base year--adjusted by factors such as changes In policy priority (e.g., the State Coundl's approval of a new development zone may increa this regon' expenditure allowance) and infladon (e.g., inflation increases the payments of wages and other procurement), price reform (e.g., certain price reform requires the provinces to spend more on subsidizing food and housing), etc. The provinces are required to make their expenditure plans consistent with tie :entral government guideline, but may augment expenditures if more resources are likely to **be** available to the province. On individual items of local govanment expenditur, the center has a set of detailed regulations restricting govemment employees' wages and the items that government agencies (at all levels) can purchase.

The state budget consists of centrl budget and local budget. The local budget includcs the provincial, county, and municipal budgets. In principle, the division of expenditure responsibilities between the center and the local governments, in so far as they are limited to the budget, is broadly defined as the following. The central government's expenditure responsibilities include capital construction and technical upgrading centrlly owned entrprises and outlays on their new product development; national defense; foreign aid and extenal relations; agriculture, forestry, and water conservadon at the central level; industrial, transportation, and commercial operations; education, culture, health and social services; outays on centrally obligated price subsidies; geological surveys; and financial of public dbt. LIcal expenditure responsibilities include basic construcdon and technical improvement of locally owned enteprises and their new product development; rual production assistance and agricultural development and water conservation at the local level; urban mantenance and construction; eduction, health, culture, and social services; social welfare and pensions; administrative expenditures; and a range of price subsidies.' There is substantial overlapping between the center's and the localities' responsibilities in actual expenditures. This overlapping iscommon in heavy industrial sectors (e.g., electricity and raw mateials), as well as in transportation, telecommunications, education, science, and health care. For example, the central government finances electicity plants, railways, and telecommunication networks, and provinces are often required to co-finance these projects. There are both central and local universities, maldng education both a local and a centml responsibiity, and a hospital or a bridge can be financed by the centml government, by the provincial government, or by the city government. Since a substantial part of investment outlays come from the central budget, the location of projects becomes a matter of importance. Provinces compete witi each other to garner a greater share of these oudays. Both before and after the state budget plan is formally approved by the Congress, intensive lobbying from the local govemments for allocating more projects in their own jurisdictions ks place. One typical form of such lobbying is that le local leaders seek help from a senior leader in the central government or the Central Party Committee, and this senior leader writes a note to the State Planning Commission or the Ministry of Finance suggesting consideration of a project in favor of this region. According to staff from the Ministry of Finance, virtually every project See Agarwala (1992).

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