FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL

Transcription

1 doi: /padm FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL SHULIAN DENG, JUN PENG AND CONG WANG There is a global movement towards more budgetary transparency, in both developed and developing countries, as this lies at the heart of responsible governance. Since the promulgation of the Regulation on Open Government Information in China in 2008, China has witnessed an external demand and internal push for more budgetary transparency. Using annual survey data collected between 2009 and 2012, we found that budgetary transparency at the Chinese provincial government level, although showing slight improvement over this period, was still very low, and there was significant volatility in the amount of information disclosed by individual provinces from year to year. These findings are mostly due to a contradiction between the central government s stated desire for more transparency and deep-rooted institutional and legal barriers against transparency. Recommendations are made as to how transparency can be further improved in China and other parts of the world. INTRODUCTION Fiscal transparency is the hallmark of a responsible government and public sector governance. Budgetary information is by far the most important part of government information that the public needs to evaluate the performance of government and to ensure that government activities are in the best interest of the public. When it comes to public spending, the government is acting as an agent of taxpayers. Because of this, there has been a strong movement towards fiscal transparency worldwide in recent years, in both developed and developing countries. Even in the USA, which is not known as a laggard in budget transparency, there has been a continued push for more transparency in recent years at all levels of government, especially for making more budgetary information available online in a timely fashion (US PIRG Education Fund 2011). The Governmental Accounting Standards Board (GASB) in the USA has been constantly working on new accounting standards so as to make state and local government finance more transparent to the public through financial reporting. This demand for fiscal transparency has also caught up with China, a country not known for a high level of transparency in any aspect of government operation, let alone financial operations. In recent years, however, China has made some noticeable progress in promoting open government. The promulgation of the People s Republic of China s Regulation on Open Government Information (hereafter referred to as the Regulation on OGI) in 2008 was a landmark event in this movement towards more open government in China. In 2010, 75 central government agencies released their departmental budgets. Some local governments achieved an even higher level of transparency, as seen in the City of Jiaozuo in Henan province and Baimiao Township in Sichuan province. Does this signal that China has entered a new era of fiscal transparency? Has China made substantive progress in making fiscal information public since 2008? What problems, if any, still exist in this government endeavour to make itself more transparent? Shulian Deng is at the School of Public Economics and Administration, Shanghai University of Finance and Economics, Shanghai, China. Jun Peng is at the School of Government and Public Policy, University of Arizona, Tucson, Arizona, USA. Cong Wang is at the School of Public Economics and Administration, Shanghai University of Finance and Economics, Shanghai, China Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

2 2 SHULIAN DENG, JUN PENG AND CONG WANG To answer these questions, beginning in 2008, the Public Policy Research Center of Shanghai University of Finance and Economics started an annual evaluation of fiscal transparency through surveys of all 31 provincial governments in mainland China. This article is based on the data collected from four years of this research. As China became the world s second largest economy in 2010, fiscal transparency of Chinese governments is important not only to Chinese citizens, but also to the whole world. The best example of this can be seen in the aftermath of the Chinese government s four trillion yuan stimulus plan in 2009 to counteract the financial crisis. Local Chinese governments borrowed an untold amount of money from state-owned banks for capital projects. There are wide suspicions that some of this debt will turn bad. As there is no transparency in local government debt, nobody knows how serious the problem is and how that will affect the Chinese and world economy if there is a Chinese local government debt crisis. The purpose of this research is twofold: (1) to assess the level of budgetary transparency at the subnational level in China; and (2) to analyze what the factors are that account for the current level of transparency at the subnational level in China. The rest of the article is structured as follows. In the second section, we provide a literature review on budgetary transparency. In the third section, we discuss the parameters in measuring fiscal transparency in our study and the methodology in collecting the data for analysis. The survey results are discussed in the fourth section, and the fifth section provides an analysis of the survey results. Policy recommendations are proposed in the final section. LITERATURE REVIEW The literature on budgetary transparency can generally be divided into three categories: the definition of transparency, the determinants of transparency, and the impact of transparency. The first two categories are reviewed here as the impact of transparency is beyond the scope of our research. Definition of fiscal transparency For research on the definition of transparency, Kopits and Craig (1998, p. 1) have provided the most widely cited definition: openness toward the public at large about government structure and functions, fiscal policy intentions, public sector accounts, and projections. It involves ready access to reliable, comprehensive, timely, understandable, and internationally comparable information on government activities.... Heald (2003) listed three dimensions of good practice regarding fiscal transparency: institutional transparency (such as budgetary process), accounting transparency, and transparency of indicators and forecast. Benito and Bastida (2009) also listed three essential elements of fiscal transparency: (1) the release of budget data (systematic and timely release of all relevant fiscal information); (2) an effective role for the legislature; and (3) an effective role for civil society through the media and non-governmental organizations. The OECD (2002) discussed the types of budgetary reports and the specific information disclosure that are required for budgetary transparency. The International Monetary Fund (2007) also identified four elements of fiscal transparency: clarity of role and responsibility, open budget processes, public availability of information, and assurances of integrity. Some organizations have also created indexes to measure fiscal transparency based on some key indicators. The most famous index is the one created by the International Budget Project (IBP). This index is based on the availability of various budgetary documents

