Empowering Cities: Good for Growth? Evidence from the People's Republic of China

Megha Mukim and T. Juni Zhu
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T. Juni Zhu: Trade and Competitiveness Global Practice, World Bank Group, Washington, DC, United States. Author email: tzhu@worldbank.org

Asian Development Review, 2018, vol. 35, issue 1, 175-195

Abstract: This paper utilizes a countrywide process of county-to-city upgrading in the 1990s to identify whether extending the powers of urban local governments leads to better firm outcomes. The paper hypothesizes that since local leaders in newly promoted cities have an incentive to utilize their new administrative remit to maximize gross domestic product and employment, there should be improvements in economic outcomes. In fact, aggregate firm-level outcomes do not necessarily improve after county-to-city graduation. However, state-owned enterprises perform better after graduation, with increased access to credit through state-owned banks as a possible explanation. Importantly, newly promoted cities with high capacity generally produce better aggregate firm outcomes compared with newly promoted cities with low capacity. The conclusions are twofold. First, relaxing credit constraints for firms could lead to large increases in their operations and employment. Second, increasing local government's administrative remit is not enough to lead to better firm and economic outcomes; local capacity is of paramount importance.

Keywords: capacity; credit allocation; decentralization; firm-level data; People's Republic of China; urbanization (search for similar items in EconPapers)
JEL-codes: G21 H81 L11 R11 R51 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:tpr:adbadr:v:35:y:2018:i:1:p:175-195

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