Financial Policies and Financial Management to Reduce Poverty in China Chu Limin Agricultural Department, Ministry of Finance October 2007

1. Financial policy framework for poverty reduction Financial policies and inputs targeting poor areas and poor population feature in their diversity and magnitude. In general, pro-poor financial policies include the following four components ： Financial policies and inputs targeting poor areas and poor population feature in their diversity and magnitude. In general, pro-poor financial policies include the following four components ： –--- Financial transfer to specific regions Including financial transfer to areas with poor counties and townships, old revolutionary basis areas and remote and bordering areas. Including financial transfer to areas with poor counties and townships, old revolutionary basis areas and remote and bordering areas.

1. Financial policy framework for poverty reduction –---- 区域性开发政策。 Regional development policies Including western development, ecological construction like grain- for-green, and other effective policies. Including western development, ecological construction like grain- for-green, and other effective policies. –----Public service polices Equalization of access to basic public services for poor areas. Including financial security for compulsory education, public health development and, new cooperative medical system, social security system (including minimum allowance) and relief system in rural areas. Equalization of access to basic public services for poor areas. Including financial security for compulsory education, public health development and, new cooperative medical system, social security system (including minimum allowance) and relief system in rural areas. –---- Poverty targeted financial support

２． Patterns and features of management over poverty reduction funds 2.1. Patterns of providing poverty targeted finance 2.1. Patterns of providing poverty targeted finance ----Supply-orientation ----Supply-orientation –According to the Program of Poverty Reduction in Rural China ( ), central finance and provincial finance increased inputs to poverty year by year. From 2001 to 2007, central finance budgeted 85 billion RMB for poverty reduction, and provincial finance devoted more than 21 billion RMB

２． Patterns and features of management over poverty reduction funds 2.2. Patterns of management over poverty targeted finance 2.2. Patterns of management over poverty targeted finance ----Multiple managing agencies ----Multiple managing agencies –The agencies include Ministry of Finance, State Development and Reform Commission, State Ethnic Affairs Commission, LGOP, Ministry of Agriculture, Ministry of Forestry, etc ----Take account of objective factors ----Take account of objective factors –The factors include poor population, farmers ’ net income, local financial power and policy adjustments

２． Patterns and features of management over poverty reduction funds 2.2. Patterns of management over poverty targeted finance 2.2. Patterns of management over poverty targeted finance ----Provincial levels play key roles in identifying projects and managing funds ----Provincial levels play key roles in identifying projects and managing funds –Responsibility, tasks, funds and power regarding the finance reach provincial levels of governments. Its applications are done bottom- up Manage funds by special accounts and pay after reporting Manage funds by special accounts and pay after reporting –The funds are passed among state treasury agencies, managed by special accounts, delivered in a uniform way by state treasury or by reporting system.

２． Patterns and features of management over poverty reduction funds 2.2. Patterns of management over poverty targeted finance 2.2. Patterns of management over poverty targeted finance ----Multi-department and multi-level monitoring ----Multi-department and multi-level monitoring –1.Monitored by auditing agencies ； –2.Monitored by financial monitoring agencies ； –3. Monitored by project implementing agencies ； –4. Monitored by the exterior, including public opinion and the mass

Management over poverty reduction funds is generally featured as follows ： First, number of poor population and poverty severity are taken as the most important criterion to distribute funds in a just and equal way. Second, rights to funds are decentralized from central government, leaving poverty reduction funds at the disposal of local governments who know more about local reality. Third, the funds are spent to address key aspects of poverty, e.g. refreshing the images of poor areas, raising the poor’ s income, human quality and capability Fourth, management over funds is moving down to lower levels of government and monitoring instruments are improved over time.

2.3. Problems with the management ----No positive incentives to fund distribution ----No positive incentives to fund distribution Distribution of funds by objective criterion tends to lose positive incentives. Selecting key poor areas by county as the basic unit tends to lose flexibility. Distribution of funds by objective criterion tends to lose positive incentives. Selecting key poor areas by county as the basic unit tends to lose flexibility.

2.3. Problems with the management ----Dilemma of targeting ----Dilemma of targeting It is swinging between support to poor regions and to poor people, and also between support to the absolute poor and to low incomers. It is swinging between support to poor regions and to poor people, and also between support to the absolute poor and to low incomers.

