Fiscal Reform, Land Expansion, and Urban Growth in China

The central government of the People’s Republic of China enacted a fiscal reform known as the “Province-Managing-County” (PMC) reform in the early 2000s. This reform eliminated the prefecture city government as the intermediate layer between the province and the county. 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 reform affects the economic growth of the cities. Our results show that on average implementing the PMC reform moderately increases city growth by 0.8 percent. 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 postreform period have faced the need to look for revenues outside the budget system, mainly extrabudgetary 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 speed that is 15 percent 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 across several robustness checks.