Fiscal decentralization and food production: Evidence from Province-Managing-County reform in China

Abstract

China launched the Province-Managing-County reform in 2004. Since then, the transfer payments, particularly for agricultural purposes, were directly allocated to the reformed counties from their superordinate provincial government, bypassing the initial intermediary cities. The reformed counties also reserved a larger share of tax revenue within the adjusted tax-sharing arrangement with upper cities. Based on the gradual roll-out of the reform, we utilize a difference-in-differences approach and a county panel ranging from 2003 to 2018, finding that the fiscal reform contributes to the promotion of food production. Theoretically, the fiscal reform would affect food production through the changes of fiscal self-sufficiency and transfer payments. However, the results only provided evidence to support the latter channel. That is, the Province-Managing-County reform raised agricultural expenditure by effectively allocating transfer payments (mainly special transfer payments) to counties, leading to a significant enhancement of land productivity at the county level, primarily manifested in an increase in the per unit area of irrigated land.