Summary:
County and township governments are at the bottom of China's government hierarchy. They are also the ultimate undertakers of a large number of public affairs. After China's reform and opening up, county and township governments have experienced two major reforms. In 1983, with the disintegration of the People's Commune system, the township government and financial systems were re-established. However, after the Tax Sharing Reform in 1994 and the Rural Tax Reform after 2000, the contradiction between revenue and expenditure in villages and towns became more serious. Problems such as the lack of constraints on financial expenditure, the expansion of the financial-support population, the difficulty in guaranteeing normal public service expenditure, and even illegal charges and large-scale debt raising were exposed. To solve these problems, since 2003, some provinces have begun to explore the county-managing-town fiscal reform. In 2006, the central government began to explicitly encourage all provinces to promote this reform. The county-managing-town fiscal reform means that township financial revenue and expenditure are directly managed and supervised by county-level financial departments. Although the county and township financial system still remain, townships' financial management power has been greatly shifted to the county level (Yang and Liu, 2012). Therefore, the county-managing-town fiscal reform is a reform of fiscal centralization. At the same time, with township finances becoming inappreciable, county-level governments began to directly bear a large amount of public service expenditure. In this sense, the reform is also a flat reform of the financial hierarchy (Jia, 2007). This paper answers the following question: Has the county-managing-town fiscal reform improved the governance and public service provision capacity of grassroots governments and ultimately promoted economic development？ Based on county-level data from 2000 to 2014, this paper uses the difference-in-differences model to evaluate the impact of the reform on economic development. The results show that the reform has promoted economic development, and that county per capita GDP has increased by 4.8% on average. The mechanism analysis shows that the county-managing-town fiscal reform reduces the proportion of administrative expenditure, inhibits the expansion of the scale of the financial-support population, and reduces the tax burden. These results show that strengthening the financial management and supervision of the higher levels of the hierarchy will help to improve grassroots governance and promote economic development. This paper also finds that the promotion effect of reform is weak in counties with large populations and more developed economies. The reason for this is that it has become difficult for county governments to obtain information after the reform, or that it does not inspire enthusiasm among township governments, which indicates that the reform should not be implemented across the board. The contributions of this paper are as follows. First, this paper quantitatively evaluates the impact of the county-managing-town fiscal reform on economic development and local government behavior for the first time. Second, this paper tentatively extends research on inter-governmental financial relationships to the county and township levels. Finally, this paper analyzes the effect of reforms that flatten the financial hierarchy from the perspective of the county-managing-town fiscal reform.
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