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China's Economy: Rural Reform And Agricultural Development : Rural Reform and Agricultural Development
 9789814293327, 9789814291859

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China’s Economy Rural Reform and Agricultural Development

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Volume

SERIES ON DEVELOPING CHINA Tr a n s l a t e d R e s e a r c h f r o m C h i n a

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China’s Economy Rural Reform and Agricultural Development

Editor

Deng Zhenglai Fudan University, China

World Scientific NEW JERSEY

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LONDON



SINGAPORE



BEIJING



SHANGHAI



HONG KONG



TA I P E I



CHENNAI

9/18/09 3:08:41 PM

Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

Originally published in Chinese by Truth & Wisdom Press, Shanghai Century Publishing Company Ltd., 2009 Copyright © Truth & Wisdom Press, 2009 中国经济:农村改革与农业发展 (编者 邓正来)

Series on Developing China—Translated Research from China – Vol. 1 CHINA’S ECONOMY: RURAL REFORM AND AGRICULTURAL DEVELOPMENT (Edited by Deng Zhenglai) Copyright © 2009 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher.

ISBN 978-981-4291-85-9 ISSN 1793-9976

Typeset by Stallion Press Email: [email protected]

Printed in Singapore.

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Contents

Chief Editor

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List of Contributors

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Series on Developing China — Translated Research from China Editorial Committee

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Preface Paying Attention to Chinese Interpretations Pan Shiwei Introduction Academic Inquiries into the “Chinese Success Story” Deng Zhenglai Chapters Gender Inequality in the Land Tenure System of Rural China Zhu Ling The Allocation of Decision-Making Power and Changes in the Decision-Making Style: Systematic Thoughts on China’s Rural Problems Zhang Shuguang, Zhao Nong v

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Farmers’ Tax Burden in Rural China: A Political Economy Analysis Tao Ran, Liu Mingxing, Zhang Qi

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Effects of Labor Out-Migration and Income Growth and Inequality in Rural China Li Shi

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Grain versus Food: A Hidden Issue in China’s Food Policy Debate Lu Feng

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Saving Behavior in a Transition Economy: An Empirical Case Study of Rural China Wan Guanghua, Shi Qinghua, Tang Shumei

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Township Enterprises and Their Interest Distribution in Reform: A Three-Player Game Model Ke Rongzhu

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Rural Interregional Inequality and Off-Farm Employment in China Zhang Ping

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Food Demand and Nutritional Elasticity in Poor Rural Areas of China Zhang Juwei, Cai Fang

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Reform in China’s Rural Areas: The Changes in the Relationship between the State and Land Ownership — A Retrospect on the Changes in Economic Institutions Zhou Qiren Index

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Deng Zhenglai is Distinguished Professor of Fudan University and Dean of Fudan Institute of Advanced Study in Social Sciences (IAS-Fudan), Shanghai, P. R. China. He supervises PhD students in jurisprudence and political theory. He is the editor-in-chief of Fudan Journal of The Humanities and Social Sciences and China Social Sciences Quarterly. He holds honorary professorships at a number of Chinese universities. Deng’s research interests include legal philosophy, political philosophy and an interdisciplinary study in humanities and social sciences. He has published nearly 20 soleauthored books, some 20 translated books and a number of edited books. His works include: State and Society: China’s Civil Society (1997, Sichuan); Research and Reflections: Intellectual Integrity of China’s Social Sciences (1998, Liaoning); Freedom and Order: Hayek on Social Theories (1998, Jiangxi); Hayek on Legal Philosophy (2002, China University of Political Science and Law); China’s Jurisprudence: Where to Go? (2006, Commercial Press).

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List of Contributors

Cai Fang, Research Fellow and Director of the Institute of Population and Labor Economics, Chinese Academy of Social Sciences. His main research fields include: agricultural economy, China’s economic reform, labor economy and population problem. Ke Rongzhu, PhD Candidate, Department of Economics, MIT. His main research fields include: applied micro theory, applied econometrics, organizational economics, and political economics. Li Shi, Distinguished Professor, School of Economics and Business Administration, Beijing Normal University. His main research fields include: income distribution, and rural reform. Liu Mingxing, Research Fellow, China Institute for Educational Finance Research (CIEFR), Peking University. His main research fields include: educational finance, and rural China. Lu Feng, Professor of Economics, China Center for Economic Research, Peking University. His main research fields include: economic principle, management economics, China’s agricultural economics, intra-product division, and China’s economic development. Shi Qinghua, Professor of Economics, Antai College of Economics and Management, Shanghai Jiao Tong University. His primary research interest is the economic behavior of rural households in China. Tang Shumei, Professor of International Economic Law, Beijing Normal University. Her main research fields include: international economic law, ix

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international trade law, international public law, and international investment law. Tao Ran, Research Fellow, Center for Chinese Agricultural Policy, Chinese Academy of Sciences. His main research fields include: urban and rural household taxation, environmental science, and Chinese economics. Wan Guanghua, Senior Research Fellow, World Institute for Development Economics Research (UNU-WIDER), United Nations University. His main research fields include: poverty and inequality decomposition, applied econometric modeling, rural development and TFP analysis. Zhang Juwei, Research Fellow and Deputy Director of the Institute of Population and Labor Economics, Chinese Academy of Social Sciences. His main research fields include: agricultural economy, labor economy and population problem. Zhang Ping, Deputy Director of the Institute of Economics, Chinese Academy of Social Sciences. His research lays particular emphasis on the economic issues on Chinese agriculture and rural areas. Zhang Qi, Research Assistant, Institute of World Economics & Politics, Chinese Academy of Social Sciences. His main research fields include: political economy, global economics, and rural economy. Zhang Shuguang, Research Fellow, the Institute of Economics, Chinese Academy of Social Sciences, and Chairman of the Academic Committee of Unirule Institute of Economics. His main research fields include: macroeconomic theory and policy, institutions, and institutional change theory. Zhao Nong, Associate Research Fellow, the Institute of Economics, Chinese Academy of Social Sciences. His main research fields include: macroeconomic theory, and institutional change theory. Zhou Qiren, Professor of Economics, Peking University. Director of National School of Development of Peking University. His main research fields include: new institutional economics, development economics, labor economics, and Chinese economics. Zhu Ling, Research Fellow and Deputy Director of the Institute of Economics, Chinese Academy of Social Sciences. Her main research fields include: income distribution, rural development, and poverty problems. x

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Series on Developing China — Translated Research from China Editorial Committee

Advisors Wang Zhongwei: CPC Shanghai Municipal Committee Qin Shaode: Fudan University

Director Pan Shiwei: CPC Shanghai Municipal Committee

Deputy Directors Deng Zhenglai: Fudan University Chen Xin: Shanghai Century Publishing Company Ltd.

Editorial Committee Members Chen Jiaming: Xiamen University Chen Jiaying: Capital Normal University Chen Sihe: Fudan University Fan Gang: China Reform Foundation Fang Liufang: China University of Political Science and Law Gao Yi: Peking University Guo Qiyong: Wuhan University He Huaihong: Peking University He Qinhua: East China University of Political Science and Law xi

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Hu Jingbei: Tongji University Jiang Yihua: Fudan University Li Qiang: Tsinghua University Lin Shangli: Fudan University Liu Kang: Shanghai Jiao Tong University Liu Qingping: Fudan University Liu Shijun: CPC Shanghai Municipal Committee Ma Min: Huazhong Normal University Mao Shoulong: Renmin University of China Qin Hui: Tsinghua University Qin Yaqing: China Foreign Affairs University Sang Yucheng: Fudan University Shen Dingli: Fudan University Shen Zhihua: East China Normal University Shi Jinchuan: Zhejiang University Shi Yinhong: Renmin University of China Sun Liping: Tsinghua University Sun Zhouxing: Tongji University Tong Shijun: Shanghai Academy of Social Sciences Wang Hui: Tsinghua University Wang Yuechuan: Peking University Wei Sen: Fudan University Xu Jilin: East China Normal University Xu Xianming: Shandong University Xu Yong: Huazhong Normal University Xu Zhangrun: Tsinghua University Yang Nianqun: Renmin University of China Yao Yang: Peking University Yu Keping: Central Compilation and Translation Bureau Zhang Jun: Fudan University Zhang Shuguang: Academic Committee of Beijing Unirule Institute of Economics Zhang Weiying: Peking University Zhang Wenxian: Jilin University Zhang Xiaojin: Tsinghua University Zhou Guoping: Chinese Academy of Social Sciences

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Preface Paying Attention to Chinese Interpretations Pan Shiwei

The name of this series, “A Developing China”, is plain and simple, but giving some thought to its implications yields three levels of meaning. The first is that China is a developing country. Over the course of the modern period, because of the constrictions imposed from the outside by imperialism and the internal corruptions of feudalism, China’s economy, politics, culture and social development all lagged behind, with the result that the country remained underdeveloped for a substantial period of time, becoming, in fact, the world’s largest developing nation. Second, China is still at its primary stage of socialism. Owing to the combination of a number of internal and external factors, China did not evolve along the traditional path of capitalism, choosing instead a non-capitalist form of development, a determination made both by its people and by history. The socialist path, however, can only be experimental in nature, and is marked by considerable uncertainty in the setting of its goals, the design of its institutions, its growth approaches and its operational mechanisms. In all of these things we can see the symptoms of a country still in the process of development. Third is the character of a still developing social science. As far as the understanding and grasp of the rules of China’s development toward modernization is concerned, Chinese social science can only deepen its awareness through a process of constant exploration and trial and error, and can only mature via repeated reflection upon and synthesis of new research. Regarding a move toward a spirit of autonomy, Chinese social science is in pursuit of a comprehensive method arising out of a gradual amalgamation of Western academic learning, Chinese cultural heritage and theoretical innovation of xiii

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Marxism. Based upon the three considerations outlined above, using the idea of “a developing China” to describe and define contemporary China is clearly an apt and precise reading. The gathering speed of China’s development, the growing intensity of its transformation, and the ever more evident achievements of its modernization over the past 30 years have attracted a good deal of interest. Like a huge laboratory, China and its development represent a comprehensive process of transformation combining economic growth, political stability, social growth, cultural maturation, and a high level of diplomatic activity. In terms of economics, China has sustained an annual rate of GDP growth of over nine percent, with GDP having jumped to the third largest in the world, and it has grown into an important contributor of industrial products to the world’s trading system. Politically, this country with a huge population and a vast area has been able to maintain a commendable stability; there has been a firm drive toward putting democracy into action; the rule of law has been implemented with great perseverance and leadership by the Communist Party has been very effectively improved. Socially, the issue of the livelihood of the people has always been at the head of the agenda; the pursuit of social justice and equality has never been set aside and there has been great effort to confine the social costs of development to as small an area as possible; the social welfare system as they have accumulated has been continually improved, and non-governmental organizations for public welfare have flourished. Culturally, the creation and innovation of a mainstream ideology has continued apace and in an environment that is profoundly changing, people’s intellectual and spiritual worlds increasingly show an essential soundness; the provision of the products of public culture grows richer by the day, and the spread of education, literature and the arts, and science has greatly increased. In diplomacy our essential premise has been to maintain an open stance and to pursue an independent, autonomous and peaceful foreign policy; we pay careful attention to relations among the major powers, as well as to links with our neighbors, and we participate actively in all matters global; we strive to contribute as we should to making adjustments to the international political situation and toward economic globalization. All of these factors indicate that China provides a model case in development that is rare in the contemporary world, regardless of whether one considers development in its totality, its

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sustainability, or its depth. As a result, it is only natural that a developing China has attracted increasing curiosity and more favorable opinion. One consequence of China’s rapid development is that people inevitably wish to take their thoughts about this issue one step further, which brings in its wake a whole series of perplexities. Has China’s development been merely the result of a series of fortuitous circumstances, or is it comprised of historical rationality and a certain objective necessity? Has China’s development been an isolated case that cannot be emulated, or can it function as a universal reference for other developing countries? Is China’s development merely an uncomplicated duplication of the developed nations of the West, or is it a unique creation that has at once assimilated such achievements of human civilization as market economics and combined them with indigenous conditions? Has China’s development been nothing more than a series of hasty and muddled practical efforts that have nonetheless brought about significant results, or will it gradually take shape as an exemplary developmental model? Is China’s development only a single charge forward, or will it be able to build on its current momentum to achieve sustained progress over a longer duration? Is China’s development only a matter of material wealth, the pursuit of profit and economic growth, or does it embody unique Chinese views on development, social order, human well-being and the world as a whole? All such questions represent unavoidable and serious challenges to those people objectively observing Chinese development. Any accurate response to these questions cannot be based only on simple common sense, but requires the assistance and support of the humanities and the social sciences. Scholars active in such fields as economics, political science, sociology and law need to take their responsibilities seriously. We can take comfort, however, from the fact that Chinese humanists and social scientists have neither absented themselves from this great and profound transformation nor lost their way during the course of this intensely dramatic restructuring — they have kept apace with the times and of events. The work of Chinese scholars of the humanities and the social sciences over the past decades can be encapsulated within the several categories listed below. First, they have engaged in meaningful analysis of both the real world and the national situation. Whether in the face of the difficult beginning days of China’s reform and opening-up or in regard to the

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specific developmental steps or changes that followed, in order to sort out the principal contradictions of each stage or field, Chinese scholars have all paid close attention to analyzing both the contemporary international environment and the practicalities of the domestic situation. With an issueoriented approach, they illuminated the full dimensions of the bottlenecks during the course of reform such that they gained a full range of information and source materials for policy makers. Second, they have developed specialized planning of the programs and the ways and means of reform. Although the pace of intensity of the Chinese reform and opening-up proceeded according to both its own rhythm and its own program, no one can deny its wide range and comprehensiveness. From economics to politics, from culture to society, hundreds and thousands of important changes took place in succession, and the survival and success rate of all of these reforms was exceptionally high. One of the main reasons for this was the development of carefully thought out as well as highly detailed contingency plans, on which Chinese scholars expended a good deal of painful intellectual labor. Almost every anticipated program required detailed thinking and preparations because of the necessity and urgency of each item on the agenda, tasks implicit in the general goal, key specific points to work on, safeguards, and due attention to each item. It was such pre-planning that differentiated China’s reform from that which took place in the ex-USSR bloc — it was less hasty, random and careless, and more objective, precise, and generally undertaken with more equanimity. Third, they have drawn upon and introduced the experiences of the developed world. Against the background of globalization, the interaction, accommodation, and contesting of an opened China with the rest of the world have become increasingly commonplace, and Chinese scholars are the interactive link between the two. They have been the group most sensitive to global trends, to the propensities of the times, and to the most beneficial elements of these tendencies. In recent years, Chinese scholars have assiduously introduced and promoted the latest news, advanced understandings and freshest concepts from abroad, with the result that Chinese from all walks of life have benefitted greatly from the extension of their perspectives and the updating of their knowledge. Fourth, they have initiated a methodical discourse. The existence of a variety of interests in the current Chinese social structure is a demonstrable

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fact; equally clear is the decisive role of the underlying socialist system in rendering a fundamental consistency of interests, such that there are not any fundamental antagonisms. The smooth implementation of the reform and opening-up of Chinese society, as well as future results, has depended upon the full expression of a variety of views and the effective coordination of a variety of interests. An ever richer public discussion, therefore, has by degrees become a vital factor in determining whether the reform and opening-up will succeed or not. Chinese scholars have played a key role in this and in the face of a wide variety of different problems associated with the developmental process, they have provided the impetus for and participated in discussions large and small. Most of these discussions took place on the scholarly level, but they were often characterized by a strong social or public quality. More often than not this discourse reflects divergent perspectives, or requests from different groups, and eventuates in a more complete conceptualization of specific aspects of the reform. The discussions have also provided numerous ideas about how to solve practical problems, opened up space for practical action and increased people’s ability to make comparisons and choices. Even more importantly, the lively atmosphere created by these discussions has enabled society as a whole to gradually achieve consensus, to gather together the public will, and to unify action. Fifth, they have assessed and taken stock of the achievements of the reform and opening-up, another key link that has been taken very seriously in the developmental process. Implementing reform in China has been, of course, particularly formidable, because modernizing this most populous nation in the world presents far more difficulties than would be the case anywhere else. Reform in China, however, also has had an exploratory quality to it, as there is absolutely no precedent that can be consulted for a country with an essentially socialist system and guiding ideology in connecting with the world economy and achieving a market economy. The Chinese experience is also characterized by its long duration, for to realize the goals of true industrialization, urbanization, commercialization, digitalization, and internationalization from a relatively low production base has to be a long and gradual process. China has had, therefore, to become proficient at taking stock and self-evaluation, diligent at repeated assessment, and bold in continuously correcting error. Chinese scholars have again and again been highly effective in this, enthusiastically encompassing a wide

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terrain, engaging in both theoretical argument and powerful social assessment. These debates have included purely academic retrospective analysis as well as retrospective summing up of experiences carried out in cooperation with the ruling party and the government. These activities have contributed powerfully to the ripening and maturation of the policy makers and implementers of China’s reform and opening-up even as they have ensured the orderliness and accuracy of the actions that have followed on its heels. Sixth, they have enhanced and spread public rationality. China’s reform and opening-up has been of great benefit to the populace as well as being an immense series of activities in which hundreds of millions of people have participated — its characteristics include self-education and self-management. Through the experience of the reform and openingup, people have not only attained material benefits, but have also attained rich and satisfying lives, gained spiritual and political growth, as well as achieved a more civil mentality. As a consequence, Chinese intellectuals have a responsibility to disseminate knowledge of the humanities and the social sciences, enhance public rationality, create a common spiritual home, and satisfy the ever-increasing needs of the popular consciousness. At the same time, the spread of public rationality has also contributed to the ability to handle inter-personal relations, provided a basic code for interaction between individuals and society, and been of great help in the mediation of these relations as well as in resolving social antagonisms. Via the many ways through which they have paved the way for the spread and enhancement of public rationality, Chinese scholars have thus provided valuable lubrication to ease the process of a tense and pressing reform and openingup; they have constantly raised the level of harmony in a society in the process of restructuring. Seventh, they have improved the humanities and the social sciences in China. The Chinese humanities and social sciences in the modern sense got a tortuous start in the 20th century. They did not really flourish until they received a boost during the period of reform and opening-up, which provided an exceptional opportunity for their development. Mainstream Marxist ideology called forth a vitality that kept pace with the times, the resources of Chinese traditional culture were taken up and sorted through from a new perspective, and the high achievements of world civilization received

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unprecedented attention and were introduced to China. All these intellectual resources were gathered together to provide a generous foundation for the development of the humanities and the social sciences. Even more important, the rich variety of achievements of the reform and opening-up provided a plentiful assortment of source materials for the Chinese humanities and social sciences, and the advancing and ever deepening project of socialist modernization allowed them ample space for development. This enabled Chinese scholars to take the initiative to contribute to the establishment of the humanities and the social sciences even as they were taking part in practical affairs. As a result, we have been delighted to observe the ever more profound and healthy interaction between academia and society, theory and practice, with the result that Chinese-style humanities and social sciences composed of the various academic disciplines have gradually come into being. It must be stressed that the prospering of the Chinese humanities and social sciences cannot be separated from the support, understanding and importance attached to them by the Party and the government. The Party and the government earnestly hope that the Chinese humanities and social sciences will be able to play a key role in undertaking the vital tasks of bringing its people to understand the world, transmitting the ideas of civilization, creating theory, counselling the government, educating the people, and being of service to society. It must be said that at the initiation point of the reform and opening-up, based on the urgent needs of the forces of production and the building of modernization, the Chinese Party and government favored the development of modern scientific technique. Following upon the intensification of the process of modernization and after due attention to the organization of the economy, however, political, cultural, social, and environmental construction were all put on the agenda, and the Party and the government’s focus on the humanities and the social sciences became ever more profound. Because of this the important concept of “four things of equal importance”, i.e. philosophy, the social sciences and the natural sciences had the same priority, was clearly set forth. This meant that training of high-caliber philosophers and social scientists received the same weight as the training of natural scientists, that raising the national quality of philosophy and social sciences was as vital as raising the national quality of the natural sciences, and that there was to be no distinction between

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giving free rein to and fully utilizing the talents of philosophers and social scientists and the treatment accorded to natural scientists. In accord with this principle, the Party and government adopted a series of important measures to forward the development of the humanities and the social sciences, making them a crucial constitutive part of overall national strength, with the earnest desire that the humanities and the social sciences will begin to thrive sooner rather than later. Because of the common effort of the Party, the government and the academy, over the course of 30 years following the reform and opening-up, theoretical research has had an important influence on policy formulation and implementation. The launching of the reform program, which began with a highly significant discussion of the idea that “practice is the only criterion for testing the truth”, opened up the movement for the liberation of thought that cast off the fetters of dogmatism. On the occasion of drawing conclusions from 30 years of development, the theoretical structure of the idea of socialism with Chinese characteristics has taken shape. It is possible to say without any exaggeration that no other historical transformation that has lasted as long as 30 years has been able to preserve such a level of enthusiastic anticipation of theoretical guidance, that no other political party has been able to effectively combine organically a steadfast loyalty to its principal ideology and capacity for the innovation of mainstream theory, and that no other country has been able to remain so favorably and enthusiastically disposed to the theoretical enterprise for so long. Theory has played a vital and unmistakable role in the research into and scrutiny of the development of China’s reforms. From this perspective it is thus possible to draw the following inferences: theory has guided practical concerns, practical concerns have changed China, and China has influenced the world. The implementation of this earth-shaking reform and opening-up has, of course, fed back into influencing and changing the development of theory itself. Over the past 30 years, the development of the Chinese humanities and social sciences has followed a path not entirely like that pursued in the West. Careful scrutiny reveals three specific features of how this process has unfolded in China. First, from the developmental perspective there have been efforts of and some preliminary implementation of combining the trinity of basic Marxist principles, the general achievements of human civilization, and Chinese realities. Second, from the perspective

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of basic content, there have been efforts of and some preliminary implementation of pushing forward a combination of the trinity of theoretical exploration, broadening the base of popular knowledge, and policy transformation. Third, from the perspective of those who participate, there has been effective advocacy of and some preliminary implementation of combining scholarly experts, leading cadres, and the general populace. Of course, during the process of merging the three entities listed above, people experienced the adjustments of moving from the unsystematic to the systematic, from lack of proficiency to proficiency, and from lacking initiative to possessing it. The upshot of these efforts has been to edge the contemporary Chinese humanities and social sciences toward a brand new point of departure. The goal of our current series is to introduce the achievements of the last 30 years of the Chinese humanities and social sciences, and their close relationship to China’s reform and opening-up, to the foreign academic and general audience. Any dispassionate review will, of course, reveal that, no matter how fast the Chinese humanities and social sciences have progressed, there are still numerous inadequacies. For example, there has yet to be adequate study of the Chinese model, more attention need to be paid to the development of academic standards, the development of the various disciplines has been uneven, there has not been enough done in regard to rendering research and analytical methods sufficiently diverse and scientific, and much more need to be done with respect to training academic talent.Among the problems, the low degree of internationalization is an especially weak link. A statistical count reveals that in the decade between 1991 and 2001, Chinese scholars of the humanities and the social sciences received 9,000 invitations to lecture abroad, with 19,000 scholars going abroad to study, and 23,000 foreign scholars invited to lecture in China. There was great progress made between 2001 and 2005, with 100,000 Chinese scholars participating in international conferences, 13,000 articles by Chinese scholars being published in foreign journals, and 2,600 cooperative ventures with foreign universities and research organizations. Clearly, then, there has been a demonstrable and stable increase in the rate of interaction between Chinese academia and the rest of the world. The imbalance in the level of “exports” and “imports” in this academic exchange is, however, still a serious problem. Taking scholarly translation

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as an example, between 2000 and 2005 there were approximately 7,000 foreign academic works translated into Chinese, but in the same period of time there were only 800 works whose primary author was a Chinese scholar translated into foreign languages. Taking the internationally influential Social Science Citation Index (SCCI) as another example, in 2007 there were 1,962 journals listed in the SCCI published in over 40 countries, with the United States accounting for almost 60% of them and the top ten countries on the list accounting for more than 90%; there were only about ten journals concerned with Chinese social sciences. Only one of these, however, actually comes from China, China and World Economy, published by Basil Blackwell in the UK on behalf of the China Society of World Economics and the World Economy and Politics Research Institute of the Chinese Academy of Social Sciences. The inability of Chinese academic research to go far from home stands in sharp contrast to China’s ever-increasing economic and political influence and represents a serious weakness in the development of the Chinese humanities and social sciences. It is in this context that, in order to carry through the strategy of having the Chinese humanities and social sciences “walk out”, the Publicity Department of the Shanghai Municipal Committee of the Chinese Communist Party decided to initiate this important “Series on Developing China”. It organized an editorial committee and appointed Fudan University Distinguished Professor Deng Zhenglai, Dean of the Fudan Institute for Advanced Studies in Social Sciences to head the program. By translating outstanding academic articles on the subject of the experience of Chinese development published over the last 30 years, this program aims to introduce a comprehensive set of outstanding world-level scholarly works by Chinese scholars and thereby take steps to move the Chinese humanities and social sciences “toward the world”. The series will be marked by the following characteristics: one, it will hold firm to the principle of “standing firmly in China and moving toward the world”, but also make sure to choose themes that will be influential in the international academic sphere and conform to its demands. We believe that only works in the humanities and the social sciences with true Chinese character, style and manner will be able to really make its way into the world, and that only works with the distinct imprint of the national culture will be truly vital. With this in mind, we have chosen a number of academic

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fields that will perhaps be influential internationally as our point of entry and developed themes like “China’s Economy: Rural Reform and Agricultural Development”, “State and Civil Society: the Chinese Perspective”, “Sino-American Relations: the Chinese Perspective”, and “Globalization and Localization: the Chinese Perspective”. Second, we have organized an authoritative editorial committee, which will uphold strict academic standards and select only the most outstanding papers on relevant topics. The committee is made up of premier Chinese scholars such as Zhang Wenxian, Yu Keping, Zhang Weiying, Wang Hui, Chen Jiaying, Zhou Guoping, Xu Xianming, Ma Min, Lin Shangli, He Qinhua and Sun Liping; it thus embodies a high level of academic expertise that will ensure meticulously fair and objective choice in the works to be published. Third, we have organized a group of high quality translators and will be on guard to guarantee a high level of translation. In addition to this team of translators, we have set up a process that will have experts from each field do a preliminary translation, which will then be checked by the original author, passed on to the English editor and finally to the editor-in-chief for review. The internationalization of Chinese scholarship is a lofty goal; it is also a difficult task, but even more than that, something that will take time. What continues to encourage us to devote ourselves to the task is this firm conviction: the economic and social development — and the related academic progress — that has already taken place in China, is taking place now, and will take place in the future is essentially aligned with trends in the advance of human civilization. We have every reason to believe that by way of our careful, even and painstaking efforts we can make some small contribution toward an understanding of China’s transformation, taking stock of the Chinese experience, researching the Chinese model, spreading Chinese values, and raising the international standing of the Chinese humanities and social sciences. Of course, owing to our lack of experience, such a large-scale undertaking as this translation project will be subject to numerous oversights, even outright errors. As far as that is concerned, we can only hope that our readers all over the world will provide us with critical feedback. Shanghai July 21, 2009 xxiii

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Academic Inquiries into the “Chinese Success Story” Introduction to Series on Developing China Vol. 1: China’s Economy: Rural Reform and Agricultural Development Deng Zhenglai∗

Since the 1980s, the end of ideological warfare characterized by the Cold War and the Iron Curtain has enabled globalization to manifest itself in two dimensions. Firstly, the transformation to market economy in postsocialist countries accelerated global economic interdependency. Globality as encapsulated in such international organizations as the WTO, the World Bank and the IMF, together with the emergence of global issues and common crises, has an enhanced capacity to weaken national sovereignty. As Robert Reich pointed out, “[T]he transformation we are experiencing now will reshuffle politics and economy in the new age, which will render a series of traditional concepts obsolete, such as national product, technology, company, industry or economy. Within national boundaries will only be left the people that form the country … The centrifugal force of global economy has been trying to weaken the bond that traditionally holds a nation together”.1 As a matter of fact, billions of people, in almost every nation ∗ Distinguished Professor of Fudan University and Dean of Fudan Institute for Advanced Study in Social Sciences, Shanghai, P.R. China. Areas of interests: social theory, jurisprudence and political philosophy. 1 Reich (1994, p. 1). It should be pointed out that Reich’s analysis of globalization is far from simplistic than this quote suggests at a glance. My quote of his opinion is only in its descriptive sense.

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taken the world over, have their daily life affected to a certain degree by the globalization that has been unprecedentedly omnipotent and ubiquitous. The second dimension came from the increasing popularity of globalization among academic researchers in all disciplines. A research report on global issues was published by the Club of Rome in the late 1960s and early 1970s (Meadows et al., 2000; Mesarovic and Pestel, 1987). Since then, “globalization”2 has become one of the most frequently used terms in international social science circle. As one of the new perspectives to examine contemporary issues, it contextualizes current intellectual life. As M. Waters has pointed out, “As much as postmodernism was a concept that belonged to the 1980s, globalization is a concept of the 1990s, a key concept for us to understand the transformation of human society towards the third millennium”.3 It needs to be pointed out immediately that globalization is also by definition one of the most controversial terms. “The variety of vantage points notwithstanding, globalization invariably concerns a dominant theory, in that the past two centuries that were characterized by using geographical boundaries to define social fields have fostered and encouraged imaginations, be it scientific or socio-political. Now this age has come to an end. Global capitalism carries with it a globalization of culture and politics, resulting in the breakdown of the socialization of national boundaries and the institutional principles of cultural knowledge, upon which the self-image and world picture familiar to all were based” (Beck, 2000a, p. 14). On the other hand, globalization has become a leading topic in every social science field internationally. Any issue of significance, be it economic, political, social, legal or cultural, will be invariably related to it. Besides, its appearance in academic journals has an extensive coverage of different areas of humanities and social sciences, such as global governance, globalization of economy, cultural globalization, global common 2 For Giddens, “Globalization may not be a term that is especially attractive or

glorifying … However, even in the late 1980s, this term was commonly used in academia and daily life, as it was already ubiquitous by then”. He pointed out that in today’s world, “every man that seeks to understand our future should not ignore it” (Giddens, 2001, p. 2). 3 Waters (1995, p. 1). Sklair also pointed out that “even though conceptually globalization is far from perfected, as a research question and subject, it has already been indisputably consolidated in social science” (Sklair, 1993).

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interest, global justice, global politics and globalization of law (Held et al., 2001, pp. 3–14). Obviously, for China and Chinese social science alike, globalization has presented the following issues to be answered. How should globalization be understood? Is it a process of objective inevitability, or subjective variability? Is it a fact or a discourse? For such less developed countries as China, what kind of challenges and opportunities can be identified? For Chinese social science, what does globalization entail? What does it mean for the “Chinese Success Story” that has attracted attention worldwide?

1.

World Structure and China as the Subject: A Chinese Perspective on Globalization

How should we seek to interpret globalization, as well as the challenges and opportunities it thus entails? As far as I can see, only through clarification of the following few issues will it be possible to offer answers that are marginally close to “satisfactory”. First, how have we been dragged into globalization? How can we understand the nature of globalization? For China, what is the difference between the current age of globalization and the times preceding it? What is China’s position in the world structure in the current age of globalization? Is the discourse on globalization and its theorization sufficient to warrant solutions for the problems facing China today? In recent studies, I have used such concepts as “world structure” or “global structure” to respond to the issues brought afore by globalization. Hereby these concepts shall be briefly outlined. My thesis can be summarized in the following few themes (cf. Deng, 2006, pp. 2–23; 2009, Pt. 1): Firstly, China was included into the process of globalization through its accession to such international organizations as the WTO, which contains structural inequality that I term as “world structure”. With the advent of globalization and the opening up of China to the outside world, especially after China’s entry into such international organizations as the WTO, China is no longer geographically isolated, in which replacement she becomes a

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country that is deeply embedded in the world structure. For China, this was the greatest transformation since time immemorial. Before this, China as an independent sovereign power was external to world structure despite the extensive international cooperation or conflicts — which means that China, although part of the world, used to be an outsider to the world game. The reason for me to signify world structure as a world game lies in the distinction between center and periphery that contains a domination of developed countries over developing ones. As Robert W. McChesney (2000, p. 7) pointed out, “The reason for market globalization is that the government of developed countries, especially the US, has superimposed trade agreements and treaties upon the whole world, enabling commercial magnates and the rich to easily dominate other national economies without shouldering relevant responsibilities”. For me, this domination by the developed countries over their developing counterparts is not only manifested in economy as McChesney pointed out, in that it allows peripheralization of China that has become increasingly dependent upon the West through market mechanisms and the optimal allocation of the means of production globally, but also in institutions and cultures. Institutionally, the legal rules or institutions as recognized by China in the world structure are in fact local knowledge based on Western experiences, through which the transplantation of certain values has assumed a unquestionable gesture of unipolarity and inevitability, as captured in the dominator-dominated relationship. On the other hand, culturally, the demise of ideology has engendered a high level of integration both in culture and in the development of science, where the Western countries as dominators export not only technology but also their culture and ideology, which in turn compresses, suppresses and depresses the development of culture in developing countries, including China. Secondly, different from the previous modernization period, the Western domination over China has changed in nature, which was based on not collusion but promises. The most important element of the so-called “modernization paradigm” in the world structure that was most often neglected by Chinese scholars, lies in the Chinese intellectuals’ collusion to the dominator during this process of domination. Such collusion is manifested in the uncritical or unreflective acceptance of the Western modernization

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paradigm. Obviously, in order for the world structure to be effective in dominating China, the collusion from China is indispensable. By this, the domination is not structural or coercive — the Western modernization paradigm remains external to China, in that without China’s collusion its dominant influence over China will cease to work, together with its ability to superimpose its rules and imaginations upon which China’s ideal picture is based. However, in the post-Cold War period, the domination of the world structure becomes effective as soon as it secures the acceptance of rules and institutions from China that has been arranged into this game. It is precisely in the light of this statement that this domination of the world structure can be concluded as structural and coercive, which was dependent not on force, but China’s promises to abide by its rules and institutions, regardless of China’s collusion or otherwise. From this it can be seen that the world structure that China joined has to a great extent a binding domination over China that is based not on collusion but promises. Thirdly, the principle of sovereign equality as vouched by international law cannot possibly rescue China, while a “China as the sovereignty” needs to be substituted by a “China as the subject”. To point out this structural inequality in the world structure is of great importance for less developed countries, as it showcases the tension between this factual inequality-based domination and the propaganda of sovereign equality as claimed by Western powers since the 16th century. The aforementioned domination has shown that the contemporary world is at the beginning of a new empire. Certainly, this new empire is dependent not upon war and blood, but information, knowledge, capital and market. More importantly, the purpose of this new empire or the dominators has been not only for extension and protection of their national interests in the world, but to propagate their values or ideal pictures that are clothed as “universally applicable” to other nations, through which to further superimpose their social or political orders. Therefore, in the current world order, apart from its justifiability to defend border integrity, national security, human rights and economic development, the so-called “sovereign equality” (or China as the sovereignty) is not only insufficient, but also limited to a great extent. China as in the world structure is not a peculiarity or departure from the Western polity, but a subject in terms of ideology, with its core on a Chinese weltanschauung and value (or a unified China perspective in the world structure).

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This shall pave the way for a proactive approach on the part of China to participate in restructuring the world order. In the contemporary world structure, an emphasis on substituting “China as the subject” for “China as the sovereignty” serves the fundamental purpose of breaking through the limits set by sovereignty, towards an inter-subject, inter-culturality and inter-civilization at the level of the world structure. This has to a greater degree suggested a legitimation or rule-making of the world structure not by a minority of sovereign powers only, but through inter-subject negotiations and interactions. Fourthly, whether from the perspective of globalization per se or from the nature of Western domination over China in the age of globalization, challenges as brought about in this process also carry with them unprecedented opportunities for China, insofar as an “ideal picture” based on Chinese perspectives can be formulated, which will then enable the transformation of a candidacy of participating in the world order into a capacity of revising these very orders. Through this, it will be possible to shape the dynamics and dimension of the development of world order according to Chinese experiences and perspectives. Globalization extends far beyond the economic globalization as vouched by economists. More importantly, it is a social transformation that is both dependent upon and transcendental to nation-state. Likewise, globalization of law is not a unification of national laws towards “non-national laws”, but a shift towards a diversification of national and non-national laws. Globalization is thus not a process of homogenization, but a coexistence of oneness and diversification, internationalization and localization, integration and fragmentation, aggregation and disaggregation. Globalization is no longer an objective inevitability, but rather a product of globalism, and an issue of counter-hegemony through different perspectives. In other words, in nature globalization is an open process that can be (re)shaped through cultural and political demands and national interests of China. Once this open notion of globalization is appreciated, the subject position of China can be assumed to restructure globalization and its orientation through the epistemological premises of “Chinese ideal picture” or “world ideal picture”. The fundamental significance for China to access the world structure lies in her gaining of candidacy to voice her own concerns over such topics as the justifiability of world structure as well as the

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so-called universally-applicable values, to the accompaniment of China’s promises to abide by these rules and institutions upon entry. However, a candidacy to voice concerns cannot be equated with the capacity to do so. Formal candidacy alone will not warrant a unique contribution by China to revising the rules for the future. On the contrary, it will entail either an acceptance of these existing Western rules, or a retreat into the safe harbor to concentrate on the millennia-long Chinese civilization. This is due to the fact that there lacks such idealizations as of identity, a life of good, desirability and a suitable modus operandi of globalization. Obviously, without these idealizations our capacity to revise or participate in revising future rules of the world order shall be severely restricted. For this very reason, endeavors should be made to offer idealizations that are based on Chinese perspectives, before China is actively involved in revising the rules of world structure, as well as in influencing the dynamics and dimension of the future world order.

2.

Counter-Hegemony and Internationalization: A Knowledge Reform for Chinese Social Science

Globalization entails challenges and opportunities for China and Chinese social science alike, which can be summarized in the following two aspects: Firstly, construction of and competition in the globalization discourse have provided ample opportunities for Chinese social science to shape the discourse in accordance with Chinese national interests and culturalpolitical demands. As previously mentioned, globalization is as much a fact as a construction of and competition in discourse, which, as far as I can see, have provided opportunities for Chinese social science that is to be shouldered with the task of seeking a globalized platform to express Chinese national interests and cultural-political demands. This judgment is based on two observations of globalization and Chinese social science: first being the interaction between globalization, globalism and the openness of globalism, while the other a Foucauldian notion of social science as “discourse”. First of all, Ulrich Beck proposed an analytical framework to encompass globality, globalism and globalization, through which it can be found 7

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that globalization as an objective inevitability was in fact a product of subjective globalism.4 Through this prism, globalism is not only genetically based on neoliberalism, but also a reflective version to critique globalism itself. Fundamentally, globalism in its genetic sense appeared first in developed capitalist world, into which China was dragged by means of accession into such international organizations as the WTO. This globalization coexists with knowledge, privilege, resources and interests of the Western power, which was exported as the neoliberalist glorification of “objective truth”5 to non-Western countries (China included), thus instituting a subjection to the West. As Dahrendorf has pointed out, apart from technology, neoliberalism (relaxation of control, privatization and liberalization) as universally practised since the 1980s paved the way for globalization. “New technological capacity was first realized in an atmosphere of relaxed controls … [which] permeated first in such powers as the US and the UK and later extended into other countries”.6 Therefore, globalization is not a purely objective economic process, but an international capitalist push through neoliberalist globalism, which is reinforced through globalization. In this institutional arrangement, the neoliberalist Utopian movement of crafting a pure and perfect market has been pursued with political strategies of all sorts, after it is being created through a cohort of stakeholders from major financial institutions and enterprises, with senior government officials, politicians 4 For Beck, globalization in its broad sense is neither an objective fact, nor a subjective construct, but rather an interaction between the objective and the subjective, of which these three levels are differentiated as globality, globalism and globalization (Beck, 2000b, as quoted in Zhang, 2000). 5 It should be pointed out that neoliberalism as in the genetic sense of globalism carries with it a necessary feature of ideology, by instituting a public notion of the “inescapable pressure of market”, through which to disable counteractions as well as to discourage political intervention of maintaining status quo. It is in this sense that neoliberalism is ideologue (Habermas, 2002). It was also pointed out that “the interconnectedness of global economy was not a natural consequence but rather the product of such policies as consciously in pursuit of set targets” (Martin, 1998, p. 11). For Smith, “globalization is an ideological construct, declaring a fundamentalist version of capitalism that has yet to come” (Smith, 2001, p. 96). 6 Dahrendorf (1998) as quoted in Zhang (2000). It should be noted that relaxation of controls, privatization and liberalization have become strategic tools by the Western Europe and the US and further advocated as “state ideologies” by neoliberalism (Martin, 1998, p. 150; cf. Scholte, 2003, pp. 39–41).

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and economists who are seeking to justify their actions. However, it was from the subordinate classes in the West as well as the peoples from other societies that the tension between globalization and globalism has been escalated. On the one hand, globalization widens the gap in living standard between the great majority of the world population and the minority that have been better-off when incorporated into globalized production and financial networks. On the other hand, this gap, together with other traditional contradictions, has enabled a critical, reflective globalism to challenge globalization and globalism in its genetic sense. An ethical issue was raised: are the rich that have consumed the majority of world resources and caused pollution en masse capable of fulfilling the aspirations of the poor in seeking development and an improvement of their living conditions (Cox, 2002, p. 20)? In other words, is this ideology and institutional arrangement capable of constructing a desirable and justifiable world order? As far as I can see, it is precisely this latter sense of globalism that provides possible theorizations for Chinese social science to shape the discourse on globalization through Chinese perspectives. Furthermore, for me, social science knowledge is fundamentally a matter of power and legitimation, which means that it is neither reflective and descriptive as claimed by positivists, nor technically regulatory, but more constructive and consolidating, in that these knowledge is capable, by means of institutionalization, of shaping, constructing and embedding into public awareness and regulatory frameworks such an “ideal picture” of social orders (Deng, 2006, pp. 266–267). Prior to this, due to the lack of critical reflection upon neoliberalism that has been lurking beneath globalization, the discourse on globalization and social order thus formulated by Chinese social scientists was essentially an idealization based on Western experiences. For this, as far as this legitimation of social science knowledge is acknowledged, with its critical power restored, it will be possible to shape a new form of global discourse based on the legitimacy of social order, national interests and cultural-political demands in China. Therefore, globalization is a game-playing process to be (re)constructed through cognizance, tradition and interests. It is to a certain extent a process of contingency, reversibility and uncertainty. For this, Chinese

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social scientists should not be contented with describing globalization, or uncritically accepting the dominance of neoliberalist globalism during this very process of globalization. On the contrary, it should be realized to that degree of sophistication that globalization is an open and changeable construct, for which an active strategy to proactively reconstruct or reshape the dynamics and dimension of globalization should be adopted by Chinese social science. Secondly, the advent of globalization has provided historical opportunities for the internationalization and a knowledge reform for Chinese social science. I firmly believe that globalization has brought ample opportunities for Chinese social science to construct a global discourse based on Chinese experiences, which informs a fundamentally critical juncture of knowledge reform for Chinese social science. By this, Chinese social science will not only be internationalized but actively engage the world in substantial discourse and dialogue. From historical perspectives, the centennial development of Chinese social science can be periodized into three stages: (1) “the introduction of Western knowledge into China,” where a modern discipline-based social science system was established by translating the theories, methodologies, disciplinary system and institutional set-up from the West; (2) “the assimilation of Western social science theoretical framework”, from the 1990s forward, by means of applying Western social science knowledge and methodology to Chinese issues and copying the Western paradigm on theoretical innovations, especially in the areas of economics; and (3) “the integration into the world”, i.e. adopting international academic norms, standards, disciplinary system and institutional set-up, particularly through academic standardization movement from the late 1990s. With these three stages of development, not only has the theoretical paradigm from the Western social science been introduced into China en masse, but also a comprehensive discipline-based system was set up. So was the case with the reinvigoration of the academic tradition of Chinese social sciences, which went hand in hand with “copying” the Western paradigm on theoretical innovations and assimilating with international academic standards. Undeniably the past three decades has witnessed a substantial development of Chinese social science, which has laid down a solid foundation for its further advancement.

