Is there an environment and economy tradeoff for the National Key Ecological Function Area policy in China?

Abstract

China implemented the National Key Ecological Function Area (NKEFA) policy, the world's largest ecological compensation program, aimed to breaking the vicious cycle of poverty and environmental degradation. However, previous studies have often overlooked the poverty and environment impact of the policy and paid little attention to the distortions it may have inadvertently fostered. This study used panel data from 1749 county-level units from 2002 to 2020, supplemented with remote sensing and Geographical Information System data, to quantify ecological poverty indicators. Subsequently, a multi-period difference-in-differences model was deployed to identify the impact of the NKEFA policy on ecological poverty and rural residents' incomes in the pilot counties. Finally, the mechanisms of policy effectiveness were examined from the perspective of administrative constraints and fiscal incentives. The results show that, firstly, the NKEFA policy has exerted a substantial positive impact on both ecological poverty and rural residents' income growth. However, ecological poverty reduction displayed a rebound effect characterized by initial improvement followed by deterioration, primarily due to inadequate incentives, leading to local government distortion behavior. Meanwhile, rural residents' incomes exhibited a consistent upward trend. Secondly, the improvement of ecological poverty is premised on weakening industrial development incentives and aided by some level of ecological migration. However, this also leads to reduced fiscal revenues, increased fiscal expenditures, and expanded fiscal deficits. The significant increase in rural residents' income largely depends on the financial intervention of local governments, especially the non-agricultural income brought about by the transfer and transformation of non-agricultural labor, as well as the agricultural income brought about by the improvement of agricultural production and efficiency. Thirdly, the NKEFA policy has yielded more apparent improvements for ecologically impoverished, resource-dependent, economically strong, and industrial backbone counties. However, resource-dependent and industrial backbone counties have experienced negative income effects. These findings provide a practical Chinese-style example of global eco-poverty reduction policies in developing countries.