3 FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL 3 throughout the budgetary process, and the IBP has used this index in its biennial survey of countries around the world since 2006 (International Budget Partnership 2006, 2008, 2010). Determinants of fiscal transparency As the level of fiscal transparency varies from one country to an other, it is only logical that researchers want to examine the factors that determine the level of transparency. These factors typically fall into three categories: political, social-economic, and fiscal. Alt et al. (2006) examined two sets of variables that determine the level of transparency: political setting and fiscal environment. For the political setting, the authors thought that more partisan politics would increase the demand for transparency. Fiscal distress can also be an impetus for demand for transparency, since if a lack of transparency in the budget process contributed to a negative fiscal shock, an appropriate response would be to increase transparency. By using a panel dataset of 50 states in the USA from 1972 to 2002, the authors found empirical evidence to support such hypotheses. Piotrowski and Van Ryzin (2007), using data from a national online survey of more than 1,800 respondents in the USA, developed several indices to measure citizens demand for transparency at the local level and explore its correlates. Among other factors, personal income was positively related to demand for transparency. Renzio and Masud (2011), by examining the results of the IBP survey mentioned above, found that most of the countries that provided very little information shared the following characteristics: low levels of income, more authoritarian political regimes, geographical location in Africa and the Middle East, and dependence on revenues from foreign aid and from the sale of hydrocarbons. Wehner and Renzio (2011) conducted empirical research using the same dataset from IBP. They found that free and fair elections had a significant direct effect on budgetary disclosure; governments with strong political competition (partisan fragmentation in the legislature) provided more and better fiscal information than those with low competition; and per capita GDP was also positively related to level of transparency. Guillamón et al. (2011) examined a sample of 100 of the largest Spanish municipalities in 2008 to analyze the impact of political and socioeconomic factors on municipal financial transparency. The authors found that higher taxes and transfers per capita led to higher transparency. Furthermore, left-wing parties were more transparent than right-wing ones, and population demands also had a positive effect on the achievement of financial transparency. Ma and Wu (2011) used the data collected from the first two years of the four-year survey by the Public Policy Research Center in Shanghai to conduct a study on the determinants of transparency in China. By using a whole set of demographic, economic, fiscal, administrative, and leadership variables, the authors found that economic indicators such as foreign direct investment and export per capita as well as marketization had a positive impact on transparency. And the provincial governor s tenure in office, budgetary deficit, and administrative transparency also had a positive impact on transparency. Other population characteristics, such as education level, internet usage, and personal income level, however, were not found to be associated with fiscal transparency. PARAMETERS AND METHODOLOGY Based on the literature review, fiscal transparency can be examined in many ways, such as the comprehensiveness, level of detail, timeliness, and reliability of the budgetary

4 4 SHULIAN DENG, JUN PENG AND CONG WANG information available, regulation regarding transparency, transparency over the entire budgeting process, and the convenience in obtaining budgetary information. While it is certainly ideal to examine fiscal transparency in all these aspects, it is not practical under current conditions in China. After reviewing various requirements and measurements used by organizations around the world, such as the International Monetary Fund, OECD, and International Budget Project, we designed an index using the unique characteristics of Chinese government fiscal reality. This index consists of 113 questions that focus on two aspects of fiscal transparency, the breadth (comprehensiveness) and depth (level of detail) of fiscal information available. A major component of fiscal transparency that is not part of the current study is transparency over the entire budgetary process. The whole process involves at least four stages: preparation, negotiation/adoption, execution, and final reporting. Many budget documents are produced along the way. A fully transparent budgetary process should be one in which all these documents are publicly available in a timely fashion. Since few budget documents are publicly available in China, an evaluation based on this criterion will yield no result. Besides, even if such reports are available, they would not matter much if very little information is contained in them. The accuracy of budgetary information cannot be independently verified in China, and thus is not part of the index in this study. Parameters The breadth (comprehensiveness) of the fiscal information consists of three parts. First, it should cover all three major categories of public funds, which correspond to the three main government functions: governmental funds which account for the provision of public goods and services that benefit the general public, such as education, health, and public safety; fiduciary funds (or social insurance funds in China) which account for assets held in trust by the government to pay for social welfare benefits such as pensions, and unemployment and disability benefits; and enterprise funds (or state-owned enterprise funds in China) which account for public investment and production of goods and services aimed at making a profit. Second, it should cover all sources of revenue collected by the government. In China, some of the revenues collected by the government are accounted for within the budget approved by the legislature, and other revenues are deposited into funds outside the legislatively approved budget. Third, it should cover both stock and flow information. Flow information refers to annual revenue, spending, borrowing, deficit, and surplus whereas stock information refers to total assets, total liabilities, and net assets. The former gives us a short-term perspective whereas the latter gives us a long-term perspective on government finance. Depth addresses how detailed the information is and at what level of government the information is available. On the revenue side, we seek a detailed breakdown of all major sources of revenue: tax, fees, debt, and intergovernmental revenue transfer. On the spending side, the level of detailed information is measured in two ways. First, we seek both functional and economic classification of government expenditure. Second, we seek information at three levels of a provincial government: overall provincial government level, departmental level, and the unit level within a department. We also seek information on the composition of assets and liabilities. Altogether there are 113 questions in the questionnaire, 66 for the governmental fund group, 30 for the social insurance fund group, and 17 for the state-owned enterprise fund group.

