Financial Reform of Basic Education in China

Transcription

Economics of Education Review, Vol. 15, No. 4, pp. 423~44, 1996
Copyright © 1996 ElsevierScienceLtd
Printed in Great Britain.All rights reserved
0272-7757/96 $15.00449.00
Pergamon
S0272-7757(96)00016-7
MUN C. TSANG
College of Education, Michigan State University, East Lansing, MI 48824, U.S.A.
Abstract--Since the early 1980s, the financing of basic education in China has moved rapidly away
from a centralized system with a narrow revenue base to a decentralized system with a diversified revenue
base. This paper provides a critical assessment of the impacts of the financial reform of basic education
in China, focusing on issues of structure, resource mobilization, inequality, and inefficiency. It concludes
that while the reform has been successful in achieving the objectives of structural change and mobilization
of additional government and non-government resources, the current system is marked by notable weaknesses in terms of glaring inequalities and significantinefficiencies.Further improvementsof the financing
system require interventions both inside and outside the education sector. Copyright ©1996 Elsevier
Science Ltd
I. INTRODUCTION
2. SOCIOECONOMIC CONTEXTS OF
REFORM
SINCE THE EARLY 1980S, the financing of education
in China has undergone fundamental changes. In
particular, the structure of education finance has
moved away rather rapidly from a centralized system
with a narrow revenue base to a decentralized system
with a diversified revenue base. This paper is a critical review of the financing reform in basic education
promulgated by the Central Committee of the Chinese
Communist Party (CCP) in 1985. ~ It focuses on the
financing structure and strategies for resource mobilization, as well as on issues on efficiency and
inequality in the financing of basic education. The
purpose is to critically assess the accomplishments
and deficiencies of the financing reform in China, a
low-income country moving away from a centralized
economy towards a "socialist market economy". The
paper consists of four parts. The first part examines
the socioeconomic contexts of the reform. The second
discusses the two defining characteristics of the
financing reform: decentralization and diversification.
The third part assesses the impacts of the reform with
respect to financing structure, resource mobilization,
inequality and inefficiency in financing. The last part
summarizes the lessons of the reform so far and presents a scheme for charting further developments in
the financing of basic education in China.
The financial reform of basic education is a key
part of a larger education reform agenda undertaken
by the Chinese government since 1985. In contrast to
earlier education reforms that focused on curriculum,
teaching methods, and quality (China Education
Yearbook Editorial Board, 1984), the 1985 reform is
the first reform of its kind in Chinese education that
calls for a fundamental change in the tizhi ("system")
of education, focusing on the structure, financing, and
administration of education (People's Press, 1985).
The origin of the education reform can be traced
to changes in the leadership of CCP and its perspective on national development since 1978. With the
downfall of the Gang of Four in 1976 and the rise to
power of the "moderate" faction in the CCP under
Deng Xiaoping in 1978, the CCP-Ied state has since
pursued a modernization policy emphasizing economic development. The goal of economic development is the material improvement of the lives of the
people; it is to be achieved through economic transformation from a centralized planned economy into a
socialist market economy, opening up to the outside
and increased foreign investment, and the application
of science and technology. Education's role in
national development is no longer only ideological
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424
Economics of Education Review
(as was the case in the 1966-1976 period during
which the CCP was dominated by the "radical"
faction); education has also the important function of
meeting the skill requirements of a developing socialist market economy and is portrayed as the strategic
foundation for national development. 2
The education reform of 1985 stipulates a policy
of a nine-year compulsory basic education (primary
plus lower-secondary education), the aim of which is
to prepare capable and developmentally balanced
builders of Chinese socialism. This is an ambitious
policy given the socioeconomic realities of China at
that time and the weak financial base for education
in general and basic education in particular. China is
a low-income country (per capita GNP about US$300
in 1985), with uneven socioeconomic development
across regions and a huge population (about 1.2
billion people in 1995, with about 25 million newborns annually). There are large geographical and cultural diversities. In terms of enrollment, China has the
largest education system in the world (basic-education enrollment was 173 million in 1985). Thus, the
financial resources needed to implement the policy
are very substantial, and the barriers are especially
severe in the less developed regions (inland and other
poor areas). For a long period of time after the founding of the People's Republic of China, government
expenditure on education has been quite low compared with other developing countries. For example,
during the 1967-1985 period, total government
expenditure on education averaged 2% of GNP, and
7.7% of the total national budget. In the same period,
general-education expenditure (primary and secondary education) averaged 1.6% of GNP and 6.2% of
the national budget (computed from World Bank,
1991). Thus, by 1985 basic education was substantially under-funded relative to Chinese norms: teaching was one of the lowest-paid occupations, there was
a shortage of school buildings and equipment, many
existing school buildings were in poor condition, and
there were hardly any funds for non-personnel expenditure. The financial conditions were aggravated by
rapidly rising prices of non-personnel education
inputs, increasing social fees (such as fees on utility,
sewage, garbage) imposed on schools 3 and high repetition rates. 4
Not only was the financial reform of basic education necessary from the viewpoint of resource mobilization, it was also part of a larger public-finance
reform deemed indispensable for supporting the economic reforms pushed by Deng Xiaoping. A key strat-
egy to facilitate the transition from a centralized
planned economy to a socialist market economy was
the decentralization of decision-making powers and
financial responsibilities from the central government
to provincial and local governments. Decentralization
in public finance was part of this overall decentralization strategy, and the financial reform in education
was a component of the public finance reform.
The decentralization of public finance began its piloting phase at the end of the 1970s; it was promulgated by the State Council in February 1980 and was
implemented at varying speed among areas within a
region (province/autonomous region/centrally administered metropolitan area) and among regions (Tsang,
1990). Before this reform, public finance in China
was very centralized; it was characterized by the practice of tong shou tong zhi ("complete collection and
complete distribution") in which a lower-level
government would turn in all its tax revenues to a
higher-level government and would receive all its
expenditures from the higher-level government. All
tax revenues would ultimately be controlled by the
central government, and all expenditures would also
come from the central government. A lower-level
government would fall into one of two categories:
"subsidized governments" for which own revenue
was less than own expenditure (thus receiving a net
subsidy) and "subsidizing governments" for which
own revenue was more than own expenditure (thus
contributing a net surplus). The amount of total
government expenditure at a given level was based on
the corresponding amount in the previous year with a
marginal adjustment; and the initial expenditure level
was determined in the 1950s. While this practice had
an equalizing effect among areas and regions, it also
strongly discouraged initiatives for improving financial conditions at lower levels.
A multi-level public financing system has been created since 1982. This system is based on the practice
offeng zou chifang ("eating from separate pots") in
which each level of government is responsible for its
own finances. The design consists of three elements:
(1) defining the tax base and financial responsibilities
for each level of government, (2) providing decisionmaking power and autonomy to each level of government, and (3) specifying intergovernmental fiscal
relationship (in fixed amount of subsidy or surplus in
a five-year period). Within some broad guidelines, a
local government can decide on its tax efforts and
expenditure levels; it can keep its excess revenue for
its own use. Besides reducing administrative rigidity,
this decentralized public-finance system assumes that
local governments are better equipped to make financial decisions to meet their specific needs and conditions; it also provides incentives for improving financial conditions at lower levels. In this new system,
there are two types of intergovernmental financial
flow: a fixed amount of subsidy from or surplus to
the next higher level of government; and variable categorical grants from the next higher level of government for specific purposes in certain sectors and subsectors. There are government administrative
structures at the central, provincial, prefecture,
county, town/township, and village levels; financial
units are set up at the central, provincial, prefecture,
county, and town/township levels. For cities (urban
areas that correspond to the county level), there are
administrative units at the city, district, ward, and
community levels; financial units are set up at the city
and district levels. The 1982 public-finance reform
provided the framework and precondition for the
1985 financial reform in education.
3. DECENTRALIZATION AND
DIVERSIFICATION
There are two defining characteristics of the 1985
financial reform in education: decentralization in
financing structure, and diversification in financing
sources for education.
