Academic journal article Public Finance and Management

Does the Province-Managing-County Reform Promote the Growth of County Finance and Economy in China? an Empirical Case Study on Henan Province 1

Academic journal article Public Finance and Management

Does the Province-Managing-County Reform Promote the Growth of County Finance and Economy in China? an Empirical Case Study on Henan Province 1

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

The PMC reform, as one of important contents of China's sub-provincial fiscal system reform in the 21 century, is intended to release county fiscal constraints and promote county economy by de-layering the existing local governance structure. Since its pilot implementation in 2002, several provinces including Henan have gained a decade of experience in reducing fiscal tiers from 3 tiers of the province, the prefecture and the county to 2 - the province and the prefecture/county. This paper aims to investigate the impacts of the PMC reform on county economy through an empirical case study on Henan province in China.

The PMC is not an innovative system emerging in the last decade. It can date back to the foundation of the People's Republic of China (PRC) in 1949 and is acknowledged in the Constitution of the PRC. The province-county relationships remained unchanged until the early 1980s when the PRC adopted a series of reforms to break the urban-rural dual economic structure and promote the development of county economy. Thus the City-Managing-County (CMC) reform2 was promoted throughout the country and brought about the rapid growth of rural and urban economy at that time.

However, with the changes of the Chinese economic system and administrative environment, the CMC - supposed to promote the coordinated development of the rural-urban economy by the mutual complementarities of each other's advantages - turned to be the biggest hurdle for the county economic development and its condition worsened in the 1990s. The CMC system increasingly threw negative impacts on county finance and economic growth by 1) leading to the higher administrative costs and lower administrative efficiency with the additional tier of prefecture between province and county (Wang 2004; Sun and Wu 2004), 2) causing the serious financial crisis at county level with prefecture-level cities' misappropriation or withholding of county-level financial resources (Chen 2002; Gan 2005) and 3) exacerbating the urban-rural disparity with gradual reduction of county education budget (Liu 2005). In addition, it was a very controversial system due to lack of a constitutional basis (Wang, 2004).3

This prompted some provincial governments to seek an effective way to strengthen the county economy. Under these circumstances, the PMC reform reemerged and rapidly grabbed extensive attention from governments and social groups in 2002. Subsequently, these reforms were recommended for na tionwide adoption jointly by the CPC Central Committee and the State Council in 2009 (Zong Fa [2009] No.1) and were highlighted as an important priority in the 12th Five Year Plan. In 2012, the Central Ministry of Finance advised all provinces to implement these reforms with suitable adaptation to local context. After two decades of reform practice, the Province Administratively Managing Cou27nty (PAMC) implemented by Hainan province, and the PEC and the PFMC implemented by Zhejiang province have stood out in easing the county financial constraints and promoting county economy. These soon become the role models for other provinces and two models (PEC and PFMC) have currently been popularized all over the country.

Along with the expansion of PMC reform pilots across the nation, more and more scholars started to conduct the empirical studies on the fiscal and economic effects of the PFMC or/and PEC reforms and draw the diametrically opposite conclusions due to various research objects (like samples in a single province or in multiple provinces) and different research methods including the Difference-In-Difference (DID), the Generalized Method of Moments (GMM), and Fixed Effect Model (FEM)). Some empirical studies showed a positive conclusion that the PFMC or PEC reform has a positive impact on county financial strength based on single- or multiple- case (Qi et al. 2009; Luo 2010; Jia and Yu 2010; Liu 2010; Cai and Huang 2010; Li 2011; Xie 2011; Fu 2012). …

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