5 FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL 5 Survey method The level of government selected for this study is the provincial government in China. Altogether there are 31 provinces and provincial-level municipalities (such as Shanghai and Beijing) in mainland China. Data for the 31 provinces were collected in two ways. First, the questionnaire was sent to all 31 provincial governments in mainland China via both electronic mail and regular registered mail. In the first year of the survey, the questionnaire was first sent only to the provincial open government information (OGI) offices. Most of them responded that since they were all recently established, they had no record of budgetary information and suggested that the questionnaire be sent to the provincial finance departments directly. Therefore the questionnaire was also sent to each province s finance department in the first year. During the first year of the survey, most finance departments later also indicated to the research team that the parts of the questionnaire regarding social insurance funds and state enterprise funds should be sent to the government agencies responsible for such funds for more information. Therefore in the following years, while the entire questionnaire was sent to these two agencies, the part of the questionnaire regarding the social security fund group was also sent to the agency responsible for all social insurance funds, and the part regarding state enterprise fund group was also sent to the provincial State-Owned Assets Supervision and Administration Commission. The mailing of the questionnaire was followed by phone contact to let the government agency know that such a questionnaire was forthcoming. Second, we searched all electronic and print records publicly available that contain the provincial government s fiscal data. Among other things, the two major public sources of fiscal information are the government s website and the statistical yearbook published by the provincial government. Once all the information had been gathered through information requests and searches of public records, it was processed and entered into a database. Then, the same questionnaire, this time with all the available information filled in, was sent back to the provincial government agencies. The purpose of this final stage was to give these agencies an opportunity to check the accuracy of the information currently available and to provide any additional information that might have been missed in the first round of the survey. Scoring Once all the information had been gathered from the second round of the survey each year, each province was scored and ranked. The score for each government consists of two components. The larger of the two components is based on the answers available for all 113 questions. Each question is worth 10 points, and if the information is available, then the government gets 10 points for that question. In some cases, a question consists of two parts, and if information is available for only one part, the respondent gets five points for that question. Altogether, if one province provides the information for all 113 questions, it gets a score of 1,130. A second and smaller component of the score, worth 50 points, is based on the overall attitude of the government towards the survey. The purpose of having this smaller component is to assess how each government responds to public request for information, as an indication of their accountability to the public. As long as the government responds to the survey, whether the information is provided or not, it will get some points. If more than half of the agencies respond to the survey (a total of two in the first year and a total of four in the following years), the province gets the total 50 points. If less than half of

