balancing of Its Own Budget,' issued by the State Council, February 1, 1980. See Economic Research Center of the State Council (1981).

6