Province-Managing-County Fiscal Reform And County-Level Economic Growth

The "province-managing-county"(PMC) reform which is first carried out in the field of public finance is an attempt at reforming the governmental hierarchy.The correct understanding of the effectiveness of this reform is of great significance to the advancement of reform and the improvement of supporting policies.To objectively assess the impact of PMC fiscal reform on the county-level economic growth,this paper uses DMSP/OLS night-time light data as the measure for counties’ economic growth and uses difference-in-difference method to conduct empirical analysis with the panel dataset of 1796 counties from 1999 to 2012.Based on the empirical results,this paper conducts further analysis about the potential mechanism.The main conclusions of this paper are as follows.First,the PMC fiscal reform has a significant negative correlation with counties’ night-time luminosity value per capita.That is to say,the execution of PMC fiscal reform has suppressed the economic growth of counties.This result remains robust after several robustness checks.Second,the span of control of provincial governments has an inverted U-shape relationship with the economic growth of counties.During the process of PMC fiscal reform,the span of control of provincial governments has witnessed a dramatic increase.Since the number of subordinate governments under the supervision of provincial governments are usually exceed the optimal value,the execution of PMC reform thus has a negative impact on the economic growth of counties.Third,the further research indicates that the PMC reform results in a significant increase in administrative expenditure of county governments but the expenditure which can contribute to economic growth does not experience significant increase.The appearance of this phenomenon can be explained by the relaxation of external supervision and the incentive distortion caused by the expansion of span of control of provincial governments.In addition,the multi-head management caused by this reform is also related to this phenomenon objectively.Based on the conclusions mentioned above,this paper makes policy recommendations from several aspects,such as exploring the reasonable span of control of provincial governments,establishing and improving the supervision and control mechanism,and improving reform supporting policies.