6 6 SHULIAN DENG, JUN PENG AND CONG WANG TABLE 1 Chinese provincial government fiscal transparency score: (in %) Rank 2009 Province Score 2010 Province Score 2011 Province Score 2012 Province Score 1 Fujian 62.7 Fujian 50.4 Xinjiang 43.7 Hubei Inner Mongolia 34.0 Shandong 29.4 Hebei 42.9 Heilongjiang Anhui 32.3 Guangdong 25.4 Inner Mongolia 39.1 Inner Mongolia Beijing 30.6 Hunan 24.7 Jiangxi 27.1 Xinjiang Liaoning 27.1 Zhejiang 24.5 Shanghai 26.6 Hainan Jiangsu 26.8 Shanghai 24.0 Jiangsu 25.6 Shandong Tianjin 23.5 Guangxi 23.7 Hunan 25.5 Guangxi Sichuan 22.2 Sichuan 23.6 Guangdong 24.8 Hebei Henan 21.0 Hainan 23.1 Sichuan 24.6 Beijing Qinghai 20.6 Anhui 22.8 Shandong 23.4 Gansju Guangdong 20.4 Tibet 22.1 Shaanxi 23.2 Jiangsu Tibet 19.6 Henan 21.4 Zhejiang 22.9 Guangdong Guizhou 19.5 Hebei 20.8 Anhui 22.6 Shanghai Shandong 19.4 Beijing 20.6 Henan 22.4 Yunnan Shanghai 19.0 Jiangsu 20.4 Fujian 22.0 Zhejiang Zhejiang 19.0 Jiangxi 20.3 Chongqing 21.8 Shaanxi Hubei 19.0 Shanxi 20.3 Beijing 21.0 Hunan Hunan 18.9 Inner Mongolia 20.1 Liaoning 20.9 Fujian Jiangxi 18.9 Heilongjiang 20.0 Hubei 20.6 Tianjin Shaanxi 18.7 Tianjin 19.9 Shanxi 20.1 Sichuan Xinjiang 18.5 Gansju 19.9 Tianjin 20.0 Henan Shanxi 17.8 Qinghai 19.8 Gansju 19.4 Liaoning Guangxi 17.0 Hubei 19.7 Yunnan 18.9 Chongqing Hebei 16.9 Liaoning 19.6 Guangxi 18.7 Ningxia Chongqing 16.5 Chongqing 18.9 Hainan 18.6 Jilin Ningxia 16.3 Yunnan 18.5 Qinghai 18.0 Jiangxi Heilongjiang 16.1 Shaanxi 18.2 Tibet 17.9 Guizhou Hainan 15.8 Guizhou 17.8 Jilin 17.8 Shanxi Yunnan 15.2 Xinjiang 17.5 Heilongjiang 16.0 Anhui Gansju 14.8 Jilin 15.5 Ningxia 15.9 Tibet Jilin 14.8 Ningxia 15.4 Guizhou 15.7 Qinghai 14.2 Average 21.7 Average 21.9 Average 23.1 Average 25.3 the agencies respond to the survey, the province gets 25 points. If no agency responds to the survey at all, it gets zero points. Over the four years, five provinces did not respond to the survey in 2009, two did not in 2010, four did not in 2011, and only one did not in There was not one province that failed to respond in any of the four years. The full score is the sum of 1,130 and 50, or 1,180. Each province s score is then converted into a percentage, i.e. the full score of 1,180 divided by the individual province s overall score. Based on the percentage, a ranking of all 31 provincial governments fiscal transparency is produced. DESCRIPTION OF SURVEY RESULTS In this section, we provide a description of the survey results over four years. All data on provincial transparency ranking used in this section are publicly available from the survey s annual report (Public Policy Research Center of Shanghai University of Finance and Economics 2009, 2010, 2011, 2012).

7 FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL 7 Overall low level of transparency After four years of the survey, one consistent finding is that the overall level of transparency remains very low at the provincial level in China, as can be seen from table 1. The table shows that the average transparency score, in percentage terms, was between 22 and 25 per cent, or only about a quarter of fiscal information requested was available. Hereafter when the transparency score is mentioned, only the number is used and the percentage sign is dropped. For example, 22 per cent will simply be referred to as 22. Limited improvement in budgetary transparency The level of transparency increased over this four-year period, from an average score of 21.7 in 2009 to 25.3 in 2012, an increase of about 17 per cent. While an increase of this level is rather limited overall and is from a very low base, the trend of steady, albeit slow improvement in transparency is still noticeable. Given the low level of transparency in the first year of the survey, any improvement in transparency indicates that the governments overall are paying more attention to this issue. Significant volatility in the level of transparency for many individual provinces For many provinces, there were significant changes in their transparency score and their ranking over the four-year period. For example, Fujian province s score decreased from 63 (or 1st ranked) in 2009 to 21 (or 18th ranked) in The score for Hubei province, however, shot up from 19 in 2009 to 45 (1st ranked) in Forty per cent of the provinces actually showed a decrease in score over this period, whereas 30 per cent of the provinces saw their score increase by 50 per cent or more. Significant variation in the level of transparency between provinces Along with volatility in individual provinces transparency levels, there was also variation in transparency levels between provinces. For example, there are ten provinces that scored consistently below the national average every year: Yunnan, Shaanxi, Henan, Chongqing, Ningxia, Jilin, Guizhou, Shanxi, Tibet, and Qinghai. The average score of this group was only 18 in 2009 and 19 in ANALYSIS OF FISCAL TRANSPARENCY IN CHINA In this section, we provide an analysis of the four findings observed in the previous section. The overall low level of fiscal transparency Even though by itself the finding that overall transparency at the provincial level is low is not particularly surprising, the survey does provide some empirical evidence, for the first time, of how low the level of transparency is, and this low level at the provincial level is similar to that found in the Chinese central government in the IBP s survey of national government budgetary transparency. It certainly is true that China is a latecomer to the transparency movement, as the Regulation on OGI was made official only in So it would be unrealistic to expect China to become fiscally transparent in just a few years. However, there are other more important legal and institutional factors that result in this low level of transparency. First, the biggest legal impediment for budgetary transparency is the People s Republic of China Law on Safeguarding State Secrecy (hereafter referred to as the Secrecy Law),

