Rising with the tide without flipping the boat - analyzing the successes and challenges of fiscal capacity building in China

While many developing countries experience a short period of economic boom and then spiral quickly into periods of deficit, currency fluctuation, and indebtedness, China has been able to sustain rapid economic growth and maintain solid fiscal capacity for the past 30years, even during the Asian financial crisis in the late 1990s and the global recession in the beginning of the 21st century. This article examines three key strategies behind China's fiscal success - its flexibility in adapting tax policies to the changing economic and social conditions, its success in realigning the intergovernmental fiscal relationship in 1994 and forcing subnational governments to become more entrepreneurial in revenue generation, and its pursuit of institutional reforms since the mid-1990s to improve the government's capacity in budgeting and financial management. The article evaluates the implications of the Chinese experience for other developing countries and discusses the future challenges of fiscal reforms in China. © 2012 John Wiley & Sons, Ltd.