3.1. Decentralization
The decentralization in financing structure is
embodied in the principle of "local responsibility and
administration by levels," according to which lower
levels of governments (governments at and below the
provincial level) are responsible for the provision
(implying also financing) of primary and secondary
education and that different levels of education are
administered by different levels of government. A
common arrangement for counties is that the county
government, the town/township government, and the
village government will be primarily responsible for
the provision, financing, and administration of uppersecondary education, lower-secondary education, and
primary education, respectively. Besides, the larger
and better equipped ("key") lower-secondary schools
are administered and funded by the county government, and the larger and better equipped primary
schools ("key" primary schools in urban areas and
"center" primary schools in rural areas) are administered and funded by the town/township government.
425
A common arrangement for cities is that primary education is administered and funded by district governments, and secondary education is administered and
funded by the city governments. Other arrangements
for decentralized financing and administration are
permitted, and local governments should employ an
arrangement best suited to their conditions (China
Education Yearbook Editorial Board, 1991).
Before the reform, public expenditures on secondary education came from the central government.
Central funds were passed down through the intermediate levels to the county/city government, which
then allocated the funds directly to education institutions. Primary education, however, was not
financed by the central government because it was
the responsibility of provincial governments. Within
a province, primary education was administered by
county/city governments. In urban areas, primary
schools were directly financed by the county/city
government. In rural areas, primary schools were
financed by community contributions. 5 In the current
situation, secondary schools are financially supported
from within a province. In particular, lower-secondary schools are funded by the town/township government (except key lower-secondary schools, which are
funded by the county government). For primary education, key and center primary schools are financed
by the town/township government. In cities, primary
schools are funded by the district government. Since
there is no finance bureaucracy at the village level, a
village committee is set up to handle financial matters
concerning rural primary schools. Rural primary
schools remain to be financed primarily from community contributions.
Categorical grants in education constitute another
(but minor) source of government funding for education. Higher levels of government often allocate a
small percentage of their education budgets for distribution to lower levels for specific education purposes,
and these grants are equalizing in nature. 6
Thus, at a given level of government, there are two
sources of public funds for education: allocation from
the own budget of the government (financed from
own tax base), and categorical grants in education
from higher levels of governments. Allocation from
own budget is primarily used to support personnel
expenditure; the excess fund, if any, is used on nonpersonnel inputs and on school repair. Categorical
grants can be used on personnel, non-personnel, or
capital inputs, depending on specified purposes.
These two sources constitute the budgetary allocation
426
(operating budget) for education. As a guideline for
public allocation to education, the central government
recommends that lower-level governments adopt a
"two-growth" policy: that the rate of growth in budgeted education allocation should be higher than the
rate of growth in regular government revenue at that
level, and that per-student budgeted education expenditure should increase year by year.
3.2. Diversification
Two categories of diversification strategies can be
distinguished: broadening the base for the government's collection of revenue for education, and
broadening and intensifying non-government resource
mobilization at the school level. The first category
consists of education surcharges in urban areas and
education levies in rural areas; they are raised primarily for basic education. The second category consists of social contributions to education, school-generated funds, external resources, and school fees;
these strategies are used for all levels of education,
including basic education. Funds from these two categories of diversified sources constitute the extrabudgetary (or "off-budget") funds for education and
are to be used at the level of the revenue source.
3.2.1. Education surcharges and levies. Surcharges for education are imposed on three types of taxes
(commodity taxes, business taxes, and value-added
taxes) paid by enterprises and individuals. These surcharges are collected by a town/township government
and are used primarily for supporting basic education
in that town/township. The surcharge rate was set at
1% by the State Council in 1986 and was subsequently raised to 2% in 1990. Since 1984, the State
Council has allowed education levies to be raised in
rural areas. In rural areas, the town/township government may choose to impose levies on rural households (mostly peasants) at a rate of 1-3% of the agricultural taxes paid by these households; again,
revenue from rural education levies are to be used to
support basic education within the same locality. The
education surcharges and levies are new financing
sources for basic education. 7 They are often used on
non-personnel items, the repair or replacement of
school buildings, and school equipment.
3.2.2. Social contributions to education. In the
Law of Compulsory Education passed in 1986, it is
stipulated that the central government encourages all
social forces, including enterprises, administrative
bodies, and non-governmental organizations to set up
schools, provided these schools meet national standards and are subject to the administration of local
governments. The central government also encourages all types of social forces and individuals to provide voluntary donations to schools (State Education
Commission, 1990). This strategy is aimed at
directing the consumption of households towards education and at capitalizing on the traditional high value
that parents place on the education of their children.
It should be noted that contributions from nongovernment sources are not new for the basic-education subsector. Even before the financial reform,
rural primary schools were financed completely by
parents and the village community. Rural primary
school teachers, who were mostly non-government
employees (known as minban teachers), did not
receive a salary from the government, but they
obtained their living subsidies from the village community. The village community also made contributions in cash and in kind towards the construction
of school buildings. This practice continues for rural
primary schools after the reform. But social contributions to both primary and secondary schools intensify after the reform. Before the reform, most community members regarded the school as simply the
property of the state. With the decentralized administration after 1985, many community members began
to see schools in their community as their own
schools and were thus more willing to make contributions. The reform is also new in two respects: it
broadens the contributing sources, and it allows noneducation organizations to set up schools for basic
education.
3.2.3, School-generated funds. Without affecting
their academic mission, schools with proper resources
are encouraged to set up their own production units
where students may conduct work-study activities
and offer paid services. Such schools can generate
their own resources, for example, from student labor,
school-run factories, or rental of school premises to
users outside the school. School-run factories are
more often found in secondary schools than primary
schools; 40-50% of their profits are retained by such
factories for reinvestment in production, and the rest
is kept by the school (Tsang, 1990). Local governments are instructed to encourage school-run production units by integrating the production and sales
of these units within the administrative domain of relevant economic departments, assisting in the procure-
ment of production inputs and in sales, as well as
providing tax breaks. The detailed guidelines for
work-study programs and school-run factories were
announced by the State Council in 1983 and 1989.
The principle of having students engage in both learning and productive activities is not a new one for education (Price, 1984); what is significant about this
strategy is the governmental encouragement and
incentives for creating production units in schools as
a prominent method for mobilizing resources to
school. These funds are often used to purchase school
equipment, provide welfare benefits for school staff,
and for repair or replacement of school buildings.
3.2.4. External resources to education.
There is
increased attention to developing external sources to
support basic education. Contributions by overseas
Chinese can be an important source to improve the
physical conditions of schools in some regions,
especially coastal provinces. In the 1980s, higher education was most favored in the use of external capital
(especially from the World Bank); but basic education began to receive some attention in the past few
years (China Education Yearbook Editorial Board,
1991).
3.2,5. School fees. Students in basic education do
not have to pay tuition fees, but they have to pay
nominal amounts of other school fees to support nonpersonnel school expenditures) The focus of the
government school-fee policy is rather targeted at the
post-compulsory levels at which students (and their
families) will bear an increasing share of the costs of
education. However, in the past few years, in an
attempt to raise more funds for school, school administrators have asked parents to pay many kinds of
school fees, and such fees have become burdensome
to many parents.
4. AN ASSESSMENT OF THE FINANCIAL
REFORM OF BASIC EDUCATION
In assessing the financial reform of basic education
in China, this paper examines both the accomplishments and deficiencies with respect to the defining
characteristics and objectives of the reform. In
essence, the reform attempts to mobilize adequate
resources for basic education through decentralization
and diversification. The assessment can be divided
into four sections. The first section focuses on the
structure of basic-education finance. It examines the
427
extent to which the education finance system has been
decentralized and diversified. It also examines the
tension in intergovernmental fiscal relationships commonly exhibited in a decentralized system. The
second section examines education expenditures over
time to assess the resource-mobilization impacts of
the reform as well as the issue of adequacy in national
investment in (basic) education. The third section
deals with education difficulties in poor areas and
with education disparities among areas and regions in
China. It concerns issues of inequality and inequity
in China's move towards a decentralized system. The
fourth section documents inefficiencies in educational
spending and highlights efficiency improvement as a
financing option.
4.1. An Emerging Financing System for Basic
Education
The implementation of the financial reform was
carried out in a carefully planned manner. Before a
new financing strategy was promoted on a national
scale, it was pilot-tested in some parts of the country.
Autonomy and flexibility were essential features in
the local implementation in order to deal with the
tremendously diverse conditions across the country.
