Interregional transfers and the smoothing of provincial expenditure in China

Interregional transfers can smooth shocks to regional revenue and prevent spending from varying across time. This paper estimates the amounts of expenditure smoothing provided by interregional net transfers to China's provinces over the 1952-2001 period. The findings indicate that net transfers minimized the volatility of provincial expenditure by cushioning a relatively large fraction of province-specific revenue shocks. However, aggregate shocks to revenue diminished the amount of smoothing, and extrabudgetary funds increased expenditure volatility. Rich provinces were better insured against province-specific revenue shocks than poor provinces. The cross-sectional disparity in expenditure smoothing widened dramatically after 1994.