Local governments and companies are trying to blackmail the central government in compensating them for paying arrear wages for their unruly citizens, writes financial expert Victor Shih on his weblog, pushing “stability” as their main card.
However, since wage arrear is a “stability” issue, local governments are likely blackmailing the central government for money. In a paper that Mingxing Liu, Luke Qi Zhang and I did on fiscal transfers in China, we found that the central government is most prone to increase transfers to county governments out of stability concerns. In the past, local governments blackmailed the center using wage arrears of government officials, which threatened the entire functioning of local governments. Now, with protests and riots barely contained in factory towns, the provincial government certainly has strong reasons to ask the center for more funds. As I write this, I am sure the good people at the Ministry of Finance are fielding a barrage of requests for emergency funds from various local governments (as an MOF official once told me “we are the fire brigade”).
Victor Shih is one of the leading voices on China’s development at the China Speakers Bureau. When you are interested in having him on your conference, board meeting or panel, do let us know.