“Province-Managing-County” fiscal reform, land expansion, and urban growth in China

Abstract

The central government of the People's Republic of China enacted a fiscal reform known as the “Province-Managing-County” (PMC) fiscal reform in the early 2000s. This reform eliminated the prefecture city government as the intermediate layer between the province and the county, and was intended largely to improve administrative efficiency and to lessen the fiscal stress of county governments. We apply a difference-in-difference method using a panel data set of 263 cities nationwide over the period of 1999–2011 to examine how the introduction of the PMC fiscal reform affects the economic growth of the cities. Our results show that on average implementing the PMC fiscal reform moderately increases city GDP growth by around 1 percentage point. We argue that this unexpected positive growth effect of the reform is induced by the expansion of land supply of the reformed cities, which in the post-reform period have faced the need to look for revenues outside the budget system, mainly extra-budgetary funds in the form of leasing land. Our analysis provides evidence on this argument, and reveals that the reformed cities tend to expand land leasing at a rate that is 14% higher than the non-reformed cities. Furthermore, we show that the impacts of the reform tend to be strengthened over time following the introduction of the reform. Our results are quite robust to alternative estimation methods.