Impact of rural road investments in a global economic crisis: Evidence from a temporary policy abandonment experiment in China

Abstract

This paper studies the rural development impacts of a road subsidy -- part of China's massive 2009-10 Economic Stimulus Plan (ESP) -- that led to the sudden and unexpected abandonment of the local cost share requirement typically imposed on villages by upper-levels of government. Relying on a staggered difference-in-differences design, the main findings show that temporarily suspending the cost share requirement for a new road upgrade project leads to higher short-term income gains in treated villages. As a potential explanation, I find empirical support for the idea that suspending the cost share burden helps to alleviate fiscal constraints: matching funds originally intended to meet cost share requirements are instead reallocated into allied road projects previously starved of resources that promote rural business creation and labor migration. The findings imply that a temporary suspension of cost share rules in response to a global economic crisis helps to promote short-term economic growth and recovery in poor rural areas.