Sub-Provincial Fiscal System Reform and Common Prosperity: From the Perspective of Provincial Fiscal Coordination

【Authors】

ZHONG Xiaomin, LIU Jinzi & LU Weijun

【WorkUnit】

Zhejiang University of Finance and Economics, 310018。

【Abstract】

Reducing regional development disparities and narrowing the urban-rural income gap are central to China’s pursuit of common prosperity. Among China’s sub-provincial fiscal system reforms launched in recent years, the Province-Managing-County (PMC) reform, initiated in 2002, stands out. By simplifying fiscal hierarchies and reshaping fiscal relations among provinces, prefecture-level cities, and counties, the reform has profoundly influenced local fiscal behavior. Yet the PMC reform has generated markedly heterogeneous outcomes across provinces. This raises a central research question: The effectiveness of the PMC reform in advancing common prosperity depends on the provincial government’s capacity for effective fiscal coordination.
This study integrates the PMC reform and provincial fiscal coordination into a unified analytical framework. Using a county-level panel dataset from 1999 to 2018, we employ a staggered DID model, measure provincial coordination capacity by the provincial share of fiscal revenue, and identify its moderating effect on the reform’s outcomes. The results show that each one-unit increase in provincial coordination capacity reduces, on average, the adverse effect of the PMC reform on inter-county development disparities by 5.275% and also reduces the within-county urban-rural income inequality. Mechanism analysis indicates that provincial governments exert their coordinating role primarily through the design of provincial-to-local transfer payments. Heterogeneity analyses further reveal that the effect of provincial coordination varies with the specific design of revenue-sharing schemes, the sequencing of fiscal decentralization, and local economic development levels.
This paper contributes to the literature in two main respects. First, it moves beyond a conventional focus on the policy effect of the PMC reform by proposing and substantiating provincial fiscal coordination as a key institutional condition explaining regional divergence in reform outcomes. Second, it provides empirical evidence for optimizing PMC arrangements according to local conditions. Given the substantial discretion enjoyed by provincial governments, sub-provincial fiscal systems vary widely. Our finding that the PMC reform performs better in provinces with a higher provincial revenue share offers a new perspective for understanding this regional heterogeneity.
Based on our findings, we propose the following policy recommendations. The PMC reform should not be implemented in a one-size-fits-all manner. Instead, fiscal decentralization to counties should be paired with enhanced provincial coordination. Specifically, policymakers should moderately expand the pool of resources available for provincial coordination, improve the design of provincial-to-local transfer payment systems, and adjust the PMC reform strategy to align with local fiscal and economic conditions.

JEL: H73, H77

【KeyWords】

Province-Managing-County System, Provincial Coordination, Urban-Rural Income Gap, Regional Development Disparities