Tuesday, June 05, 2007

Getting dividend - the WTO-column

The story that the central government from now on will ask state-owned companies for dividend got very little attention, while it potentially can be a turn point in Chinese politics. Power depends very much on the ability to control money and the central government has been very much lacking that ability. The government abolished the dividend system at the beginning of the 1990s when there was not much to ask anyway, since most of the state-owned enterprises was close to bankruptcy.

"We have a strong central government, we have also a very strong local government." A famous Chinese economist summarized one of China's most difficult problems quite pointedly a few months ago at a dinner. Because the central government is, compared to local governments in the richer provinces, relatively underfunded, it often has more slogans than money to offer when trying to solve the nation's problems. When looking at the total take from the government of China's GDP, that is as a percentage not so much different from other countries. The China problem is that most of that revenue comes from land use rights and property rights and stays out of the hands of the central government. Of course, tax revenue has gone up too with the booming economy, but is still lagging behind, leaving education, health care and social care greatly underfunded.

Already in 2002 the World Bank figured out that when the government would get 4.8 percent in dividend from the state companies, all school tuition could be waived. Now, a few more fees could be waived.

Actually, that is what the central government has been doing by waiving much of the school fees at the country side and abolishing the agricultural tax in the past few years. While those decisions were being applauded, it was only one half of the action that was needed. By abolishing the agricultural tax individuals had a bit more too spend, but if left local governments at the country side virtually without money. One of the consequences has been that the experiments with grass-root democracy have ran into trouble, since nobody wants to run for a government with no money to spend.

Allowing the central government - and to a lower degree other government departments holding state-owned assets - to collect dividends again might shift the power balance from the local governments to the centre.

Not surprisingly the destination of this new revenue stream has been the cause of much internal quarrels. An argument between the Ministry of Finance and SASAC, the State Asset Supervision and Administration Commission, has halted the execution of the plan up to recently. In the compromise the Ministry of Finance had to give in and cannot use the dividend for health care or education directly, but the money has been earmarked for R&D that would benefit the state-owned companies directly.

That means that another struggle is laying ahead. But by creating this new fund, the central government does have a bit more leverage over competing departments.

Fons Tuinstra

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