Optimizing China's economic performance through government hierarchy restructuring

Abstract

China's Province-managing-county (PMC) reform policy aims to mitigate fiscal stress and augment expenditure autonomy for county governments by eradicating the subordinate fiscal relationship between prefectures and counties. The research augments the time-varying difference-in-difference technique, utilizing a longitudinal dataset at the county level to examine the incentive effects of this reform on economic performance and local government policy decision. The empirical investigation divulges that the local fiscal incentives introduced by this reform through alleviating fiscal stress and providing expenditure autonomy significantly impact economic performance and influence local government policy decisions. The outcomes become more noticeable in economically developed regions and those characterized by enhanced institutional quality and reduced migration barriers. Additionally, the reform encourages counties to adopt a more proactive fiscal policy characterized by increased capital expenditure to promote economic performance while reducing expenditures on social security subsidies and administrative costs affirming that economic performance targets of county governments garbles the composition of public expenditure. These results support positing that a flattened hierarchical structure ameliorates delays in fiscal matters and facilitates communication across various levels of government in the context of improved institutional quality and reduced migration barriers however at the expense of reduced public expenditures. The findings additionally signifies that PMC policy reform become more incentivized in the political competition for economic performance.