Within some general guidelines of central policies,
provincial and local governments had broad decisionmaking powers regarding the specifics of implementation (such as the phasing of implementation across
regions or areas, the amounts of fees or rates, the utilization of funds, etc.). The introduction of different
strategies was spaced out over time. Although the
reform of education finance was officially promulgated by the CCP in May 1985, most of the proposed
changes had been tested during the first few years of
the 1980s. It was a conscious decision of the government to implement the financial reform at different
speeds and to different extents across areas and
regions of the country. In some provinces, for
example, the reform began first in the more economically advanced areas and then moved to less
advanced areas.
Despite variations in the speed and extent of
implementation across areas and regions in the country, a new decentralized and diversified system of
basic-education finance has definitely emerged today.
In this system, each level of government has the primary responsibility for the financing of the level of
education at that administrative level. Budgetary allocation at that administrative level is the primary
source of the education financing, while extra-budget-
428
ary funds constitute the secondary source. The primary role of budgetary allocation is enhanced by the
"two-growth" policy. For example, national data from
the State Education Commission show that the central
government basically has no role in the financing of
budgeted expenditure for primary education and general-secondary education. For primary education,
provincial and local governments accounted for
99.98% of budgeted expenditure in 1991 and 99.97%
in 1992. And for general-secondary education, provincial and local governments paid for 99.85% of
budgeted expenditure in 1991 and 99.86% in 1992
(computed from State Education Commission,
1993a). The tiny central funds are used to distribute
categorical grants to local governments and to operate
the central education bureaucracy.
Provincial data further demonstrate that most of the
budgeted expenditures for primary and general-secondary education are financed by local governments
(at and below the county level). For example, in the
Guizhou province in 1988, budgeted expenditure totalled 271 million yuan for primary education and 134
million yuan for general-secondary education. For
primary education, the financing distribution was:
87.2% by local governments, 8.5% by provincial
government, and 4.3% by central government. For
general-secondary education, the financing distribution was: 93.3% by local governments, 5.3% by
provincial government, and 1.4% by central government (computed from Tsang, 1990). In short, the financial reform has made the local governments the primary financing source for budgeted expenditure in
primary and general-secondary education (and thus
basic education).
It may be noted that decentralization in basic education has taken two common forms in developing
countries since the early 1980s. The first form is
devolution of decision-making by which subnational
governments are primarily responsible for providing
basic education and have the authority to raise and
spend revenues. The second form is deconcentration
of decision-making, which involves the transfer of
authority to lower levels within central or higher-level
government agencies; it is often accomplished by
expanding the power of regional directorates
(Verspoor and Tsang, 1993; Winkler, 1988). The Chinese reform is characterized by the first form of
decentralization.
Over time, the system has become more diversified, in at least three respects. First, extra-budgetary
funds constitute an increasing share of total resources
to basic education (see next section). Second, each of
the diversified sources contributes significant amounts
of resources to education and has different uses, as
indicated above. Third, each type of education input
has multiple financial sources. For example, personnel costs are primarily financed by budgetary allocation from own level and community subsidies (for
minban or non-government teachers) and supplemented by school-generated funds and categorical
grants. Non-personnel expenditures are supported by
budgeted funds, school fees, and education surcharges
and levies. School equipment is supported by categorical grants, budgeted funds at own level, education
surcharges and levies, external sources, and schoolgenerated funds. Repair and replacement of school
buildings are financed by budgetary allocation at own
level, categorical grants, social contributions, external
sources, and school-generated funds. New school
construction is supported by budgetary allocation,
social contribution, and external sources.
Although the financial reform of basic education
is facilitated by the larger public-finance reform, its
development also reflects the constraints and tensions
of the larger reform and of the national development
process. First, before 1994, even though the public
finance system was moving towards a multi-level
structure, the types of tax revenue for various levels
of government were not rationalized and formalized
by law. In the education sector, urban surcharges and
rural levies are only temporary revenue instruments
to provide supplemental resources to primary and secondary schools; they do not constitute stable and
reliable financing sources for such schools. Budgetary
allocation is still the major financing source; and the
level of budgetary allocation for primary and secondary schools is highly dependent on the decision of
the key local government officials. One of the major
challenges in the early implementation of the reform
was to raise the consciousness of local government
officials about the importance of investment in people
through basic education. Many local government
officials thought that spending on infrastructure (such
as roads and buildings) could show more tangible
accomplishments during their tenure than spending on
basic education. The two-growth policy was introduced to influence the spending decision on basic
education at the lower levels. It has been reported that
local government officials, especially those in economically fast-growing areas, have become more supportive of basic education over time. These officials
recognize the increasing demand for skilled workers
429
in their local economy (Xiao and Tsang, 1994;
Zhongguo Jiaoyu Bao, 1994a).
Since early 1994, the Chinese government has
undertaken a major overhaul of the tax system. In
addition to introducing some new taxes and rationalizing the tax structure, the overhaul effort also
attempts to clearly define the tax revenues and
responsibilities of the central and lower levels of
government. As this overhaul is implemented, the
revenue base for financing the budgeted expenditure
on basic education will be affected, and it is still too
early to measure the impact of the new tax reform on
budgeted expenditure on basic education.
Second, the central-local fiscal relationship has
been an issue and a source of tension in the decentralization reform in public finance and in education finance. At issue is the proper balance in the distribution
of resources, power, and responsibilities between central and provincial/regional governments. Central revenue as a share of total government revenue has
dropped since the early 1980s. 9 In recent years, the
central government felt that the lower share has hampered its ability to undertake major investment projects that are national in scope. A more worrisome
concern is the loss of too much central power over
the provinces and regions. There is a fear that, as the
provincial/regional governments get more financially
independent, they will pay less attention to the directives from the central government. The CCP sees
some degree of central control as indispensable, both
in terms of exercising macroeconomic adjustment and
in ensuring political stability. The new tax reform is
aimed at increasing the share of central revenue in
total government revenue.
In basic education, this tension is manifested in two
ways. First, a complaint from local education administrators is that the devolution of financial responsibili~, has been carried out much faster than the devolution of decision-making power. It has been pointed
out that, while the central government is eager to pass
the responsibility of resource mobilization to the
lower levels of government (e.g. through the 1985
education reform pronouncement and the 1986 compulsory basic education law), the passing of policymaking power (e.g. regarding curriculum, resource
utilization, school organization, etc.) has not been as
expeditious. There is a need to further specify and
clarify the power and responsibilities of various levels
of government (Wu, 1994). Second, the reduction in
central revenue has also limited the ability of the central government to reduce glaring disparities in edu-
cation among regions and localities (see subsequent
section on education inequalities).
In short, much has been accomplished in the
decentralization and diversification of the financing of
basic education in China. The process of reform is
not yet completed. Two major issues remain to be
resolved in the near future: the proper balance in
power and responsibilities among different levels of
government, and reducing glaring education disparities among regions and localities.
4.2. Increased Resource Mobilization
For a long period of time, national investment in
education has been relatively low. A major objective
of the financial reform is to significantly raise
resources for education through both government and
non-government sources. The resource-mobilization
impacts of the financial reform can be seen from the
growth of resources for (basic) education and from
indicators of basic education.
Table 1 presents two measures of the government's
level of investment in the entire education sector:
public education expenditure (known as budgeted
education expenditure since the finance reform in the
1980s in China) as a percentage of total government
expenditure (fiscal effort measure), and public education expenditure as a percentage of national income
(national effort measure). '° These two measures
reflect obvious changes in the level of government
Table l. Public education expenditure ratios by plan
periods (1950-1992)
Periods
1950-1952
1953-1957
1958-1962
1963-1965
1966-1970
1971-1975
1976-1980
1981-1985
1986-1990
1991-1992
(reconstruction period)
(first plan)
(second plan)
{adjuslment period)
(third plan)
(fourth plan)
(fifth plan)
(sixth plan)
(seventh plan)
(eighth plan)
Average 1950--1978
Average 1979-1992
As %
govt.
exp.
As %
nat.
income
6.43
6.92
6.58
7.58
6.36
5.65
7.16
11.57
11.08
12.15
1.53
2.30
2.65
2.57
1.95
1.94
2.47
3.15
2.77
2.75
6.50
11.01
2.20
2.88
Sources: Computed from Ministry of Education (1984),
State Education Commission (1989, 1991, 1992, 1993a),
and State Statistics Bureau (1992, 1993).
