Despite Taiwan's extraordinary economic development, rural areas are still plagued by bad roads, substandard street lighting, dilapidated bridges, and poor public facilities. Rural residents are becoming increasingly insistent in their demands for a bigger share of the island's economic pie. Observers believe that the resentment of rural residents goes a long way toward explaining the unprecedented success of the opposition Democratic Progressive Party (DPP) in the December 1989 local elections. Its candidates won six of the twenty-one races for county magistrate, including the most important one, Taipei county.
Rural infrastructure has not been expanded and modernized because only meager financial resources are available to the local governments, and most of these funds have to be used for personnel salaries and public education. Even with considerable subsidies from the central and provincial governments, some of the poorer local governments can barely cover these costs and keep their agencies functioning.
To pay for public construction and other projects, local governments rely mostly on the largess from higher levels of government. Even Taipei county, Taiwan's most prosperous and populous county, is no exception. Only 46 percent of its budget of US$1 billion for FY 1990 (ending June 30, 1990) derives from its own tax revenues. The balance comes from bank loans and from central and provincial government subsidies. At the same time, Taipei county, which has a population of 3 million, generated over US$1.8 billion in tax revenues in FY 1990, but only about US$465 million was collected directly by the county government.
Critics blame the impecunious condition of local governments first of all on a radically unbalanced system of allocating tax revenues. Most of the big earners, such as income taxes, customs duties, the commodity tax, and the stock transactions tax, are the prerogative of the central government. The local governments have considerably weaker revenue sources, such as the amusement tax, land value tax, and deeds tax. To make matters worse, even some of these revenues are shared with the central and provincial governments. Only the land value increment tax delivers sizable revenues for local governments. The provincial government collects the business tax, license fees, harbor construction dues, and the stamp tax levied on evidences of payment.
The good life is city life—lunch time at the Taiwan World Trade Center in in eastern Taipei.
In FY 1988, tax revenue from all sources topped US$18.3 billion, 56.4 percent of which flowed into the central government's treasury, while 27.4 per cent went to the provincial government and to the special municipalities of Taipei and Kaohsiung. A mere 16.2 percent trickled down to local governments.
In FY 1990 the central government's budget rose to US$24.9 billion, compared with the provincial government's US$6.6 billion and US$7.6 billion for local governments. Ten percent of the central government's budget has been earmarked for subsidies to the provincial and local governments. Typically, a local government relies on the central and provincial governments for as much as 50 percent of its budget. The financial problems of the local governments have multiplied because of the large successive pay hikes given to public employees in recent years. The provincial government subsidizes only the initial year of the salary increases. Thereafter the local governments have to cover the increased outlay on their own.
Uneven industrial development also contributes to the plight of rural areas, notably in the agricultural regions. Even if some local governments were allowed to retain all of their locally generated tax revenues, they would still be unable to cover their personnel costs. Subsidies from higher government levels are vital to their operations. For example, the Penghu (Pescadores) government will receive a US$73 million subsidy from the central and provincial governments in FY 1991, accounting for 81 percent of its budget for the year.
The backwardness of the rural areas has been aggravated by a policy, shared by both provincial and central governments, requiring local governments to raise an equal amount of matching funds in order to obtain subsidies for public works projects. Consequently, governments of the wealthier areas that can meet the requirement wind up with most of the subsidies, while the poorer local governments receive only the meager leftovers. Moreover, since many companies have their factories in rural areas and their headquarters in urban centers, the rural areas are afflicted with factory pollution, while the urban locales are blessed with tax revenues. Friction between the two inevitably results.
The buck stops here—the Central Bank of China building in central Taipei.
Nowhere, perhaps, is this bitterness more evident than in the attitudes of Taipei county residents toward Taipei city. While the county residents make valuable contributions to the prosperity of Taipei, they do not enjoy an equal share of the increasing wealth and must often put up with inadequate public facilities, beginning with chronically overburdened transportation systems. Many county residents also resent supplying the city with so many resources only to serve as a dump site for much of the city's waste.
Observers point out that the existing centralized tax allocation system is harmful to the healthy development of autonomous local politics. It also seriously hinders the construction of modern infrastructure in local areas by dampening the interest of residents in local affairs and suffocating the initiative of local governments. There is almost no room for the chiefs of local governments to pursue their ideals of constructing a better living environment for their constituents. Instead, they are turned into figureheads handling routine administrative work. As a result, some people propose abolishing elections for town and village chiefs, suggesting that it would be better to appoint public officials to fill these posts.
The central government is being urged to alleviate the plight of local governments by taking over some of their financial burden and increasing their share of the tax pie. But some observers feel that the higher levels of government should continue to serve as a mechanism for reallocating and balancing the tax revenues of different areas of Taiwan as the revenue gaps between them are narrowed. They also urge that local governments be given authority to impose new taxes and fees for specific government services such as garbage collection in order to help them meet their financial needs.
It would also help if subsidies from the central and provincial governments, which are vital to many poor counties, were institutionalized. At present, ranking government officials often randomly give out such subsidies when inspecting local governments. A more systematic subsidy process could be used to assist the poorer counties in developing tax-generating businesses, among other strategic fiscal objectives.
Local governments have also been urged to help themselves by being more efficient in utilizing their own limited resources. The handling of tenders for local public projects provides an example of such opportunities. It has been the policy of local governments to bypass open tenders in favor of negotiated arrangements for public projects. This method is popular because it allows room for pork-barrel politics, but it has been expensive. Some estimates indicate that these negotiated arrangements have boosted the cost of such projects by 30 percent or more.
Someday all this will be available in the countryside—a regional development plan is expected to narrow the gap in infrastructure between rural and urban areas
In response to calls to relieve local governments of their financial burdens, the central government has decided to take over some of the personnel and public education costs, incurring an additional expense of over US$1 billion per year. In addition, the central government will triple its current annual subsidy of US$1 billion to the provincial government and the special municipalities of Taipei and Kaohsiung.
The added burden and the possible loss of tax revenue in a revised tax allocation system will pose a major challenge to the central government's financial management system, which is already encountering growing financial demands stemming from expanding social welfare programs. The central government will have to distribute funds more efficiently and increase its revenue by intensifying the crackdown on tax evasion.
A fundamental part of the solution may lie in a bigger and more evenly shared tax pie, which can be produced by the vigorous and balanced development of local industry. This is precisely the goal of the six-year national development plan, the brainchild of Premier Hau Pei-tsun, which is scheduled to be implemented beginning in 1991.
According to the plan, Taiwan will be divided into eighteen regional development areas, each with its own industrial base, comprehensive public facilities, and convenient transportation networks. Each one will center on an industrial complex, complete with necessary infrastructure. Plans also call for surrounding each of these areas with recreational facilities. The plan is intended to narrow the growing gap between rural and urban communities, thereby alleviating the problems created by Taiwan's headlong rush toward urbanization, while increasing the vitality of rural areas.