8 8 SHULIAN DENG, JUN PENG AND CONG WANG which was first enacted in Even though the Secrecy Law was revised in 2010, there was no substantive change in terms of the hurdles the law throws up for open government information, including budgetary information. The parameters for defining a state secret are so broad and generic that pretty much everything the government is involved in can be considered a state secret. Article 9 of the law gives a list of seven areas that can be considered national secrets. As if the first six areas (important national affairs, diplomacy, national defence, national economy, science and technology, and state security and law enforcement) are not vague and broad enough, the seventh area is stated as follows: other matters that are classified as state secrets by the state secret-guarding department. In other words, the government agency has full discretion over what is considered a national secret. Article 20 also says that when there is a question as to whether some information should be classified as state secret or not, it is settled by the national or provincial level secret-guarding department. This means that if there is information that the government agency feels reluctant to release to the public upon request, classifying such information as a state secret can be an easy excuse to deny such a request and there is nothing the public can do to change that, because the government essentially has the final say over this matter. More importantly, the Secrecy Law carries more legal authority than the Regulation on OGI, as the former is a law and the latter is a government regulation, which is subordinate to a law. If there is any conflict between the two, the Secrecy Law takes precedence. For example, the Regulation on OGI clearly stipulates that original and final budgets should be made public. However, over the four years of survey, the Secrecy Law was frequently used as a reason by the provincial governments to refuse to release the fiscal information requested to the research team. Second, due to the significant variation between the original and final budgets, provincial government officials are reluctant to release detailed budgetary information. At all levels of government in China, the fiscal year starts on 1 January and ends on 31 December. Typically each government starts preparing the budget six months before the fiscal year starts. However, the central communist party s annual conference on the following year s economic work, which provides the most substantive guidance on the budget preparation of all levels of governments, does not start until late November or early December. Once the goals and priorities are set for the following year at the conference, all levels of governments have to realign their own goals and priorities in their budgets with those set at the conference. By this time, it is too late to make changes to the budget before it is submitted to the legislature for review and final approval in March of the following year, three months after the start of the fiscal year. In order to respond to the new demands (which is a certainty) coming out of the economic conference, each province has to set aside a large sum in its budget for adjustment during budget execution, which may also be affected by other new central government policy directives coming out over the course of the year (Ma and Hou 2005; Ma 2009). Inevitably this means the final budget is substantially different from the original budget. Therefore to avoid embarrassment and critique from the public and their representatives over such a large discrepancy, the governments are reluctant to make public detailed information in their original budget, or final budget, or both. A lack of detailed fiscal information is a major factor for the low fiscal transparency score, as can be seen in table 2. Most provinces were able to supply answers to many of the questions regarding aggregate information, such as total level of spending and revenue. However, when it comes to the breakdown of aggregate information, very little information was

9 FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL 9 TABLE 2 Scores on categories of fiscal information (in %) Category average scores (%) Aggregate Detailed Aggregate Detailed Aggregate Detailed Aggregate Detailed Expenditure Revenue Department budget Revenue transfer Asset/liability Social Security funds State Enterprise funds available. Without detailed fiscal information, it is impossible to evaluate government spending decisions. Third, the government accounting system also poses hurdles for the publication of some financial information. As the governments in China use cash basis accounting, some fiscal information on governments assets and liabilities is either missing or misleading. On the asset side, the government is not required to factor in depreciation. On the liability side, it is not required to acknowledge any debt that is guaranteed by the government, such as loans to state-owned enterprises and the unfunded liability in social insurance funds, as long as the government does not have to make any cash payment in the meantime. Therefore the government either does not produce any balance sheets of assets and liabilities, or it produces ones that are incomplete and incorrect. Limited improvement in the level of fiscal transparency What then accounts for the limited improvement in fiscal transparency over the four years? This finding can be understood from the perspective of the centralized leadership management system in China. Under this management system, local governments are in fact administrative agents of the central government rather than being independent institutions. The main provincial leaders, such as the provincial governor and party secretary and their deputies, are all appointed by the central government and have to carry out the policies of the central government. They are accountable only to their supervisors in the administrative and party hierarchy rather than the public and the legislative body (Lu and Xue 2011). The central government and the party central committee use all kinds of indicators to evaluate the performance of local officials and tie these indicators to their promotion. Therefore the central government plays a pivotal role in determining how government affairs are carried out at the local level, including OGI. In recent years, OGI has become a worldwide trend. The central government is fully aware that OGI is an irreversible historical trend, and cannot completely ignore public opinion. The publication of the Regulation on OGI in 2008 was the first real concrete step taken by central government to open up the government. It was in this context that we conducted our first survey. Not surprisingly, the first year s score was the lowest in the four years of our survey and the variation in transparency score was also the largest in four years, as it was the first time that all provincial governments had faced such a large-scale request for fiscal information; they were not sure how to respond appropriately and how much information they should disclose.

