The Returning Farmland to Forest Program (RFFP) is widely known as one of China's largest and most successful payment schemes for ecosystem service projects for the achievement of both environmental and economic sustainability. By sponsoring afforestation activities and compensating farmers for converting cropland to forest, the project was designed to achieve multiple goals. Ecologically, the program aims to expand forest cover and to reduce flood and soil erosion. Economically, it aims to alleviate poverty and improve rural livelihoods. Although the official metrics indicate successful program outcomes in the short term, researchers have reported mixed and controversial results for long-term outcomes. We combined the difference-in-difference (DID) with instrumental variables (IVs) regression to examine the long-term effects of China's RFFP on local economic development. We found that (1) the RFFP has had a remarkably positive impact on local economic growth in the primary sector, but considerably limits the growth of enterprises above a designated size by 16.8%; (2) the RFFP is unable to promote the development of the secondary industry because it cannot effectively promote the transfer of rural laborers to the secondary industry sector; and (3) in addition to increasing the general budgetary expenditure of local finance by 7.50%, this program has significantly reduced local fiscal revenue by 35.50%. We suggest that eco-compensation should consider the performance of the RFFP in its evaluation criteria.Sustainability 2020, 12, 1492 2 of 17 outcomes in terms of the reduction of soil erosion, flood prevention, and some degree of biodiversity improvement [6].Along with efforts to raise awareness of the issues with China's agriculture, farming, and rural areas, the RFFP aims to improve the regional economy and rural livelihoods [7,8]. Households participating in the program are expected to increase their annual income and improve their employment conditions by transitioning from on-farm labor to off-farm activities and by receiving eco-compensation. The actual outcomes of the RFFP, however, show mixed results [9]. For example, participants are compensated by the Chinese government with cash and food subsidies for the loss of income caused by converting croplands to forests. The current compensation scheme has not always fully covered farmers' economic losses. Under the current compensation scheme, participants are given 100 kg of raw grain and 20 yuan annually for completing 1 mu of afforestation. This can result in reduced annual income for farmers and in the suppression of local economic development due to a reduction in farmland. In addition, the program is reported to increase forest cover and reduce the risk of flooding and soil erosion. This provides opportunities for farmers to engage in alternative activities, such as shifting from farming to fruit cultivation, animal husbandry, and tourism, which can contribute to the development of the local primary industry. These activities may also encourage farmers an...