Budgetary Development Funds

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The low level of economic development in poor areas made it impossible

for most poor counties to be self-suffi cient fi nancially, as their expenditures

on poverty projects exceeded revenues. It was the purpose of the budgetary

development funds to support productive construction projects and other

investments in poor areas by means of special funds. These funds could be

used to support promising activities in industry, infrastructure or agriculture.

In addition a small proportion of the funds have also been used for primary

education and basic health care, for example for the construction of schools

and health clinics.

All budgetary development funds came from the Ministry of Finance,

although as noted above there is a requirement that local governments

(at the province, prefecture and county level) provide matching funds,

which were rarely forthcoming. Project identifi cation and implementation

procedures were much the same as for the food-for-work funds, except that

some funds could be used in the area of social and human development,

and the project scale was smaller. For these projects wages were not usually

paid to project participants, except where skilled workers or specialized

construction teams were needed.

Of the three main poverty programs, least is known about the distribution

and use of budgetary development funds because of the classifi ed nature

of budgetary data. Nonetheless a number of targeting concerns warrant

mention. First, because the development fund program began before the

designation of poor counties in 1986, many of these funds were given to

counties not offi cially designated as poor, which increased coverage but also

increased leakage. Second, just as for food-for-work funds, there is the risk

that poor counties will substitute development funds for other budgetary

resources that would have been allocated for similar purposes, reducing the

impact of such funds on realized investment. Assuming perfect fungibility,

development funds at worst act as a pure budget subsidy, and so should

help local governments in poor counties meet their own fi scal needs, even

if these lack a poverty focus. However, if these transfers also affect their

poverty-focused activity, there could be a crowding out problem.

Regulations stipulating that development funds be used to benefi t poor

households through development projects probably prevented full crowding

out. However, as local governments had a much stronger infl uence on

the use of these funds than subsidized loans or food-for-work funds, the

danger of bias toward revenue-producing investments was greater. Another

concern is that when development funds were used in education activity

for the construction of schools, this usually required that villages collected

supplementary fees from households to fi nance any funding gaps, which

might have had adverse poverty consequences, at least in the short term.