Effects of Transfer Payments on Regional Economic Growth

This chapter utilizes a natural experiment based on the central government’s eligibility rules for impoverished counties and employs regression discontinuity design to evaluate the impact of general and special transfer payments on local economic growth in China. The findings indicate that special transfer payments exert a more pronounced positive effect on local economic growth compared to general transfer payments. This implies that although general transfers are more effective in promoting fiscal equalization across regions and ensuring the capacity of underdeveloped areas to deliver basic public services, their equalizing nature may lead to the “whipping the fast ox” dilemma—reducing local governments’ incentives to pursue economic growth and consequently weakening their overall growth impact. In contrast, despite issues like lack of transparency in allocation mechanisms and mismatches with local needs, special transfer payments, due to their lower degree of equalization, tend to have a stronger positive effect on economic growth.