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

Author: LINA LI, NANNAN LIU and XIAOPING ZHENG
Published in PFM, Vol. 16 No. 1

There are two major models in China?s Province-Managing-County (PMC) reform: the Province-Fiscally-Managing-County (PFMC) and the Power-Expanding-County (PEC). This paper is intended to compare the fiscal and economic effects of these two reform models based on their different categories of reform policies---fiscal decentralization policies and economic empowerment policies. By taking Henan?s PMC reform as an empirical case study, we find that a) Henan?s PFMC reform did not contribute to the growth of county economy through a series of economic empowerment policies and exclusively fiscal decentralization policies, though it promoted the increase in transfer revenue at the county level. b) By contrast, Henan?s PEC reform through only economic empowerment policies did not contribute to county?s growth of transfer incomes, but it significantly promoted the growth of county economy with an annual downward trend. The further analyses on these findings show that the expansion of economic autonomy by the economic empowerment is the key positive factor to the growth of county economy in the PEC reform, while the moral hazard caused by the fiscal decentralization is the major negative factor holding back the economic effect of the PFMC reform. Therefore, this throws out a hint that the improvement of economic autonomy in county governments will be a right and effective approach to promote the sustainable development of county economy, though it should be further examined in the future research.

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