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In the new millennium, with a deeper understanding of globalization and development for Chinese social science, Chinese government has grabbed this serendipitous opportunity to propose a “walk out” strategy for Chinese social science, which may in all probability signify a new age of internationalization. During introduction, assimilation and integration, Chinese social science has replaced an autonomous judgment with a West-centric perspective, under which criterion the research findings thus obtained not only ignore China, but find it difficult to engage the world in substantial discourse and dialogue. On the other hand, the reason for the economic miracle in the past three decades has been China’s courage to travel a path that is free from the confinements of Western and traditional models. By comparison, Chinese social science is still deeply entrapped within the ideological circumscription of the USSR and the West, thus incapable of interpreting China’s own experiences. At many times, Chinese scholars were helping Western philosophers to wage a war against Chinese sages. However, “we” as an entity in waging the war are non-existent. Due to the lack of interests in theorizing contemporary Chinese experiences, “we” in fact are either a photocopier or gramophone of Western scholars. In other words, Chinese scholars have gravely ignored an in-depth study and theorization of China’s own issues. I can see that this new age of internationalization is far from a natural continuity of the previous three periods, but has placed higher demand on Chinese social science in establishing a “made in China” academic assessment scheme, through which to develop theories and in-depth studies of China and to engage the Western academia in substantial dialogue, by using a language understandable to the latter (Deng, 2008). For Chinese social science, at least two aspects can be internationalized: (1) Chinese perspectives on globalization, and reconstruction and understanding of world order; and (2) in-depth study of contemporary China (certainly, if humanities are considered as well, the philosophical tradition of China should equally be an aspect for internationalization). As aforementioned, reconstruction of globalization and world order is not only a historical mission, but an important field for Chinese social science to contribute to the world. If the spread of neoliberalism in the postCold War period and its subjection to a series of recent challenges can be

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regarded as unavoidable limits of Western culture in shaping globalization and world order, then the global discourse, with its historicity rooted in Chinese civilization and its contemporaneity in China’s current culturalpolitical demands, can become an important theoretical resource to shape globalization and influence its future development. On the other hand, an in-depth study of contemporary China, especially theorizing the “Chinese success story”, can be the field for Chinese social science to contribute to the world. It is well-known that the recent 30 years of development has told a remarkable “Chinese success story”, beneath which lie the “Chinese experiences” in achieving development without following the Western models. In spite of the existing problems in human rights, democracy and environment due to a single-minded developmentalist impetus, indisputably China is now a country of significance, in terms of tradition, history, civilization, population and modernization. The winding path of development was first built upon the ex-USSR model and later redirected to market economy. The market reform has brought 30 years of sustained growth, which is in itself a remarkable achievement.7 Of these experiences, there exists not only an institutional modus operandi with Chinese characteristics, but also a Chinese living wisdom that can be explained not through imported Western theories but by Chinese perspectives.

3.

Rural Reform as the Starting Point for Academic Inquiries into the “Chinese Success Story”

It is based on the aforementioned recognition of globalization and the opportunities for Chinese social science thus entailed that came along this translated Series on Developing China, which, by means of careful 7 Economists have already pegged their attention to decoding the economic miracle in China. Lin Yifu, for instance, suggested a “backward advantage”. For him, “for developing countries, in general capital is scarce and unaffordable, while labor abundant and cheap, which is conclusive on the mode labor-intensive industrialization” (Lin, 2002). Qin Hui offered an explanation from the perspective of transaction cost. “The second wave of reform since 1992 has two features. On the one hand, there was no more of Pareto reformism while on the other, the transaction cost of institutional transformation has been collectively lowered through marketization, which is the main reason for the so-called miracle” (Qin, 2008).

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selection, is an introduction to the world social science circle of the Chinese scholarship on the two areas of (1) globalization, world order and international relations, and (2) academic inquiries into the “Chinese success story”. The theme for the first volume is set as “China’s Economy: Rural Reform and Agricultural Development” that contains 10 quality chapters. The raison d’être for choosing this theme lies in the importance of countryside, agriculture and peasants in the Chinese reform. As is known, Chinese revolution traveled a path of “encircling the cities from the rural areas”. Likewise the Chinese reform was started in promoting the household contract responsibility system in the rural areas. Moreover, the fact that the majority of the population was living in the countryside has made rural China the core of the reform. Such structural issues that readjustment of interests entailed as urban-rural divide and poor-rich gap are closely related to the rural reform. For this, a rural study centred on the three rural issues (agriculture, rural areas and peasants) or peasantography is actually an academic “gold mine”, which, as far as I can see, contains the richest possibilities for Chinese social science to contribute to the world. I agree with Philip C.C. Huang who asserted that the study of rural China shall become the center of rural studies worldwide. “The recent decade has witnessed a decline in attracting new talents to rural studies in the Western academia, partly due to the high level of urbanization and scarcity of rural areas in the industrialized West. Recent tides in academic studies are no longer so attentive to grassroots society as they used to be two or three decades ago. However, in China, in spite of the reproduction crisis facing many of the outstanding research units specializing in agricultural and economic history, there are still a large pool of researchers available. New contributions manifest themselves in such areas as social history, cultural history and historical geography. Apart from these history-related areas, new talents, together with new tides, have emerged in sociology, economics, law and anthropology. I believe that the future development of rural studies and research will have to derive its dynamic power from China. The rural area is as much the fundamental of China as the habitat for the majority of her people. The study of rural China will lead the world in the near future” (Huang, 2003, p. 1). Moreover, as far as I am concerned, rural issues not only characterize the Chinese path of development, but also define the areas that will most possibly challenge classical Western models, especially the development

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theory. A good example can be seen in the theoretical breakthrough in economics.8 Gender Inequality in the Land Tenure System of Rural China, by Zhu Ling, examines gender discrimination during land distribution in China. With reference to the statistical analysis of the sample survey conducted in the rural areas of Shanxi Province of China in 1996, this chapter attempts to demonstrate the gender issue in the land tenure system. The author proves that although the legislative framework and economic institutions enshrine the principle of gender equality in land distribution, there are still loopholes in the institutional arrangements that lead to the insecurity of women’s land rights. Divorced women, for instance, can be underprivileged in seeking the protection of their land rights. Moreover, women upon emigration due to marriage and their children who have missed the opportunities of land redistribution in their villages are barred from obtaining land tenure. Although these phenomena have not yet significantly affected the rural women’s bargaining position within household, they do tend to bring the landless women into poverty. Finally, Zhu calls for amending current laws and regulations with regard to gender equality in land tenure. The chapter by Zhang Shuguang and Zhao Nong, titled The Allocation of Decision-Making Power and Changes in the Decision-Making Style: Systematic Thoughts on China’s Rural Problems, aims to theorize such rural issues as demarcation of and interaction between private and public policies, by an approach of historiography. The present state policies on rural issues are critically reviewed. For Zhang and Zhao, theory is devoid of meanings unless with a purpose to interpret real-life experiences. An appropriate theoretical framework can effectively inform the practice of policymaking. For this very reason, this paper articulates an analytical framework 8 It was acknowledged internationally that developmental economics was first coined in

Agriculture and Industrialization, the doctoral thesis of Peigang Zhang at Harvard University in 1945. Compared to The Theory of Economic Growth (1955) by William Arthur Lewis the Nobel laureate, Zhang’s work was not only completed much earlier, but sufficiently considered the importance of agriculture. “By comparison, Lewis suggested a model of economic growth through sacrificing agriculture for industrialization, while Zhang argued that agriculture as part and parcel of production should not be sacrificed for industrialization, but rather developed in the same vein with industry. Afterwards Lewis reflected that he made a mistake in over-emphasizing industry and sacrificing agriculture for industrialization” (Zhao, 2004).

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to investigate rural issues in China. This framework has a wider scope of theoretical application, with reference to property right as discussed in the paper. The chapter by Tao Ran, Liu Mingxing and Zhang Qi, titled Farmers’ Tax Burden in Rural China: A Political Economy Analysis, studies the current situation of taxation and fee in rural China, by using the national fixed-points survey (NFS) data of rural households in ten Chinese provinces from 1986 to 1999, as conducted by the Ministry of Agriculture. According to the research findings, the ratio of taxes and fees burden to rural household income did not increase as significantly as had been speculated. For the increasing severity of taxation and fee burden in rural China, the authors identify two reasons, namely the widening of rural income gap and the regressivity of rural tax levying rate. These facts are then incorporated into the authors’ efforts to theorize the issue of rural taxes and fees burden, which in its turn has significant policy implications. Li Shi’s Effects of Labor Out-Migration and Income Growth and Inequality in Rural China analyzes the effect of the mobility of labor force upon rural income. This chapter estimates the scale of China’s floating labor force from rural areas in recent years. Li uses relevant sample survey data to make an empirical analysis of the income distribution effect of the mobility of rural labor force, which, as he argues, not only raises the family income level of migrant workers, but also narrows the rural residents’ income gap and plays a positive role in alleviating the widening of income gap between urban and rural residents. Lu Feng’s chapter, Grain versus Food: A Hidden Issue in China’s Food Policy Debate, explores the issues of food trade, food policy and comparative advantage. First of all, the author refutes a popular misconception that China’s food sector will evolve along the path of grain trade and its net import shall be significantly expanded. Centered on the phenomenon of exchanging food for food in China in the past two decades, the chapter finds that there has been an export expansion of certain food products, including vegetables, fruits and aquatic products. Through an issue-oriented approach, this chapter then seeks to explain this phenomenon by comparing the relative costs of alternative food productions in China. This economic rationale lays a solid foundation for the analytical framework as adopted in the chapter. Finally, the possibility of a revised food trade pattern is

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discussed. The author conclusively argues that this new pattern shall have important implications for rural economy and food policy in China. Saving Behavior in a Transition Economy: An Empirical Case Study of Rural China, by Wan Guanghua, Shi Qinghua and Tang Shumei, studies the saving behavior of Chinese rural households. Using a large set of household survey data, this chapter explores the determinants of saving behavior in rural China. This model considers an extensive array of variables. It is found that (a) for the unusually high saving rate in China, positive contributors include liquidity constraints, precautionary motives and industrialization; (b) the cultural factor is an important explanatory variable in interpreting inter-regional differences in the saving rate; (c) the authors refute the life cycle hypothesis, in that a “U pattern”, rather than the commonly claimed “hump”, can be identified; and (d) the permanent income hypothesis is also rejected, for the very reason that there is a negative correlation between income and savings. With these analyses, the authors convincingly argue that the establishment of social welfare system in rural China is not only a matter of necessity, but of urgency. In Township Enterprises and Their Interest Distribution in Reform: A Three-player Game Model, Ke Rongzhu attends to the development of the Township and Village Enterprises (TVEs) — an important issue in the Chinese reform. The center of gravity in the chapter is on the inconsistency between the high performance of the TVEs under traditional ownership, and the present property right reform of the TVEs. Ke establishes a three-player game model to include government, entrepreneurs, and community and employees, of which its balance and dynamics are used to explain the reform. In this model, external factors such as technology and market risks play key parts in influencing the equilibrium. Nonetheless, in theoretical analyses, this three-player game model shows little progress from the two-player game model. The merits of Ke’s chapter lie in his standard analysis and empirical application of game and institutional theories. Zhang Ping’s Rural Interregional Inequality and Off-Farm Employment in China seeks to explain the specific conditions for non-agricultural industry to play a key part in widening or narrowing regional gaps of rural household income across China. Based on an analysis of interand intra-regional inequality through using the calculation of inequality

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decomposition by population subgroups, this article analyzes the influence of regional differences on income disparity. It argues that the economy and geographical conditions of a region can be decisive in determining the level of both agricultural and non-agricultural incomes. The method of inequality decomposition by factor components is used to analyze the factors influencing the changes in regional income difference. The process of industrialization and de-agriculturalization can affect the intra-region income inequality. More specifically, two factors can be identified: namely TVEs and the relevant employment opportunities for rural labor. TVEs, as argued by the author, can under certain circumstances play a positive role in narrowing the income gap in rural China. Food Demand and Nutritional Elasticity in Poor Rural Areas of China, by Zhang Juwei and Cai Fang, examines the issue of nutrition in needy areas in China. The data of rural household consumption in needy areas in China show that food demand can be highly elastic, at an estimated rate of 0.74. By comparison, the demand for nutrition does not show a similar level of elasticity, at a rate of only 0.14. The difference between two rates suggests the growth in food consumption does not necessarily lead to an increase of nutritional intakes. Where the quality, texture and taste of food may be improved, the nutritional quality may show no sign of improvement at all. It can be concluded from these analyses that a proactive state intervention to raise the nutritional level in needy areas can be a matter of great significance for China. In his chapter Reform in China’s Rural Areas: the Changes in the Relationship between the State and Land Ownership — A Retrospect on the Changes in Economic Institutions, Zhou Qiren discusses the relevance of state behavior in the rural ownership system. Through analyzing the role that state played in the rural reform, Zhou emphasizes that state protection of property rights is indispensable to the long-term economic growth in China. This protection still awaits further refinement and is still in its early stages of implementation. For this very reason, the participation of all stakeholders will be necessary to ensure the maturation of this property rights scheme. In particular, it should be a process that seeks to engage farmers, state agencies, elites of rural communities and other parties. Zhou forcibly argues that it is possible to create a private property ownership system out of the original public ownership system in China.

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As far as content is concerned, the above mentioned 10 chapters cover an extensive range of issues in rural reform and development in China, including property right, food trade structure, the TVEs, non-agricultural employment, the mobility of labor force, land distribution, taxation and saving behavior. The research approach ranges from macro- to microeconomics, while in terms of research methodology, property theory, game model and quantitative economics are used, in combination with historiography and empirical case studies. Hopefully, these academic inquiries into the “Chinese success story” under the theme of rural reform and development with quality scholarly examination, approach, theory and methodology, shall open a new page of internationalization for Chinese social science.

References Beck, U (2000a). The Desirable Growth of Democracy in Globalization. In Globalization and Politics. U Beck and J Habermas (eds.). Translated by Wang, Xuedong; Chai, Fangguo. Beijing: Central Compilation and Translation Press. Beck, U (2000b). What is Globalization? London: Polity. Cox, R (2002). Different Perspectives on Globalization. In The Discourse on Globalization. S Wu (ed.). Shanghai: DSX Joint Press. Dahrendorf, R (1998). Globalization. In Re-Inventing Europe: A Cosmopolitan Vision. U Beck and E Grande (eds.). Frankfurt: Suhrkamp. Deng, Z (2006). China Jurisprudence: Where to Go? (zhongguo faxue xiang hechu qu). Beijing: Commercial Press. Deng, Z (2008). Advanced Study and the Development of Chinese Social Science (27 Dec 2008). Wenhui Bao. Deng, Z (2009). Whose Globalization? Which Jurisprudence? (shui zhi quanqiuhua? hezhong fazhexue?). Beijing: Commercial Press. Giddens, A (2001). Runaway World: How Globalization is Reshaping Our Lives. Translated by Zhou, Hongyun. Nanchang: Jiangxi People’s Publishing House. Habermas, J (2002). Habermas on Globalism, Neoliberalism and Modernity. Translated by Shen, Hongwen. International Theoretical Frontiers (guowai lilun dongtai), 1. Held, D and AG McGrew, et al. (2001). Global Transformations: Politics, Economics and Culture. Translated by Yang, Xuedong. Beijing: Social Sciences Academic Press. Huang, PCC (2003). Introduction to the Study of Rural China. In The Study of Rural China, Volume 1. PCC Huang (ed.). Beijing: Commercial Press. Lin, Y (2002). Backward Advantage and Disadvantages (houfa youshi yu houfa lieshi) (8 July 2002). News Weekly (xinwen zhoukan), pp. 68–69.

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Academic Inquiries into the “Chinese Success Story” Martin, HP and H Schumann (1998). The Global Trap: Globalization and the Assault on Prosperity and Democracy. Translated by Zhang, Shipeng. Beijing: Central Compilation and Translation Press. McChesney, RW (2000). Introduction. In Neoliberalism and the Global Order. N Chomsky (ed.). Translated by Xu, Haiming and Ji, Haihong. Nanjing: Jiangsu People’s Press. Meadows, DH and DL Meadows, et al. (2000). The Limits to Growth. Translated by Li, Tao. Beijing: Mechanical Industry Press. Mesarovic, MD and E Pestel (1987). Mankind at the Turning Point: The Second Report to the Club of Rome. Translated by Lin, Changyi. Beijing: China Peace Press. Qin, H (2008). The Origin and Prospect of the Miracle of China (zhongguo qiji de xingcheng yu weilai) (21 Feb 2008). South Weekend (nanfang zhoumo). Reich, R (1994). Work of Nations: Preparing Ourselves for 21st-Century Capitalism. Translated by Xu, Dizhou. Shanghai: Shanghai Translation Publishing House. Scholte, JA (2003). Globalization. Changchun: Jilin People’s Press. Sklair, L (1993). Several Sociological Concepts on Globalization. China Social Sciences Quarterly (HK ), 5. Smith, P (2001). One World: Globality and Generality. In Symptoms of Globalization. F Wang (ed.). Tianjin: Tianjin Social Science Academy Press. Waters, M (1995). Globalization. Translated by Wang, Yanli. London: Routledge. Zhang, S (2000). What is Globalization? Europe (ouzhou), 1. Zhao, L (2004). Zhang Peigang: the Father of Developmental Economics (30 July 2004). People’s Daily (Overseas Edition), p. 8.

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Gender Inequality in the Land Tenure System of Rural China1

Chapter

1

Zhu Ling2

Abstract This chapter will firstly review the current legal framework of securing equal land rights between women and men in China. Secondly, based on the sample survey undertaken in Shanxi Province in 1996,3 this chapter will examine the current state of land distribution, identify the causes of gender inequality in terms of security of land rights, and determine the impact of “insecure” land rights on the socioeconomic status of women. Finally, the policy implications will be examined. This chapter proves that the legislative framework and economic institutions in general protect gender equality in land distribution. However, loopholes in the detailed institutional arrangements lead to the insecurity of women’s land rights, especially for divorced women, women re-location due to marriage, and for their children who miss out on land redistribution as undertaken in their village communities. Although these phenomena have not yet significantly affected the intra-household bargaining power of the agricultural women, they do tend to reduce the households of the landless women to poverty. It is therefore necessary to add a gender perspective to the

1Acknowledgements: This paper, originally translated from Chinese to English by Ms. Xie Yanhong, is part of the report on the research project “Impact of Labor Migration on Agricultural Women in Poor Areas”, funded by the Beijing Office of the Ford Foundation. 2 Institute of Economics, Chinese Academy of Social Sciences, Beijing. 3 This survey was undertaken through the Rural Social and Economic Survey Network of the Ministry of Agriculture. All of the ten sample villages are places selected by the Network for long-term observation in Shanxi Province. All of the 960 sample households are the bookkeeping households from those observation places. The sample population totals 3,623, of which women account for 48 percent. The collected data refer to the state of the sample villages, households and individuals in 1996.

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Zhu Ling current Land Administrative Law and to relevant government regulations regarding farmland tenure. Keywords: Rural; land tenure; gender equality.

1.

Women’s Land Rights

In those countries where land can be freely traded, inherited and leased, inheritance acts, marriage laws, and contract laws define from different perspectives the ways and rights of individuals to obtain land (FAO, 2000). However, in a number of countries — western Ghana, for example — customary laws of the local communities as well as religious beliefs still affect the enforcement of the formal laws (Quisumbing et al., 1999). They even play a decisive role in determining an individual’s entitlement to land (Subramanian, 1998). In as much as in China, laws prohibit the free trade and presentation of land, farmers obtain land tenure mainly through land distribution by village communities, by renting from other households, by inheriting household contract entitlement, and so on. Therefore, in order to achieve a better understanding of the land rights that village women possess in China, it is not only necessary to review the related laws and policies, but also to examine how village communities distribute land among farmers in general. During the period between 1979–83, China’s land system was completely transformed from collective ownership and cultivation to the household contract system (also known as the household responsibility system). This change was based on the equalized distribution per household size of contracted land within production teams (The Research Team for the “Study of Farmland System in China”, 1993). This change implied that every member of a household would receive an equal plot. In fact, however, land was distributed among households instead of individuals. This pattern may be explained firstly by the ideal blueprint that farmers, as the initiators of the reform, had in mind, i.e. the traditional ideal of Chinese agricultural society where the household, rather than the individual, was the unit of ownership and cultivation. Secondly, it could be explained by the actual per-capita land ratio. According to the annual socioeconomic survey of the Ministry of Agriculture, the average area of farmland per capita in 22

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rural China in the 1980s (Office for Rural Long-term Observation Points, 1992) was computed at less than 2 mu,4 or per household 9 mu that was segmented into 9 plots. If the land were to be divided and allocated to each member of the village community by the same area and quality, it would not only lead to even more serious land fragmentation, but would also incur higher organizational costs. Furthermore, the policy documents issued in the early 1980s by the top level decision-makers to permit the practice of land distribution — at that time a policy document had legal effect — determined the prevailing land system to be the household contract system. In these documents, there was neither clear definition of a natural person’s individual rights, nor reference to the rights of women. This neglect or absence of individual rights may be due, firstly, to the tradition of esteem for household rights in China’s agricultural society. Secondly, it may be due to the social preference toward collective rights (as a carry-over from the time of the planned economy); and to the pre-existent premise of gender equality held by the policy designers. This premise is certainly true in law: Article 96 of the first Constitution of the People’s Republic of China clearly stipulates that women and men enjoy equal rights in every aspect of political, economic, cultural, social, and family life (National People’s Congress [NPC], 1954). The marriage law and inheritance act issued or amended in the 1980s highlighted gender equality in terms of economic relations among family members. Article 18 of the Marriage Law (1980) declares that husband and wife enjoy the right to inherit legacies from each other; Article 31 states that in the event of divorce the joint assets of husband and wife will be disposed of upon agreement of the two parties. If they fail to reach an agreement, the court will determine distribution on the principle of prioritizing women’s and children’s interests (NPC, 1980). Article 9 of the Inheritance Act (1985) confirms that women and men enjoy equal rights of inheritance. Article 10 names the spouse as the first person in the inheritance order. As farmland is not private property, the legislative committee of the NPC provided in a special statement that the inheritance of farmland contract rights could not be dealt with in the same way as legacy inheritances. The heir of the contractor would assume the 4 15 mu = 1 ha.

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responsibility of fulfilling the contract (NPC, 1985). Most land contractors within a village community are household heads, and, as village women usually join the households of their husbands, most household heads are men. Only those household heads are women where men married into the household, or where the male heads died. Given this background, women may not encountered problems in land distribution at the beginning of the economic reform. Problems occurred when the population of a village community changed. As land could not be transferred between village communities when villagers re-located, or migrated, or when they married into other villages, women lost their land tenure in their village of origin. Because of this, Article 30 of the Law for the Protection of Women’s Rights (NPC, 1992) emphasized that women’s entitlement to land should be protected in the case of marriage and divorce. However, this law does not specify the means of providing such protection. If this type of migrant wishes to obtain farmland, the only means (other than by leasing from other farmers) is to rely on the land redistribution among those households in the villages they moved into. According to the Land Administrative Law (NPC, 1998), during the duration of a given land distribution contract, land re-distribution among individual land contractors can be held only when it is agreed to by more than 2/3 of the overall villagers meeting or by 2/3 of the villagers’ representatives. Moreover, the decisions of the village communities must be submitted to township government and agriculture administrative authority of the county government for final approval. Inasmuch as the village community is the unit that exercises the villagers’ autonomy, the stipulations of the Land Administrative Law apparently comply with the principle of internal democracy in decision-making within the village communities. However, the decisions on farmland redistribution of the overall villagers meeting are based mainly on the relevant policies of the central and local governments. As these policies are usually worked out with a lack of gender perspective, it seems that whether the land rights of the non-indigenous women are secured eventually depends on the extent to which most villagers accept the concept of gender equality rather than considering their own interests. Based on our understanding of the existing legislative framework and operational procedures of land distribution, we put forward the following

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hypotheses to be tested against the analytical statistics: • There is no significant discrimination against women in land distribution in rural China. • The insecurity of land entitlement for migrated women is directly related to the decisions made by village communities. • In areas with less developed non-agricultural sectors, the possibility of falling into poverty is higher for those nuclear families with landless women.

2.

Gender Inequality in the Security of Land Rights

Given the practices of the initial farmland distribution undertaken in the early 1980s, it can be reasoned that every member of the village communities is naturally entitled to share in the land ownership of the villages.5 However, once the distribution was over, the tenure of a specific household on a certain plot during the valid period of the contract was exclusive. This resulted in the phenomenon that those community members joining the villages during the contract period could not instantly acquire plots from the community. However, the existence of landless members was often covered up by the mean values in the analysis on the land size of the sample households. Table 1 revealed that 8.5 percent of the interviewed women did not have access to land in the villages where they are living. Linking the replies to question 2 and question 3, it could be deduced that the land rights of divorced women are insecure. If a woman did not receive a land plot in the village into which she moved by marriage, on what could she live after divorce if she were still obliged to reside in her ex-husband’s village? It is a 5According to the current residential registration system, villagers’ committees identify the membership of villagers based upon their permanent residential records. Those who registered as permanent residents in the village but were out of the villages for years (perhaps engaged in non-agricultural business) would nevertheless hold their plots allocated by the community, or would still maintain their right to share the land plots upon their return to the village. On the other hand, migrants working in the village, even if living in their “new” village for long periods, may only obtain a permit of temporary residence, and are not be able to enjoy the same rights as community members.

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Zhu Ling Table 1.

Specific Issues of Women’s Land Right. Responses of the interviewed women

Questions 1i“Do you have your own plots among your family land?” 2i“Did the village take back your girl’s land when she married into another village?” 3i“Can a woman keep her land tenure after divorce?”

“Yes”

“No”

“I don’t know”

Total

91.5% (763) 53.4% (126) 4.3% (36)

8.5% (70) 46.6% (110) 45.5% (380)

−∗∗

100% (833) 100% (236) 100% (835)

– 50.2% (419)

Note: ∗ Figures in the brackets are the numbers of the interviewed women to have given valid answers to the question. ∗∗ “–” Indicates that there are no multiple choices to the question.

custom in rural Shanxi for a divorced woman to return to her parents’family. However, if her native village community had already rescinded her land tenure, she fell into the awkward situation of being obliged to live on the land of her parents or brothers. In reality, most divorced women re-marry very soon so as to solve the problem of losing their income sources. This might explain why we neither found nor met any divorced women in our sample villages.6 The fact that more than half of the interviewed women were not even aware of the land rights of a divorced woman (Table 1). It was then presumed that the lowest transaction cost for the divorced women to gain a new source of income would be re-marriage as opposed to a lawsuit for land. Though the case that women lost their land tenure due to divorce is not statistically proved by the sample data, the insecurity of the women’s land right is manifested by the figures in Table 2. There are 70 interviewed women reporting landless and they are distributed in every village except village 1 and 2. If a village community does adjust land holding between households by their size in an expected 3–5 years, then, the landless women are considered to have owned a predictable tenure on land. If such were not the case, the phenomena would become the norm: a part of women (with 6 The statistics derived from the national sample survey on 1 percent of the population in China in 1995 tell the same story: divorced men accounted for 1 percent of the rural sample while the divorce rate of the rural women was not reported in the same sample (SSB, 1999).

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Gender Inequality in the Land Tenure System of Rural China Table 2.

Distribution of Landless Women by Sample Villages.

Villages

Vil. 1 Vil. 2 Vil. 3 Vil. 4 Vil. 5 Vil. 6 Vil. 7 Vil. 8 Vil. 9 Vil. 10

Total

Frequency Percentage

0 0.0

70 100.0

0 0.0

1 1.4

4 5.7

1 1.4

2 2.9

20 28.6

2 2.9

24 34.3

16 22.9

their children) would remain landless7 in their rural society. Thus, it can be concluded that gender inequality dramatically emerges in the dynamic process after land distribution, but does not explicitly occur at the time when villages are performing the distribution procedure. This inequality does not imply that women have no access to land tenure, rather it is represented by the fact that women are less or even not secure in their land rights compared with their spouses. It is also striking that nearly 86 percent of landless women are concentrated in villages 7, 9, and 10 (Table 2). Although the figures do not yet provide evidence to prove that these three villages do not redistribute land regularly, they do indicate that whether women hold land tenure or not is closely related to the decisions made by the village communities they currently belong to. Both regression functions presented in Table 3 demonstrate that the larger the land area and the higher the per capita income in a village community, the more likely it is that women will obtain land. The difference of the two equations can be noticed from function 2, which contains additional information about the non-agricultural employment opportunities available in the sample village. The information is indicated by the variables of the number of non-agricultural enterprises and the number of the households that travel out of their home villages for business opportunities. The estimated coefficients of the two explanatory variables testify that the more non-agricultural employment opportunities there are in a village, the less probability there is that women will obtain land tenure. This result is consistent neither with the reality in the more developed regions of China nor with our expectations. However, it indicates the facts 7 During the period between 1980–90, about 1/3 of villages across the country did not redistribute land (The Research Team for the “Study of Farmland System in China”, 1993, pp. 38–39).

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Zhu Ling Table 3. Estimation of Probabilities of Women’s Possession of Land Tenure (Logistic Models). The variable to be explained: Women’s possession of land tenure (with land tenure = 1, without = 0)

Model 1 (Observations = 832)

Model 2 (Observations = 832)

Explanatory variables

Parameter estimate

Standard error

Parameter estimate

Standard error

1.9253∗∗

0.3353

2.7159∗∗

0.3994

0.5251∗∗

0.1530

0.6265∗∗

0.1806

−0.0637∗∗

0.0270

−0.0558∗∗

0.0163

−1.5206∗∗

0.5345

Annual net income per capita of village (Mean = 1547 yuan) Land area per capita of village (Mean = 1.9 mu) Number of households perennially working off village (Mean = 5.1) Number of non-agricultural enterprises of village (Mean = 9.8) Constant Cases correctly predicted −2 Log Likelihood Goodness of Fit Chi-Square

−1.0809∗∗

0.4761

91.6% 423.67 1459.54 56.82∗∗

91.6% 402.24 1178.84 78.24∗∗

Note: “∗∗ ” The parameters are significant at 99 percent confidential level.

in rural Shanxi Province and can be explained by a variety of economic theories. Urbanization and industrialization in Shanxi Province lag far behind those in the southeast coastal area, thereby making it difficult for most of the rural laborers to find long-term non-agricultural jobs and earn steady non-agricultural income. Therefore, the majority of those working off-farm have been unwilling to scotch their land tenure claims. Furthermore, a considerable number of the households actually have to seek non-agricultural earning sources to supplement their agricultural income, because the yields of land are so low that the households cannot survive on agricultural income alone. This further explains why the increase in non-agricultural employment opportunities here does not necessary lead to greater possibilities for additional village members to obtain access to land tenure. These arguments can be confirmed by the descriptive statistics from the sample data from rural Shanxi. In 1996, a male laborer on average worked 48 days 28

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in non-agricultural business and earned 17.3 yuan/day, whereas a female laborer worked 12 days and earned 6.6 yuan/day. During the same period 85 percent of all the rural laborers were still engaged in agriculture. It is noticeable that the proportions of the households with landless women to the total sample households are as high as respectively 20.8 percent, 16.2 percent and 22.5 percent in villages 7, 9 and 10. However, the demand of such households on additional land plots8 might not be strong enough to push the village communities to take action. This confirms once again the hypothesis that when the landless group obtains plots allocated by village communities and how large those plots would actually be does not relate to the individual characteristics of the landless, but rather depends directly on the decisions of the communities. At the heart of the problem lies the fact that a village community can always find support for their decision in the various laws and governmental documents regardless of what decision they have made. Community conducting land redistribution according to population changes might argue that their decision complies with the Law of Land Administration (NPC, 1998). A village that does not balance land size by household size might use as the grounds for their decision the various policy documents regarding stabilizing long-term contract of farmland (CPC Central Committee, 1984 and 1996).9 8 Since the households contract system was implemented, it has become the prevailing phe-

nomenon that every household sends only one person to participate in community meetings. In our sample, 82 percent of the households usually had their male heads attend the villagers’ meetings. Given this situation women’s voices would not be well expressed in the decisionmaking process of the village communities. Nevertheless, in terms of claiming land tenure, the interests of the landless women were consistent with those of their husbands and clans. 9 The CPC Central Committee document no. 1 (1984) stipulated that the contract period for farmland should generally last more than 15 years, implying that 1980 was the starting point for the household contract system spreading across the country: the contract period would therefore end in 1995. In early 1996, the policy document regarding the second round of land contracts emphasized that the contract period should be extended to 30 years (CPC Central Committee, 1996). The two regulations not only supplied farmers with incentives to invest more in farmland, but also affirmed to the farmers a commitment to the implementation of the household contract system for the long run. This was especially meaningful for those farmers who had experienced enforced collectivization in the 1950s, and plays a positive role in protecting the interests of farmers as a whole as well as maintaining social stability (Jiang and Bao, 2000). Unfortunately, due to the absence of a gender perspective, these policies have tended to exacerbate the insecurity of women’s land rights in patriarchal rural societies.

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3.

Impact of Land Right Insecurity on Women’s Status

The studies conducted by Indian and Bangladesh scholars (Agarwal, 1997; Subramanian, 1998) demonstrate that in southern Asian countries the holding of property rights including land rights by women could substantially strengthen their intra-household bargaining. This research result allows us to postulate that women who actually possess their land shares allocated by village communities are more likely to participate in making the agricultural management decisions of their households. In the logistic regression model (Table 4) the managerial decision is indicated by the decision on marketing agricultural products as the participation in this process is thought essential to reflect the status of a family member in the management of a household economy. Moreover, the participation of the interviewed women in making decisions on plan of crops-growng and procurement of input goods is highly correlated with their participation in marketing decision-makings. The information about woman’s participation was derived from the answers of the interviewed women. A woman was regarded as having participated in making decisions if she thought that it was she herself who decided, or if she thought that she had jointly participated with her husband in having decided the disposal of the farm produce. Alternatively, if a woman reported that it was her husband or other family members who determined these matters, she was regarded as not having taken part in making these decisions. Nearly 40 percent of 821 interviewed women did participate in making decisions. As the purpose of this study was to examine gender relations, those female-headed households bereft of the spouse were excluded in the logistic regression analysis. Counter to our hypothesis, the regression results ascertained that the women with land tenure were less involved in making management decisions than those without the tenure. This can be explained by the fact that landless women in rural China actually hold predictable land tenure, For example, it was reported that several villages in Hunan Province when settling the second round of farmers’ land contracts practiced what we might term a predictable allocation. Girls younger than 23 years old who expected to marry someone outside the village in the near future received nothing or less than the average area of the land plot. Males around 25 expected to marry in the near future acquired double or triple the per capita plot area (The Editorial Board of The Newspaper of Chinese Women, 1999).

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Gender Inequality in the Land Tenure System of Rural China Table 4. Estimation of Probabilities of Women’s Participation in Agricultural DecisionMaking (Logistic Model). The variable to be explained: Women’s participation (part. = 1, else = 0) Explanatory variables Land tenure of women (with = 1, without = 0) Annual agricultural work-days of wife of household head Age of wife of household head Age of male household head Years of education of male head (9 years and above = 1, else = 0) Household location (dummy variables) Village 1 Village 2 Village 3 Village 4 Village 5 Village 6 Village 7 Village 8 Village 9 Village 10 Constant

Model (Observations = 802) Mean

Parameter estimate

Standard error

0.92 106.4

−.8118∗∗ .0037∗∗

.3304 .0011

45.2 47.6 0.04

.0981∗∗ −.1035∗∗ .7657∗

.0314 .0307 .3971

0.11 0.08 0.09 0.08 0.11 0.11 0.11 0.16 0.07 0.08

−1.7883∗∗ .7407∗ 1.1692∗∗ −.4182 .9674∗∗ .6375∗ −.8719∗∗ – 1.6772∗∗ .6480∗ .0338

.4706 .3522 .3169 .3435 .3126 .3231 .3322 – .3796 .3181 .5813

Cases correctly predicted = 70.07% −2 Log Likelihood = 920.848 Goodness of Fit = 794.359 Chi-Square = 159.628∗∗ Note: “–”Reference group. “∗ ”The parameters are significant at 95% confidential level. “∗∗ ”The parameters are significant at 99% confidential level.

i.e. they will receive land plots earlier or later from their villages in a redistribution process. Thus, de facto land tenure meant less important than women’s involvement in agricultural production for their participation in the decision-making process. Furthermore, in the households with landless 31

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members, the male labor was more likely involved in non-agricultural activities while the female worked in agriculture, resulting in a state where women probably tended to share more opportunities in making agricultural management decisions. The results of the estimation illustrates also that the individual characteristics (age and education) of the farmers engendered less prominent effects on women’s participation in comparison to their household location presented by village dummy variables. This was because the women’s participation to a large extent depended on the social, economic, and cultural environment they were living in while the village communities embodied most the features of that environment. It is widely believed that women in poor households have suffered more seriously from poverty than other members of the households in those rural societies where the male’s power dominates. Based on this understanding, the impact of land rights insecurity on women’s economic well-being are mainly illustrated by estimations of the probability that the sample households will fall into poverty. The sample households overwhelmingly derive their livelihood from agriculture, and on average nearly 54 percent of their net income was attained from agriculture. Farmland remains the most important income source for farmers, especially poor farmers. Hence, we assume that the households of the landless women are more likely to fall into poverty without supplementary income from non-agricultural activities. Again, a logistic regression model was employed to test the above assumption. The explained variable of the model was deprived in such a way that a cut-off point at 600 yuan (equivalent to 36 percent of the mean annual net income per capita of the sample households) was used to classify the poor and the non-poor.10 It was calculated that poor households accounted for 13.6 percent of the total sample. The results of the logistic regression confirmed that the households with landless women, smaller assets, fewer laborers, and fewer non-agricultural workdays more likely fell into poverty (Table 5). Here, the effects of the age and education level of the main labor on the household economic well being also appeared to be insignificant.

10 The officials of the Poverty Reduction Office under the State Council informed the authors

that the poverty line for rural China was set by the office at 580 yuan of per capita annual net income of a household for 1996.

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Gender Inequality in the Land Tenure System of Rural China Table 5. Model.

Estimation of Probabilities of Sample Households Falling into Poverty, Logistic

The variable to be explained: Household’s poverty (the poor = 1, the non-poor = 0) Explanatory variables

Model (Observations = 830) Mean Parameter estimate Standard error

Land tenure of women (with = 1, without = 0) 0.9 Original value of fixed assets per capita 3.0 at end of 19961 (1000 yuan) Annual non-agricultural workdays of the 86.4 household couple Number of family laborers 2.1 Age of the main laborer in household 43.8 Years of education of the main laborer in household 6.5 Constant

−1.4282∗∗ −.4796∗∗

.3180 .0920

−.0040∗∗

.0013

−.3153∗∗ −.0950 −.1474 1.8476∗∗

.1301 .1038 .1530 .6551

Cases correctly predicted = 87.23% −2 Log Likelihood = 517.14 Goodness of Fit = 888.42 Chi-Square = 97.51** Note: 1 Here “fixed assets” include non-production and production assets but do not include land. “∗∗ ”The parameters are significant at 99% confidential level.

This may reveal that the dominant economic activities in rural Shanxi have not yet become skill- and technology-demanding so that the educational background of the laborers are not strictly relevant required. As the above statistical analyses proves that poverty is the final outcome for landless people, we have to revise those perceptions formulated 10 years ago about the features of poverty in rural areas. At that time, the authors believed that both the land reform undertaken in the 1950s and the household contract system implemented in the 1980s had fundamentally eliminated the class-based poverty resulting from the unequal distribution of the land ownership (Zhu, 1990). In present rural China there will always exist a landless group if the problem of insecure land rights of agricultural women are not solved when the period of land contracts is further extended. Without sufficient non-agricultural income sources, this group will most 33

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likely plunge into an asset-poor situation. Such proletarian poverty will no doubt result in a profound negative impact on the society.

4.

Conclusion

From the analytical results it can be concluded that women’s land rights have not yet been effectively secured in rural China. Although gender equality in land distribution appears to be protected in terms of the legislative framework and economic institutions, sufficient ambiguities remain to create loopholes in the day-to-day functioning. At present, the insecurity of women’s land rights is most prominently displayed by the fact that divorced women are less protected from losing their land tenure. Frequently, both the women re-locating due to marriage and their children who miss out land distribution temporarily cannot obtain land tenure from their new villages. Although such a phenomenon has not yet significantly affected the intra-household bargaining power of the agricultural women, it does tend to reduce the households of the landless women to poverty. Therefore, it is pressing indeed now to amend the Land Administrative Law and those government regulations relevant to farmland tenure. The village communities determine the fact of both land distribution and redistribution, and the decisions of the community were made following the traditions of a male-oriented rural society. Therefore, for the purpose of protecting women’s land rights, it is necessary to emphasize clearly in the legislation that village communities must take the relevant laws as their criterion. Moreover, individual rights urgently need to be defined and protected by laws and policies during this economic transition. The logical outcome of our suggested changes in the legal framework is the insertion of gender perspective into the legislative and policy-making process. The active participation of rural women in this process will certainly contribute to these changes. Meanwhile, the diffusion of legal knowledge and information should be further undertaken so as to help rural women use the laws consciously to safeguard their own land rights. If this is not done, the progress in promoting gender equality in China achieved since the 1950s might regress under the appearance of democratic decision-making process of the village community. 34

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References Agarwal, B (1997). “Bargaining” and Gender Relations: Within and Beyond the Household. In Feminist Economics, 3(1), 1–51. Central Committee of the CPC (1984). Zhonggong Zhongyang Guanyu 1984 Nian Nongcun Gongzuo de Tongzhi (Notice about the Rural Work in 1984, January 1). In Shierda Yilai Zhongyao Wenxian Xuanbian (Selections of Important Policy Documents Issued since the 12th CPC Conference). Beijing: People’s Publishing House. Central Committee of the CPC (1996). Jinnian He Jiuwu Qijian Nongcun Gongzuo De Zhongdian He Zhengce Cuoshi (Main Tasks and Policy Measures of the Rural Working in the Ninth Five-year-plan Period and This Year, January 21). In Shisida Yilai Zhongyao Wenxian Xuanbian (Selections of Important Policy Documents Issued since the 14th CPC Conference). Beijing: People’s Publishing House, pp. 424–439. FAO Women and Population Division (2000). Women and Land Tenure. FAO web site on food security, www.fao/sd/fsdirect/FSP002.htm, May 30. Jiang Ailin and Bao Jixiang (2000). Tudi Chengbaoqi Cong 15 Nian Yanchang Dao 30 Nian (To Extend the Contract Period of Land Tenure from 15 Years to 30 Years). Zhongguo Guoqing Guoli (Journal of National Conditions and Capacity of China), 5, 6–9. NPC (1954). Zhonghua Renmingongheguo Xianfa (The Constitution of the People’s Republic of China). In Chen Hefu (ed.), Zhongguo Xianfalaibian (the Compilation of China’s Constitutions). Beijing: Chinese Social Sciences Publishing House, p. 233. NPC (1980). Zhonghua Renmingongheguo Hunyinfa (The Marriage Law of the People’s Republic of China). Beijing: Chinese Law Publishing House, pp. 2–3 and 6. NPC (1985). Zhonghua Renmingongheguo Jichengfa (The Inheritance Act of the People’s Republic of China). Beijing: Chinese Law Publishing House, pp. 2 and 8. NPC (1992). Zhonghua Renmingongheguo Funue Quanyi Baozhangfa (The Law of Protection of Women’s Rights of the People’s Republic of China). Beijing: Chinese Law Publishing House, p. 15. NPC (1998). Zhonghua Renmingongheguo Tudi Guanlifa (The Land Administrative Law of the People’s Republic of China). Beijing: Chinese Law Publishing House, pp. 5–7. Quisumbing, AR, E Payongayong, JB Aidoo and K Otsuka (1999). Women’s Land Rights in the Transition to Individualized Ownership: Implication for the Management of Tree Resources in Western Ghana, IFPRI, FCND Discussion Paper No. 58, February, Washington, D.C. State Statistics Bureau (1999). Zhongguo Shehui Zhong De Nanren He Nueren — Shishi He Shuju (Women and Men in the Chinese Society — Facts and Figures), Beijing: The Statistics Publishing House of China. Subramanian, J (1998). Rural Women’s Rights to Property: A Bangladesh Case Study, A report prepared for the International Food and Policy Research Institute (IFPRI), March, Washington, D.C. The Editorial Board of The Newspaper of Chinese Women (1999). Tudi Chengbao Zhong Weihu Funue Hefa Quanyi Xilie Baodao (A Series of Reports on Protection of Women’s

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Zhu Ling Legal Rights to Land Contract). Beijing: Zhongguo Funuebao (The Newspaper of Chinese Women), March 4–April 8. The Office for Rural Observation Points of the Ministry of Agriculture (1992). Quanguo Nongcun Shehui Jingji Dianxing Diaocha Shuju Huibian (Data Collections of Sample Surveys on the Rural Society and Economy of China). Beijing: CPC Party’s School Publishing House, pp. 4–6. The Research Team for the “Study of Farmland System in China” (1993). Zhongguo Nongcun Tudi Zhidu De Biange (Changes of Land System in Rural China). Beijing: Beijing University Publishing House, pp. 16–18, 39. Zhu, Ling (1990). Gonggong Gongcheng Dui Xiangcun Pinkun Diqu Jingji Zengzhang, Jiuye He Shehui Fuwu De Yingxiang (Effects of Public Works on the Economic Growth, Employment and Social Services in the Poor Rural Areas), Jingji Yanjiu (Journal of Economic Research), 10. Zhu, Ling and Zhongyi Jiang (1993). From Brigade to Village Community: The Land Tenure System and Rural Development in China, Cambridge Journal of Economics, 17(4).

