1. ¹Department of Economics, University of Nevada, Reno, AB 319-C, Reno, NV 89557-0207, USA
2. ²Department of Economics, University of Washington, Box 353330, Condon 408, Seattle, WA 98195, USA. E-mail: thornj@u.washington.edu

Abstract

We review the fiscal evolution of China and Russia and how the process of creating a separate tax-financed public sector in the two countries differed. China's fiscal budget was consistently smaller than in Russia, and their fiscal decentralisation was consistently greater. In China, local governments that were allowed to keep marginal increases in local tax revenue had incentives to pursue growth-supporting policies, but the absence of financial markets and barriers to investment resulted in protectionism and inefficient use of capital. Interregional fiscal transfers from the centre provided modest fiscal equalisation in China, but not in Russia. Russia's status as a petro-state makes efficient management of the public sector particularly difficult. Rising world energy prices and resource rents have generated growing federal budget surpluses, and fiscal recentralisation has been associated with expanding state control in other areas.