430
investment in education since the onset of economic
reforms in 1979. During the 1950-1978 period, the
fiscal and national measures averaged only 6.5% and
2.2%, respectively. But for the 1979-1992 period, the
fiscal and national measures rose sharply to 11% and
2.9%, respectively. The increase was more pronounced during the first half of the 1980s (the sixth
plan), when the public-finance reform was rapidly
implemented and the education-finance reform was
also underway (even though it was officially promulgated in 1985). Though the level of government
investment in education in the second half of the
1980s was not as high as that for the first half of the
same decade, it was still substantially higher than that
in the previous three decades.
Table 2 shows the amount and distribution of
financing sources for primary and general-secondary
education during the period 1986-1992. ~ It documents both the rapid rate of increase in resources to
primary and secondary education and the significant
shift in the structure of financing sources. The top
panel shows budgetary and extra-budgetary resources
for education in current prices; the middle panel
shows these resources in 1992 prices; and the bottom
panel shows the percentage distribution of education
resources among budgetary and extra-budgetary
sources.
In current prices, total resources (sum of budgetary
and extra-budgetary sources) for primary and generalsecondary education increased from 23.98 billion
yuan in 1986 to 63.39 billion yuan in 1992, at an
annual rate of 17.6%. In real terms (1992 prices), the
annual growth rate was at an impressive 8.1% level.
In real terms, budgetary resources for primary and
general-secondary education grew at an annual rate
of 3.5%, while extra-budgetary resources for primary
and general-secondary education grew at an annual
rate of 19.7%.
The positive real growth in budgetary resources for
the entire education sector (thus including basic
education) can be related to the implementation of
the two-growth policy since the 1980s. For example,
between 1991 and 1992, total budgeted allocation to
education increased by 17.2%, which was higher than
the 11.8% growth in regular government revenue.
Per-student budgeted expenditure increased by 20.9%
for primary education and by 18.0% for general-secondary education (State Education Commission,
1993a). The rate of inflation in 1992 was only 5.4%.
The rapid growth in extra-budgetary resources can be
attributed to a combination of factors, including the
government's diversification policy, a growing
acceptance of resource mobilization through nongovernment channels, the traditional community support of education, and a fast-growing economy.
As a result of the sharply higher growth rate, extrabudgetary resources have become increasingly
important sources of funding over time for primary
and secondary education (and thus for basic
education). The share for extra-budgetary resources
for primary and general-secondary education
increased from 21.2% in 1986 to 39.1% in 1992.
Thus, much of the success in resource mobilization
for basic education originated in sources outside of
the regular budget of the government. The rising
share for extra-budgetary resources will likely continue in the near future.
Among extra-budgetary resources, surcharges/
levies and social contributions have been the two
major sources; they accounted for 63% of the total
extra-budgetary revenue for primary and secondary
education in 1992.
The increase in budgeted resources for primary and
general-secondary education was matched by similar
real gains in per-student budgeted expenditures on
primary and secondary education (see Table 3).
Between 1986 and 1992, per-student budgeted expenditure in real terms grew at an annual rate of 9.6%
for primary education and at 5.1% for general-secondary education. ~-~
The financial gains were accompanied by gains in
indicators of input and output of primary and generalsecondary education. Table 4 shows that, between
1986 and 1992, primary and general-secondary education have experienced improvements in terms of the
conditions of school buildings, the availability of laboratories and equipment, the qualification of teachers,
and the promotion rates of graduates. In addition,
there were advances in universal primary education,
literacy, and in primary enrollment.
In explaining the financial gains for basic education
in the past decade, it will be inappropriate to attribute
the gains to the implementation of the education policies alone; rapid growth of the economy was also an
important contributing factor. Between 1979 and
1992, the Chinese economy (in terms of GNP) grew
at an average rate of 9% per annum, national income
grew at 8.8% per annum, and government revenue
grew at 9.8% per annum (State Statistics Bureau,
1993). Economic growth increases the demand for
skilled labor; and additional investment in education
facilitates further economic growth. In the context of
431
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432
Table 3. Per-student budgeted expenditures (1992 yuan)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Growth ra~ (%):
1981- 1992 period
1986-1992 period
Primary education
Generalsecondary
education
53
62
68
74
83
80
93
101
101
114
121
139
142
172
191
206
226
224
218
234
235
259
269
301
9.2
9.6
7.1
5.1
Sources: Tsang (1994a), State Education Commission
(1993a), and State Statistics Bureau (1993).
favorable economic growth, the finance policies did
result in substantially more resources for basic education (Zhang and Zhang, 1992).
It is important to note that, though there have been
significant increases in resources for the entire edu-
cation sector in the 1980s, national investment in education in China today remains relatively low compared to other countries (see Finance Department,
1992). In 1992, government budgeted allocation to
education amounted to 12.2% of the total government
budget and 2.25% of GNP; '3 these ratios are still
lower than the corresponding averages for Asian
countries and for developing countries as a whole
(Tan and Mingat, 1989). The financial gains for the
education sector in the 1980s have not reversed the
negative effects of the long-standing low investment
situation in the previous three decades. Education,
especially basic education, remains significantly
under-funded in many areas in China, as reflected by
substandard per-student non-personnel expenditure,
lack of library materials, teaching aids, school equipment, and laboratory facilities, as well as the poor
physical conditions of many schools (Han, 1992;
Tsang, 1990).
Consider per-student budgeted expenditures
(PSBE) for primary and general-secondary education.
Even though PSBE for primary education increased
by 9.6% per year in real terms during the 1986-1992
period, it amounted to only 139 yuan in 1992 (or
US$27). The PSBE for primary education as a ratio
of per capita GNP for China was only 6.8%, which
was substantially lower than the average of 10-11%
Table 4. Indicators of primary and general-secondary education, China, 1986-1992
Percentage of primary school buildings
in dilapidated condition
Percentage of secondary school buildings
in dilapidated condition
Percentage of primary school teachers with
at least 12 yrs of education
Percentage of lower-secondary school teachers with
at least 14 yrs of education
Percentage of primary and secondary schools
equipped with standard laboratories and equipment
Percentage of children aged 7-11 enrolled in primary school
Percentage of counties achieving
universal primary education
Percentage of population illiterate
Percentage of primary school graduates
getting into lower-secondary schools
Percentage of lower-secondary school graduates
getting into upper-secondary schools
*Figure for 1988. tFigure for 1991. ~Figure for 1982.
Sources: State Education Commission (1988, 1992, 1993b).
1986
1992
7.5
1.9
7.3
2.1
62.8
82.7
27.1
55.6
* 10.0
t20.0
96.4
60.0
98.0
t70.0
$23.8
69.5
t15.9
79.7
40.6
43.4
for countries in Asia (State Education Commission,
1993a). Since personnel costs accounted for 88% of
budgeted expenditures in primary education, only 17
yuan per student (or US$3 in 1992) was available in
1992 to cover non-personnel expenditures on teaching
aids, school repair and maintenance, utilities, school
supplies, and administrative expenses. For generalsecondary education, PSBE was 301 yuan (US$55)
per student, consisting of 245 yuan (US$45) for personnel costs and 56 yuan (US$10) for non-personnel
costs. The PSBE for secondary education as a ratio
of per capita GNP was 14.6%, which was also low
compared with that of most of the Asian countries
(State Education Commission, 1993a).
Chinese authorities have recognized the relatively
low levels of public investment in education. A recent
policy document from the central government proposes that total public expenditure on education
should reach 4% of GNP by the year 2000. There
is an encouraging policy statement for the education
sector. One must, however, recognize the challenges
in implementing such a policy. First, to achieve the
target by year 2000, total public education expenditure has to increase by an annual rate of 17.6--20.1%
between 1993 and 2000 (State Education Commission, 1993a). Second, the implementation depends
critically on the response of lower levels of government who are the major sources of funding for education (especially basic education). As pointed out
previously, with increased financial autonomy for
local governments, the central government has less
power over local governments. Thus, in addition to
the use of policy directives and media campaigns, the
central government has to develop other policy instruments in the coming years. Two potential policy
instruments can be considered. The first is the development of a system of intergovernmental grants in
education (Tsang and Levin, 1983), including the use
of matching grants from the central and provincial
governments to lower levels of government to
increase the incentive for local expenditure on education. The second is the enforcement of legislation
that stipulates the spending level on education by
lower levels of government. In March 1995, the
People's Congress passed a comprehensive set of
education laws (People's Daily Overseas Edition,
1995). Chapter 7 of this legislation indicates that
government expenditure on education should increase
over time; but it stops short of specifying spending
levels or targets.