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The Allocation of Decision-Making Power and Changes in the Decision-Making Style: Systematic Thoughts on China’s Rural Problems

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Chapter

2

Zhang Shuguang, Zhao Nong

Abstract This chapter sets up a theoretical framework for investigating the rural problems from the perspective of demarcation of and interaction between private decisions and public decisions, and provides a theoretically and logically consistent explanation on China’s rural problems by combining history with theory, and thus further carries out deep introspection and self-criticism on the present rural policy. We think, the purpose of theory discussion is to explain the world, and appropriate theory explanation is the basis for effective transformation of the world and policy practice. In addition, the analysis framework of this paper is not only suitable for investigating the rural problems but also capable of analyzing a series of other problems; the analytical method of this paper also offers a possible way for investigating the function of property right. Since the reform and opening-up, great changes have taken place in the social and economic physiognomy of China, which are not only known by every Chinese person, but also unanimously acknowledged by the whole world. But, these changes have mainly taken place in the cities and coastal areas, while the countryside and hinterland is another scene. If China’s reform was started and launched from countryside, its results had mainly benefited the cities; if the cities have already melted into the trends of modernization and integration, the trend of the marginalization has appeared in the countryside, some of which are still quite primitive and sealed; if the cities have demonstrated a kind of prosperous scene, the countryside seem a bit ruined and withered. It should be known that, China is a big country with 900 million farmers, and the situation of the farmers, agriculture and countryside not only concerns the state’s 37

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Zhang Shuguang, Zhao Nong long-term stability and order, but also directly determines the success or failure of economic development and social transformation. Domestic and international scholars have done a large number of investigations on the reform and development in rural China, and obtained a series of important research results, especially at the initial stage of rural reform. Among them, some investigated the issue of farmland system, some studied the development of township enterprises; some analyzed the changes in the purchase and sale system of agricultural products, and some discussed the development of the rural non-agricultural industry; some analyzed the issue of rural labor force mobility and peasant-worker tide, and some investigated the issue of small-town construction and urbanization, etc. However, there is an important issue, i.e. the allocation of economic decision-making power and changes in the decision-making style in countryside, that has not been paid due attention and done in-depth research. In China’s current social structure, the number of farmers is the largest, but they belong to a weak group, whose independent consciousness and organization degree is the worst; whose voice is the weakest; whose will and demand are often not paid due attention; whose right and interests often cannot be duly guaranteed and implemented, but are often infringed and damaged. Perhaps this is the very crux of China’s rural problems. So, we plan to investigate the issue of agriculture, countryside and farmers in China from this perspective, expecting to offer a logically selfconsistent explanation on this important issue that concerns China’s longterm development. The structure of this chapter is arranged as follows. Section 1 is a theoretical summary about the issue of decision-making power and decision-making style. Section 2 analyzes the changes in the farmland system and its relationship and interaction with the allocation of decision-making power and changes in decision-making style. Section 3 discusses the state monopoly, government control and discrimination policies against farmers and their restriction and infringement on the policies of rural households. Section 4 investigates the public decisions and public products of the countryside. Section 5 is a simple brief summary. Keywords: The rural problems; private policies; public policies; “quasitenancy system”; policy discrimination.

1.

Theoretical Summary: Private Decisions and Public Decisions

From the empirical perspective or in the genetic sense, institution is a balanced choice that people arrived at through trial-error, learning and adaption 38

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in the long course of evolution. In the normative significance, institution is the result of mechanism design aiming to achieve a rational social goal, i.e. within technological restriction, the institution designer of the society chooses the institutional arrangement rationally. The influence of institution on people’s behavior choice depends on the allocation of decision-making power. A very important dimension is how to divide private decisions and public decisions appropriately, and define the boundary between direct control and indirect control. Because the game equilibrium caused by individual rational strategies may not necessarily realize the maximization of social welfare, just as revealed by the prison dilemma, it is an important demonstration of human society’s self organization to impose certain restriction on individual decisions in certain way. However, the information and knowledge are distributed among individuals, and the institution designer and implementer of the society does not know the special information of each social economic environment in advance. There must be two basic preconditions for the rationality of concentrating the decision-making power on a certain mechanism designer or central planner. Firstly, the central planner must grasp enough information about the social individuals; secondly, the signal space and information required for such a decision-making style should be small or little enough. But the social individuals usually have no motive force to show their own personal information directly; and the competitive market economy is the only effective economic mechanism with minimum space. This indicates that, public (centralized) policies definitely cannot replace private decisions. Moreover, in essence, all social policies come from individuals. So, the institutional arrangement about the private decision-making power can only be made in two ways. The first is in constructive form, which directly or indirectly guarantees the feasibility of some conditions that can be described in advance (while rejecting the feasibility of opposite conditions); the second is in existent form, which does not limit the opportunities that cannot be predicted by the institution designer and implementer, and leaves free choice to individuals. Basically, the allocation of decision-making power and its separation between private decisions and public decisions mainly depend on the property right and its exclusiveness. If the property right is the right to own and use an asset (including physical product, ability, knowledge and time), exclusiveness is its essential feature. It not only means that the main body of property right should not allow others to benefit from 39

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using the right, but also means that the main body should be responsible for all the cost incurred when using the right (Ke and Shi, 2000). So, according to the exclusiveness of property right and its degree, we can make further analysis and discussion on private decisions and public decisions. Generally speaking, thorough exclusiveness is the decisive characteristic of private property right, and any choice and decision based on private property right is a private decision and individual choice, which is independently made by the individual, while independently assumes all the consequences of the decision and choice; within this range, people can act freely, without intervention by others, thus forming a space of personal autonomy, and this space is the usually called private sphere.1 Conversely, thorough non-exclusiveness is an essential feature of public or common property right, and any decision and choice based on public property right is a public decision and public choice, which is made collectively by many people through certain political procedures; within this range, any individual decision and choice depends on other people’s decision and choice, thus forming a space of collective action, and this space is the usually called public domain. It is very important to distinguish private domain from public domain and the two decision-making styles, which not only have totally different nature and result, but also have a certain inherent connection and relation. Firstly, in the private domain and private decision, the results are chosen through scattered and diversified “money votes” of the individuals, so they embody the personal free will, not only having no mandatory restraint but also fully satisfying everyone’s preference, which will seldom encounter difficult problems in knowledge and technology. But in the public domain and collective choice, since “collective will” must be formed, generally an agreement must be reached on decision-making rules and procedures firstly and then the specific choices and decisions can be made, such condition not only has mandatory restraint but also fails to fully embody and satisfy the personal preference, unless all agree unanimously. This is almost impossible in practice.

1 In Roman Law, dominium means sphere (private sphere), and its English translation is “my

home is my castle”, which means that people have an autonomous space at home, where they can do whatever they like, and be free of interference by outsiders.

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Secondly, in the private domain and private decision, the pay and reward are directly and definitely linked to each other, the costs and benefits are reciprocal, so there is seldom opportunist behavior of hitchhiking etc., and both the decision-making cost and implementation cost are relatively low; while in the public domain and public decision, multilateral pay and reward are involved, personal cost and income are not reciprocal, their interests are usually indirect and non-mutual, so there are general moral risk and “rational ignorance”,2 not only because there are more people participating in the decision-making process, who have different purposes, making the opportunity cost change constantly, and the transaction cost for decision-making is usually relatively high, but also because the supervision cost and forced implementation cost are very high. Moreover, it needs to be pointed out that, private decisions and private choices can be made by individuals independently and implemented in private organizations, so the activities in private organizations also constitute an important part of private domain and private decisions. Similarly, public decisions and public choices also involve different scopes, so they are not only at the level of region (or community) and club, but also at the level of nation and world. Private organizations also involve the relationship between the leading and the leaded and that between the restraining and the obeying, but there is essential difference from the mandatory restraint in collective action and public choice. The former is on the basis of voluntary contract and offers the freedom to withdraw, while the latter depends on legal authorization and order from top to bottom, and usually does not allow withdrawal, so the decision-making can only be influenced by complaints and claims. Similarly, there is also the principal-agent relationship in private organizations (such as enterprises), but there is obvious difference from the principal-agent issue in collective action and public choice. In case of the former, the agent is mercilessly restrained by the market competition, while in case of the latter, there is no such automatic supervision, although there is the so-called political market. Moreover, the principalagent issue in collective actions and public decisions often comes from the collusion between organized interest groups and government organs, and 2 In public choice, due to high information cost and very limited benefits, many people are

inactive, and tolerate the collective policies unfavorable to them to a certain degree. This case is referred to as “rational ignorance” (Downs, 1957).

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transform the decision-making process from the commercial positive sum game into the re-distributive zero sum game or negative sum game through rent seeking and rent setting. In theory, there seems to be a clear and simple difference between private choice and public choice, but in policy practice, the treatment of these two is much more complicated and difficult. If it is not discussed in terms of subject, but in terms of object, then on the basis of private property right, what is corresponding to private policy and private sphere is personal goods; and on the basis of public property right, what is corresponding to public decision and public sphere is public goods. The negative ownership of property right only depends on exclusiveness, while its positive use (such as disposition and trade) not only depends on the exclusiveness of goods but is also closely related with the competitiveness of goods. So, if taking exclusiveness and competitiveness as coordinates, there will be four cases: private goods have both exclusiveness and competitiveness, while public goods have neither exclusiveness nor competitive, and the two kinds of goods become objects and targets of private decisions and public decisions separately. Between them, the goods with exclusiveness but without competitiveness are naturally monopolized, while the goods with competitiveness but without exclusiveness are common resources (Mankiw, 1998). Their decision-making styles are comparatively complicated, with different changes and arrangements, and in the realistic economic life, the two have something in common and are somewhat different. For either natural monopoly or common resources, there are usually two solutions to the existence of externality. The first solution is to implement mixed policies, with two concrete methods. The first method is private decision (used and produced by privates) with government control, but the contents of control are different to some extent, in which the government control of natural monopoly is generally price control, while the government control of common resources is quantity control. The second method is tax adjustment: for common resources, such as the ecological environment, the purpose of taxation is to suppress private destruction and raise fund for environmental protection; for natural monopoly, such as fire control, the purpose of taxation is mainly financing. The second solution is to change the nature and implement single policies, namely strengthen competitiveness and exclusiveness, help establish private property right and turn into private decision; or weaken exclusiveness and competitiveness, implement 42

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public decision and collective choice. The former is mainly to put up franchise to auction, such as selling the pollution license and implementing the pollution-discharge right trade; the latter is mainly the government’s direct operation of natural monopoly. However, there is also privatization of the public-owned natural monopoly. It can be seen from the above analysis, the nature of goods is not fixed, and its decision-making style is not unchangeable, but can be changed under certain conditions. This applies not only to common resources and goods under natural monopoly, but also to private goods and public goods. For example, coffee belongs to private goods, but if operated at the airport, train and tourist attractions, it will have a certain monopoly, while prison usually belongs to public goods, but the situation of private supply has appeared in the US. It is thus obvious that, because the production and supply of goods can be separated from their financing, their policies can take different ways too. From the perspective of politics, if it is acceptable to offer specific goods and services to citizens through public budget, the private production and the subsidized right to obtain is often a cheaper way of supply, and can offer more choices to the citizens. Similarly, public ownership can be distinguished from public monopoly too, and even when government organizations are engaged in production activities, it is still necessary to compete among different public organizations and between public organizations and private organizations. Moreover, due to the decline of measurement cost and communication cost, there does not present any “natural monopoly” for which technological competition is not allowed. From the above analysis, we can see that there is obvious difference between private decisions and public decisions, and their connection is represented by their interaction and mutual transformation under certain conditions. If individual right is the origin of public right, private decision is the foundation of public decision, and the decision-maker’s private interest has impact on public decision to a great extent, then individual right as a kind of approval and promise among people is most easily subject to the external infringement due to its inherent fragility, so that it is unable to protect itself. Therefore, on one hand, collective action and public decision is always enlarged and expanded by squeezing and corroding the private sphere and private decision, while on the other hand, an important function of the institutional arrangement and public policy formed by public decision 43

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and collective action is to protect the private property right, and thus protect the private sphere and private decision. A lot of viewpoints mentioned in the above theoretical summary will be fully embodied and displayed in the following discussion.

2.

2.1.

Collective Land Right and Restricted Private Decision and “Quasi-Tenancy System” Historical retrospect and reference

In the “Structure and Change in Economic History” (1994), North provides a clear picture of the development of human social production from collecting and hunting to agriculture, and the evolution of property right system from (unrestricted) public property right, exclusive public property right to private property right. In his logic, the pressure of population growth on the cardinal number of (natural) resources constitutes the irreplaceable source of strength for such development and evolution: with the increase of population, when the incrementally decreasing marginal product value of hunting activities is lower than the marginal product value of agriculture, agriculture will gradually replace hunting to become the main mode of production; under the pressure of population growth and rare resource, the evolution of property right shows “firstly not allowing outsiders to enjoy resources, then making rules to limit the degree of resource development by insiders”. The former means the continuance and implementation of exclusive public property right, and the latter signifies the formation and function of private property right. The theory of North is undoubtedly powerful in explaining how the exclusive public property right evolved from the unrestricted public property right; it also offers certain explanation on the change from exclusive public property right to private property right. However, in the historical development and institutional change of China, we see the occurrence of both the evolution course revealed by North and its opposite course.Accordingly, there occurred a very big repetition in the allocation of decisionmaking power and changes in the decision-making style. China’s Western Zhou Dynasty and the previous “Chinese Civilization” is the agricultural society characterized by exclusive public property 44

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right (Feng and Lan, 2001). Through title granting by the “Emperor” of the imperial court, the “legitimacy” of the exclusive land right border of different clans (represented by the leader of a clan) is confirmed. Under the surface of “land right within the border”, the clan members lived under the nine-square field system with town and village as the unit. The nine-square field system at that time is the landform with the absolute proportion of public field (big field), thus forming the grand collective labor scene of “coupling plough” and the corresponding ideology of “rain first wets the public field, then pours in my private field”. After Zhou Dynasty experienced the extensive “Battle of Chinese Army” (the war against northern nomadic people on occupation of land), the military strength of the feudal lords (including the size of population) was greatly improved, thus causing the gradual decline of the imperial control power. This is represented by the decline of the emperor’s ability to maintain the land border of each border-defending feudal lord. As a result, the nations competed against each other to find excuses to swallow up lands; while the powerful “leaders” who are transferred by competition replaced the “Emperor of Zhou” to become new definers and decision-makers of land property right, and “kingly way” was thus transformed into “tyranny”. After the Spring and Autumn Era “unrighteous war” and tumult, the seven states in the Epoch of Warring States all became real countries with various elements. The political and military “vertical integration” and “horizontal alliance” in the Warring States Period offered a solemn and stirring and desolate stage for each country to display the comprehensive strength finally decided by different system efficiency and mutual struggle. The reason why the State of Qin with worse initial conditions can defeat six other countries is firstly due to “Shang Yang’s Constitutional Reform” and “Peasant War” policy: the former changed the pattern that public decision contains and substitutes all decisions, and thoroughly shook the position of nobles as hereditary decision-maker; the latter opened the way of land privatization, and realized the transformation of production decision from public decision to private decision.3 The “Grand Unification” of Qin Dynasty is in nature 3 Thailand rewards meritorious soldiers with land, which constitutes an effective way of land privatization; the clarity degree of property right at that time can be explained by a father who must return the broom to his son after borrowing it for use.

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the implementation of labor division and specialization in decision-making across the country (including the territory of the six other countries), namely separation of public decision and private decision. “Build the prefecture and county, abolish feudality” shows that, on the basis of abolishing the “enfeoffment system” that integrates regime and property right, the newtype civil official system replaced nobles (feudal princes and officers, etc.) to uniformly exercise public decision-making power; while “opening rice fields and farms, abolishing nine-square field” refers to abolishing the ninesquare field system characterized by exclusive public property right in the production field, on which the existence of public decision depends, and establishing the private land right with the family as unit, thus preventing private decision from invasion by public power and others to a great extent. If the “kings” before Qin Dynasty were definers and arbitrators of exclusive public property right, the “emperors” after Qin Dynasty became the supreme authority of exercising public decision and protecting private decision. The more important thing is that, throughout the over 2,000 yearlong “feudal” society of China, though the dynasties were being replaced constantly, but for the farmland system, the allocation of decision-making power and the differentiation of decision-making style established in Qin Dynasty continued all the time as a basic economic system.4 From the above analysis, it is not difficult to see that, public property right constitutes the foundation for the public decision to substitute and contain private decision. In the production operation field, public decision is inefficient and invalid, which has already been verified by history. Its efficiency loss mainly comes from two major aspects: the first is the serious “hitchhiking” behavior in collective production; the second is the influence of the “alienation” of public power on production activity. The public property right naturally creates conditions for mutual influence of externality: since there is measurement difficulty in collective production (Alchian and Demsetz, 1972), when there is lack of supervision or the supervision cost is very high, the interrelation in incentive sense between individual diligence degree (individual policy) and the output distribution accepted; therefore, laziness epidemic will spread all over. The “alienation” of public power comes from the opportunism of public decision-maker. The decision-maker can seize surplus naturally 4 The restoration of nine-square field system by Wang Mang’s reform can be considered as

an exception.

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from collective production, so as to meet the daily expanding needs of the decision-maker class. Especially, when the power status of decision-maker is solidified, the privileged class of hereditary nobles will be formed, and the avarice and luxury of “guests over 3,000” will undoubtedly further depress the enthusiasms of productive labor. When the agricultural land system evolved from (exclusive) public property right to private property right, agricultural production was changed into private decision from public decision. Private decision will comprehensively represent the balance between agricultural land use and land conservation on the basis of eliminating the externality (internalize the externality), thus ensuring that the rural households carry out intensive cultivation on their limited cultivated fields and long-term input for maintaining the land fertility. “When the slaves cultivate the public land together, some slaves hide their strength, but if the land is divided to individuals, no one goes lazy” (Shenfen Chapter of Lv’s Spring and Autumn Annals) is exactly the living embodiment of the difference in efficiency between these two decision-making styles. Once the decision-making sphere is separated, the objects of public decision are mainly limited in the range of public goods supply and national income redistribution. Accordingly, the public power cannot recklessly infringe upon the “sphere” of private decision. In the agricultural production, since the private land right as the foundation of private decision is an efficient institutional arrangement, why did it appear after instead of before the exclusive public property right? Obviously, the theoretical logic of North, i.e. population growth-rare resourceproperty right arrangement, is limited in its interpretive capacity.5 In order to make the interpretive capacity of North’s framework more satisfactory, at least the Marxist link should be added between “rare resource” and “property right arrangement” — factor of productivity or technology. In fact, the formation of private decision-making style (or agricultural production as private decision in other words) signifies that the individuals that obtained independence and freedom have become basic units of human society. 5 North said, “When the quantity of animals and plants is fairly enough to meet the needs of human population, there is no incentive mechanism for undertaking the expenses incurred due to the establishment of property rights for animals and plants. Only during the transition period of increasing rarity is it worth undertaking the expenditures for establishing and exercising the property right” (p. 90).

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However, when the social productivity remains at such low level that the individuals or families cannot survive independent of the clan clusters, the public property right and collective production on this basis become a helpless choice under this kind of technological restriction. The nine-square field system blooming before Western Zhou Dynasty of our country is exactly the product of stone farm implements and paired tillage method. “For those to be engaged in paired tillage, we observe their physical figures, measure their ages and forces, compare and choose those who can complement each other in cultivation” (Vol. 30 Lizai in Zhouli Zhengyi). Therefore, it is difficult for individual families to meet such production conditions. Only after the general adoption of metal farm implements and cattle cultivation style, the private decisions can possibly exist in the agricultural production with family as unit under the guarantee of private land right.

2.2.

Agricultural collectivization: Disappearance of private decision and formation of monotonous public decision

Before the founding of PRC, it has been generally acknowledged by the leader group of the new regime to realize the transformation of China from agricultural country to industrial country through the expansion of state capital. Obviously, this mission includes the dual target of public ownership and industrialization. It is in nature intended to realize these targets through public decision under direct leadership of primary agents of the state. Although the state-owned industry at that time was still weak in the five sectors of economy, and must experience the new democratic society in which the private ownership is continued and “consideration is given to both public and private interests”, but they firmly believe that: owing to the huge productive force contained in the public ownership, the temporarily weak national economy should and will surely become the leading force that “plays the decisive role”. So, the conclusion is: the new democratic society is transitional, and with the growth of national economy and the collectivization of agriculture, its future will surely be socialism. The above scheme clearly defines the future of scattered individual agricultural economy in our country. Shortly after the land reform, obvious polarization between the rich and the poor appeared in the rural areas. Even after the tenancy system is abolished, the new rich peasants not only 48

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have more production materials, but also accumulate some agricultural surplus. In order to utilize the production materials more fully, the cooperative production forms of work-exchange mutual-aid teams have spontaneously emerged in the rural areas. Originally, this is a kind of voluntary cooperation based on private decision. The inductive institutional change is under the premise of the improvement of Pareto efficiency. Therefore, the cooperation based on private decision can generally increase the interests of all cooperators, although this kind of interest distribution will not seem very equally. However, the actual progress of China’s rural cooperative tendency far exceeded the basic limitation of “voluntary” (i.e. free contract and free transaction) of private decision. From individual farming to mutual-aid team, from mutual-aid team to cooperative, from elementary cooperative to advanced cooperative, the cooperative transformation is completed mainly through discrimination and force. For example, in the Northeast administrative region, in terms of credit, supply of new farm implements, reward for working model, organizing discipline restriction, etc., the highest local policy-maker adopted the policy of discriminating against peasants working on their own and supporting mutual-aid cooperation very early (Bo, 1991). The following investigation data objectively reflects the situation of farmers joining the cooperative organization: “we built the elementary cooperative because the superiors said so. The superiors issued the concrete regulations and requirements for building the elementary cooperative, saying that if you do not join the elementary cooperative, your land will be claimed back or adjusted to remote and arid places; some cadres said, the land is given by the communist party, not your own, so you have to do as told. Although they said you are “voluntary to join the cooperative and free to withdraw from the cooperative”, if you do not join or withdraw from the cooperative, your land will be adjusted to remote and arid areas, where it is very difficult to cultivate the land” (Wen, 2000, p. 187). In fact, the nature of our country’s agricultural cooperative transformation is collectivization. “Cooperative economy and collective economy are … two categories with substantial difference. Cooperative economy is the alliance of transactions in nature, which acknowledges private property right; while the essential characteristic of traditional collective economy is merging of assets, which denies private property right (Han, 1998).6 6 For researches on cooperative economy, refer to articles by Zhang and Yuan (1991).

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It can be said that, the process of our country’s agricultural cooperative transformation from the so-called elementary to advanced, is exactly the process of gradual loss of private decision as the private property right is constantly corroded, and the process of constant expansion and swelling of public decision by corroding private decision. In this process, the externality application is growing in intensity until it is thoroughly legalized. From the mutual-aid team to elementary cooperative, the commune members can obtain the bonus according to the land put into the commune, and the rural households’ productive tools can also be discounted and offset by installments. Apart from discrimination, the main problem at that time is whether the appraisal of land level is impartial, and whether the productive tools are reasonably discounted, but private decision can serve some purpose by relying on the incomplete private property right. When the elementary cooperative is shifted to advanced cooperative, all production materials put into the commune are consolidated without compensation, the land revenue is completely deprived, and such consolidation became real “Confiscation”,7 the private decision completely withdrew from the production and economic decision-making field with the disappearance of private property right. Even in marching towards collective economy, it is not difficult to find other ways different from unpaid deprivation of assets. In the process of establishing advanced cooperative, Shenyang municipal committee once considered adopting the method of purchasing land at low price, and asked superiors about that (Dong, 2001). The central government replied to reject this method, and instructed to realize public ownership of land through gradual decrease of land remuneration and finally canceling land remuneration.8 Obviously, when the land property right owned initially by individuals is obtained by power to a large extent, thus formed a incomplete private property right at the very beginning (Zhou, 1994), when the individuals’ legitimate rights and interests can be recklessly violated, the externality 7 During the formation of advanced cooperative, the social contradiction became sharp, particularly represented as the confliction and confrontation between the rich middle peasants and the poor and lower-middle peasants. 8 Refer to Reply to Northeast Bureau on the Problem of How to Gradually Socialize the Agricultural Production Cooperative of Semi-socialist Nature issued by the Rural Work Department of the CPC Central Committee on August 10, 1954.

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application is sheltered, it will not seem contrary to common sense for this assets obtained through deprivation and the rent being deprived again. Once the public property right is established with the general formation of advanced cooperative, the agricultural socialist remodeling is completed, and the private decision in the agricultural production field is replaced by the public decision accordingly. If the formation of advanced cooperative means the establishment of rural public ownership, the establishment of people’s commune signifies the reintegration of political power and property right (integrating government administration with commune management). After the failed attempt to “upgrade” the exclusive public property right to unrestricted public property right (large scale of commune, high degree of public ownership of commune, equalitarianism and indiscriminate transfer of resources) and interfere with individual living of commune members (communal dining room) by public decision, the collective property form of “three-level owned, use the team as foundation” was established in 1962. This institutional arrangement can not only ensure that the public decision of the state agent reaches the rural grassroots through administrative system, but also enable the rural households, instead of the state, to assume the various consequences of public decision. So far, on the basis of supply and marketing cooperative, credit cooperative and people’s commune, the national and local public decision covers such fields as production, exchange and distribution in the rural areas. Differing greatly from the romanticism expressed in the poem “Happy, I see wave upon wave of paddy and beans, and all around heroes homebound in the evening mist”, the real situation in people’s commune is “go to work in large crowds, work in a half-hearted manner, good and bad are the same, but the distribution is even”. When there is chance of “hitchhiking”, shirking will become an important way in which individual commune members apply the externality. As a result, the phenomena of lying on the job, bumbling to get work points, coming to work but doing nothing and working in a half-hearted manner generally happened during production. Although the work points are appraised with partial reference of the labor performance of commune members, due to the measuring difficulty and lower proportion of distribution according to work (i.e. the so-called 70 percent is people and 30 percent is labor), the incentive effect of work point is very limited. More importantly, under this situation, the growth of rural population 51

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obtains endogenic encouragement, which has a far-reaching impact on the long-term development of our country’s socio-economy. The agricultural collectivization has made important contribution to our country’s industrialization and the primitive accumulation of state capital. Through the “scissors difference” between the industrial products and agricultural products by public policy, the agricultural surplus can be converted into capital accumulation of state-owned industry to the maximum extent with lower transaction cost. This is an important condition for the success of industry nationalization. However, the fundamental problem is whether the replacement of private decision by public decision in the economic field can become a choice with relative efficiency? If the collective economy under public decision created less agricultural surplus, what on earth does that kind of surplus scrambling like “draining the pond to get all the fish” mean except for its “effect” on suppressing the rural needs of industrial products? Through the expansion of state capital, our country established the industrial system with a complete range of production within a comparatively short period; the social cost for this is low efficiency, unbalanced structure and long stagnancy of people’s living.

2.3.

Rural reform: Regression towards private decision

The problem of inherent weak power and depressed condition of collective production under public decision cannot be solved through official forcing, political movement and “political work point” weighted according to “political performance”. The so-called “socialist education” and “ideological remolding” which attempts to change the individual utility function will only enhance the farmers’ desire for economic freedom. Therefore, “four freedoms” (free tenancy of land, free buying and selling of land, free borrowing and loaning, free trade) appeared repeatedly, just as described in the poem “Not even a prairie fire can destroy the grass; it grows again when the spring breeze blows”. The stagnancy or slow growth of agricultural total output is not beneficial even for the particular national target of rent maximization. Besides, when the farmers that account for the absolute majority of population live in poverty for long, the “legality” of state governance will be challenged and threatened. This made the public decision of the state gradually withdraw from the agricultural production field, thus ushering in the era of rural reform. 52

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The farmers’ existing state itself can be used as their chips for bargaining with the state and collective. The fact that the reserved land accounting for only 5 percent brought about 25 percent income (Xin, 2000) undoubtedly reflects the obvious difference in efficiency between public decision and private decision in agricultural production. Therefore, by the end of the 1970s, when the farmers chose the restricted private decision-making style of household contract within the boundary of exclusive public property right, the state acquiesced. The various responsibility systems (contracted labor responsibility system, contract production to each team, production contracted to each household, etc.), born out of the collective production under public decision made the farmers establish comparatively clear and relatively stable connection between the usage and output of the given land, and after eliminating the externality, the farmers’ decision on agricultural production was converted into the private decision in its true sense. “Turn in enough to the state, leave enough to the collective, the surplus is my own” not only represents an equilibrium of game among the state, collective and individuals, but also signifies that the farmers have become claimers of collective land right and obtainer of agricultural surplus. In the beginning of the reform, under private decision, the long depressed productive enthusiasm of farmers was stimulated in an unprecedented way, thus leading to the high-speed growth of agriculture in our country.9 Around 1984, our country encountered the “grain storage risk” in the purchase and storage of agricultural products. In the meantime, the state substantially increased the purchasing price of primary agricultural products. The increased supply of agricultural products not only directly leads to the income growth of farmers, but also provides corresponding material guarantee for the development of light industry and the improvement of people’s living; and the increased money income of farmers and urban citizens provides enough needs for the development of industry and service sector, and plus the light industry’s “six priorities” and “transfer from 9 From 1979 to 1984, the total agricultural output value increased by 8.98 percent annually on the average, among which that of planting industry increased by 6.61 percent annually on the average; the grain yield increased by 17.0 billion kilograms annually on the average, the cotton yield increased by 13 million piculs. From 1978 to 1983, the net money income of the farmers of the whole country increased from RMB38.1 billion to RMB112.7 billion, increasing by 24.2 percent annually on the average (refer to the article by Chinese Rural Study and Survey Group, 1987).

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military production to civil production”, etc., the economy of our country has been developing rapidly and soundly. Compared with 1978, our GDP increased by 70.9 percent and per capita GDP increased by 56.8 percent in 1984. Under the “witness” of economic development, the contract system not only spreads rapidly in the rural areas,10 but also directly promotes the urban economic system reform of our country. It is something to write home about that, the acceleration of the rural reform and development promotes the adjustment of rural industrial structure and the development of rural second and third industries, meanwhile, township enterprises have mushroomed, and all these not only creates “Chinese wonder”, but also promotes the changes in the decision-making style. At present, the concrete forms of existing farmland system of our country are “two fields system”, “three fields system” and “joint-stock system”, etc., and some regions adopted such scale operation methods as “inverse rent or contract”, “rent and inverse contract”, but the basic mode of farmland system is: collective land right plus per capita land-use right. After over 20 years of development and change, main contents of this institutional arrangement are as follows11 : (a) Land contract period unchanged within 30 years. Regarding the problem of whether the household contract responsibility system should be insisted for long time when the first round of contract expired, the Chinese Communist Party Central Committee and the State Council pointed out in November 1993: the household contract responsibility 10 By 1983, 97.7 percent of production teams practiced the household production responsibility system (Rural Cooperative Economy Research Group of Ministry of Agriculture, 1993). 11 For the improvement of the state’s farmland policies, refer to the following literatures: Circular of CPC Central Committee on 1984 Rural Work issued in January 1991; Circular of CPC Central Committee and State Council on 1991 Agricultural and Rural Work issued in December 1990; Resolution of CPC Central Committee on Further Promoting Agricultural and Rural Work adopted at the Eighth Plenary Session of the 13th CPC Central Committee in November 1991; Several Policy Measures of CPC Central Committee and State Council on Present Agricultural and Rural Economic Development issued in November 1993; Circular of the State Council for Approving and Transmitting the Proposals of the Ministry of Agriculture on Stabilizing and Improving the Land Contracting Relationship issued in March 1995; Circular of the General Office of the CPC Central Committee and the State Council on Further Stabilizing and Improving the Rural Land Contracting Relationship issued in August 1997; Resolution on Several Important Issues of Agricultural and Rural Work adopted at the Third Plenary Session of the 15th CPC Central Committee in October 1998, etc.

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system and the two-tier management system combining unification and division is a basic institution of our rural economics, which should be kept stable for long time and constantly improved; in order to stabilize the land contract relationship and encourage the farmers to increase agricultural input, the unchanged labor contract period would extend another 30 years after the original cultivated land contract period expired. In view of there are many kinds of understanding of “unchanged within 30 years” in actual work, in August 1997, the state reaffirmed: the land contract period extended another 30 years refers to the period of family land contract operation; but the household contracted responsibility system implemented for the collective land is a long-term policy. (b) “No redistribution in normal cases, small adjustment if needed”. This policy began in 1984. It requires that: under the precondition of basically stable contracted land, making necessary adjustment to the land of rural households with excessively unequal proportion between people and land after population changed. But it is not allowed to carry out general land adjustment across the village or across the team through administrative measures after many years; it is also not allowed to take advantage of the chance of “small adjustment” to increase the contract fee, thus increasing the burden of farmers. (c) “Increase people excluding land, decrease people excluding land”. In order to avoid the frequent adjustment of contracted land due to change in population and the land fragmentation thus incurred, in November 1993, the state advocated that the regions with conditions implemented the method of “increase people excluding land, decrease people excluding land” within the contract period, i.e. not withdrawing and adding land according to the increase and decrease of rural household population. (d) Allow the compensated transfer of farmland use right according to the law. Due to the reasons of seeking job in city and non-agricultural employment, etc., the rural households are unable or unwilling to continue cultivating the contracted land, so two solutions were proposed in 1984: firstly the rural household returns the contracted land to the collective for uniform arrangement; secondly the contracted land can be transferred among rural households through negotiation after approval

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by the collective. In 1993, the central government formally acknowledged: under the precondition of insisting on the collective ownership of land and not changing the usage of land, the compensate transfer of land use right according to the law is allowed after approval by the contractee. (e) Strictly control the reserved land. Regarding the problem of changing land right relationship and expanding reserved land that appeared in the second round of protraction of land contract period, the state stipulated in 1995: it is not allowed to take back the land that has already become property of team-level collective economic organizations to the village, and evenly contract across the village; it is strictly prohibited that the contractees take advantage of the chance of land adjustment to reserve more land; in case it is really necessary to reserve the land while the land should not be reserved in principle, the proportion of reserved land in total cultivated area is generally no more than 5 percent. (f) Implement appropriate scale operation of land in regions with conditions. No. 1 document in 1984 encourages the gradual concentration of land towards farming experts. Rural policy document in November 1993 further points out: in a few regions with comparatively advanced second and third industries, where most labor force moves to nonagricultural industry and has stable income, it is allowed to start from reality, respect the farmers’ will, make necessary adjustment to the contracted land, and implement appropriate scale operation. In 1995, the central government further limited the appropriate scale operation of land to coastal regions with advanced economy. At present, there are the following three methods of implementing appropriate scale operation of land: through team-run or village-run farm; through “two fields system” and operation by big contract owner; through free flow of land use right forming scale operation. The above institutional arrangement and policy choice basically reflect the state’s trends and preference on the basis of maintaining the collective land right. Policies (a), (c) and (d) are intended to realize the existing rural households’ land-right on a long-term basis of collective land, with an aim to ensure that rural households make private decisions rationally on the basis of reducing the uncertainty of external conditions, thus trying 56

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to overcome the contradiction between “land use” and “land conservation” which is inherent in the short-term tenancy system. Policies (b), (e) and (f) attempt to limit the public decision to appropriate degree and scope under the precondition of maintaining the relevant public power granted by the collective land right. It is thus obvious that, although there is private decision of farmer households under public land right, but there are different constraint conditions. It is not the farmer households’ independent private decision, and will surely be limited and corroded by public decision and public power from the central government to local governments at different levels, so it is a kind of restricted private decision at its best; the collective land right internally stipulates the “legality” of public power infringing upon private decision. This determines that some policies of the state (“increase people excluding land, decrease people excluding land” and “no redistribution in normal cases, small adjustment if needed”) are in conflict, some policies are difficult to implement or “go out of shape” during implementation and some policies limiting public power have doubtful effect. This also determines that, the household contract responsibility system not only enables the agricultural production of our country to develop rapidly, but also makes it enter the phase of increase slowdown and fluctuant.12

2.4.

Collective land right and restricted private decision

The agricultural production policies under the existing household contract system belong to restricted private decisions. Such restriction originates from the collective land property right and the external or market environment of farmer household decision. On one hand, these factors increase the uncertainty of private decisions and impede the long-term input by rural households; on the other hand, they reduce the legitimate earnings of rural households’ decisions and operation. We think that, the restriction on private decisions is the contributing factor of the decreased spontaneous 12 In 1984, the total grain yield of our country reached 407 million tons, increasing the grain

yield by 103 million tons only within 6 years (in contrast, 20 years were spent for increasing the grain yield by 100 million tons under the traditional system); by 1996, the total grain yield surpassed 500 million tons, but also spending one year for increasing the yield by 100 million tons.

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input in agriculture, deteriorated enthusiasm towards farming and cured dual structure. It is pointed out previously that, the collective land right and the land use right divided equally per capita is China’s existing fundamental farmland system. In fact, they are closely related with each other. The land use right divided equally per capita is the inherent characteristic and logical consequence of collective land right (under the condition that the designation and division of use right is permitted). The so-called collective means a gathering of many people within a certain scope (region or group). Therefore, as an ordinary member of the collective, regardless of age and gender, everyone naturally owns the coequal rights and interests of collective land. Unless one person disappears from a collective forever, such rights and interest cannot be deprived logically or rationally. This determined the fragmentation of farmer household’s land contracted, and with the change of population, the land is in a situation of “one big adjustment every five years, one small adjustment every three years”.13 According to the investigation conducted by the Ministry of Agriculture, even by the year 1996, three years after the policy of “land contract period unchanged within 30 years” was unveiled, in the newly signed land contract protraction agreement, those with contract period less than five years account for 12.9 percent, those with contract period between six and 14 years account for 28.7 percent, those with contract period between 15 and 29 years account for 28.4 percent, and those with contract period more than 30 years only account for approximately 30 percent (Song et al., 2000, p. 21). The original meaning of “land contract period unchanged within 30 years” is to “grant farmers long-term and guaranteed land use right”, so as to stabilize the planting expectation of farmer households, thus encouraging long-term input in agriculture. Obviously, this policy is adopted mainly for solving the contradiction between land “use” and “conservation” due to the frequent adjustment of land. In theory, “increase people excluding land, decrease people excluding land” should also be included in the meaning of 13According to the investigation by Yang et al. (2001), before implementing “the policy of land contract unchanged within 30 years”, 89.6 percent of villages had carried out land adjustment at different frequencies and degrees. There were 3.9 times of adjustment on the average, including 1.9 times of large-scale adjustment on the average. The largest frequency is 23 times, i.e. once a year.

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the policy of “land contract period unchanged within 30 years”. However, this policy collides with the inherent prescription of collective land right. So, although it is recorded in the relevant regulations of the state and thus become a kind of formal institutional arrangement,14 the actual progress of such forced institutional change always demonstrates the essential characteristic of collective land right. According to the investigation conducted by Yang et al. (2001), by the year of 2000, the land contract period stipulated in the contracts re-signed in some villages is less than 30, and 64 percent of contracts contain the following clauses: “in order to solve the contradiction between people and land, Party A (villagers committee) can make appropriate small adjustment to the land contracted by Party B (farmer household)”; “when the state and collective expropriate the land according to the law, Party A and Party B must obey, and make corresponding adjustment to the land”. From the farmers’ expectation of whether the land will be adjusted within 30 years, it is not difficult to see the vulnerability of this policy or provisions of the law: among the 708 respondents, those who think that the land will not be adjusted only account for 6.8 percent; those who think the land will be adjusted account for 48.0 percent; those who think that whether the land will be adjusted depends on the cadres account for 15.3 percent; those who think that whether the land will be adjusted depends on the central government account for 14.2 percent; and those who answer “it is hard to say” account for 15.7 percent. As for the farmers’ attitude towards strict prohibition of land adjustment, there have many types, including “approve”, “disapprove” and “does not matter”, etc., and different attitudes more represent the farmers’expectations of the change of their own family population, which cannot take away the “legitimacy” and appropriateness of the equal division of land use right per capita in the least. It can be concluded that, under the collective land right, the policy that can be really implemented is “no redistribution in normal cases, small adjustment if needed” that corresponds with the land use right equally divided per capita, instead of “unchanged within 30 years” or “increase people excluding land, decrease people excluding land” intended

14 Refer to the Land Administration Law of the People’s Republic of China and Regulations

on the Implementation of the Land Administration Law of the People’s Republic of China promulgated in August 1998.

