The rise of Asia is regarded in most of the world as primarily an economic phenomenon. Asian economies have rebounded robustly since the 1997 financial crisis, with growth rates in many countries greatly exceeding the global average. Yet corruption remains a problem throughout the region, significantly cramping the extent and potential of Asia's "rise."

In the 2005 "Corruption Perceptions Index" produced by the watchdog group Transparency International, most of the 22 Asian nations received low rankings and scores. Indonesia, for example, is ranked 137th among 159 nations. India and China fare only somewhat better, ranking 88th and 78th respectively. (The United States, by comparison, ranks 17th in the world.) Corruption -- defined by the United Nations Development Program as the abuse of public power for private benefit through bribery, extortion, influence peddling, nepotism, fraud, or embezzlement -- not only undermines investment and economic growth; it also aggravates poverty. In India, even the

poor have to bribe officials to obtain basic services.

Graft also undermines the effectiveness of states. The World Bank, for example, has estimated that the Philippines government between 1977 and 1997 "lost" a total of $48 billion to corruption. Why is graft a serious problem in Asian countries? Can their leaders minimize it and thereby further improve and sustain economic growth -- or is this task hopeless? My research suggests that curbing corruption in most Asian nations is difficult, mainly because of a lack of political will. However, it is not an impossible dream, as the examples of Singapore and Hong Kong demonstrate.

In this paper we set out to accomplish three objectives. First, we wanted to track and describe the way the fiscal reforms have been implemented in China's townships. Second, we have tried to identify the effect that the fiscal reforms have had on the fiscal health of the township. This objective was pursued in three contexts: the effect on the average township; the effect on townships in different provinces; and the effect on townships in poor and rich townships. Finally, we sought to assess the impact that the fiscal reforms had on village fiscal health and farmer satisfaction.

Although farmers certainly have expressed their support for tax and fee reduction through a variety of media, our results show that the fiscal reforms are far more complicated and complex than tax reduction policies. They include a large set of policies that have sought to reassign expenditures, realign responsibilities (for control over resources that flow from county to town and town to county), reduce the importance of extrabudgetary and self raised funds, and increase investment into the public goods infrastructure in rural areas. When assessing the broad impact of these policies on township fiscal health, we find the average township has not fared well. Although county to town transfers have risen, the targeted transfers to offset the decline due to the tax and fee reduction policies do not nearly cover the losses of fiscal resources in the system as a whole. In addition, many policies are putting increasing control in the hands of the county financial office. through changes such as increasing requirement to hand up town to county transfers and expenditure reassignments (even though the fiscal resources come out of the township's budget). Hence, overall the fiscal condition of township's operating budget has clearly deteriorated between 2000 and 2004.

The bright side of the fiscal reforms has come in the area of capital budget management and flows of fiscal resources into new infrastructure investment. Between 2000 and 2004 there has been a veritable explosion of investment into the rural economy, mostly in roads, but also into irrigation, drinking water and to a lesser degree into clinics. The investments have risen largely due to the rising allocation by upper level governments. While we show that the rising investment from any source increases farmer satisfaction, there are some concerns with the new effort to improve rural infrastructure. First, in many places (and especially in Jiangsu and other richer townships) as investments from above have risen requirements for matching funds apparently have led to an increase in township debt. Second, the increasing reliance investment from above also has a drawback. While any investment from any source is shown to increase the satisfaction of farmers, ceteris paribus, when the investments come from above, they appear to reduce farmer satisfaction. Apparently, when villages are less involved with the project selection, design and implementation, the projects leave farmers less satisfied.

This report provides a preliminary examination of changes in village fiscal affairs between 2000 and 2004. The basis for this assessment is a survey of 101 villages in 50 townships in 25 counties in 5 provinces in China that was carried out between March and April of 2005. The provinces include Jilin, Hebei, Shanxi, Sichuan and Jiangsu. In each province, the counties, townships and villages were selected to provide a representative cross-section. Our village survey was complemented by an investigation into fiscal changes in each of the 50 townships. In this report, we focus on the revenue and expenditure implications of these changes at the village level. We provide an overall assessment for all 100 villages, but also examine village-level differences across provinces, as well as differences between villages in the richest and poorest quintiles of our sample.

As seen in the previous sections, China's reformers, more than anything, have followed a
strategy based on providing incentives through property rights reforms, even though in China the shift to private ownership is today far from complete. The reforms started with the Household Responsibility System (HRS), a policy of radical decollectivization that allowed farmers to keep the residual output of their farms after paying their agricultural taxes and completing their mandatory delivery quotas. Farmers also began to exercise control over much of the production process (although in the initial years, the local state shared some control rights and in some places still do today). In this way the first reforms in the agricultural sector reshuffled property rights in an attempt to increase work incentives and exploit the specific knowledge of individuals about the production process (Perkins, 1994). In executing the property rights reforms, leaders also fundamentally restructured farms in China. Within a few years, for example, reformers completely broke up the larger collective farms into small household farms. In China today there are more than 200 million farms, the legacy of an HRS policy that gave the primary responsibilities for farming to the individual household. McMillan, Whalley and Zhu (1989), Fan (1991), Lin (1992) and Huang and Rozelle (1996) have all documented the strong, positive impact that property rights reforms had on output and productivity. 

In addition to property rights reform and transforming incentives, the other major
task of reformers is to create more efficient institutions of exchange. Markets-whether
classic competitive ones or some workable substitute-increase efficiency by facilitating
transactions among agents to allow specialization and trade and by providing information
through a pricing mechanism to producers and consumers about the relative scarcity of
resources. But markets, in order to function efficiently, require supporting institutions to
ensure competition, define and enforce property rights and contracts, ensure access to
credit and finance and provide information (John McMillan, 1997; World Bank 2002).
These institutions were either absent in the Communist countries or, if they existed, were
inappropriate for a market system. Somewhat surprisingly, despite their importance in
the reform process there is much less work on the success that China has had in building
markets and the effect that the markets has had on the economy.