In short, there have been significant gains in budg-
433
eted and extra-budgetary resources for basic education since the reform] 4 However, national investment in basic education remains inadequate. Much
remains to be done to increase national investment in
basic education to bring it closer to the average level
for developing countries.
4.3. Difficulties of Poor Areas and Education
Inequalities
Experience in the past decade has shown that, in
its move towards a decentralized finance system,
China has to address some of the same issues confronting other decentralized systems, such as the
treatment of disadvantaged populations and areas and
education inequalities. While the overall level of
national investment in basic education remains inadequate, the conditions of basic education are
especially difficult for disadvantaged (poor, remote,
mountainous, and minority) populations and areas. In
poor areas, for example, the weak tax base and the
meager income of households impose strong limits on
how much budgetary and extra-budgetary revenues
can be raised for basic education. And it is more
expensive to provide basic education in mountainous,
remote, and minority areas (Li et al., 1988). A recent
survey (Jiang, 1992) of 374 counties in nine
provinces/metropolitan areas found that 70 counties
had a per-student budgeted primary education expenditure of less than 50 yuan (about US$11, compared
to a national average of US$22) in 1990. Not unexpectedly, the poor counties had significantly lower
primary net enrollment and completion rates and a
much higher ratio of dilapidated school buildings.
The financial conditions have worsened in the past
few years in poor rural areas and salary payments to
teachers in those areas were either stopped or delayed.
This is a disturbing development that can have
adverse consequences for teacher motivation and the
timely attainment of universal basic education in
those areas. Also, the economic burden of school fees
and other direct private costs of education has
reportedly forced poor parents from keeping their
children in school (Zhongguo Jiaoyu Bao, 1994b;
State Education Commission, 1993a).
The difficulties of disadvantaged populations and
areas are known to education policy-makers at higher
levels. Both the central and provincial education budgets have categorical allocations to aid them, but such
allocations are too small compared to the need. For
example, the Qiandongnan area in the Guizhou province (a poor province) had a per capita income of
434
US$120 in 1988. It received a total of 3.15 million
yuan from the central and provincial government in
categorical grants for primary and secondary education. But such grants amounted to only 4.3% of the
total education revenue for that area, or 5.2 yuan
(US$1.41 in 1988) per primary-secondary student
(Tsang, 1990). As pointed out previously, in 1992,
central funds amounted to only 0.03% of total budgeted funds for primary education and 0.14% for secondary education. Data from Guizhou show that provincial funds amounted to 8.5% of total budgeted funds
for. primary education and 5.3% for general-secondary education in 1988. The plight of poor areas
reflects a basic weakness of the financing system and
is a fundamental challenge to Chinese policy-makers
in their effort to achieve universal basic education.
To significantly increase spending on basic education
in disadvantaged areas, higher levels of government
(at the county level and above) have to mobilize substantially more resources for basic education and targeting such resources at such areas. Article 56 of the
1995 education law states that governments at and
above the county level should set up categorical
grants to support basic education in disadvantaged
areas. The intention of the law is admirable. But the
effectiveness of this article of the law depends on the
amount of categorical grants available.
In the current decentralized system, large disparities exist in basic education across locations and institutions (Tsang, 1994a). Table 5 presents the statistics
on per-student budgeted and extra-budgetary expenditures at the regional administration level (for 29 provinces, autonomous regions, and centrally administered metropolitan areas) in 1989. Expectedly, perstudent education expenditures were highly correlated
with per capita gross regional product. The coefficients of variation ranged at between 40 and 50%;
and the ratio of highest spending to lowest spending
varied between 4.1 and 12.2%. Moreover, per-student
or per capita education expenditure favors key/center
schools over regular schools, urban schools over rural
schools, and schools in economically advanced areas
over schools in economically backward areas (Tsang,
1990). Jiang's study of 374 counties finds that economically advantaged counties have a unit expenditure
twice that of disadvantaged counties (see Table 6).
Inequality and inequity are found in the treatment
of gongban (government) and minban (non-government or community) teachers. Gongban teachers'
monthly salary is about 50% higher than the total
monthly living subsidy received by minban teachers.
Gongban teachers have urban residence so that they
receive additional food subsidies and their children
can go to urban schools; they also receive pension
benefits when they retire; all these are not available
to minban teachers. Minban teachers are the backbone
of the teaching force in many rural areas; they work
in a more difficult environment and are treated less
well. ~5 Finally, in poor and minority areas, girls'
enrollment rate is falling far behind that of boys'.
Actually, the governments at various levels are
aware of the issue of inequality, and a number of
measures have been taken to mitigate the extent of
inequality. For example, after the public-finance
reform, there is still a transfer of resources from relatively well-to-do governments to relatively poor
governments, through the subsidy-surplus transfer
scheme. Categorical education grants are either limited to disadvantaged areas or students (such as grants
for exempting school fees for disadvantaged students)
only or they are distributed to wider areas but with
more favorable matching rates for poorer areas. Poor
areas or households are either exempted from education surcharges/levies or have lower surcharge/levy
rates. And some counties have pooled part of the education revenue collected at the town/township level
for use in the entire county; the pooled revenue is
redistributed
downwards,
favoring
poorer
towns/townships and villages/6 Nevertheless, these
measures are so far insufficient to mitigate glaring
inequalities in basic education in China.
With continuing reliance on local financing and
uneven economic development across the country,
widening inequality in basic education among different areas is probably inevitable. Financial improvement in basic education is likely to continue to be
widespread, though the extent of improvement varies
substantially among areas. An important policy concern for the government is not so much to eliminate
inequality, but rather to ensure that the least advantaged schools will provide a minimally acceptable
quality of basic education to their students (Windham,
1990; Tsang, 1994b).
The inequality between gongban and minban teachers has been a concern for the government
(Education Fund Research Group, 1988). In 1986, the
central government provided a categorical grant to
convert 200,000 minban teachers (about 7% of the
total in basic education) into gongban teachers; local
governments have subsequently provided a monthly
living subsidy to minban teachers. Because of the
costs of conversion and the unwillingness of gongban
435
Table 5. Statistics of per-student education expenditures at regional level, 1989
Primary education (yuan)
Budgeted
Extra-budg.
Mean
Standard
deviation
Coefficient of
variation
Maximum
(highest
spending)
Minimum
(lowest
spending)
Ratio of
Maximum/Minimum
Correlation with
per capita
gross regional
product
Sum
Secondary education (yuan)
Budgeted
Extra-budg.
Sum
116.3
56.6
52.5
24.6
166.2
69.8
250.2
107.8
105.1
49.3
352.7
141.0
48.6
46.9
42.0
43.1
46.9
40.0
297.9
95.8
392.9
586.2
202.1
788.3
46.4
7.8
75.4
144.5
22.7
173.7
6.4
12.2
5.2
4.1
8.9
4.5
0.9
0.6
0.9
0.9
0.7
1.0
Source: Tsang (1994a).