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to represent the social welfare function. As a matter of fact, provisions of the law also leave a “covered way” for land adjustment: the 30-year land use period can be adjusted after obtaining consent of above 2/3 members of villagers’ meeting or 2/3 villager representatives, and approval by the agricultural administrative authorities of the village (town)-level people’s government and county-level government. Since the land belongs to the collective, the collective agent enjoys the various rights of owners.15 The exercise of such right is exactly public decision. Except for observing the previously mentioned inherent logic of the collective property right, it inevitably brings enough interest to the rational collective agent. As a result, the many problems happening in reality, such as shortening the contract period, withdrawing the contracted land, expanding the reserved land, increasing the contracting fee, doing scale operation under administrative orders and the many kinds of so-called “performance projects”, also became the dead hands rooted in the collective land right that can be temporarily suppressed but cannot be eradicated. Therefore, under the institutional arrangement of collective land right, the private decisions in the production operation of farmer households always suffers the restriction and corrosion by public power. If considering that the category of collective has not been clearly defined by the law, the behavior of village and town-level government (even above the county government) corroding private decisions under such excuses of “adjusting agricultural structure” and “expanding scale operation”, etc. will go rampant and spread in rural areas under the precondition of compatibility with the interests of collective agent. As a result, the reserved land turns into “power fields”; “relatives” of collective agent become “big contract households” of the responsible fields; vegetables are removed for planting tobacco leaves; “peasant households” that raise cattle are forced to move into “villas”; every household installs telephone: “three ten thousand project” (ten thousand mu of cabbages, ten thousand mu of day lilies and ten thousand pigeons), etc., resulting in chickens flying and dogs leaping in the villages. Faced with these phenomena, the media comment that represents the intention of high levels is: “good intention, inappropriate method”. We may ask, when the agent 15 These powers mainly include land division, land adjustment, designation and conversion

of land usage, as well as the adjustment of land expenses, etc.

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has and fully exercises corresponding and legitimate public power under the collective land right, is there any comment more appropriate than this? Clearly, whether the intention is good or not cannot be observed and verified; what can be observed and verified is whether such public power and its foundation exist or not. If the use (right) of land is actually in change, and if public power can interfere with the rural households’ private decisions, thus leading to uncertainty of their expectations, then reducing agricultural long-term input will become a rational choice for the farmers to decrease or evade the operational risk. The agricultural long-term input mainly includes building irrigation and drainage facilities, leveling and deeply ploughing up land, using organic fertilizer, erecting greenhouse canopies, developing garden economy, and adopting new technologies, etc. Obviously, high and stable yield of farmland per unit area depends on the agricultural long-term input to a great extent. This is possibly the fundamental starting point of the previously mentioned various farmland policies of the state, i.e. according to own preference, on the basis of guaranteeing the collective land right, trying to simulate an environment and condition favorable for the agricultural longterm input through appropriate restriction of public power and protection of farmers’ land use right. However, as long as the existence of collective land right is necessary for the state, it form certain equilibrium of mutual game between the state and the collective (agent). The expenditure of state game depends on the net interest brought to it by the existence of collective land right, the effect of various policies (or regulations) and the cost of their implementation (including performance and supervision); the expenditure of collective agent depends on the net return of its decision and behavior. This means that, if the collective agent controls its behavior and the degree of behavior within certain scope, it is completely possible to achieve the maximization of own interest, and such interest should be considerable. This is because that, in the existing situation, the state has many things to assign to the collective, and the “metaphysical” earnings of collective property right is still huge; meanwhile, the implementation cost of state policies and regulations (especially in the forced institutional change) seems very high. Some may argue that, because “land contract period unchanged within 30 years” has already been stipulated in the law, the land use right

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(contracting management right) has been given credibility by public means of issuing the land use certificate (rural collective land contracting management right certificate), and the land contracting has been confirmed in the form of contract, the farmers’ land use right should be able to be fully guaranteed. However, the fact is not so simple. Firstly, there is a great difference in reality (both in understanding and concrete implementation) over the width of land use right, i.e. whether it includes the right to inherit, mortgage and buy and sell, etc.; secondly, the land contract is completely different: it is difficult for the contract to clearly describe the periphery (surrounding) of the contracted land; thirdly, even if the land is not adjusted, the effect of land adjustment can be realized by “tampering with accounts” (adjustment of land expenses); finally, there is collision between the collective’s land operation and management right and the rural household’s land use right (exactly proved by the two-tier management system of unificationdecentralization integration). So, from the perspective of law, although the farmers have obtained the ID right of land use (belonging to personal right) and request right of contracting operation (belonging to creditor’s right) in the practice of household contract system, while obtaining exclusive right to control and benefit (belonging to real right) on the contracted land to a considerable extent (Jin, 2001), due to the inherent prescription of collective land right, the farmers cannot possible achieve the entire land real right or effective resistance against public power within the framework of collective land right. This determined that the existing farmland policies and regulations of the state are still transitional in the comparatively long run. If we abstract the net income brought by collective land right to the state, it is fully possible to simulate and replace the existing farmland policies of the state under given target functions. For example, grant the farmers the private right of land by certain means, allow the land use right to flow and not allow the transfer of ownership. This strategy can encourage the agricultural long-term input, realize the scale operation on the basis of free flow of land use right, and avoid the infringement of public power on private decisions. Moreover, it is not contradictory to the “theoretical basis” of the collective land right — “land is the most fundamental productive element of agriculture, and the most fundamental living guarantee for farmers”. Since the traditional concept of regarding the tenancy relationship (flow of land use right) as “feudal exploitation” is abandoned in ideology and permitted

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by the law, there is no reason to prevent the private ownership of land? Is there anything that can better represent the “living guarantee” function of land than the rural household’s ownership of their own land? The pressure of population on land is actually one of our country’s basic conditions, but rare resources need the definition and protection of completely exclusive property right more, which has become the generally acknowledged achievements of institutional economics. Of course, agriculture has such characteristics as heterogeneity, seasonality and spatial scattering characteristic; the changes in climate and price of agricultural products are generally greater, and often affect many rural households in the same region. As a result, there are comparatively obvious information asymmetry and covariance of agricultural income in the countryside. Due to the asymmetry of information, even under the conditions of market economy, the rural insurance and financial agency still grow slowly, and the credit and insurance market are not consummate enough. Once natural calamities happen, the farmer households may sell the land at low price to make it through the disaster and famine; due to the covariance of agricultural income, the land purchasers are usually big landowners or creditors with greater currency savings. When the normal years come, since the land price is higher than the capitalized value of agricultural profit (Binswanger and Deininger, 1997), in case of incomplete credit market, it is difficult for the farmer households who lost their land to purchase the land back. This will aggravate the merging and centralization of land, thus degrading the original landowners to workers or tenant peasants. Once the land becomes private, the transfer of ownership shall represent the meaning of this topic, and a certain degree of land merging and centralization is inevitable. By then, unless absolutely compelled to consider the policy of “limiting private land”, primary measures should be focused on how to perfect the rural insurance and credit market. Even if some rural households lost the land right, they can still obtain the land use right through the tenancy contract. Although it is also flow of land use right, there is great difference from the present situation (to be discussed in detail later), it is the result of private decision, excluding the direct intervention of public power. In short, it is not a wise choice in any way to pursue a certain average condition by placing the 900 million farmers (including family members)

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engaged in agriculture under the low-level “living guarantee”. If the speed of “changing from agricultural to non-agricultural status” cannot catch up with the growth of population, it means that the urban-rural difference of our country will be further widened. Then, what on earth can the GDP values taking the lead in international society indicate? Therefore, we can further improve the agricultural production efficiency only through complete and unrestricted private decisions. Those lagging behind in competition — who really need “guarantee” require the assistance of public policies on the reverse, i.e. obtaining the fundamental right of survival through re-distribution of national income (instead of averaging of production materials). Just as the clauses of eliminating “feudal exploitation” of landlords and those of reserving the foundation for emerging of new landlords (allowing the free trade and lease of land after land reform) coexisted in the “land reform law” of the past, if we try to find out China’s real situation and the logic of institutional evolution literally or in principle, the results are usually embarrassing. The collective property right and restricted private decision have their realistic institutional background, and the factors that determine this institutional background and make it cured are usually the interest patterns in certain equilibrium.

2.5.

Collective land right and “quasi-tenancy system”

Though the problem of tenancy system is mentioned many times in preceding paragraphs, in order to have a further understanding of our country’s present farmland system and the allocation of its decision-making power, we want to make analysis by comparing it with the land tenancy system in history and reality. This is very interesting. The tenancy system is an ancient farmland cultivation system based on private land right. The land owner signs the tenancy agreement with the farmer household to transfer the use right of a part of its land to the latter, and the latter cultivates and uses the land, then submits a part of the land harvest or its currency equivalent to the former as land rent, as the remuneration for the former to give up the land use right or the price for the latter to obtain the land use right. These farmer households are tenancy farmer households, or tenant peasants in short. Under the tenancy system, the ownership of 64

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land possessed by the landowner is generally called “foundational right of land”, while the land use right obtained by tenant peasants is the use right of the land ,which is generally called “surface right of land”. Therefore, the tenancy system is a system of separation between ownership and operation and use right. In view of the separation between ownership and operation right, the household contract responsibility system practiced in the rural areas of our country is very similar to the tenancy system, i.e. one party (rural collective) possesses the ownership of land, the other party (farmer household) possesses the use right of land, or one party possesses “foundational right of land”, the other party possesses “surface right of land”, while the contract is land contract, and contacting fee and “three reserves” are land rent. However, since the existing contract system is based on public land right, there is important difference from the tenancy system in principle, and obvious difference in either the behavior of economic parties concerned or the efficiency of these two institutional arrangements. For the convenience of discussion, we call it “quasi-tenancy system”. Firstly, under the private land right, the economic parties concerned have independent and equal positions, and the definition of property right is complete and clear, so the land tenancy relationship is just one possible choice and decision of the economic parties concerned. The landowner can choose to cultivate the land independently, or lease, and even rent at the same time. For example, one small landowner may choose to cultivate independently and rent in the early time, but after constant accumulation, gradually purchase land, the landowner will become landlord that fully depends on the land rent for survival at a certain stage. Similarly, tenant peasants also can choose and sign different types of tenancy contracts with different landowners, e.g. rent on a fixed amount basis, share tenancy benefit and so on; the length of tenancy period and rent (rate) is also the result of private policy of the parties concerned. Therefore, under the tenancy system, the private decisions of the both parties under the contract are complete: under the specified resource endowment, the parties concerned will reach a kind of equilibrium through bargaining, i.e. choosing a behavior among many solutions that will maximize their own interests within a certain period. However, under the collective land right, due to the economic parties concerned do not have independent

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positions, and the definition of property right is neither complete nor clear, so the decision-making space of the parties concerned is greatly restricted, having only one choice, i.e. choosing the quasi-tenancy system, unable to choose other ways (e.g. self cultivation). The key of such situation is that, the collective land right is a property right in which everyone has a share, i.e. every member of the collective has a kind of natural property right, usually called member right. Since the farmer households obtain the land use right from the collective with their own member status, in some sense, what the farmer households obtained is the use right of the piece of land that belongs to them in name. As a result, on one hand the farmer households can only sign the tenancy contract with a particular “collective” in which they are members, unable to sign the contract with other collectives; on the other hand, the collective and its agent also has no right to conclude the tenancy contract with members outside the collective, or in other words, the farmer households outside the collective usually have no right to rent, at least so during initial contracting. Therefore, in some places, the member right constitutes the foundation of community-type joint-stock system (Fu, 2001). Moreover, the contents of contract are determined through the collective (or agent), or government or public decisions in combination. For farmer households as tenants, the type, term or rent (rate) of tenancy are usually forced, instead of “endogenetically” generated through transaction negotiation or bargaining. Secondly, under the tenancy system, the tenancy contracts are equal contracts among free natural persons, and transactions among private rights, so long as both parties agree, such transactions are independent of others, without any restriction, and both parties have full right to withdraw. Or in other words, the tenancy contract is the result of choice made by the parties concerned, and their policy has considerable degree of “exemption”, i.e. a third party usually cannot interfere with the signature and performance of the contract, unless intervened by the court for resolving disputes. The specific usage, investment and income sharing, etc. of the land are independently determined by the parties concerned; and these are often hidden in the corresponding types of tenancy system. However, under the quasitenancy system, the tenancy contracts are contracts between natural persons and non-natural persons (there is no clear stipulation regarding the status of villages as independent legal person) and transactions between private right

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and public right, which are not only restricted by the member right, but also related with the third party (i.e. other members of the collective), so the exemption of policy cannot be effectively guaranteed, the transactions will be intangibly contained by other members, and the quantity of transaction, especially the initial transaction, is restricted, which cannot exceed one share of land per person on the average for conclusion of the contract. The government’s intervention on farmer households is more non-exemptible. Besides, the withdrawal right is not complete either. In some places, the farmer households are unable to withdraw, and even they are unwilling to continue the contract, if the contract cannot be transferred to others, they have to continue the payment of “three collected fees and five overall planning fees”; even if the farmer households can withdraw freely, the collective cannot withdraw freely. In reality, the collective’s agent often rips up the agreement at will, but in law, it has no right to dismiss any member, thus unable to cancel the contract signed with the member. Thirdly, in the tenancy system, according to the types of tenancy contract, there are short-term tenancy contracts and long-term tenancy contracts, fixed tenancy contracts and share tenancy contracts. Though different tenancy contracts have different risks and their division, the causality of decision-making is clear, which is another characteristic of private policy related with exemption. That is to say, under the precondition that the exemption of decision-making is guaranteed, the policy-maker, instead of others, takes responsibility for its own policy and the consequences of its behavior. From the perspective of lessee, he can choose short-term tenancy, thus unable to enjoy the return on investment; also can choose fixed tenancy, but must assume all risks; still can choose share tenancy contracts, where the benefits and risks can be distributed according to the input of both parties on one hand, and some authority of the landlord must be accepted on the other hand. Here, the land rent is a part of the residual product, but the profit and tax are strictly separated. Differently, the contracts of quasi-tenancy system are neither long-term nor short-term; neither fixed nor share tenancy contracts, but long-term tenancy contacts (30-year contact period) and fixed tenancy contracts in name, and short-term contracts (no redistribution in normal cases, small adjustment if needed) and changeable tenancy contracts in actuality, the causality of decision-making will be undermined at different degrees. Because the three collected fees and five overall planning

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fees have the highest limitation on paper, and the lessor assumes no risk whatsoever, all the risks are borne by the farmer households. However, the three collected fees and five overall planning fees do not include various expenses, and the latter actually constitutes a major part of the rent, which is not only changeable but also unlimited. It is thus obvious that, here profit and tax are integrated, and the tax fee also constitutes the land rent. Moreover, the amount of land rent is not the result of bargaining negotiation between the lessor and the lessee, some (e.g. three collected fees and five overall planning fees) are stipulated by the central government, and some are the lessor determines others (e.g. various charges) one-sidedly. The farmer households only have the obligations of acceptance and payment, but have no right to negotiate about the rent. It is thus predicated that, is not the legal restriction of land usage unchanged within 30 years a kind of contempt of the causality of decision-making?! Finally, in the relationship based on collective land right, though the farmer households have the negative property right of a share of farmland on strength of their member right, their positive property right is subject to more restrictions. Therefore, their private decision-making power is obviously less than tenant peasants under the tenancy system, and though the socalled 30-year contract period is stipulated, the farmer households do not have the behavior of tenant peasants under the permanent tenancy, and their behaviors tend to become short. Accordingly, the decision-making power of the village collective and its agent is obviously greater than the lessors under the tenancy system. Moreover, different from the private decisions of lessors under the tenancy system, under the quasi-tenancy system, as the lessor, the policies of village collective and its agent are unrestricted public decisions. This provides a very large free discretion space for the collective agent, also leaving the space for maneuver for the superior governmental authorities to intervene the private decisions of farmer households through the collective agent, thus increasing the uncertainty of private decisions of the farmer households. Under the quasi-tenancy system, the collective agent not only has greater decision-making space than the lessor under the tenancy system, but also has very different behavior pattern. Since this kind of policy is public policy, many policy-makers are faced with the problem of hitchhiking. Since they do not assume all consequences of the policy, their behaviors

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are also like the managers of state-owned enterprises, only caring about benefits from control right, and not caring about whether the long-term benefits from currency (land rent) is steadily on the rise. Since the right of control is in their hands, they have possession of everything, and it is easier to exercise the right of control, then there is soil for breeding of power abusing and village tyrants in the rural areas, and some people’s behavior went farther than local tyrants and evil gentry in the past. Besides, they also have enough motivation to erect a high wall between the central government and the farmers, obstructing their information communication, and similar incidents as that of Gui Xiaoqi in Jiangxi,16 are very general, which is to say, the strategy of village cadres to expand the benefits from control right will take the priority in any round of the game. In the course of nonagriculturalization of land, it is difficult for individual farmer household to form collective action to guard their own rights and interests, and the land is transacted with the developers through the collective agent as the lessor, while the farmer households as lessees have no right to inquire into, and can seldom obtain the benefits from land transaction. As a result, the behavior of collective agent not only makes the state fail to achieve the target of protecting the farmland, but also makes the state assume the social consequences thus incurred. In short, under certain conditions, the private decisions under private property right usually have coequal validity regardless of the difference in specific decisions or choices made. Zhang (2001) proved that: under the conditions of private property right, when the transaction expenditure is zero, regardless of self-cultivation, employing workers, rent on a fixed amount basis or share tenancy, the resource allocation contained in these 16 In August 2000, Gui Xiaoqi, the executive vice president of the Rural Development Forum

journal run by the Agricultural and Industrial Committee of Jiangxi Provincial Committee, edited the documents of the central government on alleviating the farmers’ burden into A Handbook for Lessening Farmers’ Burden, which evoked widespread response in the rural areas. The farmers held this handbook to argue with the cadres, but some cadres said the contents of this handbook were false, and some hid themselves out of fear. The farmers could not find the cadres, and finally smashed the glass of the township government, and leveled the buildings of several township governments. This is the so-called “Fengcheng Incident”. Gui Xiaoqi was dismissed for this incident. Quoted from Reflections of Three Farmer Children after “Lay-off”, No. 21 Issue of Inside Information on Economic Reform in 2001.

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ways is equally efficient; so long as the contact itself is different presentation forms of private property right, different contact arrangements do not mean different efficiencies of resource utilization. What we do is just to connect the exclusiveness and transferability of private property right with the nature of decision to endow the decision with integrity, exemption and cause and effect under the efficiency guarantees, thus drawing the conclusion of the relatively inefficient of the quasi-tenancy system under collective land right. In the real world where the transaction expenditure is not zero, nobody can assert that private land right and tenancy system are perfect, just as nobody can assert that any system is perfect, but we can be sure that: from the perspective of decision-making, the collective land right and quasi-tenancy system are inferior to private land right and tenancy system. It is thus clear that, the problem of “agriculture, rural areas and peasants” in China is after all a basic institutional problem.

3.

State Monopoly, Government Regulation and Policy Discrimination

Apart from the collective land right, the private decisions of farmer household operation are also subject to the restriction and infringement of state monopoly, government regulation and discriminative policies, the problems in this regard and the harm caused may be no less than those in terms of farmland property right.

3.1.

Dual monopoly of the state over the product market in rural area

On the product market in rural area of our country, on one hand, the state (and its affiliated organizations) is the largest buyer of agricultural products, forming the buyer monopoly over the agricultural product market, and on the other hand, the state is also the supplier of primary agricultural production materials, forming the seller monopoly over the agricultural production material market. The dual monopoly of the state not only narrows the space of farmer households’ operational policy making and obtaining profit, but also increases the total cost of agricultural products, making the agricultural 70

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products of our country increasingly lack international competitiveness on the whole. With the implementation of household contract responsibility system, the farmer households have the autonomy to make production decisions on the farmland, but in the circulation and transaction of mass agricultural products, especially grain, cotton and so on, they are still subject to greater restrictions. Though our country has abolished the system of state monopoly for the purchase and marketing of grain which lasted over 30 years in 1985, so far the state orders up to 50 billion kilograms of grain every year, accounting for about 35 percent of perennial commodity grain, and plus the part of negotiated purchasing, the purchase quantity under its control is enough to enable it to become the buyer monopoly on the grain market. If the farmers had some “freedom” to sell the commodity grain after purchase by the state on the farmers’ market, the purchasing of cotton is entirely controlled by the state and its affiliated organizations. As a result, when the market-oriented supply and demand and pricing of industrial goods is basically realized, the farmers have to face the buyer monopoly over primary agricultural products with considerable characteristics of planned economy. In order to safeguard the buyer monopoly over the agricultural product market, the state has been trying to find various approaches and ways of market and non-market (forced). For example, increase the purchasing price of grain17 ; link the ordering of grain with parity fertilizer, diesel and forward purchasing deposit, to implement material reward for the sales of cotton; change the contracted purchase of grain and cotton to the state purchase that has legal obligation towards the farmer households; upgrade the negotiated grain purchase to “second ordering” in responsibility; implement the “rice bag” provincial governor responsibility system; guarantee the function of “main channel” of state-owned grain enterprises in grain purchase, strictly prohibit private businessmen and other enterprises from directly going to the rural areas to purchase grain; and so on. The state is not only the buyer monopolist on primary agricultural product market, but also the seller monopolist on agricultural production material market.At present, the 17 In 1994, the state increased the ordering price of four grain varieties (wheat, rice, corn,

soybean) to RMB52 per 50 kilograms, increased the comprehensive purchasing price of ordered grain by 40 percent; in 1996, the price was increased by 42 percent on the basis of that in 1994 (Song et al., 2000).

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institutional barriers to entry exist in agricultural material production industries such as seeds, fertilizer and pesticide in different degrees; although the state cancelled the instructive production plans and unified distribution and purchase plans of domestic fertilizer in 1998, 17 large-scale fertilizer plants are still under control by the central government, and the price of their produced fertilizer must be floated limitedly according to the state-set guidance price, while the pricing of fertilizers from other manufacturers is also under regulation and control by local government; the fertilizer import is under franchise operation by China National Chemicals Import and Export Corporation and China National Agricultural Means of Production Group Co., Ltd.; except for a few products are self sold by the manufacturers, the sale of fertilizer and pesticide is mainly under control by China NationalAgricultural Means of Production Group Co., Ltd. and its sales networks (grassroots supply and marketing cooperative), “three stations” of the Bureau of Agricultural Economics (agricultural plants protection station, soil and fertilizer station and agricultural technology extension station). The dual monopoly of the state is nothing but a residue from the era of traditional planned economy. The government repeatedly declares that, this measure intends to iron out the price fluctuation of agricultural products, stabilize the price of agricultural materials, guarantee the interest of farmers, but the results go by contraries. The actual situation is that, the increase of purchase price of agricultural products leads to the harvest of grain and cotton; with the increase of grain purchase, the finance is overstrained on one hand, and on the other hand state-owned grain enterprises suffer greater loss, thus bringing down the purchase price index. Therefore, after the disintegration of unified purchase and marketing system, the buyer monopoly of the state over the agricultural product market not only weakened, restricted and infringed the farmer households’autonomy in production and operation policies, thus distorting their market response, and plus the time delay of adjustment and “limited rationality” of policy maker, the state pricing often deviates from the market balanced price. And the deviation of cotton price leads to the obvious fluctuation in cotton stock and net export of the state, causing our country’s “cheap sale and expensive buy” behavior on international market (Lu, 2000). This situation not only seriously lacks efficiency, but also aggravates the fluctuation of international market, and conversely, Chinese farmers are still the final undertakers of damage at last.

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Similarly, the seller monopoly of the state over the operation of agricultural materials has not brought benefit to the farmers either. During the 15 years from 1985 to 1999, there are only five years in which the purchase price index of agricultural products exceeded the price index of agricultural production materials; especially in the 1990s, despite the year of 1994, the former is lower than the latter. Since the price of agricultural products constitutes the main source of farmer income, while the price of agricultural production materials is the major part of agricultural cost, the net income of crop farming shows the tendency of decline under the dual monopoly of the state. On one hand, the dual monopoly of the state leads to excessive fluctuation in the price of agricultural products. During the inflation period, the price of agricultural products usually rises faster than rural industrial products, while during the deflation period, the price of agricultural products drops faster than rural industrial products. The maximum drop of price index of agricultural products is up to 52.1 percent, while that of rural industrial products is only 21.4 percent. On the other hand, the dual monopoly of the state leads to the tendency of increasingly widened “scissors difference” between industrial and agricultural commodity prices in recent several years (as shown in Table 1). Monopoly surely leads to the loss of efficiency. Especially, the state monopoly under institutional barriers to entry not only constrains the growth and development space of civil economy including farmer households, but also causes the monopoly organizations such as state-owned grain enterprises, supply and marketing cooperative, agricultural materials companies to stay in low-efficiency operating status for a long time. Since long ago, the state-owned grain enterprises have been relying on “benefiting from both sides” (farmers on one side, state finance on the other side), which aggravated the common shortcomings of state-owned enterprises such as poor management, lack of vitality and inferior efficiency, and the phenomena which infringe upon farmers’ interests such as reducing the quality and price, deducting the weight, etc. exist in most grassroots grain stations and grain administration stations during grain purchase (Hu, 1999); As for slow cashing of money for grain and bad service attitude became “routine”. The supply and marketing cooperative is cooperative enterprise in name, but official agency in actuality. In the purchase of agricultural

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Main General Price Indexes in Rural China (the previous year is taken as 100).

Year

CPI in country

Price index of agricultural means of production

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

107.6 106.1 106.2 117.5 119.3 104.5 102.3 104.7 113.7 123.4 117.5 107.9 102.5 99.0 98.5

104.8 101.2 107.0 116.2 118.9 105.5 102.9 103.7 114.1 121.6 127.4 108.4 99.5 94.5 95.8

General purchasing price index of farm products

General rural retail price index of industrial products

General price parity index of industrial and farm products (the general purchasing price index of farm products is taken as 100)

108.6 106.4 112.0 123.0 115.0 97.4 98.0 103.4 113.4 139.9 119.9 104.2 95.5 92.0 97.8

103.2 103.2 104.8 115.2 118.7 104.6 103.0 103.0 118.1 117.2 114.7 106.2 101.1 97.8 97.3

95.0 97.0 93.6 93.7 103.2 107.4 105.1 99.7 98.6 83.8 95.7 101.9 105.9 106.3 110.8

Source: China Rural Statistical Yearbook (2000), China Statistics Press, 2000, p. 190.

products and the supply of agricultural materials, it acts as the implementer of state monopoly on both sides. Its affiliated cotton processing enterprises also become owners of special and vested interests under the monopoly protection. The state monopoly will eventually cause damage to the state itself. The annual payment of huge-amount purchase capital and loss of agricultural products collection and storage enterprises are increasing the financial burden to the state. To take the state-owned grain enterprises as an example, by the year of 1998, the 6-year accumulative loss is up to RMB120 billion. The pressure may possibly be converted into the motive force of reform, but cannot determine the direction of reform. Faced with the aggravating contradiction between supply and demand of cotton, the state did not stick to the original reform strategy, but returned to the more rigid monopoly system with. “three not relieve controls” (not relieve controls of cotton operation, 74

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not relieve controls of cotton market, not relieve controls of cotton price) and “two unifications” (uniform prices set by the state and uniform operation by supply and marketing cooperative) in 1994.18 Some people pointed out that, the reason why the state implemented the approach of “lift controls when loose, apply controls when tight” in adjusting the demand and supply of cotton is that the state “attaches importance to the market’s effect on regulation of surplus, but has no great belief in market’s effective regulation of relative shortage; the state is market-oriented when there is surplus, and exercises monopoly when there is shortage” (Lu, 2000, p. 9). In fact, this is not merely a problem with the way of thinking, and relieving controls when it is loose, i.e. promoting market-oriented approach when there is surplus, is actually letting the farmers assume the risks and losses due to price drop caused by the government’s previous policies, while applying control when it is tight, i.e. returning to monopoly operation, means that the government attempts to monopolize the benefits from price rising. In fact, the monopoly group’s maintenance of its vested interests is one origin of affecting the above thinking and decision-making pattern and causing advance and retreat in the reform of agricultural product circulation system. In 1998, many years after the grain and cotton becoming relatively abundant, our country launched the grain circulation system reform again, practicing the separation of government administration from enterprise management, the separation of reserve from operation, the separation of central government responsibility from local responsibility, and the separation of new financial accounts from old ones, thus improving the grain price mechanism.19 We should say that it is a wise choice to separate the reserve from operation, and bring the state-owned grain enterprises to the market, which is the necessary road for the grain reform of our country. However, taking the interests of state-owned grain enterprises and the state’s financial pressure into account, the specific approaches to achieving this target is the so-called “three policies” which focuses on the implementation of sale at 18 Refer to the Proposals on Reform of Cotton Circulation System submitted by the State

System Reform Committee, approved and transmitted by the State Council in May 1991, and the Circular of the State Council on Doing Well the Work of Cotton Purchase and Sale in 1944 issued in September 1944. 19 Refer to the Resolution of the State Council on Further Deepening the Reform of Grain Circulation System adopted in April 1998.

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favorable price in grain collection and storage enterprises. Obviously, in order to thoroughly realize the sale at favorable price, it is inevitable that the state is required to further monopolize the control of grain source and sales channels (e.g. purchase grain without limitation at protective price, strictly prohibit private businessmen from directly going to the rural areas to purchase grain, etc.). This method for eliminating monopoly by strengthening monopoly instead of competition is not only ridiculous rationally, and the results from it must be one’s own wishful thinking. Notwithstanding whether the sale at favorable price can be realized, purchasing grain without limitations at protective price will cause further rise of the proportion of grain storage of the state, deterioration of the quality of stored grain, and increase of the financial expenditure for grain collection and storage. In the meantime, it also makes the low-efficiency nature of state-owned grain enterprises cure. Grain and cotton are really important materials that concern the national economy and the people’s livelihood, so it is not only beyond reproach but also very necessary for the state to maintain a certain proportion of strategic reserve and regulate the stability of price. However, this cannot become the excuse for the state to implement dual monopoly. If the state’s plan of selling grain at low price in the beginning of reform must be guaranteed with corresponding source of grain, thus, when the final consumption of grain and cotton has gotten ride of the “rationing” control, this dual monopoly loses any positive significance. Therefore, it is far from enough to simply open price, separate functions, expand operation channels under the pattern of state monopoly (e.g. allow the supply and marketing cooperatives and its cotton enterprises, cotton processing plants and state-run farms affiliated to agricultural departments, textile enterprises with certified qualifications to directly purchase, process and operate the cotton). The institutional barriers to entry in the agricultural products circulation field must be broken, the state and its affiliated agencies should gradually withdraw from the process of agricultural materials operation and grain and cotton purchase, and realize the price regulation through market throughput of reserve grain and cotton. Only in this way, the state’s dual monopoly pattern can be thoroughly changed, giving back the farmers a complete and non-restricted decision-making power in production and operation.

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It should be pointed out that, the state’s buyer monopoly over agricultural products and collective land right is an important factor for the restrictions on the farmer households’private decisions, and they are closely related with each other: the collective land right ensures the operation of the state’s buyer monopoly in some forcible ways (legal responsibility system) and at lower transaction cost; the state’s buyer monopoly becomes the real reason for persistence of the collective land right. This is the key to understanding the various problems in the rural areas. Unless the state’s buyer monopoly is broken, no fundamental change would happen in the collective land right.

3.2.

Government regulation on rural financial market

In the rural areas of our country, compared to labor force, land is also rare and capital is insufficient. If the rarity of land is related with the growth of rural population and the limitations of natural conditions, the rarity of capital is due to the institutional factor to a large extent. An important aspect is that the comprehensive regulation of the government on rural finance deprives and restricts the autonomy of financial policies of farmer households and enterprises. In the rural areas before the reform, under the people’s commune system, on one hand, since the farmers almost have no private assets except for some simple production tools, they can only participate in the collective production and distribution basically and have no rights and needs of investment and financing; on the other hand, all the rural financial agencies belong to the state and collective, and do not provide credit to individual farmer households, the farmer households’ financial policies and their relationship with financial agencies are just represented by simple cash deposit, hardly allowing any financial transaction to happen, and there is seldom fund flow among farmer households. Since the reform, the farmers’ private property right has been established, and the farmer households have become independent property owners and production operators, so the decision-making power of investment and financing is restored accordingly, and with the development of production and the increase of income, the demand of capital is also on the rise constantly. In the meantime, rural banks are restored too, and the rural credit cooperatives successively implemented the reform

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centering on the restoration of “three characteristics” (i.e. massiveness in organization, democracy in management and flexibility in operation) and reform around management responsibility system, with objects of loan changed from collective to farmer households as the core. If the investment and financing policies of farmer households in the 1980s were mainly centered on the implementation of land household contract responsibility system, the credit activities of rural financial agencies are mainly in supporting of the demand of yield and price increase of agricultural products, then in the late 1980s and the early 1990s, with the improvement of agricultural productivity and the adjustment of rural economic structure, the township enterprises and the second and third industries in the rural areas have been developed rapidly, the focus of rural financial activities is shifted from agriculture to non-agriculture, and played an important role in supporting the development of non-agricultural industry, and the rural capital supply and demand also shows the tendency of net inflow. All of this is closely related with the expansion of the farmer households’ production and operation policies, especially the expansion of the scope and power of the financial policies. The situation at that time was as follows: on one hand, since the local government can take advantage of reversed transmission of the pressure for easing monetary condition to increase the currency issuance, plus the warranty of township government and its officials, the majority of capital flows to the township enterprises, and solves the capital problem of establishing township enterprises, thus an important characteristic of the development of township enterprises is liability operation (Zhou, 1997). Meanwhile, since the grassroots government offers support in the aspect of land and capital and provides operational convenience, the township government has a certain proportion of stock right in the property right structure of the enterprises (Chen, 2000). On the other hand, with the development of diversity of economic principal and diversification of economic structure, the financial market and financial activities are required to follow suit. Since the many-year official operation of credit cooperatives cannot meet the requirements of rapid development of farmer households and township enterprises on the financial services, a large number of civil financial agencies emerged, e.g. rural cooperative foundations, township enterprise foundations, farmer savings unions, etc., which not only provide a part of capital support for the local economic development, but

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also becomes the primary capital source for the development of township enterprises, especially individual and private enterprises.20 By the middle of 1990s and later, with the consolidation of “unauthorized fund raising and establishing financial institutions and conducting financial businesses without due approval”, the government constantly strengthened the regulation on the financial industry, and financial policies tend to be centralized, which is more obvious in the rural areas. Firstly, the agencies have shrunk. The newly established shareholding banks and non-bank financial agencies almost have no branches in the rural areas, and the agencies of state-owned commercial banks at levels below county are all cancelled, the rural cooperative funds are all shut down, there is almost no such non-government agency which offers small-amount credit, and civil finance is illegal, so the rural financial agency is only credit cooperative remained. Besides, the rural credit cooperative has its own defect (Cao, 2001). Firstly, the cooperative finance in name is official finance in actuality, in 1996 the credit cooperatives are disaffiliated administratively relation from the agricultural banks, and their business management and financial supervision are undertaken by the county-level credit cooperative and central bank respectively, since the central bank does not treat it as cooperative finance, and performs more and more management over it, the credit cooperative becomes more and more dependent on the central bank, and its official characteristic becomes more and more obvious, in the meantime, the credit cooperative is not allowed to establish independent clearing system, as well as its business scope is limited (not allowed to operate in financial savings and building savings), the county-level credit cooperative shows no respect for the nature of cooperative finance and operational autonomy of the grassroots credit cooperative. Secondly, the operating mechanism is misfit and rigid, the rural credit cooperative blindly imitates the example of the state-owned commercial banks, unwilling to operate in agricultural loan and small-amount credit to farmer households, focusing the capital investment on industrial and commercial 20According to the investigation by Chen et al., among the loans of Chongqing Rural

Cooperative Fund (RMB10.448 billion), 35.9 percent went to farmer households, 42 percent went to township enterprises, 18.5 percent went to local governments, and 3.6 percent went to state-owned enterprises affiliated to the central government and municipalities, and in some counties and towns 70–80 percent of capital for regional development came from the loans of rural cooperative fund.

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enterprises, but without complete risk prevention; the capital source and capital utilization are not matched, with high cost of fund raising, and weak interest-bearing ability; in management, the cadres can only be promoted but not be demoted, the employees can only employ but cannot dismiss, the salary can only be increased but cannot be decreased. Thirdly, there are serious problems left over from history, e.g. the agricultural banks used to directly occupy the assets and capital of credit cooperative without returning, a large amount of capital cannot be claimed back under the intervention of local government, forcibly applying burden to the credit cooperative when cleaning up the cooperative fund, etc., placing it in unequal position in competition against the state-owned commercial banks. All of this deprived and limited the farmer households’ financial decision-making power to a large extent, squeezing their investment and financing policies within a very small scope, and making it have illegal nature, thus causing a series of serious consequences. (1) Being the only formal financial agency in the rural areas, the credit cooperatives’ assets quality and operating status are very bad. By the end of 1999, the proportion of credit cooperatives with capital adequacy ratio less than 8 percent was over 80 percent, and among the 13,000 rural credit cooperatives of the whole country, the proportion of insolvent ones is over 1/4. (2) As the only legal financial agency in the rural areas, the credit cooperative is unwilling and unable to grant loans to the farmer households, and the majority of farmer households’ capital demand is still supplied by illegal civil finance (see Table 2). This opens up opportunities for the blooming of high-interest loan. According to investigation, the occurrence rate of rural private lending is up to 95 percent, in which high-interest lending reaches 63 percent, and super-high-interest lending exceeding four cents’ interest rate is over 25 percent (Wen, 2001). Moreover, due to the special situation in the rural areas, the lenders of high-interest loan are mostly the cadres at town and village level.21 (3) The major function of credit cooperative is not to supply capital to the rural 21 The lenders and rural grassroots cadres are incorporated as a whole, which actually creates

a combination of private property and public right, Such situation is very popular in our country, and it is basically because of our insufficient protection of property right. The private right turning to public right is for seeking the protection by public right and expanding private right through it. This is possibly a huge curse in the future reform and development of our country. This viewpoint was proposed by Professor Shi Jinchuan when commenting on this paper.

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Composition of Capital Sources of Farmer Load (%).

Year

1985

1995

1996

1997

1998

1999

Loan from Banks or Credit Unions Loan from Cooperation Foundation Personal Loan Others

40

24.23 5.52 67.75 2.50

25.42 2.45 69.27 1.86

23.94 2.91 70.38 2.78

20.65 3.42 74.29 1.64

24.43 3.47 69.41 2.68

Source: Research Report on Rural China (2000), China Financial and Economic Publishing House, 2001.

areas, but to absorb capital from the rural areas, plus the deposit of postal savings without lending, and the net deposit of agencies of state-owned commercial banks at county level and below, therefore, in recent several years, the rural capital on the whole has been flowing out. Departments concerned once made estimation in this situation, and found out the annual net outflow is hundreds of billion RMB, which respectively accounts for 6.9–20.7 percent and 16.7–50 percent of the increased amount of total savings and loans of the financial agencies (2000.9–2001.9), equivalent to all the loans of the rural areas. As we all know, capital is the basic productive element, and investment and financing policies are the most important economic policies. If the investment and financing policies of farmer households are intervened and restricted, the decision-making power and selection freedom of farmer households is very limited. And the government’s strict control and excessive regulation on rural finance becomes an important factor for infringing the rights of farmer households and impeding the rural economic development. In recent years, although the shrinkage of township enterprises is related with market conditions, it has great relationship with the rural financial regulation. Here many problems need to be clarified. Firstly, some people hold contemptuous attitude towards civil finance, degrading it as “grassroots finance”,22 sufficiently showing the mental state of these theorists and managers. What is finance and how does it come into being? In a word, once credit can be transferred and traded, finance comes into being, which is the result of human cooperative order expanding over 22 Refer to China Economic Times in December 2001.

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the limitations of blood ties, while the spontaneously emerging “grassroots finance” is exactly the contemporary mirror image of market economy at the beginning of human origin, it is neither humble nor savage. Some people’s thoughts are stuffed with constructivism, thinking that a social economic formation of society can operate efficiently only after milling, gouging, casting and polishing, seeming to forget their ancestors, and even possibly knowing nothing about finance. If the civil finance is “grassroots finance”, is not the state-owned finance which cultivated and nourished by the government “potted landscape finance” in terms of its ability to survive and compete.23 It is very dangerous to entrust the entire wellbeing of an economic society to a few “potted landscape”. The commercial civilization developed in the traditional rural China was loaded with high-risk financial industry, the money exchange shop of Jin Province was also “grassroots” in the beginning of development, but its silver certificates can be extensively circulated to St. Petersburg towards the west and Kobe towards the east, which had very good credit and high efficiency, without any sheltering and protection by the state. How can today’s state-owned financial system with piles of messy accounts catch up it? With China’s formal entry into WTO, the financial industry has accelerated the pace of opening up, and the messages of foreign-funded banks entering and participating in equity come in succession, making breakthrough in Nanjing and Shanghai, foreign-funded banks have opened foreign-currency service to residents, and foreign-funded banks in Shenzhen and Shanghai have opened RMB service. However, no move has been made to domestically financial opening, private-running banks are still not allowed to enter. Recently, the government ordered to merge several private-running urban cooperatives and build a urban commercial bank, I went to investigate, the host asked me to make inscription, I wrote “keep true color of privately-owned finance, develop into first-class commercial bank” purposefully. However, the word “privately owned” touched the nerves of some officials, and the host called me hurriedly, requesting another inscription without the word “privately 23 In 1998, the government issued RMB270 billion special national bonds for increasing the

capital of wholly state-owned commercial banks to 8 percent, now it decreased to 5.7 percent, then the non-performing assets stripped by changing debt into the stock was RMB1300 billion, and the present non-performing assets of the banks increased to RMB1800 billion, accounting for 26.6 percent of bad assets.

