Vertical Absorption: Socialization of Project Fund Operations and Grassroots Governance Risks

This project presents a new type of national governance system that extends directly from the central government to grassroots society. In order to ensure implementation of the will of the Center, its funds have the characteristics of specialized management, including top-down financial allocations, dedicated funds, and separate accounts.

Field investigations have found that county-level governments have broken through the specialized management system of project funds by vertically absorbing semi-administrative village cadres and village-level organizations to transfer project funds, forming a new phenomenon of socialized operations of project funds. Specifically, under pressure from performance incentives and financial shortages, county-level governments bundle project financial and administrative rights, and village cadres take the initiative to undertake project funds through political mobilization and economic interests. Due to the project funding exceeding the individual capacity of village cadres, local commercial banks provide loan funds to advance project payments to village cadres under personal asset guarantees. Due to financial pressures from the government, county-level governments adopt deferred and installment payment methods to pay project funds that are privately advanced by village cadres. Through the semi-administrative intermediary of village cadres, project funds are transformed from fiscal funds to personal bank debts of village cadres, completing the transformation from specialized management to socialized financing and repayment of financial guarantees.

Although the scale of project funds for socialized operations is very small compared to total infrastructure expenditures, it represents a new source of project funds-local governments breaking through the national project system and transferring construction funds to village-level organizations and individuals. The resultant dependence of county and rural interests has a more profound impact on local ecological governance. In the vertical absorption of project funds, a close interest attachment is formed between the grassroots government and village cadres, leading to the alienation of grassroots governance relationships and the formation of governance alliances. This has resulted in weak top-down execution of national policies at the grassroots level, with greater autonomy in strategic actions at each level of governance. At the same time, it poses a threat to the security of national project resources. The “referees” (i.e., the grassroots governments) and “athletes” (i.e., the village cadres) of the project are in collusion, making project supervision a mere formality. At the village level, there is a “strong absorption” effect on project resource allocation, forming a development pattern in which the strong become stronger and the weak become weaker.