Table 6. Disparities in unit education expenditures at county level, 1990
Per capita income of
county
Per capita budgetary
expenditure
Per capita extra-budg.
expenditure
Sum of per capita
budgetary and extrabudg. expenditure
Per student budgetary
expenditure on primary
education
Less than 300 yuan
300-400 yuan
400-600 yuan
600-800 yuan
More than 800 yuan
Mean of sample
18.78
16.91
18.28
19.70
33.66
19.78
10.25
13.30
12.52
19.23
22.01
14.60
29.03
30.21
30.80
38.93
55.67
34.48
85.15
65.46
72.06
84.07
154.19
82.84
Sources: Jiang (1992) and Tsang (1994a).
teachers to work in rural areas, minban teachers will
remain the backbone of rural primary education in
the near future. A practical strategy is to continue to
improve the monthly compensation to minban teachers, and to provide some pension benefits to retired
minban teachers so that they feel more secured and
continue to work hard in rural areas. In fact, some
counties have started to establish a people's education
fund in an experimentation to assist minban teachers. 17
4.4. Inefficiency and Management Weaknesses
Much of increase in resources to basic education
has been taken up by personnel expenditure, to sup-
port employment of additional teachers (including the
conversion of 200,000 minban teachers to gongban
teachers), salary raises and additional benefits, and
compensation to retired staff (Education Fund
Research Group, 1988). Teacher salaries have
increased in order to keep up with the rising costs of
living. As a result of increased teacher costs, personnel expenditure as a share of budgeted expenditure
has increased over time at both the primary and general-secondary levels (see Figure 1). For example,
this share increased from 75% in 1984 to 88% in
1992 for primary education; it increased from 64% in
1983 to 81% in 1992 for general-secondary education. Nevertheless, teacher salaries remain low
436
90
85
8O
g
• Primary
• Secondary
I,.
70
65
60
I
L
i
I
I
I
I
I
I
L
19801981 198219831984198519861987198919901991
Year
I
I
1992
Sources: Prepared from figures given in State Educatkm Commission (1989, 1991, 1992, 1993a).
Note ltmt ftgures are not available for 1988.
Figure 1. Personnel expenditure as a share of budgeted expenditure (%).
compared to other occupations, because of rising salaries in other occupations and the hiring of additional
gongban teachers.
The overstaffing of gongban teachers in urban
areas is an obvious problem. For example, based on
staffing standards in 1984, a preliminary estimate put
the number of excessive school staff in primary and
secondary education at half a million for all the urban
areas in China, around 1987-1988 (Education Fund
Research Group, 1988). Since there were 3.27 million
school staff in primary and secondary education in
urban areas in 1988 (computed from State Education
Commission, 1988), 15% of this staff was excessive.
A study of Tianjin City finds large rates of overstaffing of teachers. Between 1979 and 1983, the rate
averaged 32.5% for primary education and 28.3% for
lower-secondary education (Li et al., 1988).
Observers of Chinese education have pointed out
that, compared to other Asian countries, primary and
secondary education in China have much lower student-to-teacher ratios and less instruction time per
week. A recent study by the World Bank compares
China with other countries (World Bank, 1991). In
China, the student-to-teacher ratio is 25 in primary
school and 17 in general-secondary school; the corresponding averages for Asia are 34 and 23. China
could reduce the number of teachers by about 30% if
it were to adopt the Asian averages (and part of the
savings could be used to raise teacher salaries). In
fact, in recent years, school principals have been
granted more power regarding staffing decisions; they
can hire fewer teachers and increase average
teacher pay.
Chinese teachers teach about 12-18 hrs per week,
while teachers in other countries teach about 20-25
hrs per week. But Chinese teachers also spend a large
amount of their time on off-instruction activities
(tutoring, class preparation, grading, home visits,
etc.), which are important for raising student learning.
Overall, Chinese teachers work at least as hard as teachers in other countries. And increasing instructional
time for Chinese teachers may not lead to increased
efficiency in basic education.
It has to be pointed out, however, that the education
sector is burdened with some personnel costs for
which the solution lies outside the education domain.
For example, the number of retired teachers and staff
equals 9% of the total number of teachers and staff
on duty; and about 9% of the personnel costs are used
to pay retired teachers and staff (Han, 1992). The education budget has to support the livelihood of retired
education personnel before there is an established
social security alternative.
The increasing share of personnel costs implies a
corresponding decreasing share of non-personnel
costs in budgeted allocation for education. Also,
instructional expenditures constitute a small part of
the total non-personnel cost. For example, in the
Guizhou province in 1988, total non-personnel expenditure on primary education amounted to 9.73 million
yuan; 17% of this amount was spent on instructional
items and 83% on non-instructional items. Among
non-instructional items, administrative costs (costs
related to meetings, travel, banquets, etc.) alone
amounted to 5.47 million yuan. For general-secondary education, total non-personnel expenditure
amounted to 10.51 million yuan; 16% of this amount
was spent on instructional items and 84% on noninstructional items (Tsang, 1990). Administrative
costs amounted to 5.56 million yuan. Thus, within
non-personnel expenditures, relatively too little is
spent on instructional items and too much on administrative items. It is not uncommon to find a lack of
instructional materials and equipment in primary and
secondary schools despite a significant increase in the
overall resources for primary and secondary education. In some schools, available instructional
materials and equipment cannot be fully utilized
because the lack of complementary items (Li et al.,
1988).
Besides the inefficiency in the utilization of person-
437
nel and non-personnel resources, weak financial management is also widely recognized as a major
resource-utilization problem (Li et al., 1988; Wang,
1989; Han, 1992; State Education Commission,
1992). Many education administrators lack proper
training and qualifications. Some government officials
at lower levels often divert education resources to
other uses and may even spend such resources freely
for personal gains. Though the precise amount of
diverted education resources may be difficult to estimate, it is believed to be substantial. For example,
Han (1992) reported that, in an audit of over 2000
education departments above the county level and
over 8000 schools, total diverted education fund
amounted to 420 million yuan.
High rates of repetition are another indicator of
inefficiency in basic education (see Note 4), although
it is not clear whether the high rates are due to the
finance reform. However, according to information
from the government, dropouts had increased in the
latter half of the 1980s. For example, in 1987-1988,
there were 4.28 million dropouts in primary schools
and 2.87 million dropouts in lower-secondary
schools. The average dropout rate was 3.3% for primary education and 6.9% for lower-secondary education; both rates were higher than the respective ones
for 1986-1987 (China Education Yearbook Editorial
Board, 1991 ).
Different strategies for increasing education
efficiency have been discussed in recent years in
China. Some strategies, such as better training of
administrators, reduction in administrative costs, and
increased power for school principals to control
excessive staffing of teachers, are feasible within the
education sector. Strategies that involve the reform of
personnel and social security systems are multi-sectoral in scope; they cannot be implemented in the education sector alone. Other strategies, such as increased
accountability and legal actions to control mismanagement and corruption, will be more difficult to
implement because of weak democratic tradition, significant lawlessness at local ievels, and the fragility
of the current legal system. Efficiency improvement
in education depends on interventions both inside and
outside of the education sector.
5. DISCUSSION AND SUMMARY
As part of a public-finance reform that supports a
larger economic transition from a centralized planned
economy to a socialist market economy, the reform
438
in the financing of (basic) education is necessary and
inevitable. In moving away from a centralized
financing system, the education reform gives lower
levels of government the power, responsibility and
incentives to mobilize government resources for education. It also encourages and develops non-government mobilization as an increasingly important secondary source to finance education. Based on the
objectives for structural change and overall resource
mobilization alone, the financial reform in basic education has been a success in China. Though this success can be partly attributed to appropriate government policies for education, it cannot be abstracted
from the larger economic and public finance reforms
as well as favorable economic growth during the
same period. In fact, it can be argued that the education finance reform could not have proceeded without a prior public-finance reform. Also, the increased
resources for basic education might have been significantly diminished if the national economy had
been stagnant.
However, the positive assessment of the financial
reform of basic education must be strongly qualified
by significant weaknesses in basic education,
especially the plight of disadvantaged population and
areas, glaring inequities and inequalities, and substantial inefficiencies. These weaknesses are partly
reflective of an emerging and unbalanced decentralized system and partly reflective of the characteristics
of Chinese society as this point in time.
In the transition from a centralized to a decentralized finance system, at least three issues have to be
addressed: properly defining the power and responsibilities of different levels of government; building the
capacity of local governments to properly exercise
new power and fulfill added responsibilities; and
achieving a tolerable level of inequity and inequality
within the system. China has gone a long way in
defining a decentralized structure. But it has yet to
strike a more balanced and stable fiscal relationship
between central and local governments. The taxation
reform in 1994 sought to clarify and redefine the revenue bases of central and local governments and to
increase the share of central revenue. This centrallocal tension will likely persist as a feature of a
decentralized finance system and as part of the larger
dilemma between central control and local autonomy
in China's transition to a socialist market economy.