10 10 SHULIAN DENG, JUN PENG AND CONG WANG The publication of the Regulation on OGI has both heightened the public s awareness of its right to know and provided the means for doing so. As a result, public information requests have increased considerably since then. For example, the number of information requests received by the Shanghai municipal government increased by almost 200 per cent from about 9,400 in 2008 to about 27,000 in 2011 (Shanghai Municipal Government 2009, 2012), and the number for Shandong province went from about 25,000 in 2009 to 30,000 in 2011 (Shandong Provincial Government 2010, 2012). In light of more information requests, the central government issued two directives in early 2010 to standardize government information disclosure and to make government affairs more open to the public. In January 2010, China s powerful State Council issued the Opinion on Improving Open Government Information Request, and in March of the same year, the Ministry of Finance (MoF) issued the Guidance on Improving Open Budgetary Information. While these two directives were aimed at improving government transparency by setting more specific rules on how governments should proceed with OGI, some of the rules actually had the opposite effect. For example, the MoF s Guidance says that the finance department of each level of government should be responsible for the publication of the government s overall budget, and each department within the government should be responsible for making its own detailed departmental budget public. This rule splinters the entire government budget into numerous smaller departmental budgets, and thus increases the time and cost in obtaining budgetary information for the entire government. This can be exemplified by the city of Guangzhou, the provincial capital of Guangdong. In 2009, the city s Bureau of Finance released the departmental budget of all its 114 departments on its own website, winning praise from the public. After the Guidance was published, the Bureau of Finance stopped publishing all departmental budgets on its website, and the number of departments whose budget was available on their own website decreased by 80 per cent. Another rule in both directives is the one item per request rule, meaning each information request should be about one piece of information only. This makes it much more difficult for the public to request budgetary information for the entire government, which by its nature will involve multiple pieces of information. Given the central government s cautiousness in its approach to information requests and transparency, it is no surprise that the average transparency score in 2010 remained essentially unchanged from that in However, at just about the same time, there were other prominent voices in the central government calling for more transparency. Premier Wen Jiabao made several public speeches commenting on the importance of making fiscal information public. On 23 March 2010, during a State Council meeting on clean government, he emphasized that the budget should include all information on revenue and expenditure and this budget should be made public to facilitate public oversight (State Council 2010). In August 2011, the Party Central Committee and the State Council jointly issued the Opinion on Further Opening Government Affairs and Improving Government Services, demanding that government agencies at all levels strictly observe the Regulations on OGI and take the initiative to promptly make fiscal information public, and that the information made public should be comprehensive. Also in August 2011, the Chinese Supreme Court issued a ruling in administrative cases on OGI, providing more legal protection for the public s right to know. It laid out the situations under which if the government denies an information request, the

11 FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL 11 public can sue and the court has to accept the suit, thus putting more pressure on the government. Given the central government s stronger exhortation for more transparency since March 2010 through speech, directive, and verdict, it is then not surprising that the local provincial governments responded by trying to be more responsive to public requests for government information and making more government information available to the public. Therefore after stagnation in 2010, we witness a slight increase in overall transparency score in 2011 and Volatility in transparency score for many individual provinces The overall slight increase, however, masks one unique phenomenon uncovered in the survey, which is the significant volatility in transparency score over this period for many provinces. No existing literature can help us understand this phenomenon in China. By comparing the ranking and the change in transparency score of each province from year to year, a fairly strong pattern of change emerges. Those provinces with higher (lower) score/ranking in year T were more likely to reduce (improve) their score/ranking in year T + 1. This phenomenon can be more clearly seen in figure 1. In each graph, the provinces are arranged in the order of their transparency ranking from the highest to the lowest. For example, in figure 1(a), the provinces, from left to right, are arranged in the order of transparency ranking in 2009, and the column shows the change in transparency score from 2009 to 2010 for that province. It is noticeable that in all graphs, reduction in score occurs more frequently to the left and improvement more frequently to the right. For further analysis, we conduct a simple regression analysis, by regressing each province s transparency score in year T (say 2009) on its change in transparency score from year T to T + 1 (say from 2009 to 2010). As expected, the coefficient is 0.5, and it is significant at the 0.01 per cent level. This variable alone explains 28 per cent of the variation in change in transparency score. What can explain this kind of behaviour in fiscal transparency? On the surface, there seems to be a certain arbitrariness in the level of transparency chosen by a provincial government. It shows that there is no standard as to how fiscally transparent a government should be. At a deeper level, such lack of standards is also a reflection of the conflict between the central government s stated desire to increase transparency and the existing legal and institutional barriers to any significant improvement in transparency. As the central government has repeatedly stated its desire to increase budgetary transparency, local governments, as the administrative units of central government, need to obey the central government s policy directive, even if that is against their self-interest. They need to do at least the minimum to pass muster with the central government and the public. Since the central government has not set any clear standards in any policy directive as to what level of transparency is acceptable, one way for the local government to meet this imagined level of acceptance is to look to their peers to find out. Our first year s survey set the benchmark for the acceptable range of transparency among all 31 provinces. Aware of what this range is, provincial governments now have the flexibility in moving up and down the range, as long as such movement does not reflect too negatively on the provincial government leadership. This explains at least why many provinces with low scores initially moved up in this range in subsequent years. Then why did relatively high scorers later retreat? This has to do with barriers posed by the existing legal and institutional restrictions. It is easy for the provincial governments to see the central government s ambivalence towards transparency. If the central government were so bent on transparency, it would have amended the National Secrecy Law to make