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owned”. After 20 years of reform and opening up, in a province with the most advanced privately owned economy, it is ironic that such a strange thing should happen. Secondly, it is very necessary to strengthen financial supervision and guard against financial risk, but many people will connect the civil finance with financial risk, and the government and financial supervision authorities always worry about the civil finance. In fact, within a community, people are creditworthy and obey ethical constraints, or they can hardly live in the community. Of course, this does not mean there are no problems and risks in civil finance, some with too high liability ratio and some with too many bad accounts, recently the agitation of bank runs also happened in some places, but it is nothing if compared with huge bad accounts accumulated by the state-owned finance. Obviously, the present main problems and risks in China’s financial industry are not in the civil finance but in the state-owned finance. This is “the sword of Damocles” hung over the heads of Chinese people. This does not mean that there is no credit problem and financial fraud in the civilian world, but this absolutely cannot constitute the excuse for abolishing civil finance, just as we cannot give up market economy just because problems occurred in the market. In fact, even in developed and normal financial market, this situation is unavoidable. Moreover, the problems occurring in the rural civil finance are exactly the consequences of the government supervision authorities regarding it as illegal, so that besieges and chases as well as bans it. This is because that, in a market faced with punishment every day, the information asymmetry is much more serious than in normal situation, and the ethical risks thus incurred, especially the problem of adverse selection, are more serious. This has been proved by the theory of the winner of Noble Prize in Economics this year (Rothschild and Stiglitz, 1976). In fact, the credit problem with the government and its officials is more serious and with greater harm, which is the origin of the chaos of our market order and financial order, and the rampant swindling. For example, the rural cooperative fund is established and developed for operating the collective assets after the disintegration of people’s commune, now the authorities freely shut it down by the excuse of guarding against financial risk, which itself is a behavior of infringement and being not creditworthy. Moreover, the result of government regulation is actually the creation of a profit-making space, and the stricter the control is done, the greater the

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profit-making space will be created, the underground finance will be more actively, and the more counterfeit or poor-quality commodities will appear. Thirdly, the blooming of rural high-interest loan is the price for the government’s financial regulation. The rural economic development needs accommodation of money, but state-owned banks seldom grant loans to the rural areas, and credit cooperatives cannot meet the financing demand of rural households, so private lending is developed naturally, and highinterest loan is inevitable too. The interest rate of high-interest loan is up to four and five cents because there is risk, which is not only the normal operation risk, but also includes political risk. Since the government does not allow the legal existence of private lending, thus when determining the interest rate, the lenders will certainly take this risk into consideration. Despite such high interest rate, people still borrow, and the transactions are voluntary, because there is huge market demand. Therefore, when the front door is closed the side door is chosen, and when the right path is blocked the unorthodox path is chosen. Of course, private lending is not necessarily unorthodox, and state-owned finance is not necessarily right path. The rural areas cannot get financial service, small and medium-sized enterprises cannot obtain formal financial support, and large and mediumsized enterprises also need introduction of nongovernmental investment. Therefore, civil finance really has the necessity and conditions for existence and development (Wang, 2001). Though high-interest loan is unorthodox path, there is soil for its existence and development, and the government cannot ban them by an order, unless there is any substitute. It is better for the government to acknowledge its existence and allow its development, while standardizing and supervising it in its development than to ban it by an order, doing such foolish things beyond its capacity. As long as all kinds of formal finance and civil finance are developed, and can fully and conveniently meet the financing demand of rural economic development and farmers’ living, the high-interest loan will disappear naturally (Zhang, 2001). The agriculture may be centered on cooperative finance in the future, but in the present rural China, civil finance is still the main channel. It is horribly ironic that a formal finance only has capability of meeting 1/4 financial demand to prate about main channels. Finally, civil finance will inevitably encounter many problems during development, with certain risks, just as rural cooperative fund before its

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closure. The key is to find a solution. The existing solution is to just close down. In fact, this is the simplest but the most foolish approach. None of the problems thus incurred is solved, some are transferred, e.g. bad accounts are transferred to rural credit cooperatives; some are more serious, e.g. vacancy of rural financing channels. Actually, the problems happening during development can only be solved during development, and the problems occurring in market competition must be solved in market competition too. To solve the problems in market competition with the approach of government regulation will only screw things up. Especially, the government never gets good results from radical response. The retreat and repetition of grain supply and marketing system reform in 1994 is likewise, and closing property right transaction center and rural cooperative fund is likewise too. The nature of such situation is the infringement of public policy on private policy, and origin is subject to the fact that the government has excessively high power of free discretion and without any restriction.

3.3.

Policy discrimination against farmers

The basic function of governmental behavior and public policy is to protect the right of private choice and the decision-making freedom, whose arrangement and operation must conform to the principle of impartiality, i.e. principle of non-discrimination. However, in our policy practice, there are a large number of discriminative provisions, especially being serious in rural areas. This is direct infringement upon individual equal right and private decision-making freedom. Among all the discriminative policy provisions, the discrimination against farmers’ identity and the restrictions on their behavior may be the most obvious and unreasonable. Such policy began in the 1950s. In 1953, the Administration Council issued the Order on Practicing Planned Purchase and Supply of Grain according to corresponding resolution determined by CPC central committee, then implemented the coupon management of grain supply; in 1958, Regulations of PRC on Household Registration Management and relevant supplementary measures were unveiled and implemented, and on this basis, a complete set of policy provisions and institutional arrangements which discriminates against farmers were formed, including labor employment, social welfare, education and training, etc. 85

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This is the price for establishing the planning economy system and promoting the industrialization strategy that gives priority to developing heavy industry. Since then, a high wall has been erected between the urban and rural areas, and the farmers were in a depressed and discriminated position without freedom of choice and decision-making right. Farmers could only be farmers forever, could only live in the rural areas, and could never jump out “farm door” unless they enlist as soldiers and get promoted, go to schools and be assigned jobs, or move to cities by marriage. The proceeding of reform and development of production have gradually disintegrated the foundation of these discriminative policies, and some of them are basically cancelled, e.g. grain restriction on farmers’ free flow; some of them are partially cancelled, e.g. allowing enterprises to recruit workers from the rural areas; some of them are relaxed, e.g. household registration system and relevant policies attached to it. If the prosperity in the early and middle 1980s was mainly due to the fact that the farmers obtained the choice freedom and decision-making right in the rural areas and agriculture, the high-speed economic growth in the early 1990s is related with some rights obtained by the farmers to leave the rural areas and enter the cities. In those days, the large-scale mobility of farmers used to be the liveliest scene throughout the land of China. Faced with some temporary phenomena of disorder at that time, the government launched a series of policies strictly for limiting the cross-region movement of farmer workers with the excuse of strengthening the management of the mobility of rural labor force, instead of dismissing rural labor force rigidly as in the period of planning economy.24 However, since these policies had little effect, the government started to implement policies intended for orderly mobility with organization and management.25 These policies were necessary and 24 Emergency Circular of the General Office of the State Council on Strictly Controlling the Outflow of Farmer Workers, issued in March 1989; Circular of Ministry of Civil Affairs and Ministry of Public Security on Further Controlling the Blind Outflow of Farmer Workers, issued on April 10, 1989. 25 Circular of Ministry of Labor on Printing and Issuing Re-employment Project and Firstphase Project of Rural Labor Force Cross-region Flow Ordering — “Urban-rural Coordinative Employment Program”, issued in November 3, 1993; Proposals of the General Office of the CPC Central Committee and the State Council on Strengthening the Work of Flowing Population Management, issued in 1995.

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achieved some progress, but their restrictions were very obvious too. With the change of economic situation and increase of urban lay-off and unemployment, it has become an important task for governments at all levels to implement the re-employment project. Although the central government and relevant departments proposed the policies regarding further reform of urban-rural separation system and promotion of urban-rural labor force market integration,26 many provinces and cities implemented various provisions that limit the entry of rural labor force into the city and work of migrant labor force in the name of managing the mobility, which still limit and infringe the farmers’ choice freedom and decision-making right. This situation not only complemented with the cyclic fluctuation of China’s economic operation, but also formed the interest contradiction between the central government and local authorities, between developed regions and underdeveloped regions as well as the confliction between policy formulation and policy implementation, meanwhile demonstrating behavior completely different from that of foreign local governments that welcome immigration of people. This is worth pondering over. Generally speaking, the urban and developed areas are the inflow areas of farmers while the underdeveloped areas are the outflow areas of population. Therefore, those restrictive and discriminative policies are formulated and implemented mainly by urban governments and governments in the developed areas. Song et al. have conducted a very thorough investigation and research in this field (2001), on which basis this paper makes some further explanation; firstly, there are restrictions on household registration. If the central government and some provinces and cities basically cancelled restrictions on household registration in small towns,27 large and medium-sized cities only loosened the restrictions a bit,28 far away from

26 Circular of the Ministry of Labor and Social Security, the State Planning Commission

and the Ministry of Agriculture on Further Unfolding the Rural Labor Force Development and Employment Trial Work, issued in July 2000. 27 Circular of CPC Central Committee on 1984 Rural Work, issued on January 1, 1984; Circular of the State Council on the Issue of Allowing Farmers to Settle down in the Towns, issued on October 31, 1984. 28 Circular of the Ministry of Public Security on Improving Urban Household Registration Management, issued in 2000.

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cancellation. Some regions have not thoroughly carried out relevant provisions on farmers’settling down in small towns, some carry out total quantity index control, and still some only exempt the supporting fees for township expansion for a few people, but a large number of cross-province flowing workers still cannot obtain urban residence certificate. In addition, most large and medium-sized cities have not positively implemented the policies that allow children to follow their parents, husbands to unite with their wives and the elderly to run to their children to settle down in the cities, so the farmers, especially those cross-province flowing farmer workers, are basically unable to settle down in large and medium-sized cities. Secondly, there are discriminations against employment. The rural laborers who enter the cities have encountered a series of unequal treatment in such aspects as job seeking, employment and management. To take Beijing as an example, since 1995, a series of regulations and policies have been established in Beijing, which limit the number of industries the migrant workers and businessmen can get engaged in to thirteen, and the number of job types to 206, most of which are hard, dirty, tiring, dangerous and toxic types that local people are unwilling to get engaged. In the meantime, for industries and job types out of the restriction scope, the employers are required to employ local people. For those that breach this without approval, the labor department can impose the maximum fine apart from ordering the dismissal. Since 2001, the restricted job types have been decreased to five, but the qualification threshold has been added, requiring the migrant workers to have schooling above the junior middle school level.29 Even worse, Beijing used to set up some resettlement and repatriation agencies against migrant workers, forcibly isolating and dismissing many farmers as “blind influxes”.30 Thirdly, there are discriminations against social security. Urban employees generally enjoy the five major insurances including pension, medical, unemployment, maternity and work-related injury; some towns 29According to the report of Beijing TV Station on December 4, 2001, Beijing cancelled the

restriction on household registration in the recruitment of workers, and give formal Beijing household registration to business owners investing in Beijing and paying annual tax over RMB1 million. 30 “Blind influx” is a phrase insulting human dignity and infringing upon human rights. Their personal rights cannot be guaranteed, and the methods of catching and repatriating them are exactly the same way to criminals. China Review once made in-depth discussion on Su Ping incident in Guangzhou, refer to “Law World” of China Review in August 2000.

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cover local rural labor force under pension and medical insurance in accordance with urban security standards and financial resources; migrant rural labor force generally enjoy no insurance treatment (except for work-related injury insurance for migrant workers engaged in highly dangerous work). From a practical sense, this kind of difference has its rationality, but the unequal urban and rural security treatment is a problem we have to face. Over the past few years, the government has improved the urban security level several times, thus continuing to expand and create this inequality to some extent. Finally, there are discriminations against education and training. Providing opportunities for education are important means and conditions for equal participation, but discriminations generally exist in education. There are schools that do not allow the children of migrant workers to get enrolled, or schools that add considerable boarding charge of varying amount, some “follow-up primary schools” run by farmer works are not recognized by local education authorities. Even being recognized they still cannot be brought into local education management, so that all problems are solved by teachers, students and parents, and the conditions for running school are very poor.31 This indicates that, only by allowing free mobility of labor force without allowing free migration of population, the policy discrimination against farmers cannot be eliminated. From the above discussion, we can see that our government has always been an urban government. Although the success of China’s revolution once depended on the support of farmers, who also have made great contribution and sacrifice to China’s construction and development, the farmers still have not obtained an equal position yet. The key to the backward situation of rural areas is due to the large number of farmers. This has become a common understanding. There are two approaches to decrease the rural population, i.e. giving fewer births and transferring to the urban areas. Problems exist in our policies in both aspects. The problem of giving fewer births will be discussed in the next section. Here we will focus on the problem of urbanization. Urban governments and governments in developed areas limit farmers’working and doing business in urban areas, and considering it as protecting the interest of urban citizens, but actually it is directly or indirectly infringing upon their rights 31 Hongkong Commercial News reported this issue with an article titled “Difficult Schooling

of Migrant Workers’ Children in Guangdong” on November 29, 2001.

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and interests consciously or unconsciously. Firstly, non-discrimination is a universal constitutional right. Since the government can breach the constitution, depriving and infringing upon the farmers’ equal rights arbitrarily, it also can infringe up the rights of urban citizens. This is the reason why infringement events incurred by the government and officials are fairly common now, and also the reason why the real concept of human right is weak in our society. Secondly, the farmer workers’ entry into the city is restricted, making their employment, residence, income and living highly unstable, which is an important reason for the high occurrence rate of crimes committed by the migrant farmers, so that form a serious threat to the safety of urban citizens. Obviously, preventing disorder by restriction is actually creating chaos. Thirdly, the migrant workers have made great contribution to the development of economy and society in urban and developed areas, so the discriminative behavior of urban governments and governments in developed areas is actually limiting and impeding the development of cities. Facts prove that, if a region or city has less restriction or the restriction is cancelled earlier, the urbanization progress is faster in that region or city, and the economic and social development there is more dynamic and creative. The situation in Zhejiang Province is the most representative. Though Zhejiang did not announce publicly, it is the region that first loosened the domicile control and employment restrictions in towns, and the region with the most developed private-running economy across the country. Therefore, Zhejiang’s development shows trends and characteristics different from other regions of the country. During the “ninth five-year” period, when the nationwide urbanization and non-agricultural tendency is slowly progressing, Zhejiang’s urbanization and non-agricultural tendency is rapidly progressing; when the farmers’income growth of the whole country and other regions is slow (26.2 percent), greatly lower than urban residents’ income growth (33.4 percent), Zhejiang farmers’ income growth is rapid (31.3 percent), exceeding the urban residents’ income growth (28.3 percent). Zhejiang’s income level is only second to Shanghai and Beijing in the whole country, and if taking the incomparable factors to cities into account, it is actually No. 1 in the whole country; when the export of the whole country and Guangdong province decreased this year, Zhejiang’s export grew rapidly; when the national economy was caught in

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The whole country

Urbanization

1980 1985 1990 1995 1996 1997 1998 1999 2000

7.8 13.5 3.8 10.5 9.6 8.8 7.8 7.1 8.0

198.39 23.71 26.41 29.04 29.37 29.92 30.40 30.89

Nonagriculturalization

1.8 5.3 9.0 4.6 4.3 3.8 2.2

Urban residents’ income

GDP

Urbanization

8.6 4.9 3.9 3.4 5.8 9.3 7.4

162.2 21.7 3.9 16.7 12.7 11.1 10.1 10.0 11.0

13.49 19.78 30.50 32.22 32.37 35.60 36.80 39.70 48.68

Nonagriculturalization

Farmers’ incomes

Urban residents’ income

64.05 71.03 74.94 84.12 85.31 86.26 87.35 88.22 89.05

6.1 3.8 4.7 5.6 7.8

1.1 1.6 5.3 8.0 9.1

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A Compare between Zhejiang and the Whole Country.

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Table 3.

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deflation after 1997, Zhejiang’s economy still maintained the growth rate over 10 percent (see Table 3). The above analysis shows that, the state’s dual monopoly over rural product market, overall regulation over rural finance and policies of discrimination against farmers are the several important aspects that restrict and infringe farmers’ choice freedom and decision-making power. They are related with and in support of each other, like several thick ropes, tightly binding the farmers’ hands and feet. This is the true origin of rural marginalization and backwardness.

4.

Rural Public Products and Farmers’ Burden

In the above paragraphs, we discussed China’s present rural problem from such aspects as farmer households’private decisions and the restrictions and infringement they suffer. In this section, we will shift to another angle and continue to discuss this problem from the aspect of rural public decisions and public products. In the theoretical summary of this paper, we once pointed out clearly that, public decisions and public products have different scopes, and as far as this paper is concerned, they are either national or regional; among regional public decisions and public products, there is differentiation of province, city, county and village. This differentiation is not only necessary but also important. And the government’s supply of these public products mainly represents the government’s productive function and redistribution function. The public products can be either supplied directly by production of the government and state-owned enterprises, or indirectly through financing of public budget. Due to the direct supply (production) and indirect supply (financing), natural monopoly and public ownership of public products can be done separately, so it is an important problem to decide whether it is directly supplied by production of the government or indirectly supplied (financing) and at which level the government financing is done. Our problem is that there is serious dislocation and reversion in this aspect. One important aspect is the problem of farmers’ burden, which entangles all the above problems with confusion and reversion.

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The farmers’ burden discussed in this paper refers to the sum of various taxes paid by the farmers (including hard labor). Before “changing taxes to fees”, formal tax items mainly include agricultural tax, tax levied on agricultural and forestry special products, tax per head on slaughtered animals, and fees paid by farmers for overall township planning and village reserve, etc. The agricultural tax is generally parity collected at proportional tax rate in accordance with taxed land area and perennial yield. The fees for village reserve include reserve fund, welfare fund and management fee; the fees for overall township planning include fees for school running at township and village level, family planning, preferential treatment to military dependents, militia training and building rural roads, in principle. These two kinds of fees are referred to as “three deductions and five charges” in short, and collected according to rural needs and in principle with certain limitation (the upper limit of proportion is 5 percent of per capita net income in the last year). The hard labor refers to the accumulative labor and voluntary labor contributed to public welfare undertakings. Beside the formal taxes, the farmers have to pay numerous other fees. Objectively speaking, the proportion of agricultural tax in the farmers’ burden is not high. The so-called heavy burden on farmers mainly refers to the “three deductions and five charges” and other incidental expenses paid by the farmers, which are too many and too high. To take Anhui province as an example, the agricultural tax of the whole province was RMB1.286 billion (actually collected amount) in 1997, and the amount of “three deductions and five charges” was RMB3.278 billion during the same period; the sum of agricultural tax and tax levied on agricultural and forestry special products is less than the amount of “three deductions and five charges” (as shown in Table 4). The more unbearable burden on the farmers comes from the arbitrary collection of charges, abuse of fund-raising and unchecked apportionment, which are called “three vices”. These numerous expenses are neither fixed nor stipulated, and come from various sources. The investigations shows that, besides the township government, the subjects of charging in some regions have expanded to such departments and institutes as township cultural stations, traffic stations, police sub-stations and land administration offices (Administrative Law Research Team of Law School of Suzhou University, 1997). Eighteen departments directly affiliated to Hebei provincial government altogether issued 56 documents concerning

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Agricultural Tax (in 10,000 yuan)

Special Local Product Tax (in 10,000 yuan)

Total (in 10,000 yuan)

Tax per mu (yuan)

Three Deductions and Five Charges [2] (in 10,000 yuan)

Tax per capita (yuan)

1993 1995 1996 1997

4906 4956 4968 4999

6206 6371 6384 6388

33471 76389 107551 128585

6580 37419 45245 63592

40051 113808 152796 192177

6.45 17.86 23.94 30.08

125365 217600 253095 327834

25.55 43.91 50.95 65.58

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94 Table 4.

Source: Research Group, the Finance Department of Anhui Province (1999, pp. 40) [1] 1 mu = 0.16473692097811 acre [2] “three deductions” (for public reserve funds, public welfare funds and management fees) and the “five charges” (charges for rural education, family planning, militia training, ruralroad construction and subsidies to entitled groups.)

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collection of fees from the farmers, involving 83 charging items; and the local governments of 19 counties in Shijiangzhuang city altogether issued over 100 documents concerning the burden on farmers, involving more than 800 items of fees, fines, fund raising and apportionment (Wen, 2000, p. 424). The above situation of farmers’burden is vividly described as “the first tax is light, the second tax is heavy, and the third tax is a bottomless hole”. The daily increasing burden will eventually lead to the farmers’ dissatisfaction and resistance. However, when the farmers refuse to pay the unreasonable fees, some regions will adopt such mandatory measures as cutting off the lighting circuit, ordering children to quit the school, fines, collecting articles instead of paying fines, restricting personal freedom and labor punishment (Administrative Law Research Team of Law School of Suzhou University, 1997). Some regions even caused serious incidents of injury and death (Research Team of Anhui Provincial Department of Finance, 1999). This deteriorates the strained relations between the cadres and the masses, and then causes the intensification of society contradiction. The state always places the problem of farmers’burden in an important position. According to statistics, from 1985 to 1996, the central government promulgated altogether 25 policies on alleviating the farmers’ burden through documents, leaders’ speeches and other ways; among which 19 policies were promulgated from 1993 to 1996, equals to promulgating 4.8 policies annually on the average (Wang et al., 1999). In recent years, the policies on alleviating burden and banning the Three Vices have been strengthened. The state has promoted the rural tax and fee reform, and adopted such measures as merging towns and reducing personnel. To take Anhui as an example, as the trial region for rural tax and fee reform, this province has organized the agricultural tax collection of 2000 according to new methods in most regions of the province, and adopted the reform scheme of “three cancellations, two adjustments and one gradual cancellation”: i.e. cancelling live pig slaughter tax, fees for township overall planning and rural educational fund raising, etc., which are administrative fees and governmental fund specially collected from the farmers; adjusting agricultural tax policies32 and collection methods of tax levied on agricultural 32 In other words, the amount of agricultural tax payable by the farmer households are

determined by taking the second-round land contract area as tax-calculating area, using the average unit area grain yield of the five years before 1998 as tax-calculating unit area

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and forestry special products; gradual abolishing the uniformly stipulated labor accumulation and voluntary labor, initiating collective production and public undertakings and the needed capital, practicing the “one project one discussion” system, and decided by villagers’ meeting or villager representatives’ congress through discussion, but the upper limit is RMB15.00 per person per year (Zhu, 2001). It is not difficult to find out that the above tax and fee reform has two targets: one is to restrict the collection of various fees in rural areas, and the other is to bring the original “three deductions and five charges” into the so-called formal and stable pattern. Specifically, the latter is to incorporate the fees for township overall planning into the agricultural tax, while changing the village reserve to the additional agricultural tax. Seen from the present situation after experimenting, “changing fees to taxes” has taken certain effect in alleviating the farmers’ burden. According to the investigation on ten towns in Anhui Province conducted by Zhu (2001), after the tax and fee reform, the burden is alleviated by RMB29.70 per person on the average, and RMB17.90 per mu on the average; this does not include the exempted fees for educational fund raising and various arbitrary charges and unchecked apportionment. However, the tax and fee reform aroused some new problems too. Firstly, the income of village-level organizations decreased substantially (up to 63 percent on the average), seriously affecting the proceeding of work33 ; secondly, the township income decreased (by RMB178,000, with 10 percent of decrease on the average), directly affecting the payment of salary for the personnel supported by the yield, taking 7 percent as the upper limit of region-difference proportional tax rate, and the national grain purchasing protective price as tax-calculating price; and determining the agricultural tax payable to the farmer households and additional agricultural tax is levied with 20 percent of agricultural tax as the upper limit, and treated as village reserve; stipulating the agricultural tax and additional agricultural tax must remain unchanged for several years, which are deducted by the grain stations when the farmers sell their grain. 33 Here, the decreased income of village-level organizations only refers to the difference between the original village reserve and the present additional agricultural tax; if take the village-level income returned from the original fees for township overall planning (as stipulated, “the fees for township overall planning belong to all farmers within the range of collective economic organizations, mainly used for non-governmental undertakings assisted by the state”) into account, the extent of income decrease would be larger. Obviously, the scheme of tax and fee reform demonstrated the undue emphasis on township interests and infringement upon the interests of village-level organizations.

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government finance, especially the teachers (seen from the account, the salary of primary-and-middle-school teachers accounts for 44.8 percent of total expenditure of township government on the average, and 75.2 percent of total amount of salary for the personnel supported by the government finance); finally, “changing fees to taxes” change the management fees, etc. into taxes, depriving the democratic rights of villager autonomous organizations and farmers to a certain extent. The problems caused by the rural tax and fee reform and the suspension of reform require us to make in-depth reflections on the farmers’ burden and its origin from the perspective of rural public decisions and public products. Among the public products provided by the government, those with national scale and global property should be decided and provided by the central government and those with local scale and regional restrictions should be decided and provided by different regions. Our current problem lies in the confusion of such differentiation in many aspects, and in the reversion of the relationship therein. For example, national defense and security, foreign affairs, basic legal system, basic research, basic education, basic medical treatment and family planning, etc. are national public products. If there was no dispute in theory over national defense and diplomacy, basic legal system and basic research, and the expenditures for preferential treatment for families of servicemen and martyrs and militia training were actually undertaken by the local government and farmers, then there is discrepancy over the basic education, basic medical treatment and family planning, etc., and in practice these are all or partially provided by local government, and undertaken by the farmers. As far as education is concerned, basic education is the basic way and important condition for creating equality, involving the long-term peace and order as well as long-term interests of the state, so it is a national public product and should be provided by the central government. This is the origin of compulsory education. But higher education is to meet the needs of personal development and self-realization, which is individual decision and choice, so either the school or students should take responsibility independently. The government should not use the money from taxpayers to support personal development beyond equality needs. However, in our country the case is seriously dislocated, and the present basic situation is that, university

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education is controlled by the central government, middle school education is controlled by provinces and cities, and primary school education is controlled by counties and towns. The central government undertakes the burden of university education that is originally not its responsibility, but pushes the burden of primary and middle school education to the local government. Since over 2/3 counties and towns of the country are in deficit, and education expenditure accounts for approximately 60 percent of the total expenditure of the counties and towns, therefore, on one hand the county and town-level finance is unable to support education, and the phenomena such as delay to pay salary for teachers and interception of educational fund has become general, while on the other hand asking for money from students and their parents, fund raising, apportionment and collecting fees in disguised way happen repeatedly. It is thus obvious that, a large proportion of farmers’ burden is transferred from the central government. If the farmers’ burden were to be really alleviated, the Law of Compulsory Education should be truly implemented, and the central government should undertake the function of financing for basic education. This will promote the realization of equality, improve the county and township financial situation, truly alleviate the farmers’ burden, support the development of rural and backward regions, and radically change the financial operating mechanism. As for university education, the financial support of central government would not have any big effect, and will cause a new kind of policy discrimination. In fact, the government does not have to supply any money, and it is enough to return the decision-making power to the school and individuals. As far as medical care is concerned, it has the same property and situation as education, and should be divided into general medical treatment and basic medical care. The former is like higher education, and should be decided and chosen by individuals, and also produced and supplied by individuals; the latter is not only a public product but also a national public product, so it should be financed by the central government. This is because that, the basic medical care not only concerns the improvement of labor force level, but also has huge social benefit beyond the return on personal investment, which is the basic precondition for giving full play to personal potential and realizing equal opportunities of personal participation, and also an important aspect for anti-poverty strategy and achieving

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the “human development” objective (Zhu, 2001). However, we now regard the basic medical treatment as public product of local community, and provided by the township government’s financing. But due to financial difficulties, the township government either apportions to farmers or gives up their responsibility, and the result is the decline of rural medical care and health work and the deterioration of poverty condition. As far as family planning is concerned, it is also an aspect of passing the buck of the central government. As pointed out previously, the biggest problem of China is the huge population, mainly of too many farmers, but the control of population is not individuals’ rational choice, but the government’s requirement, which not only concerns the present social and economic development, but also concerns the future of Chinese nation, so it is a national public product, whose importance is no less than national defense and diplomacy. This is why the control of population is regarded as the basic state policy. If great achievements of family planning had been made in urban areas over the past 20 years, there is a big problem on rural population control, which not only causes the over rapid growth of rural population, aggravating the difficulty and burden of urbanization, but also reduces the qualities of the entire population. It is thus obvious that, the key of population control lies in the rural areas. One important reason for the failure of rural family planning is the adoption of the practice of “those above invite guests, those below treat”, and the central government does not undertake corresponding financing responsibility and cost, but pushes it to local township governments. And due to limited financial strength, the township governments either cannot afford or apportion to farmers. As a result, the farmers have to undertake dual cost: one is the opportunity cost of individuals’ fewer births, and the other is the cost of family planning work. This not only aggravates the farmers’ burden, but also confuses the public policy and administration. In order to implement the rural family planning well, the central government should undertake the function of financing for family planning, which is the most impartial and effective method. Income is always related with expenditure. If the expenditures of rural organizations or institutions show some rigidity, reducing income rigidly through administration or outer force is undoubtedly not lasting. Obviously, the main reason of aggravated burden on farmers lies in the constant increase of rural institutions and expenditures. For example, the institutions of towns

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have “six teams”, “seven offices” and “eight stations”,34 the organizational structure is bloated and overstaffed to rather serious degree. According to the typical investigation on three towns in Hebei province, the number of rural cadres and primary and middle-school teachers supported by farmers’ money was about 1,600, i.e. about 56 farmers supporting one cadre, and the salary for cadres and teachers apportioned to each farmer was about RMB45.00 (Wen, 2000, p. 437). Once there are institutions, there must be things to do, and when there are things to do, money must be spent. So, each department and various institutions will hang out the flags of “engineering campaign”, “projects” and “services”, etc., and take advantage of their respective administrative power or monopoly position to forcibly collect fees in order to meet the needs of daily bloating institutions and personnel. The key of the problem lies in whether these institutions are what farmers need and whether the farmers can decide on their establishment, cancellation and merging, scale and personnel composition. The answer is obviously no, or basically no. Therefore, as the bearers (subjects) of the burden of various taxes and fees, the farmers can never apply any material restriction on such expansion of institutions and personnel. The scale of rural institutions and their staff lacks endogenous restriction, which is one origin of the increasing burden on farmers. If connection was made with the supply of national public products undertaken by the farmers, although the farmers’ burden directly happens with the grass-roots organizations and cadres, but the root is in the top. Since there are different public decisions and public products at different levels and within different scopes, what are the public products of towns and villages and how to provide them? It is necessary to clearly discuss whether the existing tax-for-fees reform could solve the supply problem of rural public products.

34 The “six teams” refer to township government, party committee, discipline inspection

committee, people’s congress, CPPCC and Department of the People’s Armed Force, which belong to “chief township level” in the administrative order; the “seven offices” include such departments as finance, taxation, public security (court, procuratorate), industry and commerce, traffic, health (including quarantine) and grain administration office; the “eight stations” include agricultural technology, water resource, seeds, plant protection, agricultural machinery, animal husbandry (veterinary), food, fishery (aquatics), etc.

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Firstly, the village-level organizations are the organizations of villagers’ community autonomy, not administrative institutions and governmental organizations of the state. Whether the village reserves or not, how much it reserves and according to what it reserves as well as how it uses the reserve are all the rights of the villagers’ autonomous organizations, and no other person has right to intervene, especially the superiors and central government. Therefore, whether the reserve is collected at 5 percent of the net income in last year before the fee-to-tax reform or collected as additional tax at 20 percent of agricultural tax after the fee-to-tax reform, it is an obvious behavior of infringement. Since the villagers’ autonomy is practiced, the village directors are elected by villagers, while the “financial power” of village directors is not decided by voters, but by the central government. This indicates that, the government does not regard the villages as the villagers’ autonomous organizations, but as the governmental institutions of certain level to manage. Secondly, towns are governmental institutions of certain level, and let’s not discuss whether they are necessary to exist firstly, but starting from the existing facts. As mentioned previously, the originally stipulated township and village-level school running, basic medical treatment, family planning and militia training, etc. are not public products of the towns, and should not be provided by the towns. None of the “eight stations” is a governmental institute, and the health office which undertakes the work of general medical treatment and grain management office among the “seven offices”, are not governmental institutions either. They do not provide public products within the township scope, and their policies are private ones, which can be made through competitive market instead of non-governmental administrative methods. Placing them into the affairs of township governments is an infringement on private decisions on one hand and confusion of public decisions on the other hand. This is the origin of many messy things happening in rural areas. Thirdly, although the “six teams” and the financial department, taxation department, public security office, industrial and business management office, traffic management office, etc. perform the governmental functions, under the present system conditions and management level, especially in underdeveloped regions, separately setting them will do more harm than good. These institutions are unable to provide service as well as reduce

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the burden, and most of them directly infringe upon the farmers’ rights and interests. If these institutions are not streamlined, canceled or merged, even the central government undertakes the function of financing for basic education, etc., the expenditures appropriated will be intercepted level by level, and unable to reach where they are needed, thus unable to reduce the farmers’ burden. Finally, the problem of farmers’ burden is not only related with taxes and fees but also related with the supply of public products. The public products need to be provided under public decisions. The public products within the township scope, e.g. village roads, water supply, power supply, etc., are decided at the township level, instead of the upper government and state, and the state can give help but cannot implement forcibly. Importantly, only when during this public (configuration) decision-making process the farmers’ own preference are fully demonstrated and necessary supervision is made on the expenditures, can the Samuelson conditions for Pareto optimum configuration of two products (private products and public products) be reached or approached in reality (or the optimum combination of public products and tax revenue be obtained).35 Obviously, the reality of our country is far away from this. It is very doubtful whether the quality and quantity provided by public products match the farmers’ needs or payment of taxes and fees. Therefore, the government and its institutions do not fully withdraw from the private decision-making sphere, the farmers are unable to demonstrate their own preference and exercise the right to supervise during the public decision-making process for the supply of public products, which is another reason why the burden on the farmers of our country is aggravated. In summary, the theoretical confusion surely leads to mistakes in policy practice. On one hand, confusion is about the difference between public products and private products, and the difference among public decisions and public products at different levels. On the other hand, only focusing on the input of public products (taxes and fees) but ignoring the connection between input and yield is not only the origin of various rural problems at present, but also determines the “deadlock” and failure destiny of the rural tax and fee reform. 35 For Samuelson conditions for Pareto optimum configuration of private products and public

products, refer to the articles by Muller (1992, ch. 3).

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5.

Conclusion

This chapter sets up a theoretical framework for investigating the rural problems from the perspective of separation and interaction between private decisions and public decisions, and provides a theoretically and logically consistent explanation on China’s rural problems by combining history and comment, and thus further carries out deep introspection and self-criticism on the present rural policy. We think, the purpose of theory discussion is to explain the world, and appropriate theory explanation is the basis for effective transformation of the world and effective implementation of policy practice. In addition, the analysis framework of this chapter is not only suitable for investigating the rural problems but also capable of analyzing a series of other problems; the analytical method of this chapter also offers a possible way for investigating the function of property right.

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Farmers’ Tax Burden in Rural China: A Political Economy Analysis1

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Chapter

3

Tao Ran, Liu Mingxing, Zhang Qi2

Abstract This chapter attempts to reveal some stylized facts and features of taxes and fees in rural China based on a 10-province large sample rural survey from 1986–1999 (database of Fixed Observation Points of Agriculture Ministry). In contrary to many other people’s claim, we found the taxes and fees burden for the sampled farmers’households as a share of farmers’ income did not grow as fast as many people had imagined. The widening of rural income disparity and regressivity of rural tax rate are the key reasons for the emergence of rural tax issue. Based on this fact, this chapter gives a new theoretical explanation for the issue of farmers’ tax burden. We also compare our argument with alternative explanations and point out the barriers for reform of rural taxes and fees, for the establishment of rural fiscal system and for the reform of grassroot administrative system. Keywords: Taxes and fees burden; theory on governmental regulation; property right defects; fiscal decentralization; dualistic structure in urban and rural areas; conflict between population and land; democracy.

1 The authors really appreciate the precious opinions from Professor LinYifu, Professor Zhou Qiren, Doctor Shen Minggao and Doctor Hu Shudong. The authors shall be responsible for all omissions or mistakes mentioned in this paper. Hereby Liu Mingxing acknowledges the sponsorship by Ford Foundation and American National Bureau of Economic Research for this study. Contact: Tao Ran, [email protected]; Liu Mingxing, [email protected]; Zhang Qi, [email protected]. 2 Tao Ran (Center for Chinese Agricultural Policy, Chinese Academy of Sciences), Liu Mingxing (China Institute for Educational Finance Research), Zhang Qi (Institute of World Economics & Politics, Chinese Academy of Social Sciences).

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1.

Introduction

After many years of evolution, the issue of farmers’ tax and fee burden in China has become a serious concern for both government and ordinary people. As discussed in academic circles, the seriousness is reflected in four aspects: (1) the average farmers’ burden has been increasing rapidly in recent years; (2) the income of tax and fee has not translated into effective supply of public goods in rural areas, but only provided a hotbed for the expansion and corruption of grassroot government; (3) the constant increase of farmers’ tax and fee burden not only directly impedes further development of rural economy, but also becomes an unstable factor for rural area and even the entire society; (4) despite the central government’s repeated orders and injunctions to forbid disordered charge, the effect was not obvious.3 Even the newly launched rural tax and fee reform encountered many conflicts and problems from the very beginning. If there were no auxiliary measures and proper adjustment of the current reform plan, rural taxes and fees may increase again. This is very important, because similar phenomena have occurred many times in China’s history, i.e. soon after every reduction of tax and fee, the old problems reemerged and frustrated the tax and fee reform, thus leading to the so-called “The Law of Huang Zongxi”.4 However, our empirical analysis raises the questions for the first point mentioned above. The calculation results of inter-temporal sampling data of a large-sample farmers’ households in 10 Chinese provinces indicate that the ratio of average tax and fee burden for farmer households to rural net income has increased since 1990s, but the rate was only about 2–4 percent, which is not as serious as many people used to imagine. Nevertheless, due to the widening income disparity among different rural areas and the unequal tax and fee burden for rural residents with different incomes, the regressivity of rural taxes and fees in the late 1990s was more serious than it had been in the late 1980s and the early 1990s. The ratio of tax and fee burden to 3 The statistics shows that national ministries and commissions have issued 37 official documents on reduction of farmers’ taxes and fees burden (by Project Team of Academy of Macroeconomy Research, State Development Planning Commission, 2000). Song et al. have made detailed description of various efforts taken by central government to reduce farmers’ burden in 2000. 4 Please refer to Qin Hui’s comment on “The Law of Huang Zongxi” (2001).

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income constantly gets higher for the regions (groups) with less income. In other words, the seriousness of the problem about rural tax and fee burden is not mainly or not purely due to the increase of absolute quantity of tax and fee burden and average ratio (to income). The more significant reason is the increased regressivity of tax rate. The above findings are significant in many aspects. The most important aspect lies in reminding us of the apportionment of rural taxes and fees is not an isolated problem. It is closely related to farmers’income increase and widening of disparity among different rural areas, etc. Then, what on earth is the relationship between rural tax and fee burden and current situation (or predicament) of rural economy development? In other words, whether heavy rural tax and fee burden is the reason for stagnation of rural economic development or the slow rural economic development is the reason for increase of tax and fee burden? Or is there another common reason for rural tax and fee burden, slowdown of farmers’income increase and constant widening of interregional disparity? In recent years, the central government has promulgated a series of policies, attempting to speed up the growth of rural economy, reduce interregional disparity and lighten farmers’ tax and fee burden. But why are these policies not satisfactorily effective?5 What is the mechanism behind “The Law of Huang Zongxi”? Why is it so difficult to break up? Does there still exist growth space for farmers’ income, including income from agricultural production? Why grassroot governments of more impoverished regions have stronger tendency to breach the policies of central government, constantly raise apportionment of taxes and fees and have more serious corruptions? What is the dominant factor for the behavior model of these grassroot governments? What is the connection between this hidden factor with income disparity and apportionment of taxes and fees? Our empirical findings and the questions mentioned above prompt us to give a general theoretical explanation for the development of rural China over the past 20 years, especially for the behavior relationship and features of governments at different levels, increase of farmers’ income, widening of income disparity and variation of tax and fee burden at overall level and in internal structure. There are many obstacles during reform, and the reform of tax and fee system is difficult at every step. It is not known how to start 5 Please refer to the Appendix — A Brief Commentary on Current Situation of Rural Taxes

and Fees Reform.

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for many problems. This is also probably because we do not have a general theory. In our opinion, the various improper governmental regulatory policies are the key factors for causing the tax and fee problem in rural area and also the key to explaining the dynamic variation of income disparity among regions and farmers. They are also the key to explaining the behavior models of grassroot governments.According to this viewpoint, we tried to put all the observed phenomena into an integrated theoretical framework for analysis, and thus arrive at many meaningful deductions. The rest of this paper will proceed as follows. We will firstly give a simple introduction and historical review of rural tax and fee burden in China. We will then give a description of rural tax and fee burden based on a 10-province data between 1986 and 1999, pointing out some typical facts of rural tax and fee burden during the analysis period and their features. Based on the two steps above, we will put forward our own perspective and compare it with other perspectives on the rural tax and fee burden.

2.

Rural Tax and Fee Burden in China: History and Facts

In terms of time series, the tax and fee burden of Chinese farmers has obvious stage character.After the founding of new China, the government started to gradually implement Stalinist “catching-up” strategies that give priority to the development of heavy industry. For obtaining maximum resources from rural areas to support industrialization construction in urban areas, an economic system characterized by “state monopoly for purchase and marketing” and “people’s commune” was established in Chinese rural areas. As a result, until the market-oriented economic reform in 1979, collective economy still occupied absolute monopoly position in Chinese agriculture and rural economy. Since the traditional rural economic system cannot properly solve the problem of supervision and incentive in agricultural production, the Chinese agricultural economy grew very slowly, except for the early period of cooperative movement (Lin, 1991, 2000). During this period, the transparent tax and fee burden of farmers was mainly reflected by tax payment 108

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to the state. In fact, to stabilize the agricultural production of weak foundation, the state always implemented policies of light tax and stable tax. According to Regulations of the People’s Republic of China on Agricultural Tax issued in 1958, the national average tax rate was 15.5 percent. Because the yield for tax assessment at that time was lower than actual yield, the actual burden ratio of agricultural tax paid by farmers to actual yield (and output value), about 10 percent calculated as per yield and about 5.9 percent calculated as per output value, was obviously lower than the nominal tax rate. With constant increase of actual agricultural yield, the actual burden of agricultural tax for farmers was reduced year by year. It was 11 percent during the periods of the 2nd Five-Year Plan and the 3rd Five-Year Plan; 6 percent during the 4th Five-Year Plan; 5 percent during the 5th Five-Year Plan (He, 2000). In terms of agricultural tax only, the burden of farmers is quite light. Nevertheless, due to the low efficiency of agricultural production and the low level of agricultural yield, the comparatively low tax burden does not mean that farmers can enjoy more economic surplus. More importantly, under the system of “state monopoly for purchase and marketing”, in order to provide cheap agricultural products for urban industries and residents, the government assigned mandatory purchase tasks to farmer households directly, which became mandatory quota. While stipulating the amount of mandatory turnover, the government also stipulated the price. Only when the mandatory task is fulfilled can the farmers freely sell their agricultural products to other villagers, the state grain purchasing department or statecontrolled grain market. However, since the state has made the purchase to the maximum extent, the farmers have little extra products to sell (Lin and Yang, 1993). Mandatory purchasing from farmers was equal to levying taxes on farmers, so the actual tax burden of farmers was quite high.6 From 1978, Chinese government implemented a series of reforms in rural areas, including adopting the Household Contract Responsibility System in substitution of the Production Team System (and finally abolished People’s Commune), expanding rural product and factor market, opening 6 For instance, the average ratio of grain yield by farmers to total state grain yield was up

to 25.08 percent during 1954–1957; and during 1958–1961, this average ratio even reached 30.21 percent, of which this average ratio dramatically increased up to 37.71 percent in 1959 (Lin and Yang, 1995).

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the price of most agricultural products except for grain and cotton. To adapt to Household Contract Responsibility System, the distribution accounting method of community economic organization transformed from “threelevel ownership with the production team as the basic unit, unified management and unified accounting” to “accomplish task placed by state, keep enough for collective and then all remained belong to individuals”. The basic unit for taxation transformed from collective to individual farmer households. Farmers must bear diverse taxes and fees and other expenditures derived on this basis. Therefore, different from the situation under the People’s Commune System, the tax and fee burden of farmers became transparent. Specifically, the tax and fee burden of farmers consists of the following:

2.1.

State tax

This is some surplus labors turned over by farmers to the state for free, including agricultural tax, tax for special agricultural and forestry products, farmland occupation tax, livestock slaughter tax and some commercial and industrial taxes, etc.As pointed out previously, the proportion of agricultural tax to farmers’ income is not high. But different from the situation before reform, with the development of rural commercial economy, other taxes paid by farmers to the state increased year by year (see Table 1).

Table 1. Taxes Paid by Farmers to the State During 1996–1999 (Excluding Agricultural Tax and Tax for Special Agricultural and Forestry Products).

Year

Total amount of taxes (RMB1 billion)

Growth ratio (%)

Of which: Livestock slaughter tax (RMB1 billion)

Growth ratio (%)

1996 1997 1998 1999

1206.1 1308.0 1370.0 1449.8

— 8.4 4.7 5.8

17.2 19.1 21.3 22.4

— 11.0 11.5 5.2

Source: Quoted from Study on Issues of Rural Taxes and Fees Reform (draft version) by Project Team of Academy of Macroeconomy Research, State Planning Commission (SPC).

