This article sheds light on the ways in which township governments mobilized resources from local financial institutions, and how failure to repay many of these loans gave rise to sizeable local government debt. Mobilization of resources was done through loans to collective enterprises whose de facto owners were township authorities. Though the enterprises were nominal borrowers, loan transactions would not have occurred without guarantees by township governments. Another way of financial resource mobilization was by establishing local informal financial organizations that were subject to less strict regulations, and over which township authorities could exercise control. Further, because the enterprises' profits and taxes ultimately went to township authorities, and the enterprises also contributed towards provision of public goods that were the authorities' obligation, enterprise financing became a roundabout way in which township authorities sought financial assistance for their fiscal needs.
The political economy of public goods: Some evidence from India
