The project began with a review of literature and secondary data to identify what would be useful for the project. The team collected the information on the county-level financing and spending data from 1980 to 2003. This information, compiled from different data sources and standardised, was used to analyse how public spending, its financing and governance have affected growth and distribution of income among smallholders in western China.
The team conducted numerous field trips in western China (Guizhou and Gansu - the two poorest western provinces) to investigate the major issues related to public policies and poverty reduction. Subsequently the team designed survey forms at the county, township and village levels to investigate the effects of public policies at the different government levels on rural poor and smallholders in Western China. The surveys forms were tested and refined after pre-tests in two provinces. Enumerators were then recruited and trained.
Surveys conducted in selected counties, townships, and villages of Guizhou and Gansu collated major social economic indicators for governance, public investment and provisions, resources endowments, income, inequality and poverty. In addition, a census-type household survey (encompassing all households in three villages) was conducted in Guizhou Province.
Based on the data collected, three levels of analyses were conducted: county, village and household. At the county level, the analysis focused on how decentralisation of fiscal system leads to different outcomes on growth and regional inequality, and how central government transfer affects inequality within-province and within the western poor region of China. The village-level study analysed how public provision, governance and resource endowments determine per capita income of smallholders.
China has a politically centralised government structure with strong top-down mandates. On the other hand, the country has a highly decentralised fiscal system. Local governments and communities are responsible for most local public goods and services. Large differences in economic structures and revenue bases exist, however, causing the implicit tax rate and fiscal burdens in support of local government functions to vary significantly across jurisdictions, particularly between coastal and western China. Coastal China, initially endowed with a broader non-farm tax base, does not need to rely heavily on new and existing firms to finance public goods provision, which creates a healthy investment environment in support of non-farm sector growth.
By contrast, local governments in western China, where smallholder agriculture is the major economic activity, spend the majority of their resources on their own operating costs, leaving little for public investment. Because of the relatively high transaction costs associated with collecting taxes from the agricultural sector, local governments tend to levy the non-farm sector heavily, thereby greatly inhibiting its growth. Due to lack of resources, local governments and communities cannot provide much-needed support for agricultural production (e.g. extension services often lack funds for travel, training, and purchase of improved seeds and breeds). As a result, regional differences in economic structures and fiscal-dependent burdens may translate into widening gaps in equality between western and coastal China.
The positive development is the rapid increase of private and farmer initiatives in bringing new technologies, practices and market information to individual smallholders. These initiatives are particularly active in the livestock sector.
In trying to narrow the regional development gaps and to help the smallholders in western China to increase their income, the government has introduced numerous policies - particularly through central government transfers. However, the country-level analysis shows that fiscal equalisation policies, though in favour of inland areas, did little to reduce the inland gap between poor and non-poor counties.
This has important policy implications. While the central transfer is important for narrowing the regional gap, the efficient use of these funds - particularly targeting public provisions for smallholders instead of covering local government operation - should be a precondition for future increase of the transfers. In particular, public provisions in infrastructure, education and health, and agricultural technology should be in the top priority list.
If various institutional and policy barriers that hinder the market integration between western and coastal China can be removed, enabling smallholders to either migrate to coastal areas or engage in non-farm activities in their own communities, then private investment will flow to western China. The rapid rise of coastal China also provides huge market opportunities, particularly for high-value produce, for western China's smallholders. Again, the central government transfer should be geared to reduce transaction costs for smallholders.