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According to the analysis of the State Planning Commission, rural, commercial and industrial taxes are deemed as a part of tax and fee burden for farmers. This will mislead the calculation of tax and fee burden for farmers, because the levied objects of many rural, commercial and industrial taxes and other taxes for non-agricultural activities are rural enterprises rather than the farmer households. For brevity, the burden of farmers discussed hereinafter only includes agricultural tax, tax for special agricultural and forestry products, farmland occupation tax, livestock slaughter tax and some commercial and industrial taxes targeted to farmer households.

2.2.

Local fees

A phenomenon with Chinese characteristics is that farmers must pay diverse fees charged by local governments and rural grassroot community organizations. Typical local fees are as follows: (1) Fees paid by farmers for overall township planning. Its main function is to provide fund for rural public goods and town-level administrative services. In the past period of People’s Commune, the demand of rural public goods was satisfied inside the commune and the needed capital was not included in the national public fiscal system. After abolishment of People’s Commune in 1983, town-level government was established to perform corresponding functions. Under the existing fiscal system, the capital allotted by higher-level governments is only enough for town-level governments to perform some basic functions. Other required funds have to be raised by town-level governments in their own governed rural communities. Under the current policies, the funds for school running, family planning, special government allowance, militia training and transportation development are allowed to raise within the town, i.e. the so-called “Five Pooling Funds”. (2) Fees paid by farmers for village reserve. Besides the fees paid for overall township planning, farmers also bear economic fees charged by villagelevel community organizations. In terms of administration system, rural community organizations are not governmental authorities, but they still take orders from their higher-level governments and carry these orders out. Current policies thus stipulate that village-level organizations are entitled to levy the accumulation fund, the public welfare fund and the management 111

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fee. The accumulation fund is used to construct farmland irrigation works, purchase productive fixed assets and found collective enterprises; public welfare fund is used to take care of “households enjoying the five guarantees”, provide allowance for destitute households and provide capital for other collective welfare undertakings; management fee is used to pay reward for cadres and management expenditure. In addition, farmer households must pay “contract fee” for allotted farmlands. These are so-called “Three Village Reserves”. (3) Social burdens like local fund raising, charges and apportionment etc., i.e. so-called irregular fund raising, irregular charge and irregular apportionment, which are called as “three irregular fees”. Though the state government does not publicly permit these fees, but they are charged in a shockingly wide scope. For instance, construction fee for road and school, insurance premium, registration fee for marriage, construction fee for housing, subscription fee for newspaper and magazines and so on. Some local governments and village organizations even force farmers to pay these fees via loans and take this opportunity to transfer collective liabilities to farmers. In some areas, local fees are far beyond the farmers’ ability to bear, e.g., registration fee for marriage is RMB600 in some local places, which is equal to 1/4 of farmers’ per capita pure income. Annual fees for a medium village is RMB3,000–4,000 and sometimes may be up to RMB8,000–14,000 (Project Team of Academy of Macroeconomy Research, State Planning Commission, 2000). (4) Penalty, i.e. punishment for farmers’ acts of indiscipline administered by local governments or village organizations, for instance, excessive birth. The government exercises strict control over birth and the punishment for excessive birth is severe. But, if farmers are able to afford sufficient penalty or bribe the officials concerned, they can have more children. In many cases, it is arbitrary to decide what act should be punished or what amount of penalty should be fined. It is an open secret to make income by such arbitrary penalty. For instance, in a village near Wuhan, if a second child is born within five years after birth of the first child, a penalty of RMB2,000– 5,000 shall be imposed. Most penalties are arbitrary decision. Besides the transparent items described above, farmers have to bear invisible burdens as below: 112

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(5) Currency equivalents, i.e. the so-called mandatory labor, including free labor for flood control, maintenance and establishment of irrigation system, construction of school and road, construction of reservoir, forestation, etc. In 1994, an average of per capita 16.4 working days was contributed in rural areas. In 1999, it increased to 18.2 working days. The number was even up to 23 working days in some years. If converted into cash, it was equal to per capita payment of RMB89.3 in 1998 and was 130 percent higher than in 1994. Some local governments had brought forward the appalling method of “paying money instead of labor”. The amount of “paying money instead of labor” was up to RMB6.4 billion in 1999, which was per capita RMB6.9 and each laborer had to bear RMB13.46 on the average (Project Team of Academy of Macroeconomy Research, the State Planning Commission, 2000). (6) Education fee. Rural residents must pay most of their education cost, which is different from urban residents. Although the state stipulates nineyear compulsory education (primary school and junior middle school), there is no sufficient education capital provided for rural areas. Therefore, many rural schools charge various additional fees besides the tuition fee by their own criterion, such as electricity and water fee, dormitory construction fee, school security fee, examination fee, etc. (7) Other invisible burdens, i.e. force farmers to sell grain products such as rice, corn and wheat to the state at a price lower than market price. In some areas, farmers have to pay water fee and electricity fee at a price higher than market price. For the burdens mentioned above, two points need to be emphasized: (1) if the taxes in our consideration exclude commercial and industrial taxes for individual non-agricultural households, the ratio of taxes directly charged by the state to the tax and fee burden of farmers will decrease substantially7 ; (2) compared to urban residents, rural residents not only have to pay more tuition fee and other education expenses for primary and middle school education, and also the education quality is much lower 7 During 1994–1998, the proportion of agricultural tax, tax for agricultural and forestry

special products, livestock slaughter tax and farmland use tax to total rural tax income is 23.15 percent, 27.81 percent, 36.95 percent and 39.88 percent respectively (Project Team of Academy of Macroeconomy Research, State Planning Commission, 2000).

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than in urban areas. Therefore, in terms of comparison, we could deem farmers’ educational expenses as a part of their tax and fee burden to a certain extent.

3.

Tax and Fee Burden of Farmers: Tax Rate is Regressive or Excessively Increased?

With survey data of more than 6,000 farmer households in 120 villages of ten provinces8 from 1986–1999 (excluding 1992 and 1994), we are able to analyze the trends and features of rural tax and fee burden in detail. We first give different definitions for rural tax and fee burden with different contents, including: FEE1, i.e. (agricultural taxes and non-agricultural taxes paid by individual farmer households9 + fees paid by farmers for overall township planning and village reserves + other irregular fees charged by local governments but not stipulated by the state with transparent order)/pure income of farmer households; FFE2, i.e. (fees paid by farmers for overall township planning and village reserves + other irregular fees charged by local governments but not stipulated by the state with transparent order)/pure income of farmer households; FEE3, i.e. (irregular fees charged by local governments but not stipulated by the state with transparent order)/pure income of farmer households; EDUFEE, i.e. tuition fees paid by farmer households for education and other expenses charged by schools/pure income of farmer households, which is slightly higher than tuition fees and other expenses charged by schools (about 1–2 percent). Since we only have tuition data after 1995, in order to compare the overall status of 1990s, we adopt EDUFEE and define total burden as TFEE = FEE1 + EDUFEE. Table 2 lists values of TOTALFEE, FEE1, FEE2 and FEE3 of each province in time sequence, from which we may find some interesting results. 8 These ten provinces include Shanxi, Jilin, Zhejiang, Jiangsu, Anhui, Henan, Hunan, Guan-

dong, Sichuan and Gansu. 9 It includes agricultural tax, tax for agricultural and forestry special products, livestock slaughter tax, farmland use tax and some commercial and industrial taxes paid by individual farmer households, but not includes commercial and industrial taxes paid by individual non-agricultural households, such as commercial and industrial taxes paid by township enterprises etc. This description is also applicable hereinafter.

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Farmers’ Tax Burden in Rural China Table 2.

Tax and Fee Burden by Province (%).

Year

FEE1

FEE2

FEE3

EDUFEE

TOTALFEE

Shanxi

1993 1995 1999

5.16 4.99 5.31

2.89 2.32 2.96

1.01 0.31 0.19

4.69 5.85 7.75

9.85 10.84 13.05

Jilin

1993 1995 1999

7.05 8.01 9.36

4.29 4.85 4.86

0.08 0.28 0.15

4.27 6.38 7.83

11.32 14.40 17.19

Jiangsu

1993 1995 1999

6.03 7.40 8.67

4.83 5.87 6.78

1.28 1.23 1.18

4.62 7.29 6.65

10.64 14.70 15.32

Zhejiang

1993 1995 1999

3.15 3.67 4.48

0.88 0.89 1.08

0.09 0.12 0.45

3.53 4.11 5.38

6.68 7.78 9.86

Anhui

1993 1995 1999

3.88 5.19 5.45

2.09 2.99 3.04

0.14 0.96 0.04

5.83 5.54 8.45

9.71 10.73 13.90

Henan

1993 1995 1999

5.31 6.29 7.32

3.50 4.15 4.87

1.41 2.01 1.12

5.13 5.57 8.08

10.45 11.86 15.40

Hunan

1993 1995 1999

6.20 6.26 8.63

3.92 3.88 5.11

1.33 1.42 1.73

6.39 6.57 12.93

12.59 12.83 21.57

Guangdong

1993 1995 1999

3.86 3.76 3.64

1.09 0.38 0.55

0.11 0.05 0.01

4.10 5.14 6.02

7.95 8.90 9.67

Sichuan

1993 1995 1999

6.39 7.00 10.04

3.55 3.63 4.27

0.23 0.62 0.98

4.44 5.44 8.66

10.83 12.43 18.70

Gansu

1993 1995 1999

6.98 6.14 7.44

5.12 3.37 3.27

1.07 0.50 0.39

4.66 4.08 6.27

11.64 10.22 13.71

Firstly, from 1993, the burden calculated based on TOTALFEE of each province has been on the rise. During 1993–1999, the burden increased from 7.95 percent to 8.90 percent in Guangdong; increased from 11.23 percent to 14.40 percent in Jilin; increased from 10.83 percent to 115

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18.70 percent in Sichuan; increased from 12.59 percent to 21.57 percent in Hunan. Secondly, further survey reveals that, the increase of TOTALFEE is mainly derived from EDUFEE growth rather than FEE1 growth (tuition fees and other education expenses, which are slightly higher than tuition fees). In 1990s, in terms of FEE1, the burden decreased a little in Guangdong, remained stable in Zhejiang and Shanxi and increased at different speeds in other provinces; in terms of EDUFEE, the burden increased from 4.10 percent to 6.02 percent in Guangdong, increased from 4.27 percent to 7.83 percent in Jilin, increased from 4.44 percent to 5.44 percent in Sichuan, increased from 6.39 percent to 12.93 percent in Hunan. In summary, the growth of FEE1 in those provinces with heavy tax and fee burden was not as rapid as people generally imagined, which was about 2 percent– 4 percent. If we accept the reality reflected by the data, then why did the tax problem got more and more serious in the late 1990s? It is in part because tax and fee burden shows obvious regressivity among provinces, i.e. undeveloped provinces bear heavier taxes and fees than those comparatively developed provinces. For instance, in the late 1990s, TOTALFEE of Guangdong and Zhejiang was about 7 percent– 9 percent; while in Shanxi, Anhui, Henan, Gansu, it was 11 percent–15 percent; for Sichuan, Hunan and Jilin, it was up to 15 percent–20 percent.10 Furthermore, except for the two comparatively developed provinces Guangdong and Zhejiang, local charges (represented by FEE2) of other provinces were more than half of the FEE1. However, in Guangdong and Zhejiang, taxes directly charged by the state (represented by TAX) were the majority of farmers’ tax and fee burden. It indicates that undeveloped provinces have more serious problem of local charges than the more developed provinces. Another reason is the regressivity of tax and fee burden among farmer households with different incomes. In order to contrast tax and fee burdens of farmer households with different incomes in detail, we calculate TOTALFEE of 1986–1999 and investigate the difference of burden among farmer households with different incomes. The brief results are listed in Table 3. 10As a comparatively developed coastal province Jiangsu is an exceptional case, which ratio

was just up to 14 percent–15 percent.

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Farmers’ Tax Burden in Rural China Table 3.

Tax and Fee Burden of Farmer Households with Different Incomes (Yuan, %). FEE1

FEE2

FEE3

TOTALFEE

Income (RMB)

1986

1999

1986

1999

1986

1999

1986

1999

4,000 6,000 8,000 >8,000

10.50 6.53 5.56 6.22 4.08 3.10 6.80 4.89 9.89 7.55 3.09 9.45 — — —

— 25.59 18.11 15.59 13.07 10.61 7.95 6.79 5.37 5.41 4.43 3.44 3.40 3.89 4.44

7.02 4.00 3.41 2.93 1.95 1.39 2.35 1.26 1.42 4.61 1.60 3.87 — — —

— 14.94 10.51 9.39 7.90 6.35 4.18 3.57 2.98 2.69 2.11 1.53 1.10 1.04 0.23

2.82 1.23 0.84 0.62 0.38 0.33 0.21 0.38 0.13 0.03 0.14 0.39 — — —

— 2.91 3.09 2.09 1.64 1.07 0.48 0.34 0.41 0.41 0.33 0.34 0.48 0.26 0.11

13.72 9.23 7.67 7.86 5.70 4.41 7.87 7.42 10.36 8.12 3.56 10.06 — — —

— 55.09 36.92 29.23 25.00 21.92 16.95 16.14 13.42 12.81 11.73 9.55 9.77 9.02 7.31

Note: “—” means that no matched farmer household sample is available.

As Table 3 shows, in 1990s, especially after 1995, the tax and fee burden represented by FEE1, FEE2 and FEE3 showed obvious regressivity. For instance, in 1986, FEE1 for farmer households with lowest per capita income (per capita income was lower than RMB200) was 10.5 percent, but it was 9 percent for the farmer households with highest per capita income (per capita income was higher than RMB4,000). In 1999, the figures became 25.5 percent and 4.4 percent respectively. If we put EDUFEE into calculation, the regressivity would be much more obvious. For farmer households with the lowest income, TFEE was 13.7 percent and 23.7 percent in 1986 and 1989 respectively, but in 1997 and 1999, the TFEE of the same farmer households increased to 68.7 percent and 55.1 percent. The direct reason for this phenomenon is that the income disparity among different rural areas and different farmer households has kept widening since 1990s, but the levying situation of rural taxes and fees did not change accordingly. In addition, the farmer households with low income mainly obtained their income from agriculture, so they were easier 117

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Tao Ran, Liu Mingxing, Zhang Qi Table 4. Income (RMB) 12,000

Income Level, Income Structure and Tax and Fee Burden (1999). Average Income (RMB)a

Income Structure (%)b

FEE1 (%)c

FEE2 (%)d

522.40 1,204.91 1,970.35 2,766.30 3,570.66 4,804.11 6,868.57 9,532.26 23,594.92

86.52 82.22 72.98 60.18 46.41 41.83 30.51 22.32 6.89

17.53 10.35 6.71 5.22 4.27 3.42 3.89 2.91 5.14

11.51 6.75 4.12 2.90 2.18 1.44 1.16 0.32 0.30

Note: a Per capita pure income. b The proportion of agricultural income to total operation income for farmer households. c,d The description is the same as hereinbefore.

to be affected by rural tax and fee burden. Moreover, the poorer the farmer households are the higher proportion of taxes and fees they had to bear. We can get a glimpse of this situation from Table 4. As this table shows, for the farmer households with lower income, the ratio of agricultural income to their operation income is higher and the tax and fee burden on them is heavier.

4.

Governmental Regulation and Rural Tax Burden

Obviously, it still seems too simple to attribute the tax and fee burden and regressivity issue to the enlargement of income disparity among different rural regions and farmer households, because the economic growth, income disparity and regressivity of taxes and fees in the rural regions may be just a series of associated phenomena that remain to be explained. In the basic framework of economics, the precondition for constant income growth is that the economic growth itself must fully follow the principle of comparative advantage. Admittedly, due to the different objective conditions in different regions, the initial economic growth level cannot be 118

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uniform. However, in the analytical framework of economic growth theory, the disparity of initial income and many objective factors is not that important, because the resource allocation effect of market will finally eliminate the interregional disparities.11 With constant economic growth and convergence of income disparity, the regressivity of tax and fee and even the problem of tax and fee burden should be alleviated to some extent. Therefore, in order to explain the increasing regressivity of rural taxes and fees, we have to first explain why rural income growth did not tend to converge. If the regions of high income get rich first because they follow the principle of comparative advantage, why could these regions do this successfully while others could not? What factors cause the “market allocation of resources and equalization of factor price” to move towards its opposite? As discussed above, in our opinion, the economic regulatory policies of the government play an important role here. We do not attribute the root of the problem to the lagging of rural democratic politics reform or outdated rural fiscal system, but emphasize that the diverse governmental regulations on rural society and economy are the underlying reason for those “unique phenomena” (including the problem of tax and fee burden) in rural China. Most regulations, i.e. the series of policies, tasks or targets issued by the state, are compulsory political tasks for local governments at different levels. Each regulation and its varying strength will directly impact the game behavior among local governments at different levels and farmers: higherlevel governments issue tasks and targets lower-level governments, then the lower-level governments adjust their anticipated income function and behavior accordingly and bargain with the higher-level governments. No matter what the specific processes and steps are, the farmers have to accept the final consequences. Based on the above findings, we will answer the following questions in this section: why does the government regulate the economy? What determines the structure of regulatory policies? What is the relationship between 11 In the condition of perfect competition, no matter what disparity of initial condition is,

economic growth of different regions should tend to converge. The objective condition of province is tremendously different from each other in China, but the situation is similar in the US. Why the disparity of income per capita converges in the US? Most of all, interregional disparity of Chinese economy was arising till the 1990s. What is the reason for it? For more comments, please refer to Lin and Liu (2000).

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regulatory policies and income growth? Why do the same central policies have different results in different regions? What is the effect of regulatory policies on the formation of rural tax and fee burden and its regressivity? Given a series of regulatory measures of the central government, how to determine the behavior mode of grassroot governments?

4.1.

Endogeneity and theoretical origin of regulatory policies

Even though China has implemented market-oriented reform for more than 20 years, the government still maintains strong political control over rural regions and has many non-market-oriented regulations on rural economic and social activities. In order to analyze the formulation, implementation and economic consequences of the regulatory policies, we have to firstly explain why the state formulated these regulatory policies and the relationship among these policies. Therefore, let us first briefly review the analysis of governmental regulation in economic theories. Generally speaking, the theories of regulation can be divided into two strands, i.e. public interest theory and private interest theory. The former one is represented by Pigou’s argument on welfare economics (1938), which mainly focuses on the reasonableness of governmental regulation in economic system, e.g., due to reasons of natural monopoly, information asymmetry and externality, etc. Nevertheless, in reality, the actual effect of governmental regulation is not always in compliance with social welfare. So, around the 1960s and 1970s, the mainstream economists, represented by scholars from the Chicago School of economics, started to explore actual behavioral motive of governmental regulation. They emphasize that governmental regulation is only for the sake of protecting the interests of certain interest groups (Olson, 1965; Stigler, 1971; Peltzman, 1976 and 1989; Becker, 1983).12 In development economics, the theories that purely 12 Neo-institutional economics sub-divides “private-interest-theory” by using “transac-

tion cost” and “institutional structure analysis” (McCubbins et al., 1988; North, 1990; Williamson, 1996; Alston et al., 1996; Dixit, 1996; Irwin and Kroszner, 1999), especially make research on the specific mechanism of generation of regulatory policy. In addition, theory of industrial organization also uses similar mechanism into some specific industries. As for the laws and economics, the study on public-interest-theory about regulation goes

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discuss regulation still remain on comparatively elementary level, mainly empirically validating the influence of regulatory policies on development, i.e. whether the regulation is a “helping-hand” or a “grabbing-hand”.13 In these discussions, almost all papers give no positive answer to this question, i.e. why do the governments of developing countries need to adopt a set of extremely complicated regulatory measures? If they are just used to strengthen “grabbing”, is it necessary to “regulate” all aspects of economic activities? As everyone knows, with the regulation system getting more complicated, the bureaucratic system will inevitably expand rapidly and the political interest conflict will get intensified, so the people in power and certain interest groups may not obtain the optimum private interest from regulation. It means that, in the existing literatures of economics, there is not a theory that can explain the cause for “institutional structure of regulation” in developing countries. Therefore, it is also difficult to analyze how the government grabs from private departments through regulation, i.e. what is the internal logic for implementation of various regulatory measures? The statement on development strategy of Lin (1994, 1999) provides a possible theoretical platform for this question. In his theoretical dissertations, he points out that, to catch up with the developed countries, the developing countries artificially support many industries that go against their comparative advantages. In order to support these incapable industries, the governments of developing countries have to formulate diverse regulatory measures to forcefully intervene with the economic system, i.e. the government’s design of regulatory measures complies with certain strategic development targets. Besides outlining the actual purposes of economic

deeper and its main entry point is to discuss the relation between regulation and Laws, to be more exact, the relation between judicial system and governmental regulator. A core problem is if all regulations can be done by the method of legislation and jurisdiction, why it needs to establish special regulatory organization (government) besides court and judge. In the opinion of Shleifer (2001), the existence of regulator is for the reason that Law enforcement cost expenses. But, in the opinion of Pistor (2002), the existence of regulator is because of incompleteness of Laws. Please note that both the two opinions assume regulator (government) itself has no independent political target and will not be controlled by certain interest groups. 13 For instance, “the Regulation of Entry” by Shleifer et al. (2002) published on QJE in this spring, and Barth et al. (2001) etc.

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regulation in developing countries, Lin also classifies the concrete implementation of regulation into three aspects, i.e. resource allocation mechanism, macrorelative price and micro-decision-making power. This so-called “triune” institutional structure is the outcome of traditional “catching-up development strategy”.14 Along the thought of development strategy, we can clearly understand the structure and evolution15 of the regulatory policies in developing countries and can clearly discuss how the regulatory policies affect the economic growth. In fact, “strategy” itself is a kind of governmental regulation. Limited by length of the paper, this paper is not going to discuss the relationship between development strategy and regulatory policies in detail, but its discussion will focus on the various regulatory policies of the government on rural society and economy. In terms of the impact and executive strength, the current regulatory measures of the state on rural society and economy are mainly as follows: compulsory grain and cotton purchasing policy (no matter purchasing at prices lower or higher than market price), household registration system and family planning, etc. (1) Compulsory grain and cotton purchasing policy. Chinese grain policy is fundamentally different from agricultural protection policy of developed countries. The current grain policy in China is a regulatory policy, i.e. the government intervenes with the input of agricultural production means, decision-making of farm production, selling of farm products in an allaround way, and farmers are totally in a passive position as individuals in market economy. In western countries, grain protection policy is considered for national grain safety and provides fiscal subsidy for its domestic grain price. As for what to produce and what quantity to produce is totally on the farmers’ discretion, and the government has no right to intervene.16 14 For more commentary on “triune” institutional structure, please refer to Lin (1994, 1999). 15 Some political economy and regulatory theory scholars (Niskanen, 1971; Brennan and

Buchanan, 1977) emphasized that government, as an independent and giant interest group, made many regulatory policies just for special demands and objectives of their own, e.g., financing a budget deflect and so on, which are so-called Leviathan Approach. However, these theories only aimed at the political phenomena in many developed country and were not further studied for the governments of developing countries. 16 Prior to the market-oriented reform, China adopted the self-sufficiency grain policy without consideration about the regional comparative advantage. The mandatory plan of agricultural production at that time covered all aspects. It not only prescribed farm area of

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Why does the government adopt such severe policy regulation? It is actually closely related to the traditional developmental strategies. In order to carry out the catching-up development strategy that goes against comparative advantage, the government must reduce the industrial salary cost, which in turn deceases the price of consumer goods. Nevertheless, in order to fully control the price of grain and cotton, it is far from enough to simply intervene with the product market, because farmers can adjust their production and sales decisions according to the variation of relative prices. Therefore, the government has to regulate each aspect of agricultural production and adopt the method to purchase grain from house to house. Even though this situation had changed greatly since the reform and opening-up, the traditional system still had tremendous inertia and seemed to be strengthened in the middle 1990s. (2) Household registration system and family planning. The two policies are also the outcome of catching-up strategy. Because the allocation of capital and labor under the catching-up strategy is not compliant with market discipline, the government has to comprehensively control the mobility of labor through household registration institution to satisfy their policy needs. Moreover, the heavy industry supported by government in urban area is not each kind of crops and also production input and yield etc. taking the efficiency loss due to this policy into account, when economic reform started in the end 1970s and at the beginning of 1980s, the state decided not to make any mandatory agricultural plan again and changed the mandatory state purchase quota into purchase contract between the state and farmers. However, purchase contract system met many problems once after it was carried out in the first year: management cost for thousands of contracts was an enormous number and the method to perform contract is quite limited. Most of all, the growth rate of agriculture got slow after 1985 and grain yield decreased, then government regressed its policy so that voluntary purchase contract turned back to be mandatory. The policy unveiled in 1985 has not been publicly recanted and the name of contract still remained, but this cannot deny the mandatory of contract. The quantity of purchase was allocated to each farm household according to the farmland the household contracted under the household contract responsibility system. During 1986–1989, the state increased purchase price of grain and promised to provide subsidy for productive input to farmers, like fertilizer and loan. Although the management cost and fiscal burden was very high, this policy was implemented throughout 1990s along with fluctuation of grain market. Marketization got progress at the beginning of 1990s, but market price of grain sharply increased in 1995, so government restored the administrative intervention in grain market for keeping grain safety. Central government required provincial governments to balance supply and demand of grain in their responsible provinces respectively, thus the intervention in grain production and sales by local government was enhanced.

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compliant with Chinese labor-intensive-type economic structure, so urban area cannot absorb excessive rural labor and even cannot solve employment problem of its own. With this background, one effect of the household registration system is to retain idle laborers in rural regions, preventing their impact on urban economic structure. Certainly, the problem of idle laborers was not serious at the beginning of catching-up strategy, which got obvious in the end of 1960s. However, once the problem turned up, it could not be settled only depending on the household registration system. Therefore, the central government launched family planning policy at the beginning of 1970s so as to inhibit the further increase of idle laborers fundamentally. (3) From “Great Leap Forward” at the end of 1950s, “Second Leap Forward” at the end of 1970s to blind intervention in township enterprises by rural grassroot governments in the early 1990s. The catching-up strategy of central government not only put rural area as “sacrifice” for economic growth, but also carried out target and method of catching-up strategy into rural economy. For political achievements, the governments at different levels issued targets for the development speed of society and economy, improved per capita income of farmers factitiously and founded plenty of industrial enterprises against local natural condition and comparative advantage. On one hand, it caused the tendency of boasting and falsification. On the other hand, it caused serious labor redundancy and accumulated a large amount of liabilities, which eventually destroyed the sustainability of economic growth.

4.2.

Regulatory policies and economic growth

Why does the governmental regulation obstruct economic growth? What channels of the regulation affect economic growth? The “triune” perspective of Lin focuses on three channels: resource allocation system, macroprice signals and microautonomy. In many of Lin’s works, he has discussed the inevitability of intervention in the three aspects so as to implement the catching-up strategy. (1) Resource allocation. The prime function of regulatory policy is to control the allocation right of social resources. After the planning system was abandoned, the government mastered and allocated main social resources 124

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by enhancing the control of fiscal system and financial system. The rural regions are no exception. It is clear proof that the government controlled the circulation of bulk farm products and agricultural supplies and directly intervened in labor mobility. In addition, the restraining policy for rural financial development and great disparity between grassroot government’s capability of fiscal mobilization and income of ordinary farmer households in poor regions also prove government’s dominant position in allocation of rural economic resources. (2) Distortion of macroprice signals. Since the reform and opening-up, the price regulation for industrial products got looser gradually, but the intervention in agricultural products still continued. In order to control the circulation of grain and cotton, the government intervened in farmers’ specific production measures and controlled the market of farm products and the price of agricultural supplies, making farmers unable to get right discretion on the specific variation of market demand. It needs to be noted that the government has been depressing the purchase price of farm products all the time. Although this trend has been reversed since1996, the reversion did not necessarily give any support to the income growth of farmers. For instance, since 1997, the state has spent a large sum of money on the purchase of grain, but the income growth of farmers did not speed up but got slower. It may be related to the overall economic cycle and another reason is the development of township enterprises was obstructed under the condition of product competition (e.g., due to the issue of property right). The possible situation is the subsidies provided by the state for grain was consumed by the giant stateowned grain purchase system but remained less to farmers. Of course, this perspective needs our further study based on existing data. But, in any case, no matter the government depressed or raised the price of farm products, it interfered with the market price, which was economically inefficient. (3) Loss of micromanagement autonomy. In order to implement various policies unveiled by the central government, the grassroot governments directly intervened in many aspects of township enterprises and farm production, especially in those major grain and cotton production regions and enterprises run by towns, where such situation is quite obvious. For private interest, many local governments played an obstructive role in the reform of enterprise transformation. 125

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In summary, the governmental regulation on rural society and economy distorted the relative price of production factors and output in rural regions, inhibited the growth of rural product and factor markets, obstructed the proper mobility of production factors and allocation of resources in rural regions and made resource allocation, farm production, operational decision-making in rural regions deviate away from their own comparative advantages, thus suppressing the adjustment of agricultural structure and the development trend of non-agricultural economy in rural regions, which was unfavorable for long-term growth of rural economy.17

4.3.

Regulatory policies and tax and fee burden

In order to carry out the catching-up strategy, the government not only has to control market, enterprises and farmers, but also needs to control itself, because the implementation of any regulatory policy unveiled by the central government actually depended on the cooperation of local governments. It is undoubted that the internal organizational structure of the government is an important part of the institutional structure of regulation. The local governments exercise administrative power to levy taxes and fees from farmers also in the name of implementing the state policy and task. In many cases, the major concern of local governments is whether the state task issued level by level is accomplished. If the reduction of farmers’ burden must be at the cost of failure to accomplish the state task, the local governments are more likely to scarify the interest of farmers. Therefore, another important hypothesis of regulation theory is the introduction of information asymmetry among various levels of governments, i.e. it is impossible to predict the execution cost of any given policy measure of the central government at the grassroots level. That is to say, due to the enormous cost of supervision, the higher-level governments are unable to precisely know how many manpower and funds are needed by the lower-level governments to accomplish these tasks.18 For this reason, 17 One more strict study indicated the significant negative impacts of the governmental

regulation on the development of rural critical market, the mobility of rural labors, as well as farmer households’ the income growth and distribution. 18 One critical task for local officials is to carry out the family planning policy ordered by the state. Taking undeveloped social security system, low education level, traditional concept

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the lower-level governments may bargain with the higher-level governments to expand staffing and increase budget. Due to political system and information advantage, the lower-level governments often occupy the positive position. The central government itself is legitimate, and as a result, no matter towards the higher-level governments or farmers, the grassroot governments have sufficient reason to extend scope and strength of regulatory policies and concoct various pretexts to gain benefits. This means the increase of tax apportionment has the so-called “characteristic of irregularadded charge”.19 In fact, most bureaucratic systems in history have this characteristic. If the central government adds tax by RMB0.01, farmers may be charged by RMB0.1 at the end. Since the local governments make exploitation level by level at the excuse of implementing the central government’s policies, the farmers’ burden gets heavier and heavier. At present, the reform of tax and fee conducted by the central government is difficult to make progress, and most reforms of tax and fee in history failed at last. This is the key point of the so-called “The Law of Huang Zongxi”.20 Certainly, the current tax-sharing system, fiscal situation that requires self-sufficient fiscal system of rural government and asymmetry between right and responsibility of local government arising from it, aggravate the and low employment rate of women in rural area into account, existing family planning policy is largely different from farmers’ expectation for birth. Therefore, it is quite hard to carry out family planning work in rural area and the demanded personnel and fund become a large number. Therefore, it is difficult to estimate exactly how much cost should be paid to achieve the family planning target of central government. 19As for the unobservability for implementation cost of introducing policy, one contribution of regulation theory is to extend soft budget constraint theory into political economy area, i.e. grassroot government enhances charge strength toward private unit under the pretence of policy ordered by its superior government. 20 We hereby attempt to figure out what reaction the local government shall take when central government insists on certain economic regulation and what the impact of it on overall structure of government finally. Since the establishment of our country, although unified and centralized structure was always kept apparently, size and internal structure of Chinese government has actually got great changes (e.g., fiscal decentralization, size of grassroot government, division of fiscal power and administrative power of local government, rural democratic autonomy etc.). All these changes are closely connected with development strategy and economic regulatory policies issued by government in different periods. Undoubtedly, in terms of our existing studies, it is not able to give comprehensive explanation for internal structure and size of government. For instance, it needs further discussion on how to define structure and interface of government. In this paper, we just connect expansion of government size with regulatory policy.

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effect mentioned above. The state issues regulatory tasks to rural regions, but does not provide sufficient fund (in fact, due to information asymmetry, the higher-level governments can never provide sufficient fund for implementation of regulatory policies). This objectively provides further condition and excuse for the local governments to charge taxes and fees arbitrarily.21 It needs to be noted that, in terms of regulation and economic growth, on the basis of distortion caused by resource allocation system, macroprice signals and microautonomy, the above analysis adds a 4th channel, i.e. due to the information asymmetry, regulatory policy will result in natural expansion of government size when it is conveyed among governments at different levels. With the expansion of government size, the government will inevitably compete for economic resources with local people and businesses. The expansion of government size and increase of tax apportionment occur synchronously. When rural economic growth stagnates due to excessive regulation, the expansion of government size may result in absolute reduction of farmers’ income.

4.4.

Interregional disparity of regulatory policy and regressivity of tax and fee apportionment

In the previous analysis of rural tax and fee burden, we assume farmers are in a passive position. But, in fact, the inevitable results of income growth and regulation loosening are the rise of farmers’ social and economic position and decline of governmental administrative control and apportionment levying capability, i.e. the apportionment is the outcome of power competition between government and farmers. To summarize all the previous analysis, it is not difficult to find that farmers lost economic autonomy under strong control of government, so the economic development was deviated from the principle of comparative advantage, income growth slowed down, thus the farmers’ position and bargaining power were very low; meanwhile, upper-level regulatory policy gave excuse for various behaviors of local 21 For instance, the state stipulates that each child has the right to take nine-year compulsory

education, but government has not provided sufficient budget for those policies. Therefore, in order to implement these state policies, local governments have to raise fund locally.

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governments, thus increasing apportionment, control capability of government was further enhanced and the capability of production and capital accumulation could not be guaranteed effectively. In this bargaining model, the strength of regulatory policy determines asset distribution; asset distribution determines relative bargaining capability between government and farmer households and thus determines the amount of apportionment. According to above logic, the poorer the rural region is, the heavier the farmers’ tax and fee burden will be in that region. Farmers with lower income have lower bargaining power and the government regulation is stronger. Therefore, interregional disparity of governmental regulation is the key to explaining income disparity among regions and farmers and also the key to explaining regressivity of taxes and fees. But why does interregional disparity exist in governmental regulation? We need to introduce a new hypothesis, i.e. “homogeneous-regulation-withheterogeneous-enforcement”, which means though a given regulation or intervention measure issued by the central government is implemented all over the country, the specific implementation in different regions is not the same. The catching-up strategy mentioned previously is just a theoretical abstraction. In fact, the strategic target of central government must be realized in specific industrial sectors, or it cannot be implemented. For example, the government strengthened the intervention in agriculture (self sufficiency of grain and turnover of public grain), supported some heavy industries and military industries, forcibly implemented the family planning policy, etc., i.e. the regulatory policies must aim at some specific economic activities. With this background, from the perspective of policy implementation, due to the difference of economic structure and social structure among different regions, there will be interregional difference of regulatory policies at two levels at least. Firstly, before the policy implementation, taking into consideration these external different conditions, the central government may take the initiative to adjust the policy implementation target, strength and scope according to the regional difference; secondly, assuming that the central government gives no consideration to these factors and uniformly carries out the regulatory policies, the more it depends on the intervened region in economic structure, the more easily the economic development

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will be subjected to the regulatory policies. Certainly, in real economy, it is not easy to fully differentiate these two cases. (1) Disparity of endowment structure. Taking grain policy as an example, almost all Chinese provinces must carry out the grain purchase policy unveiled by the central government. However, the quantity of governmental purchase (or the proportion of purchase quantity to total production yield) is dramatically different in different regions. This specific quantity (proportion) is mainly determined by higher-level governments after comprehensive consideration of diverse factors and conditions (such as factor endowment condition, natural environment and even the level of grain selfsufficiency in each region). Therefore, for different regions (even different farmer households), the implementation strength of grain purchase regulation may have considerable disparity. A most obvious fact is the provinces with comparative advantage of agriculture must face more intervention from grain policy. In addition, in terms of the strategy of giving priority to the development of heavy industry, some provinces with relatively intensive natural resources are undoubtedly given the priority. (2) Disparity of traditional economic structure. The industrial policy of government cannot be separated from existing economic structure. Compared with provinces depending on light industry, the provinces with heavy industry such as Liaoning, will obtain more intervention from government. (3) Disparity of natural and geographic condition. The government often lays out the economic structure in combination with geographic condition and position. For instance, in 1960s an 1970s, for military purpose, the central government placed some heavy industries in inland provinces but not coastal provinces such as Fujian. (4) Disparity of initial income. For instance, family planning policy, as a “basic state policy”, must be implemented in all provinces. However, the implementation of it in different regions was quite different. In poor regions of lower income, the non-agricultural job opportunity was less and education level was lower in general. Compared with rich regions, farmers in poor regions had stronger demand for children. In this kind of regions, it is more difficult to carry out the family planning policy, so more manpower and materials are needed to fulfill the policy in these poor regions. 130

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In summary, in China, where there is tremendous interregional disparity of social and economic structure and varied regional comparative advantage, it is natural that local governments intervene differently, thus resulting in different economic development paths and achieve different economic outcomes. In other words, when the central government sets a certain goal of development strategy, provincial governments may adopt different development strategies. In provinces with intensive governmental intervention, economic development gradually deviated from the path of comparative advantage and the income growth could not be sustainable. Due to information asymmetry, regulation and governmental intervention opened up a door for grassroot officials to levy exorbitant taxes and fees, which caused a widening of income disparity and regressivity of taxes and fees.22 In a similar way, inside a region, if a group receives more regulatory restriction, its income growth would become slower and bears relatively heavier tax and fee burden.

4.5.

Governmental structure expansion, corruption and public goods supply

As we discussed at the beginning of this paper, the rural tax and fee problem is serious not only because of the regressivity of tax rate but also because tax and fee income does not translate into effective supply of rural public goods, but rather provides conditions for corruption and government size expansion. More charges are used to pay for more governmental personnel, then these governmental personnel can be arranged to charge farmers for more money. As a result, the original function of grassroot government was totally abandoned. The main work of officials is to charge fees and carry out various unreasonable regulatory measures. It is easy to explain this phenomenon in our model, because the reason, purpose and driving mechanism of charging by grassroot government are not to provide local public goods. We may even say that the initial intention to form the huge 22A more strictly empirical study we finished recently indicated that, once other variables

were controlled, the stronger the governmental regulation was (represented by grain purchase quantity per capita or the proportion of purchase quantity to total grain yield), the lower the income of rural area (farm household) grew and the higher the proportion of taxes and fees to pure income (and tax rate per capita) was.

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grassroot government in rural China is to implement the various policies of the central government. Even the local public goods supply was often embodied in policies and tasks issued by higher-level government but not determined by the local government. So far, the present political system still cannot realize supervision on grassroot political power from bottom to top, and as for supervision and restriction by administrative system from top to bottom, the cost may be tremendous. Administrative power of each level depends on authorization and support from its higher-level government and has its independent personality and interest. Therefore, when the higher-level government delegates the power to its lower-level government, it also stimulates the organization and development of independent interest of the lower-level government.23 The power structure separated from social interest and tremendous cost of supervision from top to bottom enables the governmental authority at each level to realize its own political and economic interest in the name of state. At the same time, the implementation and execution of state power cannot be realized without local governments at all levels, including grassroot political power. The state power must depend on the cooperation of the local governments, but it cannot effectively supervise the local governments. The so-called social supervision and restriction are also weak in front of administrative power. Faced with this structural defect, the state is often caught in a dilemma: if the state neglects the arbitrary behaviors of local governments, the stability of regime will be threatened; if the state goes back to the old way to revoke the power, not only the authority of local governments would be greatly damaged, but also the administrative efficiency would be reduced substantially. However, the regressivity of taxes and fees and interregional income disparity also indicate that within the same bureaucratic political system, the behavior of different grassroot governments can be enormously different. 23 Zhang (2000) indicated that, as for specific administration, in order to implement policy,

central government must depend on local governments and superior governments must depend on their inferior governments, because local governments have the power to take actions that suit for local circumstance, affairs and people, have autonomy to administrate (not in legal sense) local affairs and are independent to get out of state and social supervision (not in legal sense).

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In other words, what is the difference in corruption between governments of developed regions and governments of undeveloped regions? Why did not the widely existing corruption obstruct economic growth in some regions but cause negative consequences in others? Our answer is the rent-seeking action of local government also systematically changed due to the disparity of economic development pattern caused by regulatory policies. In the developed regions, the central government’s regulation and intervention in traditional industries has lower impact on local economy. Due to the weaker regulatory policy, the industrial structure is no longer dependent on traditional industries and agricultural sectors, with a high degree of industrialization. On the other hand, many preferential policies of the central government, including attracting foreign capital, supporting new technical industry, encouraging export, etc., have generated positive incentive for these regions. Meanwhile, in order to promote economic development, the local governments are reducing the strength and scope of intervention by merely controlling some scarce resources such as the examination and approval of industrial and commercial land. Due to the simplification of governmental function, the government size is getting smaller gradually. The final mode is somewhat similar to the rent-seeking behavior of “share tenancy”, which not only guarantees the actual income the officials of grassroot governments obtain from the local economy, but also reduces the governmental intervention in actual economy, thus promoting the market-oriented development of economy. The rapid economic growth also serves as an administrative achievement that the grassroot government can show to its higher-level government. That is to say, the loosening of regulation relieves the interest conflict between the central government and local governments, and realizes the uniformity of promoting marketoriented reform and meeting political and economic interests of grassroot officials within a certain scope. However, the undeveloped regions take an opposite path. Heavy regulatory policies brought about a huge grassroot bureaucratic system. In the meantime, undeveloped economy made local officials focus more on political interest and tend to put the fulfillment of upper-level policy target in the first place. In order to obtain visible results in a short period, the government has to enhance the administrative control, to mobilize resource to the largest extent and achieve short-term policy target or accomplish

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the so-called “political achievement evaluation”. As a result, the economic reform tended to lag behind and the market developed more slowly. With the government extending its power to every part of economic system, arbitrary corruptions were found everywhere. This is obviously more inefficient than “share tenancy”.24 In a word, the more the central government controls, the more huge the grassroot governments will become, the more rent-seeking opportunities there will be, and the more backward the economy will become. With local income growth stagnating, the grassroot officials were more likely to pursue political interest and their target of economic policy was more short-term oriented, which fell in a circulation of “regulation-poverty-corruption”.

4.6.

History course of loosening and enhancing regulation

We now summarize the previous analyses on regressivity of taxes and fees. Our theoretical framework mainly depends on four hypotheses: (1) since the government has been implementing the catching-up strategy against comparative advantage for a long time, it is inevitable to adopt various regulatory policies for economic system; (2) regulatory policies distort economic structure, thus obstructing the economic growth for a long time; (3) since the implementation cost of regulatory policies is hard to estimate, when regulation is enhanced, government size expands more rapidly and corruption goes increasingly rampant; all these led to the explicit increase of farmers’ tax and fee burden; (4) the regulatory policies must aim some actual industrial sectors, but due to interregional disparity of objective conditions, these industrial sectors have different weights in different regions, so there is huge interregional disparity in the strength and difficulty of regulation implementation. 24 Many theoretical literatures of political economy always focus on the developing coun-

try’s issue about “market-oriented reform, supervision of central government and corruption of grassroot government”. For early discussion, please refer to Becker and Stigler (1974); Banfield (1975); Rose-Ackerman (1975, 1978); Klitgaard (1988, 1991); Shleifer and Vishny (1993). Laffont and Guessan (1999) gave model-based description about this issue. The consensus of these literatures is, it must intensify market competition and improve supervision by democratic method so as to reduce corruption.