Current weaknesses in decision-making capacity at
the local levels can be partly attributed to unqualified
personnel and other technical deficiencies. Local
capacity can be enhanced over time through the training of personnel, the development of information systems, and through the use of education inquiry to
inform education decisions. But mismanagement and
inefficiency in education are due not only to technical
deficiencies alone. Arguably, they are due more to the
lack of a strong system for accountability; and this
lack is symptomatic of current weaknesses in the
legal and political realms. In the long term, improvement in efficiency and in decision-making by local
governments will depend more on legal, political and
other reforms outside of education.
Substantial inequalities and inequities are a major
weakness of the current system. Govemment documents point out that the task of equalization in China
is made more difficult by the large population, the large
size of the basic education system, and uneven socioeconomic and cultural developments among different
regions and areas in the country (Finance Department,
1992). But so far efforts to reduce the large inequalities
and inequities in basic education have impacts more
symbolic than real; and financial equalization by central
and provincial governments has been very minimal.
Education disparities will likely increase over time
because of increasing economic disparities between
regions and increasing reliance on non-government
financing sources. In some decentralized finance systems, higher levels of government play a more significant equalization role (such as the state governments in
the U.S., which account for about half of total funding
for K-12 education~8). What is sorely needed in China
is the establishment of a system of intergovemmental
grants in education that channels more equalization
grants from central, provincial, and county levels to
respectively lower levels. The system should be aimed
at: (1) targeting resources at the most disadvantaged
populations and areas to ensure a minimally adequate
level of per-student expenditure (Tsang, 1994b); and (2)
reducing inequities and inequalities in the system to levels deemed tolerable in the Chinese context. The major
challenge in the implementation of this system consists
in garnering sufficient political commitment, not in
the technical tasks of designing appropriate funding
formulas. ~9
To summarize, Figure 2 presents the financing strategies that have been employed in the past decade
(in lower cases) and potential strategies that may be
employed in the rest of this decade and beyond (in
upper cases). The scheme in Figure 2 distinguishes
resource-mobilization strategies for basic education
into two broad categories: strategies that mobilize
439
i_
Decentralization
Education
and
--
--
.Government
surcharges
levies
EDUCATION TAXES
Categorical
grants
SYSTEM OF INTERGOVERNMENTAL GRANTS
Domestic
-- - sources -[--- - Diversification:
| Social c o n t r i b u t i o n s
|
School f e e s
/
School-generated
fund
Mobilizing
--
--
additional
Non-government
--/
/
resources
|
-[
-- - Overseas
-- • External
sources
Resource
mobilization
for
INCREASED COST
- RECOVERY IN POSTCOMPULSORY EDUCATION
contributions
aid
MORE AID FOR BASIC EDUCATION
- International
--
basic
education
-- - From other sectors
MORE REALLOCATION FROM OTHER SECTORS
!
Reallocating
• existing
resourses
SOME REALLOCATION FROM
- - POST-COMPULSORY EDUCATION
TO BASIC EDUCATION
i
-- -
WITHIN BASIC
EDUCATION
--
TEACHERS' TIME
BETWEEN PERSONNEL &
NON-PERSONNEL COSTS
REDUCING ADMINISTRATIVE
COSTS
IMPROVED FINANCIAL
MANAGEMENT
Figure 2. Resource-mobilization scheme for basic education in China.
additional resources to basic education, and strategies
that reallocate existing resources. Additional
resources can come from either domestic or external
sources. Domestic sources consist of government
sources and non-government sources. Existing
resources can be reallocated from other sectors to
education, from other subsectors of education to basic
education, and from alternative uses within basic education. Resource reallocation can be based on criteria
for promoting efficiency and equality/equity. The
strategies attempted so far fall largely within the cate-
gory of mobilizing additional resources, with relatively little attention to the category of reallocation of
existing resources. Subsequent strategies for addressing the current deficiencies should pay more attention
to the reallocation of existing resources in favor of
basic education, while consolidating and deepening
efforts to mobilize additional resources to basic education at the same time. This paper ends with a brief
discussion of these potential strategies for further
improvements in resource mobilization, equality/
equity, and efficiency in basic education.
440
5.1. Increasing Resources to Basic Education
5.1.1. Reallocation from other sectors to education. The State Education Commission would
like to increase the amount of budgetary allocation to
education gradually over time, from the recent level
of 2.5-3% to 4% of GNP, and from 12% to at least
15% of total government budget (Finance Department, 1992). It requires a further increase in education's share of the government budget at various
levels. The cooperation of lower-level governments is
critical; but this cooperation is not assured, and a
stronger enforcement method may be required. 2°
Budgeted allocation for (basic) education will be substantially increased if this reallocation is achieved.
5.1.2. Education taxes for basic education. With
the acceptance of education surcharges and levies by
the people, the central government has recently converted them into local taxes to be used primarily for
basic education. The objective is to make them a regular part of the local tax base for basic education and
to stabilize the amounts collected over time; local
governments can still decide on their taxing rates.
5.1.3. International subsidized loans. So far only
a small portion of international subsidized loans (for
example, IDA loans) has been used in basic education; basic education should claim a larger portion
in light of its prominence in the overall human
resource development effort undertaken by the
government. 2'
5.1.4. Reallocation within education and cost
recovery. With the rise in average household
income over time, urban households will be able to
bear a larger share of the costs of post-compulsory
education (such as upper-secondary education and
higher education) through increased education fees
(Chen, 1992). Also, there are large inefficiencies in
post-compulsory education (Han, 1992; Tsang and
Min, 1992; Hao and Wang, 1987; Wang, 1989). With
increased cost recovery and improved efficiency in
post-compulsory education, 22 higher levels of government (central, provincial, and county) should be able
to increase the amount of categorical grants to lower
levels to target basic education for disadvantaged
populations and areas.
5.2. Assisting
Disadvantaged
Areas
and
Populations
A system of intergovernmental grants in education
should be established to promote equity and equality
in education. Substantially larger intergovemmental
grants should be designated for basic education,
especially for disadvantaged areas and populations.
At the central and provincial levels, such funds for
local governments can come from the increased allocation to education and from reallocation within education. The expected increase in central revenue as a
result of the 1994 taxation reform should strengthen
the central capacity for equalization among regions. 23
At the county level, such funds for the lowest levels
can also come from pooled resources generated at the
town/township level. There is no shortage of equalization proposals; what is needed is strong political will
for equalization actions.
5.3. Improving Efficiency
Improving the efficiency in the utilization of available resources for basic education should become an
increasingly important financing strategy. Personnel
input can be more fully utilized by increasing the
student-to-teacher ratio and by granting more staffing
power to school administrators. Reallocation of
resources from personnel input to non-personnel input
may be necessary so that essential non-personnel
input (such as instructional materials and equipment)
is available. At the same time, non-instructional nonpersonnel costs such as administrative expenses
should be reduced. Financial management can be
improved by strengthening the project management
of education funds, providing training to administrative and finance staff, strictly enforcing financial regulations, and strengthening the system of monitoring
in education (Han, 1992; Jin, 1993). As pointed out
previously, efficiency improvement also requires
interventions outside of the education sector. One
should recognize that the success in the mobilization
of additional resources for basic education can be significantly undermined by inefficiency in resource utilization; this success may also unintentionally reduce
the pressure to raise efficiency. Thus, efforts to
improve efficiency have to be persistent and be part
of a long-term financing policy for basic education.
Acknowledgements--An earlier version of this paper was
presented at the Economics of Education Symposium held
in Manchester, U.K., on 19-21 May, 1993. The author
acknowledges the helpful comments of Douglas Windham
and two anonymous referees.
NOTES
1. This paper limits its scope to basic education only. The education reform of 1985 has also affected
the financing of other subsectors of education such as higher education, and vocational and technical
education.
2. The split in the leadership of the CCP with contrasting national development perspectives actually
began in the late 1950s. And with each subsequent change in CCP leadership, the role of education in
national development also changed (see Tsang, 1991 ).
3. For example, for primary and secondary schools, there was a shortage of 75 million m 2 of school
buildings; 45 million m 2 of existing school buildings were in dangerous condition; only 6% of primary
schools and 47% of secondary schools were properly equipped; and per-student non-personnel expenditure amounted to about US$0.40 for primary schools and US$1.8 for secondary schools (Education
Fund Research Group, 1988).
