Does administrative decentralization enhance economic growth? Evidence from a quasi-natural experiment in China

Abstract This paper employs a quasi-natural experiment of “counties power expansion (CPE)” reform in China to investigate the effect of administrative decentralization on local economic growth. Administrative decentralization seeks to redistribute authority, responsibility and financial resources for providing public services among different levels of government. Using a county-level dataset from 2000 to 2008 in China, we find that administrative decentralization significantly increases per capita GDP by about 3.3%. Our results further indicate that the positive effect on economic growth is mainly attributed to the increase of investments. We find that the devolution of power attract more private firms and enterprises from foreign countries as well as Hong Kong, Macau, and Taiwan of China. We also find that after being given more power in the administrative decentralization reform, local officials in areas with relatively weak supervision on the financial funds might divert a certain amount of fiscal revenue intended for county construction and public goods provision to illegal uses, thereby greatly undermining the positive role of administrative decentralization on economic growth.