Agricultural subsidies retard urbanisation in China*

Although agricultural subsidies are usually seen in high-income countries with small agricultural labour forces, China started to heavily subsidise agriculture when its per-capita income was very low and more than half of its population was working in agriculture. A concern is that these abnormal agricultural subsidies may have significantly retarded China's urbanisation process by reducing rural-urban migration. Based on a panel of county-level data from 1,878 Chinese counties, we found that agricultural subsidies reduced China's yearly outflow of agricultural labour by 0.68 million people (with a 95 per cent confidence interval of 0.67-0.69) - about 5.7 per cent of the annual rural-urban migration observed during the sample period. We concluded that abnormal agricultural subsidies are a significant cause of China's widely observed under-urbanisation.