4. A study by the World Bank estimated that, for the 1986--1987 period, repetition rate averaged 37.8%
in grade 1, 29.4% in grade 2, 26.7% in grade 3, 24.5% in grade 4, and 19.0% in grade 5; the figure
was 30.6% for grade 6 in 1987 (World Bank, 1991). Recent information from six provinces in China
shows that the repetition rate in grade I was reduced by 8% per year during 1988 and 1995. The
decline was due to a combination of administrative policy (school principals were instructed to reduce
the number of repeaters) and quality improvement (World Bank, 1996, p. 82).
5. A rural community provided contributions, in kind and/or in cash, to school construction and to the
support of the livelihood of minban teachers (teachers that are not government employees).
6. For example, there are categorical grants for elimination of dilapidated school buildings, school repair,
subsidies to teachers, teacher training, vocational/technical education, and subsidies to five types of
disadvantaged areas (revolutionary areas, minority areas, mountainous areas, remote areas, and poor
areas).
7. Note that education surcharges and levies are not "official" taxes; they are additional payments based
on existing taxes. There are several reasons that education taxes were not adopted in the 1980s. First,
surcharges and levies are flexible. Since they are not taxes, they do not need a lengthy process for
approval and adoption and they are not regulated by law. They allow experimentation by local governments and can be dropped easily if experimentation is unsuccessful; and implementation can vary with
different local conditions. Second, taxes do not have a good connotation in China; surcharges and levies
would prepare people to accept the notion that they need to contribute more of their own resources to
support education. Third, from a logistic viewpoint, education taxes cannot be imposed before a reform
of the overall tax system (Tsang, 1990).
8. Information from the provinces of Shaanxi and Guizhou indicates that, in 1988, other school fees
amounted to about 5-7 yuan per student per year in primary schools, and about 12-18 yuan per student
per year in lower-secondary schools (computed from Tsang, 1990). In 1992, the national average was
17 yuan for primary education and 39 yuan for general-secondary (lower plus upper-secondary) education (State Education Commission, 1993a).
9. By 1990, central revenue accounted for about 35% of all government revenue in China; this share
is much lower than that for many industrialized (e.g. 64% for U.S.A.) and developing countries (e.g.
64% for Brazil). Also, central expenditure accounts for about 45% of all government expenditure in
China. This share is low compared to the average share of 70% for industrialized countries and 85%
for developing countries (World Bank, 1992). One objective of the 1994 tax reform is to increase the
central share of total government revenue to about 60%. The central share of total government expenditure will also increase correspondingly.
10. In the measure of national effort, national income is used in Table I instead of GNP because a
complete series for GNP is not available for the period concerned.
11. Secondary education is divided into two levels: lower-secondary education (mostly general education,
with some vocational/technical education in rural areas) and upper-secondary education (mostly general
education and vocational/technical education, with some teacher education). Financial data for lowersecondary and upper-secondary general education are reported together; thus, it is not possible to isolate
financial data for basic education (primary plus lower-secondary). Because of the much larger size of
basic education, the improvements in financial conditions for primary and general-secondary education
should reflect similar improvements for basic education. Note that education surcharges and levies, the
largest extra-budgetary source, are used primarily for basic education.
12. It is not possible to separate extra-budgetary expenditures for primary education and general-secondary education in the published data. Thus, it is not possible to compute per-student budgeted and extrabudgetary expenditure for each level of education. However, given the rapid growth in extra-budgetary
441
442
expenditures, one can reasonably assume that per-student budgeted and extra-budgetary expenditures
for both education levels have also increased in real terms over time.
13. While extra-budgetary resources contain most of the non-government expenditures on education in
China, they do not include the non-fee direct private costs (DPCs) of education (such as parental
spending on textbooks, writing supplies, school bags, transportation costs, additional costs of school
uniform and food, etc.). Total non-government education expenditure (all education expenditure outside
the regular government budget) equals the sum of total extra-budgetary expenditure and total non-fee
DPC. A recent study estimates that, in primary and general-secondary education, total non-fee direct
private cost of education is equal to about four times of the total school fee (Tsang, 1994a). Using this
finding, it can be shown that, in 1986, total non-government expenditure on primary and generalsecondary education was 15.47 billion yuan (in 1992 prices), or 33% of total government and nongovernment expenditure on primary and general-secondary education. In 1992, total non-government
expenditure on primary and general-secondary education was estimated to be 42.36 billion yuan (1992
prices), or 52.3% of total government and non-government expenditure on primary and general-secondary education. Thus, by 1992, total expenditure outside the government budget exceeds total government
budgeted expenditure for primary and general-secondary education!
14. In 1992, total government budgeted expenditure on education amounted to 53.9 billion yuan, or 2.25%
of GNP. However, part of the extra-budgetary expenditure (16.7 billion yuan) was also under the
government finance account. Thus, the total education expenditure under the government finance
account was 70.5 billion yuan, or 2.94% of GNP. The national effort indicator would be higher if the
latter education expenditure measure was used. Nevertheless, the 2.94% level was still lower than the
average level for developing countries.
15. Minban teachers work in rural areas. In 1990, they constituted 41% of all the full-time primary
teachers and 10% of all the full-time lower-secondary teachers (computed from State Education Commission, 1990). Data from two provinces in 1989 indicate that gongban teachers received a monthly
salary of about 105 yuan; minban teachers had a monthly living subsidy of 40 yuan from the government
and 30 yuan from the community. Food subsidies for urban residents amounted to about 70 yuan per
month (Tsang, 1990).
16. Louchuan county in Shaanxi, for example, allows its towns and townships to keep 80% of their
education levies and surcharges. The remaining 20% is sent to the county government to support basic
education in the entire county. Note that, in order to maintain local incentives, the great majority of
the funds are kept at the town/township level.
17. The people's education fund was started as early as 1984 in Pingdu County in Shandong Province
(Education Fund Research Group, 1988). It was then gradually adopted and adapted by other counties
in the country. In recent years, there are two major sources of revenue for the fund: 1-3% of the annual
net income of rural population (with higher rates for higher-income rural households) and 1% of the
basic salary of cadres; some counties also ask individuals engaged in business and enterprises at the
town/township level to contribute. As much as 90% of the revenue is used to provide salary and benefit
to minban teachers; the rest is used on non-personnel items in basic education, teacher training, adult
education, and vocational/technical education. The payment to minban teachers replaces the living
subsidies provided by rural households. The fund is aimed at providing minban teachers with a regular,
stable, and larger monthly income and to increase the amount of pensions to retired minban teachers.
Some counties are closing the gap in compensation between minban teachers and gongban teachers.
18. Much of the state education fund is distributed to local school districts in different forms of equalization grants. Nevertheless, local resources still constitute over 40% of the total funding for K-I 2 education in the U.S., and significant disparities in local spending still exist (Cohn and Geske, 1990).
19. The education law of 1995 states that governments at and above the county level should set aside
some categorical grants to assist poor and minority areas. But it does not specify the level of effort by
these government units or the spending targets for poor and minority areas.
20. The education law of 1995 states that various levels of government should increase budgeted allocation to education; more specific spending ratios and guidelines will be determined by the State Council. This is somewhat of a setback for proponents in the education sector who want to have specific
spending ratios and guidelines written in the education law.
21. Since the early 1990s, more subsidized loans from the World Bank to China have gone to basic
education. The limitation of this strategy for China is that the amount of international subsidized credit
for China will decrease in the near future as China continues to grow economically and as there is
more demand for a diminished supply of such credit.
22. In China, higher education's share of the total public (budgeted) education expenditure increased
rapidly in the early 1980s. By 1985, this share was about 28%. It is much higher than the average of
20% for developing countries (Tsang, 1988). But since 1985, higher education's share in China has
been reduced (to about 21% in 1991). There may still be room for an additional 1-2% reduction in
the share.
23. In 1994, as part of its anti-poverty initiative, the central government identified 592 poor counties
across the country. These counties are expected to receive additional assistance from central and provincial levels in education and other sectors. In May 1996, the government announced that it would
substantially increase the amount of central categorical grants in education during the ninth plan period
(1996-2000).
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Financial Reform of Basic Education in China

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