Institution, Diversity, and Local Development: Lessons from China's Administrative Village System

Abstract

What is the impact of diversity on economic development? This paper offers micro-level evidence in the case of China's "Administrative Village System" (AVS), a program of forced integration in rural communities from the 1950s to the early 1980s. Aiming to foster inter-group cooperation and increase economic efficiency, the AVS program brought together farmers with diverse identities to live and work together for agricultural production and public goods construction. Using a regression discontinuity design, this paper demonstrates that the effects of diversity depend on institutional contexts. During the AVS program when personal freedom of decision-making was denied, diversity had little effect on economic development and even led to negative consequences, such as increased mortality during the Great Leap Famine and conflicts during the Cultural Revolution. However, after the program ended and China transitioned to a market economy, the impact of diversity reversed. In regions that experienced stronger forced integration, better inter-group interaction emerged as people tended to trust strangers more and interact more frequently with those of different identities in labor and land markets. Consequently, increased diversity led to better economic development. This paper highlights the importance of institutions in shaping the developmental consequences of diversity.