Agricultural subsidies retard urbanisation in China

Although agricultural subsidies are usually seen in high‐income countries with small agricultural labour forces, China started to heavily subsidise agriculture when its per‐capita income was very low and more than half of its population was working in agriculture. A concern is that these abnormal agricultural subsidies may have significantly retarded China’s urbanisation process by reducing rural–urban migration. Based on a panel of county‐level data from 1,878 Chinese counties, we found that agricultural subsidies reduced China’s yearly outflow of agricultural labour by 0.68 million people (with a 95 per cent confidence interval of 0.67–0.69) – about 5.7 per cent of the annual rural–urban migration observed during the sample period. We concluded that abnormal agricultural subsidies are a significant cause of China’s widely observed under‐urbanisation.