Lessons for Developing Countries

Local Government Organization and Finance: China 165

Lessons for Developing Countries

China’s experience in local governance is instructive for developing countries.A few important lessons are enumerated below:

A stronger role for local governments can help produce innovative service delivery while improving local economic development.In China,a larger role for local governments in public expenditures has helped promote foreign direct investment,improve efficiency in public resource allocation,and foster economic growth (Lin and Liu 2000).In addition,it has alleviated the incidence ofpoverty.Meanwhile,stronger economic and political clout,associated with greater effort to levy and collect taxes,has led to faster development ofprivate enterprises and accelerated reform of

SOEs (Jin,Qian,and Weingast 1997). Decentralized public governance can build citizen-state trust by helping the public sector focus on results-based accountability to citizens (Shah 2004).In China,decentralized public governance helped create incentives to improve local public services and responsiveness to local preferences.

China’s experience supports the argument that decentralized fiscal structures are more suitable in the institutional environment ofdeveloping countries,especially ifcareful attention is paid to the design ofinstitutions vital for the success ofdecentralization policies.They include the rule oflaw,an enabling environment for competitive service provision, self-financing,a charter ofrights for citizens,effective limitations on the authority ofgovernments beyond their designated spheres ofinfluence, and—most important—accountability to local residents (Shah 1999).

The incentives for self-financing and interjurisdictional competition in

China led to major transformations in local economies and improved service delivery. Interjurisdictional fiscal equity should receive serious attention in a decentralized system oflocal governance (Shah 1994).Although China as a whole has experienced sustained prosperity over the past decade,the gulfin fiscal disparities across the nation has widened.Public services in rural areas and poorer jurisdictions are not on a par with those in urban areas and richer jurisdictions.Dismantling internal barriers to the mobility ofcapital,labor,and goods and instituting fiscal capacity equalization with an explicit standard and national minimum standards grants for merit goods—such as education,health,social welfare,and infrastructure—can help in this regard.China has already taken some steps to