Fiscal administration in China from 1949 to 1978 presents a typical case of central economic planning. Targeting quick industrialization, China took planned economy and centralized management systems as natural options (Hou, 2003). In this context, annual budgets were subordinate to annual economic plans. Budgeting was used to the extreme for channeling all possible resources into capital construction. Reoccurring delays in budget formulation and frequent random changes to revenues and expenditures rendered budgets useless. Under centralized ‘‘frenzy’’ economic planning, budgeting lost its financial planning function. Absence of fiscal/budgetary discipline left officials and government with no control over expenditure.
Budgeting was a handy tool when it fitted needs for capital. When budgetary restraints blocked the way for large-scale construction, the concept of budgeting was ignored. In sum, planning and budgeting did not serve China well in this period. Had they been used properly, planning and budgeting could have helped China tremendously in improving effectiveness of its governance, efficiency of its economic development, and accountability of officials and government entities.
5.1.5 Why Central Economic Planning?
Fiscal administration in China followed the Soviet-style central economic planning, with national medium-term five-year construction plans under a long-range development program. It all started from a national dream for prosperity. When the Communist Party of China (CPC) won over the country in 1949, the CPC targeted quick industrialization, despite eminent difficul- ties of runaway inflation, absence of modern industries, lack of economic and financial expertise, unavailability of foreign aid and hard currency. Top leader Mao Zedong assumed that ‘‘national economy should not be more difficult to manage than military affairs’’ (Gu, 1993, entry for August, 1958). To implement large scale construction in such an environment, central planning seemed to be the best choice because the Soviet-style planning for mobilizing resources suited China’s need. After a few years of
preparation and intensive learning from Soviet experts, the first five-year plan started in 1953.1
Chinese economy was run on a market-based fashion in the first three years, with free markets for all farm produce and private enterprises being subject to no central planning except limited regulatory ‘‘guidance.’’
Only state-owned enterprises were fully subject to central plans. In late 1953, when food supply fell into unexpected trouble in cities, threatening the implementation of the on-going five-year plan, nationwide ration provision of daily necessities, obligatory sale of harvest by farmers to the government, and segregation of rural from urban residents (tight control of citizen mobility) became the only policy option. This was copied from the Soviet Union.2Within a few years, all private enterprises were ‘‘merged’’
into state ownership and the whole national economy was placed under rigid central plans.
5.1.6 Central Economic Planning and Annual Budgeting
Under its one-party rule system, China had no problem in achieving unanimous agreement on national policies. The annual policy-making process starts with the Party Central Committee’s economic development policies and guidelines, which then become the economic development plan and the annual budget. The economic plan and budget are delibera- ted at the CPC Central Economic Conference, then consulted with demo- cratic parties, and finally submitted to the National People’s Congress for approval (Figure 5.1).
The real challenge was in administration. A central planning system was set up in 1952, with detailed rules on the structure, procedures, units of planning, and rules regarding the compilation and review of economic plans.3 A powerful State Planning Commission (SPC) was created as a super-ministry in charge of all economic planning activities, with its most important task being compiling the annual plan for national economic development. The central budget agency is the Ministry of Finance, lower in rank than the SPC. A formal budgeting process was created and approved in 1951 as the ‘‘interim rules on budgets and final accounts’’ (Figure 5.2).
Under this construct, the annual [national and local] budget and the budgeting process was merely the policy tool to implement the economic plan (Figure 5.3).
The complex nature of economic planning and the fact that the CPC was not at all familiar with managing economic activities often delayed in-time completion of plans. In the extreme case of 1963, ‘‘it took a whole year to finish the annual plan.’’4 Whenever the budgeting procedures conflicted with economic planning, the resulting budget would be
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unpredictable, subject to frequent changes by following the belated development plan. In this sense, the budgeting procedures never really worked. Mid- and late-year budgeting and multiple budgeting were common in those years. The budget utilizes also monetary instruments.
The Central Bank was a secondary tool for implementing the economic plans. The annual currency issuance and working capital addition was part of, and included in, the annual budget.
Frequent, long delays in compiling the annual economic plan and budget caused serious consequences to fiscal administration. Long delays and frequent changes in the development plan led to widespread uncertainty.
No one at the central or local levels knew how much they would have for the next year, which was a huge disincentive for local economic develop- ment. Budgets could not serve as usable guide for operations; huge wastes Figure 5.1 Annual planning and budgeting process of China.
were common and unavoidable. The budget also lost its function as an oversight instrument to hold officials and agencies accountable because the highly centralized process did not allow much participation at lower levels.
Absence of managerial discretion and performance incentive resulted in disinterest and irresponsibility. After China started its reform program, this centralized planning-budgeting system went into disuse.
Figure 5.2 China’s annual budgetary process as prescribed by the ‘‘Interim rules on budgets and final accounts’’ (Government Council, July 1951).
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5.1.7 Two Lessons
The China case bears two lessons in the planning-budgeting relationship.
First, planning and budgeting are complementary equals. Subordination of one to the other destroys the fit between the two functions. China’s long- range economic planning did not provide a natural link to annual budgeting.
It was divorced from the budgeting process, done regardless of how budget- ing went. When conflicts occurred between the two, it was always budgeting that conceded. In so doing budgeting did not serve as well as it could have done to economic operation. Second, a highly centralized system does not provide adequate room for active agency initiative, nor does it provide incentives for agencies, inducing no cooperation or responsibility. In this case, agencies merely muddled through, contributing little if anything to performance or accountability.