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On the basis of the four hypotheses above, from the perspective of governmental regulation, we cannot only explain the emergence of rural taxes and fees, but also can give reasonable explanation for the widening income disparity. Certainly, regulation theory does not rule out the importance of other factors, but here we emphasize that if the regulatory policies are not eliminated, the problem of tax and fee burden is difficult to be addressed effectively. Looking back at the actions on loosening regulation taken by the government and the dynamic changes of rural tax and fee burden since reform and opening-up, we can find a lot of empirical evidence to support the above-mentioned theoretical framework. Specifically speaking, although the central government still kept many regulations for overall rural society and economy since the market-oriented reform in 1978, the overall policy trend was mainly to weaken governmental regulation before the late-middle 1980s, including abolishing People Commune System, launching the household contract responsibility system, granting farmers certain micro-operation autonomy and right to set up rural industrial enterprises; expanding rural product and factor market, relaxing the control on prices of most agricultural products except for grain and cotton; even attempting to give up the compulsory grain ordering plan, etc. Accompanying all these was a shrinking size of rural grassroot government (from the production team in 1970s to the village-level government in 1980s) and rapid growth of agricultural, non-agricultural and farmers’ per capita income. Under this situation, the problem of farmers’ tax and fee burden was not serious. But just after a short period, the loosening trend of governmental regulation began to stagnate in the end of the 1980s. The strength of governmental regulation was enhanced in the 1990s. This can be seen clearly from the changes in China’s grain policy. In the 1990s, the contractual grain purchase was changed to the state purchase, and the contractual purchase actually became a mandatory plan; in 1994, the purchase and wholesale of grain went back to a unified management by state-owned grain department; in 1995, the reform of grain circulation system started, while the system of “provincial governor assuming responsibility for the rice bag” was launched to emphasize local grain self-sufficiency in the same year, and this system is still valid till now. All these policies are characterized by return of old system and strengthening of governmental regulation.

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After 1996, China’s domestic grain price began to invert in the international market. Do such agricultural protection policies bring benefits to the farmers? To answer this question, we need to clarify some starting points: (1) For production and circulation of farm products, China’s grain regulatory policy distorted the resource allocation mechanism and market price, so it will inevitably obstruct agricultural growth in the long run; (2) Regulatory polices caused rapid expansion of bureaucratic system and directly grabbed the income of farmers. Therefore, although the central government provided tremendous fiscal subsidies, it is doubtful how much of them turned into individual income of farmers; (3) Since 1996, the income that farmers gained from agriculture almost stagnated (the growth rate of non-agricultural income decreased as well). It may be due to some characteristics of agriculture itself (e.g., the demand elasticity of grain price was very low), but the governmental intervention policy for rural economy also had unshakable responsibility. As in this circumstance, the possibility for farmers to adjust grain production according to actual market demand and diversification of products was depressed. In addition to enhanced regulation for grain production and marketing, after 1992, local governments’ “Great Leap Forward” intervention in rural industry has brought about serious negative consequences. In some, compared to the 1980s, the government enhanced its intervention in rural economy in the 1990s, which not only distorted the resource allocation system, messed up the price signals, deprived the microautonomy, but also rapidly expanded government size and resource occupation by bureaucratic system. Accordingly, the development of agriculture slowed down, the paths of increasing agricultural income and non-agricultural income were blocked, and the issue of tax and fee burden became worse off.25

25 Lin and Liu (2002) systematically measure the change of overall governmental regulation

strength in 28 provinces during 1978–1999 and its impact on economic growth. The statistic result indicates that the poorer the province is, the higher the regulation strength is; in 1980s, regulation strength in almost all provinces was on the downtrend; but in the 1990s, the regulation strength in many mid-west provinces increased.

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5.

Evaluation on Related Academic Viewpoints26

The problem of rural tax and fee burden has been discussed in academic circle for a long time. There are various perspectives. However, the key of theoretical explanation is to use minimum factors to account for maximum facts. A crucial criterion is to weigh the advantage and disadvantage of different theories. As for the problem of rural tax and fee burden, most perspectives attempt to explain why the farmers’ tax and fee burden becomes heavier and why income disparity between urban regions and rural regions widens, but are unable to explain the regressivity of tax rate and income disparity among different regions. In this paper, we just evaluate some representative perspectives, i.e. the “Theory of Property Defect”, the “Theory of Fiscal Decentralization”, the “Theory of Urban-Rural Dualistic Division”, the “Theory of Democratic Politics”, the “Theory of Conflict between Population and Land”, and we also make some comparison between “Regulation Bargaining Model” and these perspectives. 26 Besides the theories described in this section, the perspective of this paper has many

more meanings. For instance, in the sight of laws and economics, the state prescribed many clauses to protect the interest of farmers in a series of Laws and Rules, but they could not be implemented. Why? From the standpoint of pure law, it may be because these Laws and Rules were self-contradictory. But, in fact, on the surface, there was no direct contradiction among many Laws and Rules. The actual situation was, the implementation of some Laws and Rules changed the interest structure and motivation mechanism in reality, thus resulted some other Laws and Regulations could not be carried out. This is the root cause why many Laws cannot be effectively implemented in developing countries. The theory of “Incomplete Law” (Pistor, 2002) indicated the main barrier for implementation of Laws was derived from incompleteness of the Laws and relevant improper configuration of judgment and amendment right for making up the incompleteness. This theory did not sufficiently reveal complicated market and social structure of developing countries, thus its explanation for legitimate phenomena in backward countries is weak. The problem of taxes and fees apportion of farmers is a typical example for it. In fact, Chinese security market and financial regulation also have the same problem. When market structure is distorted factitiously, any management structure of enterprises shall not effect and any implementation of incomplete Laws cannot be done. For additional instance, the Law on Compulsory Education of China is seemed to be an accurate and complete Law, but the actual implementation is totally out of it. It did not achieve its expected purpose, but brought heavier burden for farmers and provided a legal excuse for government corruption. In some, taking the relation between governmental intervention and economic structure as entry point to analyze the implementation of Laws provides a new thought for the research of science of laws and economics.

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5.1. Theory of property defect Theory of Property Defect argues that the series of problems presently occurring in Chinese rural regions, especially the slowing down of income growth, are mainly due to insufficient protection of farmers’property rights. Compared to the existing studies on “property right”, the recent study of Zhou (2001) extended the conceptual scope of property right and further emphasized the dynamic relationship27 between property right reform and income growth by analyzing the historical changes of rural China since the founding of the state. (1) There is no definite answer to the definition of property right. The early studies divided it into three meanings, i.e. use of asset, residual claim and residual disposal. Zhou made further extension in his study, emphasizing all governmental restrictions on the economic freedom of farmers (such as the intervention in product and production factor market) undermine the property right of farmers. Due to property right defect, individuals of microeconomy lost their economic autonomy and were misled by distorted price signals, resulting in resource allocation deviated from the principle of comparative advantage. (2) The income growth of farmers depends on the reform of property right system.28 Farmers can protect themselves in the market according to restrictions on property right, and nobody else can protect the farmers. (3) The institutional reform of property right is from bottom up, i.e. the transformation of property right arrangement is often a result of farmers’ spontaneous escape from governmental regulation. The escape behavior itself is the stimulation to economic growth. In other words, the government abandoned the wrong development strategy not because the government is

27 Compared with the regulation theory, the property right theory is actually easier to be

accepted by western academic circle. Some western scholars like Shleifer, Acemoglu et al. keep focusing on the importance of property right protection. However, Zhou’s perspective on Chinese rural issues is different from these western scholars. 28 Zhou indicated that the laws on farmers’private land resale had been released in other transitional countries like Russia. Compared with those countries, the progress of “progressive reform” in China is slower.

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clever but because the self-protective behavior of farmers made the government clever.29 Among the several perspectives mentioned above, the “Regulation Theory” is very similar to the “Theory of Property Defect”. Based on the following knowledge, we insist on analyzing the issue from the perspective of “Governmental Regulation”: (1) Improper regulatory policies make property right of farmers defective and eventually damage economy growth. The changes of regulatory policy and property right system are consistent. In fact, the government’s abandonment of regulation constitutes a necessary condition for sufficient property right of farmers; (2) From the perspective of regulation, it is easier to understand why the government infringes the property right of farmers and why the government adopts a specific set of “infringement” measures. The regulation theory not only gives an economic explanation for the economic consequences caused by infringement and also explains the motive and action pattern of governmental infringement; (3) If regulatory policies cause the infringement on farmers, what are the different impacts on farmers’ income caused by different acts of infringement? What is the relationship between “one type of infringement” and “another type of infringement”? For instance, in a rural economy where the factor market is controlled, as long as there are the product markets, it is possible for farmers to allocate resources and select technology according to their endowment conditions and comparative advantages.30 In other words, an infringement in certain aspect may not lead to serious economic consequences. Nevertheless, if the governmental regulation also limits the free 29 In a letter to the Author, Zhou indicates that, “… but the reform of property right does not

depend on the wisdom of central government (in history, usually unwise central government activated large-scale reform of property right). Historically, since 1960 (it is earlier in fact, such as it started as from the second half year of 1956 in Wenzhou, Zhejiang), ‘central’ policies were not wise and the reform of land right in grassroot level arose in China one after another, under the compelling of situation, from ‘private plot’ to ‘contract production quotas to individual households’, which spread so widely, that these behaviors were allowed if there was ‘after-reorganization’ from government.” 30 Please refer to Lin (2000).

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exchange in the product markets, the bad outcome of infringement would arise. Therefore, the regulation theory is able to explain, from the perspective of general equilibrium, why the government often regulates every aspect of farmers (comprehensive infringement) instead of just adopting a certain type of regulatory measures; (4) “Regulation Theory” offers a more in-depth depiction about the inherent characteristics of bureaucratic system. As discussed previously, the government has to implement its various infringement measures by itself. If we discuss the problem only from the angle of protecting the property right of farmers, it is unable to well understand the behavior characteristics of grassroot government. In addition, it must be pointed out that, the perspective of property right theory on the evolution of property right system is undoubtedly very inspiring. In other words, if the choice of development strategy is crucial, whether the evolution of development strategy is driven by people or by the government? In other words, whether this institutional transformation process is induced or imposed? Lin (2002) also discussed what factors determine the adoption and change of development strategy, but similar perspectives are not comprehensive and deserve further study.

5.2. Theory of fiscal decentralization Theory of Fiscal Decentralization argues that present fiscal and taxation system is the key to causing the farmers’ tax and fee burden. The central government takes advantage of the tax-sharing system to centralize major taxes that also have low collection cost. Local governments just control some small taxes that are difficult to levy. What is more important, the village-and-town-level governments cannot obtain their daily expenses from their higher-level governments. These grassroot governments have no guaranteed fiscal income, but they undertake the task of implementing most of the central government’s policies. Due to the asymmetry of responsibility, power and benefit, the grassroot governments have to explore every opportunity to enlarge their local income source. It results in heavier tax and fee burden for farmers. It is clear that this perspective points out a vital weakness of China’s present fiscal and taxation system. However, the design defect of fiscal and taxation system is not all the problem or not 140

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the most crucial part. Because if the implementation cost of any policy is predictable, the problem in fiscal and taxation system can be easily solved through institutionalized and transparent fiscal decentralization and transfer payment system. The key problem here is, if the cost of regulation implementation cannot be measured or is very difficult to measure, it is impossible to establish the institutionalized and transparent fiscal decentralization and transfer payment system.

5.3. Theory of urban-rural dualistic division This is another representative perspective, which argues that the central government’s long-term policy orientation results in discrimination against the rural areas, enhancing the pattern of dualistic economy. This kind of systematic discriminative policy caused the farmers to assume the cost of industrialization and urban development all the time, and a typical method is that the government takes advantage of their pricing power in industrial and agricultural products and provide economic surplus for industrial capital accumulation. In this sense, the problem of farmers’ burden has been very serious since the founding of the state, and it merely became explicit at present. The above argument undoubtedly makes certain sense, but is too general. It also fails to give a satisfactory explanation for the disparity of tax and fee among different regions and within the same rural region.

5.4. Theory of democratic politics This perspective attracts more attention. Admittedly, since farmers are deprived of political right, it is easier for the government to intervene in rural economic and social life and makes it possible for the grassroot governments to embezzle farmers’ benefits in the name of implementing the policies from higher-level governments. Therefore, realizing grassroot democracy in rural China is the only way to political democratization of the state. The difficulty for Theory of Democratic Politics is how to explain the interregional disparity of farmers’ income and the regressivity of tax rate, because both the developed and the undeveloped regions have a roughly similar political system in China. Moreover, little change has taken place in the political system in recent ten years. Why do some regions with slow income growth have heavier tax and fee burden, but some other regions 141

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with rapid income growth have comparatively light tax and fee burden? In a broad sense, we may ask such a question, i.e. as a country without western democratic system, why does China grow faster than those developing countries with western democratic system? In another study we are doing,31 we will carry out a comparatively systematic research on the construction process of democracy in rural China and its achievements, and the preliminary conclusion includes two points: (1) if we do not abandon the policy regulation, the effect of democracy on increasing income and reducing apportionment is very limited; (2) the performance of democracy construction is directly affected by the strength of regulatory policy.32

5.5. Theory of conflict between population and land Finally, there are some scholars who insist on the Theory of Conflict between Population and Land. It argues that the series of phenomena now occurring in rural China is fundamentally due to the tight relationship between population and land. Under the precondition of low per capita income and low per capita resource occupancy, the present economic and social conflict cannot be solved in a short time. This problem involves the relationship between endowment structure itself and economic development evolution, and also involves how to understand the relationship between population size and economic growth. In the long run, the increase of population density is no longer the barrier for economic growth since the 31 Please refer to “Governmental Regulation, Economic Growth and Democracy Promotion

in Rural China” by Tao, Liu and Zhang (2000), which will be published soon. 32 Zhou also indicated that, when the rights of farmers could not be protected sufficiently,

the effect of grassroot democracy was limited and might be negative. (1) “Direct democracy of villager” cannot solve democratic problems in a larger scope, such as town-level, countylevel and above. (2) No matter if it is direct democracy or indirect democracy, if property right cannot be defined specifically, democratic problem is not easy to solve. “Logically, if it is decided to deprive the property right of minority through a majority voting, what should we do?” In the 1980s, for researching the possibility of long-term land contracting, Zhou observed the reaction of villagers for the experience of “population grows and land fixes” created by Meitan of Guizhou province. Farmer households might have family member added in future rejected this rule; in the villages where such farmer households were in majority, the opinion to change land contract annually was prevailing! It used “democracy” to decide property right but not carried out democracy on the basis of “inviolable property right”. The result was not optimistic.

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Industrial Revolution. The powerful evidence is the economic success in East Asia. The fact that the per capita farmland occupancy of all countries in East Asia is low may be more serious than Mainland China. However, so long as correct development strategy is adopted, the agricultural society can accomplish transition to industrial society in a short time and the phenomena like heavy tax and fee burden, etc. are not necessarily inevitable, at least in a comparatively long period of time.

5.6.

Policy dilemma of loosening regulation

The regulation theory attempts to explain the widening income disparity and the regressivity of tax rate at the same time, thus to provide a general theoretical account for the development of rural China. In this framework, the various facts like economic growth, income disparity, tax and fee burden, expansion of government size and insufficiency of public goods supply in rural regions are all determined endogenously. Certainly, the reform of rural tax and fee system is an important part of Chinese economic system reform. If we are to propose a more complete and feasible reform plan, we must take possible long-term and short-term difficulties of the reform into account.33 Generally speaking, the fundamental way to address the present problem of rural China is to relive or even eliminate all kinds of unreasonable economic regulatory policies. In fact, this perspective has been highly acknowledged in academic circle.

5.6.1. Potential risk of reform However, what we want to emphasize here is that “loosening regulation” is not a simple problem. Obviously, if governmental regulation is not reformed, the problem of rural tax and fee burden cannot be thoroughly solved. However, the problem is governmental regulation covers a wide range of contents, and its implementation involves governmental organization, fiscal revenue and expenditure system, local public goods 33 Logically, different theoretical perspective may result in different breakthrough point for

reform, such as taking action from governmental organization structure and fiscal revenue and expenditure system, from standardization of farmers’ property right relations, from local public goods supply, corruption and governmental intervention, from adjustment of macroscopic economy and so on. But, each of them is one-sided and is hard to achieve a complete and feasible policy conclusion. “Regulation theory” also has to face this problem.

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supply system and industry management system, etc., and even related to ideological issues. Any reform of single system will not lead to full success and coordinated reforms of other systems are necessary. Therefore, the comprehensive reform will take a long time. During the process, the market mechanism should play a leading role, instead of merely depending on intervention of administrative mechanism. The central government should abandon the behavior model of “issuing policy without providing funding”. It must reform the organization structure of central and local governments, clarify responsibility and power relationship among governments at different levels and fully mobilize local government’s enthusiasm to promote reform. In other words, even though the theory can explain the facts, we still face many problems in specific implementation of reforms, e.g., which is first, which is heavy and which is difficult, etc.? “Standard” theory cannot avoid the difficulty of “realistic” policy implementation. For example, a basic problem for developing countries in recent years is how to relax regulation and realize marketization. There is a great macroeconomic risk, because long-term economic regulatory policies have seriously distorted the technical and product structure of practical industries, creditor rights and liabilities structure of financial system and enterprises as well as fiscal revenue and expenditure structure of governments at different levels. These issues need a long time to solve. Once improper measures are taken during reform, it is fully possible to trigger fiscal and financial crisis and cause unexpected collapse of economic growth. Finally, the reform policy cannot be continued and all previous progresses will be wasted. In addition, political risk of reform is obvious too. Once the government is unable to pay the cost of reform in a short time and cause the stagnation of reform, there may be two consequences in terms of political system34 (or the government’s political strategies and organization structures): (1) totally regresses to conservatism; (2) traditional centralization politics collapses rapidly and local governments do things in their own ways. The reform of Russia is similar to the latter one. 34 The circumstance is determined by the state political system and economic structure at

the beginning of reform. In case that the political control capability of central government has reduced sharply and overall economic structure is still highly distorted, the latter circumstance will prevail.

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It is actually a terrible circumstance. If economic decentralization is not effectively established among governments at different levels together with political decentralization, it may bring unfavorable impact on economic growth (Blanchard and Shleifer, 2001).

5.6.2. Difficulties in political and economic reform in rural China Faced with the complicated social and economic situation in rural China, which way is suitable for us to relax regulation, the “big-bang” radical way or progressive way? If we take progressive reform, what is the sequence to loosen regulation? When loosening regulation, the stability of economic system itself must be considered. This is undoubtedly a common difficulty. Specifically speaking, there are difficulties in six aspects at least when loosening regulation and carrying out reform in rural China: (1) How to ensure the stable transition of governmental organization. Loosening regulation is to reform the governments at different levels, but the objects of reform are just the implementers of the reform policy. If the higher-level governments do not consider the interests of the lower-level governments at all when designing the policy, e.g., downsize grassroot government sharply in a short time, it will be difficult to carry out the policy. In other words, when loosening regulation, the function transformation and structure adjustment of the government must be done stably. If in a rush, it will be difficult to carry out the reform policy due to tremendous resistance from grassroot government; or result in sudden collapse of grassroot governmental functions, which make the normal governmental functions unable to operate. (2) How to ensure stability of macroeconomy. There are two meanings. Firstly, it may be difficult to prepare the cost of reform when macro economy is sluggish. Secondly, the reform itself needs stimulation and it had better not damage the short-term growth. The meaning of the latter is not to set short-term reform target, but to prevent the reform from failure due to rapid deterioration of economic situation in a short time. At present, in China, the overall production capability is excessive; rural laborers are flowing back to rural regions; operation status of township enterprises gets worse;

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income growth of farmers slows down; agricultural income has stagnated; interregional disparity of income is huge. In this situation, where does the cost of rural reform come from? How to stimulate economic growth in a short time, while reforming the rural economic system? If reducing the tax and fee burden of farmers, the direct fiscal income from farmers will decrease in a short time. However, it needs increased fiscal expenditure to stimulate growth (how to increase fiscal expenditure is also a big problem). Then, how to make up the relevant fiscal deficit thus incurred? (3) How to ensure the stability of creditor rights and liabilities system. Many survey reports indicate that rural grassroot governments and their affiliated township enterprises are in serious deficit at present, being heavily in debt.35 And the source of debt is complicated. Obviously, if not clearing up these debts, it is difficult to re-establish the fiscal revenue and expenditure system of grassroot governments. We may consider two extreme cases: (i) suppose the debts of rural collectives were mainly provided by bank and land was taken as pledge. If the debts cannot be effectively cleared up, and private ownership of land and its free circulation were carried out, plenty of rural collectives and farmers will go bankrupt, and then the bank will become the largest landowner in China; (ii) suppose the debts of rural collectives are raised from farmers. Once the debtor breaches the contract or delays the return for a long time, it will cause serious conflict between cadres and masses, increasing unstable factors to society. Therefore, it is a hard task to handle the relationship between creditor rights and liabilities. If using administrative methods, it will snuff out market mechanism as the situation of clearing chain debts in 1992 and rectifying financial order in 1994. It often gets the situation worse when enhancing governmental intervention. Moreover, the measures taken at that time were just to transform debt risk of enterprises into credit risk of financial organization, and then transform financial risk into fiscal risk. Nevertheless, how to depend on the market to fulfill this task is also a problem worthy of research.

35A popular perspective is that the average debt of each town-level government is almost

RMB4 million.

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(4) How to ensure the stability of fiscal revenue and expenditure system of governments at different levels. Essentially, the reform of tax and fee system requires establishment of new investment and financing system of rural public goods (including division of the role and responsibility of local governments at different levels regarding public goods supply). As mentioned above, the central government increases the central fiscal revenue through the tax-sharing system at present, but it does not abandon the various regulations and interventions for local economy. Therefore, local governments have to face a higher-level government that just issues policy but not provide fund. Due to asymmetry between power and responsibility, the fiscal revenue and expenditure system of governments at different levels is seriously distorted. There is a possibility that the central government cancels diverse traditional regulations and their affiliated taxes and fees. However, within a short time, because the central government does not provide necessary subsidy for local finance and local finance has no new income source, the rural fiscal budget may dry up, causing debt crisis and serious shortage of public goods in local places.36 Or, grassroot governments wait for higher-level governments to pay their cost, but how do the higher-level governments determine the fiscal expenditure of their lower-level governments? It is difficult to resolve the problem of information asymmetry. In the end, the problem of tax and fee apportionment will come back. In order to solve the problem of public goods supply in rural area thoroughly, it is necessary to divide the role and responsibility of local governments at different levels regarding public goods supply, re-establish local fiscal revenue and expenditure system, coordinate the relationship between tax levying and fiscal income system, and clarify the functions of central, provincial, municipal, county and township-level governments. This cannot be accomplished in a short time.37 36 In fact, the results and experience of taxes and fees reform in recent years prove that the

above worries are reasonable. The strict unification policy of taxes and fees sharply reduced grassroot fiscal income. Many large-scale construction projects of rural infrastructures had to be suspended. And even the salary payment of rural teachers was terminated. (Shen, 2002). 37A weakness of “Regulation theory” is that it does not fully explain the relation among taxation, public goods supply and economic growth in a basic model according to the economic feature of rural China. Therefore we may outline the approximate scale of public goods supply in different phases of economic growth in rural areas and obtain theoretical level of taxation. Then, we distinguish the local public goods and general public goods

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(5) How to ensure the stability of social security system. From another angle, this problem is how to make up for those people who suffer losses in reform. Structural transformation (including industrial structure and governmental structure) will undoubtedly damage the interests of some people. It is particularly obvious in radical liberalization reform. If the central government downsizes the government staff sharply, abandons support for incompetent township enterprises and allows free circulation of land, then who shall be responsible for providing basic living guarantee for redundant grassroot governmental personnel, laid-off workers of township enterprises and bankrupt farmers? (6) How to coordinate the relationship between political system reform and economic system reform. A problem repeatedly emphasized hereinbefore is that loosening regulation must be accompanied with other institutional reforms, in which the coordination of political system and economic system is crucial. For instance, if we are to rearrange the fiscal relationship among central, provincial, county and township-level governments, there are at least three reforms to push forward38 : (i) under the leadership of National People’s Congress, to realize law-based tax sharing between the central government and local governments; (ii) grassroot tax and fee levying and management rights must be decentralized. Tax items and levying methods are determined by local residents in democratic way and are fixed in legitimate form; (iii) to realize unification of tax levying and management right and income right. Obviously, the reform of local fiscal and taxation system is closely related to the reform of political system. Similarly, the grassroot democracy construction is also subject to the reform progress of other political and economic systems. Democracy (compulsory education and large-scale infrastructure construction), thus define the boundary between central finance and local finance, i.e. the proportion of rural public goods supply burdened by central government and local government respectively. In this way, we can achieve a theoretical design of central and local fiscal system. Because we do not have such a framework, we do not know what the reasonable tax burden of farmers is and what scale of transfer payment from central government to local government should be. In other words, the relation between these homologous factors and the level of economic development is not transparent. 38Yao (1999) summarized the reform of fiscal system into three aspects, i.e. “Transfer the Power to National People’s Congress”, “Decentralize the Power to Local Government”, “Integration of Tax Policies”.

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construction in rural regions mainly adopts the principle of “discussion of one item at a time” (yishiyiyi) among farmers. But the promotion of democracy must be coordinated with other reforms: (1) governments at different levels must carry out democratic election seriously, otherwise no public goods supply across villages, towns and counties can be done; (2) under the condition of undeveloped factor market (limited by household registration system, employment system and land system), farmers cannot “vote by their feet” and there is non-conforming preference for public goods inside communities. Therefore, the efficiency and fairness of voting is doubtable. The influence of external political intervention, vote buying and patriarchal clan will be unavoidable. In summary, any system reform needs the coordinated reforms in other areas and takes a long time to accomplish. During the reform period, the government should give full play to the role of market mechanism, instead of only emphasizing administrative intervention. If there is any improper cooperation at any link, the reform may fail and all previous progress will be wasted. The reduction of tax and fee burden of farmers and correction of regressivity of tax rate must be done in combination with present urgent demand in rural regions. It is not allowed to deal with any issue on its own or limit the reform within the tax system. The fundamental way out for the problem of rural China is to accelerate the circulation of production factors, improve the industrial structure, increase the farmers’ income and consumption, raise the employment level, speed up industrialization and urbanization. Only under such a circumstance the tax and fee reform can be accomplished. As for specific reform measures, the government should take removing “unreasonable regulatory policy” as core, take increase of farmers’ income and correction of regressivity of tax rate as target, and give full consideration to current fiscal difficulties in rural regions and realize that democratic construction is a long-term task. The tax and fee reform has to satisfy the needs of macroeconomic adjustment and be coordinated with reform of grassroot governmental organization, to further clarify power and responsibility relationship between higher-level government and lower-level government as well as between government and farmers, and fully mobilize the local government’s enthusiasm to promote the reform. A reform measure without local government coordination is not feasible, because the reform measure cannot be carried out and has

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to face resistance from grassroot government. No matter how “perfect” arrangement we prepare in advance, it will take a long time in practice to form a practical and feasible reform plan for rural tax and fee system.

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Farmers’ Tax Burden in Rural China Working Paper No. 204, The Center for Law and Economic Studies, Columbia Law School. Project team of Academy of Macroeconomy Research, State Planning Commission (2000). Study on Reform of Taxes and Fees in Rural China. Draft. Project Team of Agricultural Tax Bureau of State Administration of Taxation (2000). Farmer’s Burden and Agricultural Tax Reform. Taxation Research, 4. Project Team of Rural Social and Economic Survey Office of State Statistics Bureau (1999). Improve Purchasing Power of Farmers, Develop Rural Market. China Economic Times, March 9. Qing, Hui (2001). A Note on Rural Taxation. Working Paper, Tsinghua University. Rodrik, D (1996). Understanding Economic Policy Reform. Journal of Economic Literature, March, 9–41. Rose-Ackerman, S (1975). The Economics of Corruption. Journal of Public Economics, 4, 187–203. Rose-Ackerman, S (1978). Corruption: A Study in Political Economy. New York, Academic Press. Rural Social and Economic Survey Office of State Statistics Bureau (2001). Consolidate Achievement, Face Problem-Follow-up Survey on Trial Points of Rural Taxes and Fees System Reform in Anhui Province. Survey World, 2. Saunders, A (1985). Conflicts of Interest: An Economc View. In I. Walter (ed.), Deregulating Wall Street: Commercial Bank Penetration of the Corporate Securities Market. NewYork: John Wiley & Sons, pp. 207–230. Shen, Bo (2002). Impact of Rural Taxes and Fees Reform on Farmland Irrigation Construction and the Countermeasure. China Rural Water Conservancy and Hydropower Engineering, 4. Sheng, Laiyun and Meijun Sun (2001). Burden Alleviation: Focus on Farmers with Middle and Low Income. In Green Paper on Rural Economy from 2000–2001. Rural Development Research Institute of Chinese Academy of Social Sciences and Rural Social and Economic Survey Office of State Statistics Bureau, Social Sciences Academic Press. Shleifer, A and R Vishny (1993). Corruption. Quarterly Journal of Economics, 108, 599–617. Shleifer, A and R Vishny (1998). The Grabbing Hand: Government Pathologies and their Cures, Cambridge, MA: Harvard University Press. Shleifer, A. and R Vishny (1994). Politicians and Firms. Quarterly Journal of Economics, 109, 995–1025. State Administration of Tax (2002). Report on Rural Taxation Reform. Stigler, GJ (1970). The Optimal Enforcement of Laws. J. Pol. Econ., 78, 56. Stigler, GJ (1971). The Theory of Economic Regulation. Bell Journal of Economics and Management Science, 2, 3–21. Stigler, GJ (1988). Chicago Studies in the Political Economy. Chicago: University of Chicago Press.

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Tao Ran, Liu Mingxing, Zhang Qi Sun, Meijun (1998). Alleviation of Farmers’ Burden, Focusing on Fundamental Solution. In Green Paper on Rural Economy from 1997–1998. Social Sciences Academic Press. Tao, Ran, Mingxing Liu and Qi Zhang (2002). Governmental Regulation, Economic Growth and Democracy Promotion in Rural China. Draft. Wang, Shaoguang and Youqiang Wang (2001). Franchise, Income Tax and Budget Supervision — A Study on Rural Fee — Tax Swap Reform. Strategy and Management, 3. Williamson, J, ed. (1994). The Political Economy of Policy Reform. Washington: Institute for International Economics. Williamson, O (1996). The Politics and Economics of Redistribution and Efficiency. In The Mechanisms of Governance. Oxford: Oxford University Press. Wittman, DN (1995). The Myth of Democratic Failure. Chicago: University of Chicago Press. Wu,Yi (2001). Rural Authority that Lacks of Administration Resources and Rivalry between Carders and People on Taxes and Fees Levying — and Discussion on State Regime Establishment in Rural Society. http://ccrs.org.cn/big/ddzgshfhyz.htm. Xiang, Jiquan (2001). Rural Governance Under Fiscal Shortage. Working Paper, Huazhong Normal University. Xu, Yong (2004). Villager Autonomy, Governmental Tasks and Reform of Taxes and Feesand Overall Study on External Administrative Environment for Villager Autonomy. http://www.ccrs.org.cn/big/cmzzzfrwjs.htm. Yao, Yang (1999). Allocation of Taxes Right: Difficulty for Fiscal Taxes Reform. Chinese Economic Research Center of Beijing University. Ye, Xingqing (1997). Study on Reform of Rural Public Goods Supply System. Economic Research, 6. Yi, Ming (2000). On the Problem of Rural Tax and Fee Burdens. Strategy and Management, 1. Zhang, Hongyu and Liangbiao Chen (2001). Basic thought and Countermeasure Study on Rural Taxes and Fees Reform. Review of Economic Study, 24F-4. Zhang, Hongyu et al. (1998). High Focus on Income Growth and Burden Reduction for Farmers. Chinese Rural Economy, 9. Zhang, Jing (2000). Problems on Grassroot Governmental Authority and Rural System. Zhejiang: Zhejiang People’s Press, 2000. Zhou, Qiren (2001). A Series of Papers on Farmer’s Income. Working paper of the Chinese Economic Research Center of Beijing University, No. C2001012. Zhu, Baoping (2001). Progress, Difficulty and Discussion on Trial Points of Rural Taxes and Fees Reform. Chinese Rural Economy, 2. Zhu, Gang (2001). Fiscal Investment in Agriculture and Tax Income from Agriculture. In Green Paper on Rural Economy 2000–2001. Zhu, Shouyin (1998). Research Report on Experiment of Rural Taxes and Fees Reform. Management World, 2, http://www.usc.cuhk.edu.hk/wk_wzdetails.asp?id=1590. Zhu, Shouyin (2001). Exploitation on Reduction of Farmers’ Burden-Analysis on Trial Points of Rural Taxes and Fees Reform. http://www.usc.cuhk.edu.hk/wk_wzdetails.asp? id=1590.

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Appendix A brief commentary on current situation of rural tax reform — Can we get out of the strange circle in Chinese history? In order to radically solve the system problem of farmers’ burden, Chinese government further expanded the reform scope from 2002 on the basis of rural tax and fee reform trial in Anhui Province from March of 2000. Many people count on this reform and even call it “the 3rd Revolution of Modern Rural China” after Agrarian Revolution and the Household Contract Responsibility System. Basic content of rural tax reform can be concluded into three points: (i) Cancel “Three Deductions”, “Five Charges”, miscellaneous fees, gradually abolish accumulative labor service and voluntary labor service, establish rural tax system based on agricultural tax and agricultural surtax with increased tax ratio which are shortened as “change fees into taxes”. (ii) Make up local fiscal gap with associated fiscal transfer payment provided by the central government and local governments at different levels. (iii) Funds needed for other collective production and public welfare undertakings within the village are determined by democratic discussion on villager congress by the method of “one issue, one discussion”. According to primary information obtained at present, the average burden of farmers at trial regions has decreased. Taking Hebi city of Henan Province as an example, in 2001, for 25 towns of it, after carrying out tax and fee reform, the per capita burden was reduced by 24.3 percent, which was RMB16.04. Meanwhile, fiscal income was decreased by 49.7 percent, which was from RMB1,414.036 billion to 70.7674 million; the town-level fiscal gap was up to RMB71.1256 million and if deducting fiscal transfer payment, the fiscal gap was RMB41.504 million. In the tax and fee reform, agricultural tax was calculated as per farmland area and assessed according to average production yield of the five years before 1998, for suburban towns with comparatively less farmland, their fiscal gap was further widened as the tax and fee burden of farmers was reduced. For instance, farmers in Lulou town, Shancheng district of Hebi city got 96.0 percent burden reduced, but the fiscal gap of this town was widened to RMB5.7

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million. There was still RMB4.7 million of fiscal gap, even after deducting the transfer payment provided by its higher-level government. Village-level income is charged in the form of agricultural surtax, which was 20 percent of agricultural regular tax. The agricultural surtax was used by village but managed by town, causing the income of village to decrease substantially, which especially made those administrative villages with weak collective economy hard to carry out works. According to survey on 107 administrative villages, in this year, village income was RMB2.7598 million less than last year, which decreased 27.4 percent compared with 2001 and average reduction for each village was RMB25.8 thousand. The method of “one issue, one discussion” was hard to unify ideas of most farmers due to its design defects and incomplete democratic system. Even when most villagers agreed to establish public welfare undertakings, they were stuck due to minor villagers who disagreed with contribution. The above-mentioned phenomenon was common and was especially obvious in the regions where the burden of farmers was heavy in the past. This circumstance made academic circles and grassroot officials doubt about the feasibility and fiscal sustainability of rural tax and fee reform, and made many farmers worry the reform could not sustain for long and be afraid of regressing to old way. According to the primary conclusion drawn from our empirical study, the burden problem of farmers is or is not mainly derived from sharp increase of average farmers’ burden, but because of two aspects: Firstly, the problem of farmers’ burden is mainly derived from the increase of regressivity of rural tax rate, i.e. under the condition of rapid widening of income disparity among rural regions, the traditional rural tax system is not adjusted accordingly, thus resulting in unequal tax and fee burden among farmers with different income. Especially, regions and people who have comparatively low income are burdened with heavier taxes and fees. Secondly, the absolute amount of rural taxes and fees is not the reason for the rural burden problem. The reason for the problem is that the agricultural tax income is not used for providing rural public goods, so the rural production capability, income of farmers and living level cannot be improved. On the contrary, it is mainly used to carry out various regulatory tasks issued by higher-level governments, especially the central

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government, such as grain purchasing and family planning, etc. On one hand, these regulatory tasks themselves may distort resource allocation and bring low efficiency. On the other hand, due to information asymmetry among governments at different levels, the cost to implement these regulatory policies at grassroot level is hard to predict. Therefore, the lower-level governments are able to bargain with higher-level governments in the name of implementing tasks issued by the central government and require expanding establishments and increasing budget, thus making the increase of taxes and fees have the characteristic of “irregularly-added charge”. In fact, most bureaucratic systems in history had this characteristic. If the central government adds tax of RMB0.01, farmers may be charged RMB0.1 at the end. Since local governments make exploitation level by level at the excuse of implementing the central government’s policies, the farmers’ burden gets heavier gradually. Despite the difference in representation form of the current difficulties in the agricultural tax and fee reform or the so-called “Strange Circle of Huang Zongxi” in tax and fee reforms in history, this is the fundamental reason.

Problems of new rural tax system The new rural tax system at present has the following problems: Firstly, the design of new tax system does not give enough consideration to and even neglects the fact that the rising regressivity of farmers’ burden is the main reason for the problem of farmers’ burden, but deems it as the problem of reducing average tax and fee burden; and “one-size-fitsall” method for design of new rural tax is possible to make the regressivity of farmers’ burden worse. Since the new rural tax system’s cancellation of various charges may increase tax rate of agricultural tax, and farmers with comparatively low income mainly depend on agricultural income, so these farmers are easier to be negatively affected by the new tax system. The regressivity may not get lower and may even get totally contrary result. In other words, even though farmers’ average burden decreases due to cancellation of various charges, the farmers with lowest or comparatively low income may not have fewer burdens. However, reducing the tax and fee burden of these people should be the basic objective of rural tax reform. According to the phenomena occurring recently, for people with

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high income, their income was not largely influenced by the tax reduction after tax reform. Even for the high taxes and fees before reform, they were able to bear. But tax reform makes local finance tight and brings higherlevel governments stress to provide fiscal transfer payment. However, people with low income did not benefit much from fiscal transfer payment. The problem of fiscal cost lacking pertinence should be avoided when designing tax system and arranging transfer payment system. Secondly, as for agricultural tax rate and levying method, current tax reform also face some problems. For instance, relatively unified tax rate of agricultural tax neglects the basic principle of levying tax as per capability of tax payment. In the regions where rural industry and business are comparatively advanced and fiscal income is mainly from non-agricultural taxes, there were not too many local charges originally. But, after increase of agricultural tax rate, people in these regions bear heavier burden than before. Even in regions where economy is not developed, the tax rate does not have to be unified in different regions. For suburban regions with few per capita land area and high differential rent, if agricultural tax is calculated as per farmland and regular production yield for agricultural tax is measured by average production yield of previous years, the taxes may decrease excessively and unnecessarily widen local fiscal gap. Thirdly, current rural tax reform is designed to reduce farmers’ burden by establishing new system, but it seems the sustainability of local finance is not considered sufficiently. So far, higher-level governments, especially the central government, have not given any systematical and regular arrangement for transfer payment. Therefore, administrative measures may still have to be used to enforce the implementation at the end. If local finance is under great pressure and fiscal transfer payment from higher-level governments is not able to completely make up the fiscal gap, the higher-level governments have to breach the promise of ceasing to charge, or take mandatory administrative measures to require the local governments to overcome fiscal difficulties by themselves on the premise of no additional taxes and fees. However, because of demand of normal operation and possible existing debts, it is difficult for local governments to fulfill it. Fourthly, the new tax system reform neglects the key impact on the rural tax problem caused by the implementation of regulations ordered by higher-level governments. Because implementation of various regulations

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ordered by higher-level governments becomes main task for local governments, under the condition of information asymmetry among governments at different levels, higher-level governments can never know exactly how many personnel and how much money are needed for implementing these regulations and cannot make institutional transfer payment arrangement with clearly separated responsibilities, rights and interests. Local governments always have excuse to request enlargement of transfer payment. In fact, this problem has come up when the rural tax reform just began. Many local governments do not try to reduce local administrative cost and cut down excessive personnel, but use every means to ask for transfer payment from higher-level governments. This is the inevitable result, since higherlevel governments depend on local governments to implement regulations and there is information asymmetry. In this sense, it is crucial to loosen and cancel unnecessary regulations in order to solve the problem of farmer burden and establish sustainable new rural tax system. Fifthly, the current tax reform emphasizes reducing absolute level of tax and fee burden, but does not give sufficient consideration to establishing and improving the public fiscal system so as to provide adequate and efficient fund-raising channels for rural public goods supply. After loosening and canceling regulations ordered by the higher-level governments, the main work of grassroot governments must turn to providing local public goods, including infrastructure, farmland irrigation construction and rural basic education, etc. In fact, efficient public goods supply can improve the productivity of agriculture and rural economy, which is finally favorable to improving farmers’ income and living quality. Therefore, on the premise of reasonable use of fiscal expenditure, the increase of absolute level of tax and fee burden may be associated with the decrease of relative (for income) level of tax and fee burden. In this sense, the policy that only emphasizes reduction of farmers’ taxes and fees may be one-sided. Finally, under the condition of incomplete grassroot democratic system, it may be difficult to operate the principle of “one issue, one discussion” due to extremely high transaction cost and even make the originally feasible public undertakings unable to be carried out. It needs to coordinate with rural democracy construction to make further improvement.

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Effects of Labor Out-Migration and Income Growth and Inequality in Rural China1

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Chapter

4

Li Shi2

Abstract Using the 1995 survey of rural household income, this chapter attempts an empirical analysis of the interactive relations between rural labor migration and income distribution, with the emphasis on the effects of ruralurban migration on income growth and income distribution in rural China. The results of our analysis indicate that rural migration makes a contribution to the growth of rural income, not only by raising labor productivity of migrant workers but also by permitting more efficient allocation of the remaining, non-migrating workers. Faster growth of rural household income resulting from more rural workers moving into urban areas could narrow the urban-rural income gap. From our two different approaches to estimating the contribution of rural migration to changes in rural income inequality, we find that rural migration at least does not cause deterioration in income distribution, and might improve it. Remittances from out-migrant workers have definitely played a role in reducing income differentials among rural households. Our simulation analysis also indicates that the distribution of rural household income in 1995 was more equal than it would have been in the absence of rural out-migration. However, at the provincial level, we find some evidence that rich and poor provinces experience quite different effects of rural migration on income inequality. Keywords: Rural migration; income distribution; China.

1 The author is grateful for comments from Chang Kyung-sup, John Knight, Carl Riskin,

Zuo Xuejin, and Zhu Ling and appreciative of Carl Riskin for making language correction. Wei Zhong made contributions to the computations in this paper. 2 School of Economics and Business Administration, Beijing Normal University.

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1.