12 12 SHULIAN DENG, JUN PENG AND CONG WANG (a) Fujian Inner Mongolia Anhui Beijing Liaoning Jiangsu Tianjin Sichuan Henan Qinghai Guangdong Tibet Guizhou Shandong Shanghai Zhejiang Hubei Hunan Jiangxi Shaanxi Xinjiang Shanxi Guangxi Hebei Chongqing Ningxia Heilongjiang Hainan Yunnan Jilin Gansju -20 (b) Fujian Shandong Guangdong Hunan Zhejiang Shanghai Guangxi Sichuan Hainan Anhui Tibet Henan Hebei Beijing Jiangsu Jiangxi Shanxi Inner Mongolia Heilongjiang Tianjin Gansju Qinghai Hubei Liaoning Chongqing Yunnan Shaanxi Guizhou Xinjiang Jilin Ningxia -40 (c) Xinjiang Hebei Inner Mongolia Jiangxi Shanghai Jiangsu Hunan Guangdong Sichuan Shandong Shaanxi Zhejiang Anhui Henan Fujian Chongqing Beijing Liaoning Hubei Shanxi Tianjin Gansju Yunnan Guangxi Hainan Qinghai Tibet Jilin Heilongjiang Ningxia Guizhou FIGURE 1 Change in transparency score (in %): (a) from 2009 to 2010; (b) from 2010 to 2011; (c) from 2011 to 2012

13 FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL 13 it very clear what type of information is not a national secret and should be made public. However, the law was amended in 2010, two years after the publication of the Regulation on OGI, without the slightest improvement in clarifying or narrowing the scope of what is considered to be a national secret. With this law as a shield, much of the budgetary information can be withheld from the public, if the provincial government chooses to do so, without running foul of the central government directive on transparency. Besides, there clearly is no negative consequence in being less transparent, because for local government officials, what they care most about is the evaluation of their performance by their superiors and the opportunity for promotion; being transparent to the public is certainly not an important part of the evaluation criteria, which are overwhelmingly focused on local economic development and now increasingly on maintaining social stability. In other words, central government s directives on transparency carry no real weight, as is clearly evidenced in the case of Fujian province, which has the steepest drop in transparency score in four years. It is not a legal requirement and there is no real standard for what exactly is considered to be transparent; there is no real consequence for not following through. Such a contradiction cannot be lost on the provincial government officials, and thus it should not be a surprise that quite a few of those who scored high in the first year lowered their level of transparency in later years. This ambivalence on the part of central government also explains two other findings. First, it explains why, with the exception of Fujian province in the first year of the surveys, there were no other provinces that scored substantially higher than the others in any given year. The transparency score seems to be range bound (the range between the highest and lowest transparency score), and this range has become narrower over four years. Standing out from the group carries political risk. It risks alienating other provinces by making them looking bad without bringing any tangible benefit to oneself. And given the central government s ambivalence, it may also risk alienating the central government if the higher level of transparency is more than the central government can tolerate as it can eventually reflect poorly on the central government itself. Second, the ambivalence also explains why there is such limited improvement in transparency over the four years of the survey. Variation in transparency level between the provinces Despite the ups and downs in transparency scores of individual provinces, we still see some differences in the overall transparency level between provinces over the four years, even though such differences are not quite as large as those between countries found in the IBP survey. As described earlier, there are ten provinces, or a third of all provinces, that consistently scored below the average, whereas there are also other provinces that scored much higher than this group. What can account for this variation even within the centralized leadership management system mentioned above? Based on the literature review, there are three groups of factors that can have an impact on the level of transparency: political, fiscal, and social-economic. The political factor concerns political party competition, and thus is not relevant in this case as China has a one-party political system. The fiscal factor looks at the level of government spending, with more government spending leading to more transparency. The social-economic factor focuses on the characteristics of the population, such as income level, which is also seen as a proxy for economic development, and education level. To understand the impact of fiscal, social, and economic factors on transparency, we conduct a statistical analysis by using a panel dataset of 31 provinces over the four-year survey period. The dependent variable is the transparency score obtained from our four

