The incentive role of creating “cities” in China

China operated an urbanization policy by which counties could be given city status between 1983 and 1997. The policy had substantial impacts on the new administrative entities, including more discretionary power and fiscal independence. Such “county-to-city upgrading” provided the central government with an instrument to reward localities. Using a large dataset covering all counties during 1993-1997, I show that upgrading is not an automatic procedure that endorses the high urbanization levels in existing counties. Although official guidelines for upgrading counties to cities were published, these requirements were largely ignored in practice. Instead, economic growth rate was the key factor in determining which counties obtained city status. This paper interprets the creation of county-level cities through upgrading as part of the incentive structure of Chinese local officials. The importance of both fiscal and political incentives facing the local government in promoting economic growth is highlighted.

Research Highlights►This paper relates urbanization policy with a fundamental question faced by central governments in developing countries: how to provide incentives to local governments? ►China adopted the “county-to-city upgrading” policy as the most popular city-creating method in the 1980s and 1990s. ►It forms a part of the incentive structure of Chinese local officials. ►The importance of both fiscal and political incentives facing the local government in promoting economic growth is highlighted.