Does fiscal decentralisation drive county economic convergence? Evidence from China

This paper exploits a quasi-natural experiment of ‘Province-Managing-County’ (PMC) reform to investigate the impacts of the fiscal decentralisation on inter-county economic convergence in China. Using China’s county-level dataset from 2000–2020, we find that the PMC reform significantly increases the speed of convergence in per capita gross domestic product (GDP) across counties. Our finding survives under various robustness tests. Heterogeneity analyses show that the convergence effects differ for counties in terms of locations, economic status and institutional quality. Mechanism tests further indicate that promoting fiscal capacity and innovation are effective influencing paths through which the PMC reform facilitates the inter-county convergence.