14 14 SHULIAN DENG, JUN PENG AND CONG WANG TABLE 3 Correlation coefficients GDP REVENUE EDUCATION NETUSE FDI GDP REVENUE EDUCATION NETUSE FDI years of the survey. Based on the literature review, five independent variables are used to measure the fiscal, social, and economic factors, which are as follows: 1. The first economic variable is per capita GDP (GDP). As indicated in the literature review, it should have a positive effect on transparency. The variable is log transformed. The data are from the State Council s Development Research Center database. 2. The second economic variable is foreign direct investment (FDI). China s economic development over the last few decades heavily depended on FDI. With more FDI, foreign investors will demand more transparency from local government and should have a positive effect on the level of transparency. It is measured by the ratio of local FDI over local GDP. The data are from the State Council s Development Research Center database. 3. The first social variable is the education level (EDUCATION). The more educated the population is, the greater the demand for transparency. It is measured by the percentage of the local population that has gained a post-secondary degree. The data are obtained from China Statistical Yearbook compiled by the National Bureau of Statistics of China. 4. The second social variable is internet usage (NETUSE). The greater the number of people using the internet, the better informed and connected the population is, and this can lead to greater demand for transparency. It is measured by the percentage of the population using the internet. The data are from the Statistical Report on China Internet Development (China Internet Network Information Center, various years). 5. The fiscal variable is the size of government, measured by the per capita total government revenue (REVENUE). This should have a positive impact on transparency. The variable is log transformed. The data are from the State Council s Development Research Center database. One potential problem with the independent variables in this model is collinearity, as GDP per capita can potentially be positively correlated with all other variables in the model. Table 3 shows the correlation coefficients among the five variables. It turns out that GDP is highly correlated with REVENUE and NETUSE, moderately correlated with EDUCATION, and has a low correlation with FDI. Therefore the two variables REVENUE and NETUSE are eliminated from the model, and only three variables therefore remain in the model. After conducting a Hausman test on the dataset, it is found that a random effect model should be used. The result of the random effect model is shown in table 4. The two economic variables, GDP and FDI, have a significantly positive effect on the level of transparency. At the local level in China, a higher level of economic development and

15 FISCAL TRANSPARENCY AT THE CHINESE PROVINCIAL LEVEL 15 TABLE 4 Random effects model results Variables Coefficient Robust standard error t P > t GDP EDUCATION FDI openness to the outside world in general is associated with a greater level of transparency. This mostly confirms the findings in other research studies reviewed earlier. Education level, however, has no impact on transparency. DISCUSSION The level and trend of fiscal transparency at the provincial level in China exhibits characteristics that are both familiar and unique. On the familiar side, even in a unitary political system like China, there is still variation in the level of transparency among the 31 provinces, just as there is variation within countries and between countries found in other research studies. Even the reason for the variation among provinces is similar, namely that a higher level of economic development leads to a higher level of transparency. However, the magnitude of this variation between provinces is limited by a unique characteristic in China, which is the volatility in the transparency scores of individual provinces from year to year. This results from the contradiction between the central government s stated desire to improve fiscal transparency and existing legal and institutional barriers that prevent this from fully happening, an indication of the central government s ambivalence towards transparency. The low level of transparency and the very limited improvement over four years also resulted from this contradiction and ambivalence. Given this contradiction, no meaningful improvement in fiscal transparency can be made without major changes to these legal and institutional barriers, regardless of how much the central government has expressed the desire to make the government public. First, in terms of legal barriers, changes need to be made to either the Secrecy Law, or the Regulation on OGI, or the Chinese Budgetary Law. The national Secrecy Law needs to be amended to narrow the definition of secrecy and there needs to be a clear and specific list of information that is considered a national secret and what kind of information is exempt from this list. Failing that, another legal change is to upgrade the current Regulation on OGI to a Law on OGI, so that it is on a par with the Secrecy Law. In this case, the Law on OGI can specify exactly what kind of information has to be made public and what kind of information can be exempt from OGI. Again failing that, one more legal change that can have an impact on fiscal transparency alone is the Chinese Budgetary Law. The current Budgetary Law does not mention budgetary transparency at all. A revised Budgetary Law should not only make budgetary transparency mandatory, but also specify the standard of budgetary transparency, something to this effect: the disclosure of budget information covers all three government fund groups; it should cover assets and liabilities of each fund, in addition to all annual revenue and expenditure within and outside the budget; it should disclose economic as well as functional classification of budgetary information; and it should disclose information to requesters in the most convenient and least costly way. If there is any fiscal information that is considered to be a national secret, it should be clearly specified in the law. A