Decentralization and Rural Welfare: Evaluating the Effects of the Empowering and Strengthening Counties Reform on Farmers' Income in China

This paper examines how administrative decentralization affects the income of rural residents in China. Since 2002, China has implemented the counties power expansion (CPE) reform, which devolves part of the economic and social management authority previously held by prefecture-level cities directly to county governments. Exploiting the staggered implementation of the reform across counties as a quasi-natural experiment, we employ a staggered difference-in-differences approach and find that the CPE reform significantly increases the per capita disposable income of rural residents, with an average increase of approximately 5.7%. The heterogeneity analysis shows that the incomeenhancing effect is stronger in counties with higher fiscal self-sufficiency, counties that simultaneously implemented the direct provincial fiscal administration reform, and counties located in major grain-producing areas. Further mechanism analysis reveals that the reform promotes rural income growth through two channels: the expansion of nonagricultural employment and the advancement of agricultural modernization. Our findings suggest that institutional reforms centered on county-level governance constitute an effective pathway for improving rural welfare and provide important policy implications for the design of decentralization reforms in developing countries.