Sowing Uncertainty: Assessing the Impact of Economic Policy Uncertainty on Agricultural Land Conversion in China

This study examines the impact of economic policy uncertainty (EPU) on agricultural land conversion. Using a newspaper-based index of EPU and a comprehensive panel dataset covering 270 prefecture-level cities in China, we estimate a city fixed effects model to explore this relationship. Our results indicate that a one-standard-deviation increase in EPU leads to a 22.2% increase in the conversion of agricultural land to urban residential, commercial, and industrial uses. This finding suggests that the surge in EPU triggered by the global financial crisis accounts for approximately 45% of the increase in agricultural land conversion. The adverse effect on agricultural land preservation mainly stems from intensified fiscal pressures and heightened demands on local governments to meet economic growth targets. To address potential endogeneity concerns, we employ the one-period lagged U.S. EPU index and its temporal variations as an instrument for China’s EPU, leveraging cross-country spillover effects. Our instrumental variable estimates confirm the validity of the land conversion effect and its underlying mechanisms. Furthermore, we find that the effects of EPU are particularly pronounced in cities located in non-eastern China and those that depend heavily on fixed asset investment for local economic development. Finally, our analysis of potential policy interventions to mitigate EPU-induced agricultural land loss suggests that strengthening market-oriented reforms and reducing province-level quotas on agricultural land conversion can effectively offset the impact of rising EPU.