2.3. Problems with the management ----Managers too far on top of the pyramid ----Managers too far on top of the pyramid Funding projects, identified and managed by provincial governments, fail to meet local demands, and prolong the application and approval of projects through multiple levels of administration, to keep projects from working on time. Funding projects, identified and managed by provincial governments, fail to meet local demands, and prolong the application and approval of projects through multiple levels of administration, to keep projects from working on time.

2.3. Problems with the management ----Composition of actors involved is unreasonable ----Composition of actors involved is unreasonable Governments are dominant, with the power especially converged at senior levels, while non- governmental organizations and poor citizens are weak. Governments are dominant, with the power especially converged at senior levels, while non- governmental organizations and poor citizens are weak.

3. Guidelines for the new era 3.1 Maximize the functions of public finance to equalize access to basic public services in poor areas and realize sustainable development ----Increase transfer to poor areas and give them more financial power ----Improve institutional system for urban-rural balanced development, and prioritize support to poor rural areas ----Strengthen security of public products and services for rural areas and tilt it to poor rural areas

3.2 Continue to increase finance for poverty reduction Finance for poverty reduction includes the inputs and management of money and more importantly the political will of government. Therefore, for higher efficiency of the finance, it requires on the one hand improving policies and strategies up to practical needs, and on the other enhancing institution, monitoring and management. Entering the new century, major changes have taken place in poverty reduction for rural China, which decides the next step of finance for poverty reduction should be performed with bigger amount, better management, clearer guidelines, improved policies, and innovated mechanism, so as to be more effective.

3.2 Continue to increase finance for poverty reduction ----Expand the connotation of development-oriented poverty reduction ----Expand the connotation of development-oriented poverty reduction –With the rural minimum allowance system and equalization of access to public services in place, the government should shift from targeted to comprehensive poverty reduction, by expanding the focus from targeted spots to areas and communities. The priorities here should be capacity building for poor people and poor areas to develop and to fight against poverty.

3.2 Continue to increase finance for poverty reduction ----Reset the objectives and tasks ----Reset the objectives and tasks –The objectives should shift from subsistence to income increase and reduction of gaps. The tasks should be to improve infrastructure conditions, human quality, capability and economic growth.

3.2 Continue to increase finance for poverty reduction ----Identify priorities of poverty reduction ----Identify priorities of poverty reduction Apart from village-based development, infrastructure construction, development of locally-special industry with comparative advantages, resettlement and training for labor transfer should also be the priorities. Apart from village-based development, infrastructure construction, development of locally-special industry with comparative advantages, resettlement and training for labor transfer should also be the priorities.

3.2 Continue to increase finance for poverty reduction ----Innovate mechanism ----Innovate mechanism –To address the defects of management over poverty reduction finance, financial agencies at various levels have for years explored and gained a lot on how to improve the mechanism and innovate the pattern of management. Decentralize approval of projects Appropriation in advance Reform the approach to deliver subsidized-interest loans Pilots of award and subsidy funds Performance evaluation Build an information system Pilots of mutual financing at village level in poor villages Pilots of integrating resources for clustered development

3.2 Continue to increase finance for poverty reduction For the next step, focus should be given to: For the next step, focus should be given to: –Exploring the mechanism to coordinate poverty reduction finance and other finance supporting agriculture and rural areas; –Building an incentive mechanism for the distribution of poverty reduction funds for it to be result-driven; –Decentralizing funds, responsibility, management and decision of poverty reduction projects to county level and establishing mechanism to select project according to local demands; –Setting up in-and-out mechanism for key poor counties and pushing for participatory approaches.

3.2 Continue to increase finance for poverty reduction ----Strengthen management to ensure safety and effectiveness of finance ----Strengthen management to ensure safety and effectiveness of finance Explore the ways of direct appropriation of poverty reduction funds to expand the scope of government procurement for poverty reduction funds. Improve the reporting system. Complete mechanism of project management and implementation. Render the bidding for projects more open and transparent. Bidding should be strictly performed for big projects. Small projects can be decided by village-level organizations participated by local residents. Improve approaches of management, improve the information system for management and monitoring, set up cross-departmental reporting and coordination mechanism for funds and project management Organize effective inspection and monitoring systems, improve bulletin systems.

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