Introduction

Rural labor migration and income distribution are two issues urgently in need of appropriate policies in China. The two issues are mutually interactive and determinative, each playing reciprocally the roles of cause and effect. This paper attempts an empirical analysis of the interactive relations between the two, with the emphasis on the effects of rural-urban labor migration on income distribution in rural China. The first issue discussed is to what extent rural workers away from their home villages contribute to the growth of their household income. To anticipate, we find that out-migrant workers have not only a direct effect on the growth of their household income but an indirect effect, as well, in that their out-migration raises the labor productivity of members remaining in their households. The impact of rural migration on income inequality in rural areas is rather complicated. To a large extent it depends upon whether most of the out-migrant workers are from low-income or high-income families. The data from the 1995 survey of household income indicate that most of the migrants were from households with medium incomes. This is not unexpected, since medium income household members are more likely to have both the incentive to seek improvement and the means to finance travel and job search. However, this makes it more difficult to infer the effect of migration on income distribution in a simple way. Therefore, we investigate two aspects of the problem: first, by estimating the effects of the remittances sent back by the out-migrants; and second, by comparing the contribution to overall income inequality in rural China of the out-migrants’ forgone income (opportunity cost) with that of their actual income. We estimate separately the effects of rural labor migration on overall inequality in rural areas as a whole, on the rural income differentials between different provinces and on the rural differentials within these provinces.

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2.

Rural-Urban Divide in the Labor Market and the Size of Rural Migration

2.1. The urban-rural divide and control of labor mobility During the 20 years from the implementation of the household registration system in 1958 to the start of the reform in 1978, mobility of the labor force and population in China had been reduced to the lowest level in history.3 The migration of people within rural areas, within urban areas and between city and countryside was all institutionally controlled. Although two decades have elapsed since the start of the economic reform in 1978, it has not yet come to terms with one of the biggest institutional defects in the Chinese socioeconomic system — the rural-urban divide. Ever since the implementation of the household registration system in 1958, rural and urban people have been institutionally separated into two independent and unequal communities with different economic systems. The first stroke of the rural economic reform that started at the end of the 1970s was to break the institutional deadlock brought about partly by restrictions imposed on labor force mobility. The “household responsibility system” implemented in the villages and the dissolution of the People’s Commune System granted to the farmers more freedom in managing production and in their personal lives and also eased restrictions on villagers’ mobility. The effect of the reform in boosting farm production and in the vigorous development of township and village enterprises (TVEs) alleviated tremendously the shortage of consumer goods in urban areas, thus providing material conditions for the implementation of urban economic reforms.

3 “Regulations on Household Registration of the People’s Republic of China” adopted by the Standing Committee of the National People’s Congress in the January of 1958 enacted legal clauses concerning the range, reporting, nullification and change of domicile registrations. It was then, and through the household registration system, that overall control over migration, especially the migration of rural workers, began. In August of 1964, the State Council circularized regulations of the Ministry of Public Security on change of registered permanent residence, and once again stressed the spirit of two “strict restrictions”, i.e. strict restriction on both migration of rural inhabitants to cities and towns and migration of town residents to cities (Wang and Hu, 1996).

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However, the urban economic reform at that time focused on reforming commodity prices while reform of the price of labor — wage setting — was neglected. Neither the rationalization of wages through the establishment of competitive and mobile labor markets, nor the establishment of a unified national labor market so as to utilize the entire urban and rural labor force more efficiently, was considered. In addition, the remaining labor control system in urban China, the institutional obstacles hindering labor from moving from rural to urban areas, and the distortions in labor prices produced thereby, had all to a large extent misled urban industry into adopting an excessively capital-intensive strategy of development. Moreover, the reform of urban enterprises at that time emphasized improvements in internal management and in work incentives through such approaches as “decentralization of decision-making rights from the state to the enterprises” and “giving more material incentive to workers”. There was a tendency toward accelerated increase in wages, which further widened the gap between the labor incomes of urban and rural workers. Even more important is the fact that an ever-growing proportion of national income had been going back to urban areas through state investment in fixed capital, infrastructure construction and public utility investments, all of which further widened the gap in overall development level between rural and urban China to a degree well beyond the income gap alone. Thus, while urban residents are well along in the process of modernization, much of the rural population is still far from entering this process. Such a pattern runs the danger of becoming cumulative and self-reinforcing. During the early years of reform, the lag in development of an urban labor market did not have much of a negative effect on the processes of the reform, while the fast-growing TVEs absorbed part of the surplus labor from the agricultural production, thus easing the pressure of rural labor on the land. However, in the second half of the 1980s, rural enterprises changed their development strategy from a labor-intensive to a capitalintensive approach, thus weakening their capacity to absorb surplus labor. On the other hand, due to population growth and the intensification of farming, the absolute size of the rural labor force and the amount of rural surplus labor were still on the increase. So, the migration of part of this surplus labor to urban areas became inevitable.

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Although migrant rural workers were not allowed to freely enter the labor market in urban China, they were eagerly demanded by various urban sectors. First and foremost, it was the rapidly growing non-state sectors that demanded large numbers of migrant workers. Second, the migrants themselves created a number of informal urban sectors which they peopled, thus creating their own demand. Third, there were urban job vacancies for dirty, humble, heavy and unprofitable work that full-status urban workers were reluctant to do, and the only alternative was to employ migrant labor. Fourth, financially hard-pressed state enterprises found it cheaper to employ migrants, especially for short-term jobs. For all these reasons, since the late 1980s the rural residents started to pour into urban areas to accept or hunt for new and higher paying job opportunities.

2.2. The size and pattern of labor migration in recent years The size of rural labor migration has not been very clear up to now. One reason lies in conceptual confusion. For example, one of the terms frequently used in the Chinese research literature and the media is “floating population in cities” and another one is “floating labor force in the countryside”. At times these two different concepts have been lumped together as one. But actually they are different because the latter (floating labor force in the countryside) includes those having migrated into the cities and those having migrated to other rural areas or small towns. Further, the concept of “floating population in cities” represents a much wider concept. It covers not only the floating rural labor force but also part of the rural floating population that is not in the labor force, as well as the floating population coming from other cities and towns, including those both within and outside of the labor force. A survey of floating population in 1988 (Li and Hu, 1991) showed that there were altogether 7.18 million members in the 11 biggest cities, such as Beijing and Shanghai, among which about 4.26 million were from rural areas, constituting 59.3 percent of the total. Again, among the total floating population, 48.3 percent were employable, and part of these had come from other cities and towns. The floating rural workers made up only about 45 percent of the total floating population in cities. Unfortunately,

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even knowing the above data it makes still difficult to estimate the size of the entire migrant rural labor force in urban China. Since the 1980s, there have been a number of different estimates of the size of the rural floating labor force and the number of rural migrants in urban areas. The estimates of the former during the late 1980s and early 1990s range from 40 million to 80 million people — a puzzlingly large difference, indeed. Further, faced with so many different estimates it is difficult to know the proportions of the rural floating labor force flowing into urban areas and to other rural regions. A 1994 survey of rural labor migration carried out by the Ministry of Labor in eight provinces of rural China indicated that about 20 percent of the total rural labor force were working away from their home villages, among which 40 percent were working within their home counties (Knight et al., 1996). Calculating on this basis, and keeping in mind that the eight provinces surveyed had higher than average proportions of outmigrants, the total number of rural migrants working away from their home villages in the entire country may have numbered roughly 45 to 50 million. In addition, the 1995 survey of household income that is the occasion for this book indicated that rural workers working away from their home villages constituted 9.9 percent of the total labor force, which puts total number for the whole country in that year at about 45 million. However, although these two surveys allow us to estimate the overall size of the rural floating labor force, it is still difficult to get at the number of migrant workers moving into the cities.

3.

Empirical Results

Table 1 presents information about the size of rural labor migration from the 1995 household income survey,4 including the proportion of migrant workers and of households with migrant workers in each province. Table 2 shows the personal characteristics of the migrant workers, in comparison with non-migrants. 4 The survey was conducted by the Institute of Economics, Chinese Academy of Social Sci-

ences, with the assistance from the State Statistical Bureau in Beijing and foreign scholars. The samples were derived from large samples of the State Statistic Bureau. The 1995 survey of rural household income covers 19 provinces and 8,000 households.

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Effects of Labor Out-Migration and Income Growth and Inequality in Rural China Table 1.

Distribution of Migrant Workers by Province, 1995.

Workers (percent of column total)

Households (percent of column total)

Province

Migrant workers

Non-migrant

Total

HH with migrant workers

HH without migrant workers

Total

Beijing Hebei Shanxi Liaoning Jilin Jiangsu Zhejiang Anhui Jiangxi Shandong Henan Hubei Hunan Guangdong Sichuan Guizhou Yunnan Shaanxi Gansu National

0.09 3.97 3.79 1.53 2.84 5.37 3.79 7.62 9.47 7.94 6.40 2.12 7.30 10.69 14.16 4.55 1.76 3.97 2.66 100

1.36 6.68 3.79 3.30 3.43 6.53 5.16 5.17 4.10 9.12 9.37 5.07 4.95 5.63 9.20 3.87 4.77 3.73 4.78 100

1.25 6.51 3.81 3.15 3.41 6.43 4.98 5.43 4.47 8.99 9.13 4.82 5.19 5.92 9.61 3.96 4.53 3.77 4.64 100

0.11 4.70 3.95 1.43 3.21 5.33 3.09 8.31 8.54 7.62 6.53 2.06 7.79 9.00 13.98 4.99 1.95 4.24 3.15 100

1.57 6.66 3.69 4.40 3.90 6.51 5.53 4.88 3.22 9.07 9.37 5.86 5.82 5.48 8.86 3.40 4.25 3.61 3.92 100

1.25 6.23 3.75 3.73 3.75 6.25 5.00 5.63 4.38 8.75 8.75 5.03 6.25 6.25 9.98 3.75 3.75 3.75 3.75 100

Source: 1995 Household Income Survey. Notes: (1) Migrant workers are those who worked outside their villages or left them to look for work for more than one month in 1995. (2) Households with migrant workers are those having at least one migrant worker, as defined in (1) above.

The existing literature has universally regarded rural China as a labor surplus economy. Theoretically, in such an economy, labor out-migration should benefit income growth. However, due to various obstacles to the free movement of productive resources, especially labor, the theoretically expected effect on income growth may not show up clearly in the real economy. We now turn to this issue, using the data from the sample surveys.

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Statistical Description of Rural Migrant and Non-migrant Workers, 1995. Migrant workers (percent)

Non-migrant workers (percent)

Total (percent)

Gender: Male Female

72.1 27.9

49.2 50.8

51.3 48.7

Age group: 1–18 19–25 25–30 31–35 36–40 41–

10.0 46.3 13.6 9.1 7.5 13.6

7.1 18.0 10.4 10.6 11.7 42.0

8.3 20.5 10.7 10.2 11.3 38.9

Marital status: Married Single Other

47.5 51.5 1.0

77.7 20.0 2.3

73.8 23.7 2.5

Education: College Professional Upper middle Lower middle Primary

0.2 1.7 11.4 55.9 30.5

0.6 1.2 8.3 39.2 50.3

0.6 1.3 8.5 40.5 48.6

Household size: 2 and below 3 4 5 6 7 and above

1.62 12.72 28.27 25.29 14.83 17.27

3.0 15.4 33.2 25.6 13.2 9.7

2.87 15.38 32.95 25.53 13.25 9.98

Minority Han

5.30 93.05

7.5 91.1

7.1 91.1

Source: 1995 Household Income Survey. Notes: (1) Migrant workers are those who worked outside their villages or left them to look for work for more than one month in 1995. (2) Households with migrant workers were those having at least one migrant worker, as defined in (1) above.

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3.1.

Income of households with and without out-migrants

The total rural labor force can be divided into two categories: out-migrants and non-outmigrants; and all rural households can correspondingly be divided into households with out-migrant workers (hereafter MH) and those without out-migrant workers (NMH). On the basis of these classifications, we calculate first of all the per capita income of households with and without out-migrant workers and the income per worker for each province and the entire sample. These calculations are presented in Table 3. Table 3.

Income of Households With and Without Migrant Workers. Households: Sample size

Income per capita

Income per worker

Province

With

Without

With

Without

With

Without

Total

1641

6332

2074

2104

3243

3777

2 78 51 22 55 90 50 139 147 126 102 36 129 143 238 80 31 67 55

98 416 248 277 244 409 348 310 202 570 597 365 370 354 560 219 268 233 244

2627 1404 1443 2251 2366 3718 2396 1537 1800 2906 2170 1787 1499 3671 1759 1367 1189 1612 1090

4824 1816 1216 1977 1963 3628 3795 1759 1617 2560 1603 1727 1435 4306 1408 1233 1391 1291 1047

4127 2781 3187 4034 3795 5386 3372 2464 2844 4098 3619 2666 2450 5709 2444 1995 1698 3067 1985

7974 3915 2695 3369 3797 5473 6045 3290 3149 4151 2925 2986 2971 8564 2264 2423 2481 2965 1957

Beijing Hebei Shanxi Liaoning Jilin Jiangsu Zhejiang Anhui Jiangxi Shandong Henan Hubei Hunan Guangdong Sichuan Guizhou Yunnan Shaanxi Gansu

Source: 1995 Household Income Survey, by Institute of Economics, CASS. Notes: (1) Migrant workers are those who worked outside their villages or left them to look for work for more than one month in 1995. (2) Households with migrant workers were those having at least one migrant worker, as defined in (1) above.

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Table 3 shows that, for China as a whole, the per capita income of MH was slightly (about 1.5 percent) lower than that of NMH, while income per worker of the former was 16 percent below that of the latter. However, the situation was different in different provinces. Among the 19 sampled provinces, there were six in which per capita income of MH was below that of NMH, most of the six being relatively developed provinces, such as Guangdong and Zhejiang. The last two columns in Table 3 give a very rough indication of the wage gap between out-migrant and non-migrant workers in 1995.5 Among the 19 sampled provinces, in 13 per worker income of MH was below that of NMH, and in six it was higher. These six provinces were Gansu, Shaanxi, Sichuan, Henan, Liaoning and Shanxi. All six are relatively backward in economic development and the wages earned by their out-migrant workers was higher than the income of the workers engaged in local farming activities. Moreover, in some provinces such as Jilin, Jiangsu, and Shandong, the income per worker differential between MH and NMH was not very large, suggesting that some outmigrants had failed to find jobs, or had originally earned such low incomes that only through migration could they bring earnings up to the provincial average.6 Even in more developed provinces, some workers left their home villages to find more lucrative opportunities. Most provinces are large, populous, and divided into geographically and economically diverse regions. Even advanced Guangdong has a poor, hilly hinterland, for instance. Therefore, it is understandable if migrants from such poorer localities, even while raising their household income, cannot bring it up to the provincial average.

3.2. The estimated effects of rural out-migration on the income growth of rural households It should be recognized that the above comparisons are over-simplified, since the factors determining household income, in addition to labor 5 It should be remembered that “out-migrants” include those looking for work as well as those working. Therefore, the average income per worker of households with out-migrants is lower than the average for those households whose out-migrant members actually found work. 6 Small sample sizes for some provinces, including poor provinces such as Yunnan and Gansu, increase the chance of sampling error. The results for these provinces should be regarded only as suggestive, at best.

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Effects of Labor Out-Migration and Income Growth and Inequality in Rural China Table 4.

Results of Income Function of Rural Households in China, 1995. Dependent: Household income

Independent variables Irrigated land (mu) Non-irrigated land (mu) Production assets (yuan) Number of workers Migrant workers Non-migrant workers Household with migrants (dummy) HH without migrants (dummy) Province dummies: Beijing Hebei Shanxi Liaoning Jilin Jiangsu Zhejiang Anhui Jiangxi Shandong Henan Hubei Hunan Guangdong Sichuan Guizhou Yunnan Shaanxi Gansu Intercept Adj-R2 F-value Mean of dependent Observations

Mean 4.20 3.35 2727.8 2.45 0.265 2.185 0.21 0.79

0.062 0.035 0.035 0.037 0.063 0.050 0.057 0.045 0.088 0.087 0.051 0.062 0.063 0.101 0.038 0.038 0.038 0.038 1.000

Equation 1 0.00009 −0.0064∗∗∗ 0.00002∗∗∗

Equation 2 0.00009 −0.0069∗∗∗ 0.000019∗∗∗ 0.108∗∗∗

0.170∗∗∗ 0.076∗∗∗ 0.094∗∗∗ — — −0.884∗∗∗ −1.174∗∗∗ −0.803∗∗∗ −0.905∗∗∗ −0.344∗∗∗ −0.411∗∗∗ −0.869∗∗∗ −0.802∗∗∗ −0.729∗∗∗ −0.888∗∗∗ −0.916∗∗∗ −1.047∗∗∗ −0.105 −1.188∗∗∗ −1.147∗∗∗ −1.107∗∗∗ −1.152∗∗∗ −1.282∗∗∗ 9.345∗∗∗ 0.232 104.0 8.744 7825

— −0.883∗∗∗ −1.169∗∗∗ −0.837∗∗∗ −0.917∗∗∗ −0.359∗∗∗ −0.430∗∗∗ −0.898∗∗∗ −0.823∗∗∗ −0.751∗∗∗ −0.897∗∗∗ −0.935∗∗∗ −1.063∗∗∗ −0.127∗ −1.213∗∗∗ −1.166∗∗∗ −1.132∗∗∗ −1.154∗∗∗ −1.299∗∗∗ 9.264∗∗∗ 0.239 108.0 8.744 7825

Source: 1995 Household Income Survey. Notes: (1) Migrant workers are those who worked outside their villages or left them to look for work for more than one month in 1995. (2) Households with migrant workers were those having at least one migrant worker, as defined in (1) above. (3) In this and subsequent tables, ∗∗∗ denotes statistical significance at the 1 percent level, ∗∗ at 5 percent and ∗ at the 10 percent level.

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force, include also land, production assets, etc. Besides, the huge regional disparities in rural China, the unbalanced development among different regions and the relatively independent fiscal policy of “linking expenditures to revenues” in individual provinces have all contributed to the formation of the income gaps. In order to control for factors other than labor force, we estimate the effects of labor migration on household income growth, using a household income function. The income function of rural households includes land (divided into irrigated and non-irrigated land), production assets (in present values) and provincial dummy variables (to control for income differences arising from provincial location). Two different equations are specified. In the first, the number of household out-migrant and non-migrant workers are taken as two independent explanatory variables; their estimated coefficients can be interpreted as their marginal rates of contribution to household income. In the second equation, while taking the total number of working members of the household as the explanatory variable, households with and those without out-migrant workers were introduced as dummy variables. The estimated results of the two models are presented in Table 4. The results of Model I show that the estimated coefficients of both out-migrant labor and non-out-migrant labor are highly significant. The marginal contribution of out-migrant workers to total household income is higher, by about 10 percentage points, than that of non-migrant workers. According to the 1995 survey data, household income came to 6,270 yuan in rural China, so our estimate implies that an average out-migrant worker earned about 600 yuan more than household members working locally. Therefore, we can conclude that there was a positive wage premium for being an out-migrant worker. This conclusion is also supported strongly by the results of Model II. When the presence of out-migrant workers is introduced into Equation 2 as a dummy variable, its estimated coefficient indicates that the marginal contribution to household income from having out-migrant members, compared to not having them, is 9.4 percentage points. The estimated coefficient was highly significant. The results of the two models in Table 4 indicate that the rate of contribution to income of out-migrant workers was higher than that of nonmigrant workers. This is but one effect of rural migration on income rural

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household income. In addition, rural migration is accompanied by a process of reallocation of production resources within households, and especially of labor. For households with surplus labor, out-migration would reduce the surplus and increase the marginal product of labor of the remaining members, especially those engaged in farming activities. This is another effect of rural migration on rural household income. If this effect exists, then the estimated coefficient of farm labor in the income function of MH should be higher than that for NMH. To test our hypothesis, the income functions of MH and NMH are estimated separately. In the MH income function, the numbers of out-migrants and non-migrant workers were introduced as explanatory variables along with other production variables and dummies; the NMH income function has the same specification, except that it excludes out-migrant workers. The difference in the estimated coefficients of non-migrant workers in the two functions reflects the difference in these workers’ marginal rates of contribution to total income in the two types of households. It also reflects the difference in their marginal productivity, resulting from reallocation of labor within the household. Part of the estimated results was significant7 and is given in Table 5. The fit and estimated results of both functions for the entire rural sample — for households with and without out-migrant workers — are quite satisfactory statistically. The value of adj-R2 means that more than 20 percent of the total variance in household disposable income is explained by the two models. In them, the estimated coefficients of the variables of both out-migrant workers and non-out-migrant workers are highly significant. What is more interesting is that the coefficient on non-migrant workers in the model for MH is 0.099, three percentage points higher than the corresponding figure, 0.069, in the model for NMH. This indicates that the marginal product of non-migrant workers living in households having outmigrants is higher than that of workers in households with no out-migrant workers.8 7 Listed in Table 5 are the estimated results for nine provinces only. This is because most of

the estimated coefficients of labor variables in these provinces passed the statistical test of significance, while those for other provinces were not statistically significant and so are not discussed further here. 8 Due to the very small difference in per capita income between the two groups of households, the absolute amount contributed by a non-migrant worker in an MH is also higher than his (her) counterpart in an NMH.

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Income Functions of Rural Households With and Without Migrant Workers. Estimated coefficients: Migrant workers

Non-migrant workers

Adj-R2

F-value

Observations

Total sample: HH with migrants (MH) HH with no migrants (NMH)

0.186∗∗∗

0.099∗∗ 0.069∗∗

0.267 0.225

27.0 83.8

1641 6184

Anhui: MH NMH

0.420∗∗∗

0.113 0.038

0.238 0.057

4.07 5.64

50 308

Henan: MH NMH

0.248∗∗

0.113∗∗ 0.064∗∗

0.200 0.129

6.02 22.5

102 580

Hunan: MH NMH

0.238∗∗

0.130∗∗∗ −0.014

0.203 0.034

7.51 4.18

129 358

Guangdong: MH NMH

0.214∗∗

0.025 −0.032

0.130 0.092

5.24 9.75

143 347

Sichuan: MH NMH

0.339∗∗∗

0.083∗∗ 0.061∗∗

0.111 0.088

6.93 14.3

238 553

Guizhou: MH NMH

0.190

0.078∗ 0.040

0.125 0.014

3.25 1.76

80 217

0.272∗

0.223∗∗ 0.029

0.335 0.124

4.02 10.28

31 264

0.091 0.004

2.31 1.23

67 231

0.131 0.398

2.62 40.52

55 240

Yunnan: MH NMH Shaanxi: MH NMH Gansu: MH NMH

0.580∗∗

0.035

0.147∗ −0.0003 0.128∗∗ 0.033

Source: 1995 Household Income Survey. Notes: In the national and provincial regression models, control variables of land and production assets were introduced. Subject to limit space, the coefficients of the control variables are not presented in this table.

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Such findings support our hypothesis that the rural migrant workers not only earn higher income outside their households but also raise the productivity of their stay-at-home relatives. Perhaps a further question should be raised, however. If education is conducive to labor mobility, it is possible that MH have more human capital than NMH, and that this, rather than the posited reallocation of labor, is what explains the higher productivity of non-migrant workers in MH. To answer this question, the average years of education of migrant and non-migrant workers in the two types of households were compared. Although the average amount of education of out-migrants was 1.2 years more than that of non-migrants in NMH (8.28 years compared with 7.04 years), in MH the average amount of education of non-migrant workers was only 6.14 years in 1995. Thus, the higher productivity of non-migrant workers in NMH than in MH was not due to more human capital. However, we cannot rule out spillover effects from the superior human capital of the out-migrant workers on the productivity of their non-migrant relatives. It would be a very tough task to measure this! Table 5 also presents estimates of the same income functions for nine provinces. Among the 19 provinces in our survey, the estimated results were unsatisfactory for ten. Some of these had samples that were too small and others had statistically insignificant labor coefficients. However, the regression results in the remaining nine provinces were significant. The estimated coefficients of non-migrant workers in the income function of MH were higher than those of workers in NMH in all nine provinces, although some of them were not significant. These results further support our hypothesis that rural migration increases productivity of non-migrant relatives.

3.3.

Effects of migration on income distribution

To what extent has rural migration impacted on the income distribution in rural China in the 1990s? Has it tended to widen or to narrow income inequality? Has it contributed to reducing the incidence of rural poverty, or has it had no significant role to play in poverty alleviation? Although all these issues have been touched upon in our theoretical discussion above, we need to see whether we can verify our theoretical hypotheses, and also try through an empirical investigation to better understand the real situation, which is rather complicated. 175

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The effect of migration on rural income distribution can be analyzed using two approaches. One is simply to examine the effect of income remitted back or brought home by out-migrant workers. Here, such remittances can be counted either as part of the total income of their households or as transfer income from other family members. Thus, the inequality measures can be compared for household income including and excluding remittances, and the effect of the remittances on rural income inequality can be precisely calculated. This approach is frequently seen in the current literature, and is even more applicable to developing countries, where labor mobility takes place through population migration and remittances become the main economic link between the outmigrants and their original families. Another approach is based on estimating opportunity costs of the outmigrant workers. Knowing the opportunity costs, we can compare the actual income of households with their simulated income derived from substituting the opportunity cost of outmigrants (i.e. the estimated income they would have earned, had they not migrated) for their actual income, and therefore we can compute inequality measures for both the actual income and the simulated income. We have to assume, of course, that the outmigrant workers, had they remained in their home villages, would have earned only their opportunity cost — which is the income earned in home villages. The difference in some inequality measure, such as the Gini coefficient, between these two incomes, can be regarded as the change in income inequality caused by out-migration. Technically, the analysis required for this approach is more complicated, because the estimation of the opportunity cost of out-migrant workers requires a proper use of the production (income) functions of the rural households. Fortunately, the 1995 rural household income survey data provide the possibility of attempting both approaches. Remittances from outmigrants were reported as a source of household income, and personal information was collected that can be used to distinguish permanent household members from non-permanent members. Among the 7,998 rural households in the sample, 1,181 received remittances from out-migrant members, with the average amount being 2,190 yuan, accounting for 25.1 percent of total household income of those households receiving remittances. For all households in the sample, the average remittance came to 25 yuan, comprising 3.8 percent of household total income in 1995. The importance of remittances varied widely among the provinces. Table 6 shows the number of 176

Remittances and their Shares in Household Income in Rural China 1995. Share of remittances in income: Receiving households

All households

1182

14.8

2190

324

25.1

3.8

1 50 46 7 22 21 46 132 131 64 63 24 117 118 198 43 30 41 28

1.0 10.0 15.3 2.3 7.3 4.2 11.5 29.3 37.4 9.1 9.0 6.0 23.4 23.6 24.8 14.3 10.0 13.7 9.3

2500 2073 1374 1695 2380 3807 2489 2061 2219 2221 1641 2137 1864 4045 2097 965 1347 1945 1023

25 208 211 40 175 160 286 604 830 203 148 128 436 955 520 138 135 266 95

9.4 28.3 27.4 24.0 27.5 27.4 29.5 28.6 26.6 17.7 18.3 23.5 29.3 23.0 27.8 16.1 24.6 29.3 21.1

0.1 2.8 4.2 0.5 2.3 1.2 2.1 8.6 10.1 2.0 2.0 1.8 7.3 5.0 9.1 2.4 2.2 4.3 1.9

Source: 1995 Household Income Survey.

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Total Province: Beijing Hebei Shanxi Liaoning Jilin Jiangsu Zhejiang Anhui Jiangxi Shandong Henan Hubei Hunan Guangdong Sichuan Guizhou Yunnan Shaanxi Gansu

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Table 6.

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households receiving remittances, their proportions to all households, the size of remittances per household and other relevant information, for the entire sample and for each province in it. It is clear from the amount of regional variation that the impact of remittances on regional income differentials in rural China needs to be investigated, as well. For this analysis, we make use of the Gini coefficients and decile distributions of rural personal disposable income, both including and excluding remittances. The Gini coefficient shows how a commonly used aggregate measure of income inequality responds to remittances, while from the decile distribution we can see the changes in each decile group’s share of total income due to remittances. Table 7 shows that the Gini coefficient for personal disposable income in rural China as a whole in 1995 was 0.411. If the remittances sent back by the out-migrant workers are deducted, the Gini coefficient would rise by five percent to 0.431. In other words, the presence of remittances lowers the Gini coefficient of rural personal disposable income by about five percent, suggesting that remittances were helpful in narrowing income differences. Table 7.

Decile Shares of Income, With and Without Remittances, Rural China, 1995.

Personal income

Personal income after deducting remittances

Share of remittances in income (percent)

1 2 3 4 5 6 7 8 9 10

0.0227 0.0394 0.0485 0.0577 0.0676 0.0792 0.0931 0.1114 0.1461 0.3343

0.0235 0.0358 0.0448 0.0546 0.0645 0.0760 0.0908 0.1118 0.1485 0.3497

17.3 7.1 5.8 6.1 5.1 4.3 4.0 2.9 4.5 1.6

Gini coefficient Coef. of variation

0.411 1.218

0.431 1.266

Decile (ascending order)

Source: 1995 Household Income Survey. Notes: (1) There are totally 34,739 individuals in the rural sample. (2) Deciles are sorted in ascendant order.

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The changes in the decile shares of income shown in Table 7 also support this conclusion. Remittances increased the respective shares of six of the seven lowest decile groups, all but the lowest, by three percentage points per decile group, on average. The share of the lowest income decile was reduced slightly by remittances, even though the remittances were responsible for a far higher share of this decile’s total income (17.3 percent) than of any other decile’s. This suggests that the size of remittances for this group was very small, relative to the size of remittances for other groups. Remittances lowered the shares of the richest three deciles. The expensive opportunity cost of migration for these well-off groups may have dampened their enthusiasm to move. Table 8 shows the concentration ratios of personal income with and without remittances, and of remittances, themselves, as well as their respective shares in total income.9 The concentration ratio of remittances was rather low, being 0.170 only, far smaller than the Gini coefficients for all income and for all income excluding remittances. Although the share

Table 8. Contribution of Remittances to Inequality of Rural Income: Decomposition Analysis.

Type of income

GINI or Concentration ratio

Remittances Personal income after remittances Personal income

0.1702 0.4207 0.4113

Shares of total Contribution to total income (percent) inequality (percent) 3.8 96.2 100.0

1.57 98.43 100.0

Source: 1995 Household Income Survey. 9 We use here the formula for indirect decomposition of the Gini coefficient, which can be

 written as G = Ui ∗ Ci, in which Ui is the share of the ith source of income in total income and Ci is the concentration ratio of that income source. The concentration ratio is analogous to the Gini ratio, except that it measures the inequality in distribution of a given kind of income (e.g. wages) over all income recipients, not only recipients of that source (wage-earners). For example, if wages were very high relative to other kinds of rural income, but distributed very equally among wage-earners, they would have a very low Gini ratio but a very high concentration ratio. The relative contribution of an income source to the inequality of total income can be expressed as Ri = Ui ∗ Ci/G. The Ri’s for all income sources add up to the Gini ratio of total income. See Khan et al. (1992).

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of remittances in total income was 3.8 percent, their contribution to the inequality of total income was only 1.57 percent. Clearly, remittances are an “equalizing” source of rural income in the sense that, ceteris paribus, an increase in their share of total income would reduce the overall Gini coefficient. Let us try a simple simulation analysis. Suppose the concentration ratios for the two income sources were unchanged, while the share of remittances in total income increased from the existing 3.8 percent to 10 percent and then to 20 percent. The Gini coefficient of total income would then decline, ceteris paribus, from the existing level of 0.411 to 0.396 and then to 0.371, decreasing by 3.7 percent and 9.7 percent, respectively. This suggests that encouraging more migration among low income households would play a positive role in restraining the widening of income inequality in rural China. The second approach is to estimate separately the income functions of MH and NMH. Then the marginal contributions of out-migrant workers and non-migrant workers to household total income can be estimated. For the NMH, the income function includes only the number of non-migrant workers as the labor variable, the coefficient of which is their marginal contribution to total household income. This can also be regarded as the opportunity cost of migrating. That is to say, if the migrating workers in a household were to stay at home, their marginal contribution to total household income would be equivalent to that of non-migrant workers in NMH. The income function of MH can be expressed as:  Yn (Lm ) = βmo + βm1 Lm + βm2 Ln + βmi Xi + ε (1) Here Yn is the total income of households; βm0 is intercept; βm1 is the marginal contribution of out-migrant workers to household income and βm2 is that of the non-migrant workers to household income; Xi is other production inputs and control variables; and ε is a random error term. For NMH, the income function takes the form as follows:  Yn (Ln ) = βno + βn2 Ln + βni Xi + ε (2) in which the explanations for the variables and parameters are basically the same as in formula 1. βn2 can be taken either as the marginal rate of contribution of workers to the income of their families, or as the opportunity 180

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cost of migration for out-migrant workers in MH. The latter interpretation stems from the assumption that if there were no out-migrants among MH, their income function would coincide with formula 2 and not formula 1. So, from our household income data, two sets of predicted incomes can be derived from the two formulas. One of the two sets, Yp, is composed of the predicted incomes of the MH derived from formula 1 and the predicted incomes of NMH derived from formula 2. The other set, Yo, is composed of the predicted incomes of MH and NMH, both derived from formula 1. However, the predicted incomes of the MH here are actually the predicted opportunity costs to labor migration — i.e. what those households would earn if their out-migrant workers stayed home. Table 9 also shows some inequality indices of the two sets of predicted income of

Table 9. Effects of Remittances on Lorenz Curves in Rural China: Income Function Approach. Total sample

Guangdong

Sichuan

Yp

Yo

Yp

Yo

Yp

Yo

1 2 3 4 5 6 7 8 9 10

0.0445 0.1016 0.1669 0.2399 0.3207 0.4092 0.5079 0.6249 0.7712 1.0000

0.0445 0.1015 0.1669 0.2395 0.3200 0.4089 0.5079 0.6231 0.7680 1.0000

0.0541 0.1205 0.1938 0.2734 0.3592 0.4511 0.5512 0.6617 0.7935 1.0000

0.0551 0.1219 0.1944 0.2721 0.3584 0.4442 0.5446 0.6564 0.7898 1.0000

0.0517 0.1173 0.1925 0.2761 0.3694 0.4700 0.5788 0.6991 0.8321 1.0000

0.0580 0.1298 0.2108 0.2983 0.3913 0.4969 0.6054 0.7201 0.8505 1.0000

Gini C. V.

0.2686 0.7454

0.2700 0.7624

0.2134 0.4936

0.2180 0.5479

0.1856 0.3407

0.1512 0.3452

Deciles

Source: 1995 Household Income Survey. Notes: (1) Yp = Predicted personal income with income functions of households with and without migrant workers, respectively; Yo = Predicted personal income of all households, using income function of households without out-migrants, thus assuming migrant workers make same contribution as non-migrant workers. (2) Province dummies were used in the household income functions for total sample. (3) The calculations are for individuals, not households.

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all the rural samples, as well as the samples for Guangdong and Sichuan province.10 In Table 9, the difference between the Gini coefficients for the two sets of predicted incomes is very small, with inequality slightly higher for the second set of predicted incomes. That the Gini coefficients are so similar is in part due to a well-known deficiency of the Gini coefficient itself as an index of inequality, namely, that it is quite insensitive to income transfers among non-extreme groups.11 The coefficient of variation in Table 9 registers a greater difference in inequality between of the two sets of predicted income, with the CV of Yo being 2.3 percent higher than that of Yp. So we can conclude that, while the changes in inequality as measured by different indices are different, the implications are basically similar, i.e. if the outmigrant labor force had remained working at home, overall income inequality in rural China could have been somewhat higher than it was in 1995. This conclusion, drawn from the analysis of the overall rural sample, may not hold for particular provinces with special conditions. Table 9 shows results for Guangdong and Sichuan provinces that basically tally with theoretical expectations. These expectations are that in more developed provinces (e.g. Guangdong), outmigrants tend to come from lowerincome families; with strong feelings of relative deprivation, they have strong motivation to move out, as explained by Stark (1984). The large difference between their expected income from migrating and the opportunity cost of migration promises to narrow the income gap between their families and high-income families. In the backward provinces (e.g. Sichuan), on the other hand, most of out-migrant workers are from families with mediumlevel income and above, rather than those with lowest incomes. This is mainly because of financial constraints facing the poorest families, who lack the means to travel, bear risks and finance job search. Migration thus 10 There are several reasons for choosing Guangdong and Sichuan as the provincial cases to examine. First, both provinces have high proportions of rural out-migrant workers, as shown in Table 1. Second, Guangdong is an economically prosperous province on the east coast, while Sichuan represents the underdeveloped west. Third, both provinces have large enough sample sizes, both with and without out-migrant workers, to permit the estimation of household income functions. 11 The changes in the Lorenz curve for the total rural sample in Table 9 shows that, compared with Yo, the income shares of the 2nd, 4th and 5th decile groups of Yp are higher. However, the reflection of these changes in the Gini coefficient is miniscule.

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tends to raise the incomes of middle-income families relative to low-income ones, which would widen income inequality in these areas. For Guangdong Province, the Gini coefficient of Yo is 2.2 percent higher than that of Yp, while the coefficient of variation of Yo is 11 percent higher than that of Yp. This indicates that rural migration has narrowed income differences in rural Guangdong. However, for Sichuan, the results are just the opposite. Although the difference in coefficients of variation between Yo and Yp is very small, the 3.4 percent difference in Gini coefficients (that of Yp being the higher) is rather substantial. In Sichuan, it seems, the outflow of rural labor has actually increased rural income inequality. Of course, these results obtain only for the two provinces concerned. Further research is needed before a general conclusion can be drawn that rural migration reduces income inequality in economically prosperous regions while increasing it in backward regions.12

4.

Conclusions

With the enormous gap, including the income gap, between urban and rural areas in China, the migration of rural workers looking for income-earning opportunities will be a long-term and continuing phenomenon. The results of our analysis indicate that rural migration makes a contribution to the growth of rural income, not only by raising labor productivity of migrant workers but also by permitting more efficient allocation of the remaining, non-migrating workers. Faster growth of rural household income resulting from more rural workers moving into urban areas could narrow the urbanrural income gap. From our two different approaches to estimating the contribution of rural migration to changes in rural income inequality, we can conclude that rural migration at least does not cause a deterioration in income distribution, and might improve it. Remittances from out-migrant workers have definitely played a role in reducing income differentials among rural 12 Similar estimates for all provinces in the 1995 household data were attempted in order

to find the correlation between the difference in Gini coefficients for Yp and Yo, on the one hand, and the income level of the provinces, on the other. However, small sample sizes and other problems led to unsatisfactory results.

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households. Our simulation analysis also indicates that the distribution of rural household income in 1995 was more equal than it would have been in the absence of rural out-migration. However, at the provincial level, we find some evidence that rich and poor provinces experience quite different effects of rural migration on income inequality. In rich Guangdong, rural migration reduces inequality, while in relatively backward Sichuan, it appears to increase income inequality, mainly due (we suspect) to the lack of mobility of workers in very low-income households.

References Chai, H, J Knight, R Mo and L Song (1996). The Rural Labour Force Survey for China, 1994: The Main Results. Draft. Cooperative Research Team of Eight City Governments (1993). Labor Employment and Urban Development in the Chinese Large Cities (in Chinese). China Labor Press. Corden, W and R Findlay (1975). Urban Unemployment, Intersectoral Capital Mobility and Development Policy. Economica, February. Griffin, K and Renwei Zhao (1993). The Distribution of Income in China. Macmillan Press. Katz, E and O Stark (1986). Labor Migration and Risk Aversion in Less-Developed Countries. Journal of Labor Economics. Khan, A, K Griffin, C Riskin and Renwei Zhao (1992). Household Income and its Distribution in China. China Quarterly, 132. Knight, J and L Song (1996). Chinese Peasants Choices: Migration, Rural Industry or Farming, Processing. Li, Mengbai and Xing Hu (1991). Impact of Migrant Population on Development of Large Cities and Relevant Policy (in Chinese). Economic Daily Press. Li, Shi (1997). Rural Migration and Income Distribution in China.A research report prepared for Washington Center for China Studies. Office of National Population Sample Survey (1997). Data of 1995 One Percent National Population Sample Survey (in Chinese). China Statistical Publishing House. Perkins, DH (1988). Reforming China’s Economic System. Journal of Economic Literature, 26. Project Team of Employment Department, Ministry of Labor (1996). Opportunity and Ability: Employment and Mobility of Rural Labor in China (in Chinese). Discussion Paper. Riskin, C (1987). China’s Political Economy. Oxford University Press. Shorrocks, AF (1980). The Class of Additively Decomposable Inequality Measures. Econometrica, 48.

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Effects of Labor Out-Migration and Income Growth and Inequality in Rural China Stark, O (1984). Rural-to-Urban Migration in LDCs: A Relative Deprivation Approach. Economic Development and Cultural Change, 32. Tang, Ping (1995). Analysis of Income Level and Inequality of Rural Households in China (in Chinese). Management World, 2. Todaro, M (1969). A Model of Labor Migration and Urban Unemployment in Less Developed Countries. American Economic Review, 59. Urban Investigation Team of Beijing (1995). Observing Mobility of Talent People in Beijing (in Chinese). Capital Economy, October. Wang, Jianmin and Qi Hu (1996). Migrant Population in China (in Chinese). Shanghai: Financial University Press. World Bank (1995). World Development Report 1995: Workers in an Integration World. Oxford University Press.

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Grain versus Food: A Hidden Issue in China’s Food Policy Debate1

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Chapter

5

Lu Feng2

Abstract This chapter examines the likely pattern of China’s food trade in future should China’s food trade policy be adjusted to accommodate her comparative advantage. Differing from the common perception that China’s overall food sector will follow the path of grain trade and face an ever growing trend in net import, this study has found an evolving pattern of exchanging food for food in China over the last 15 years. The pattern is in part characterized by strong export expansion of selected food products such as vegetables and fruits, aquatic products etc. The economic rationale behind the observation has been examined through a comparison of relative costs among alternative food productions in China and discussion of other potential causes. The potential for China to further develop the food trade pattern and its implications for China’s rural economy and the traditional policy of grain self sufficiency are discussed. Keywords: Comparative advantage; structure of food trade; food export; food policy. 1 This paper was prepared during my three months visit to the Research School of Pacific

and Asian Studies (RSPAS) at the Australian National University (ANU) from August 1996 as part of the China Grain Project sponsored by the Australian Centre for International Agricultural Research. I would like to thank Prof. Ross Garnaut and Dr. Yiping Huang for inviting me for the visit. I am most grateful to Prof. Garnaut for his warm encouragement and many valuable comments on the early draft of this paper. I have also benefited in many ways from discussions with Dr. Premachandra Athukorala. The early draft of the paper was presented at the Conference on Food and Agricultural Policy Challenges for the Asia-Pacific at Manila during October 1–3, 1996 and at the Economics Seminars at RSPAS, ANU on October 29, 1996. I appreciate many useful comments contributed by participants on both occasions. The responsibility for the remaining errors is mine. 2 China Center for Economic Research (CCER), Peking University, Beijing, 100871, Fax: (010) 62751474; Tel.: (010) 62751475, Email: [email protected].

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1.

Introduction

China has been highly acclaimed for its ability to feed over 20 percent of the world’s population with only 7 percent of the world’s arable land. Nevertheless, as industrialization gathered its full steam over the last decade or so, there is evidence that traditional emphasis on self sufficiency in grain may eventually become an undesirable policy. As a result, the prospect of China’s further integration into the world food system has attracted much research interests and even become news headlines in recent years. Previous studies on this subject have focused exclusively on China’s future grain demand, supply and import requirement3 while paying little attention to other food products. There seems an implicit assumption that the future trend in China’s food trade as a whole will coincide with that of its grain trade. This assumption is reflected in the current debate surrounding Brown’s prediction on China’s future food situation. In his extreme assessment of grain situation in both Chinese and global context, Brown raised the question of “who will feed China?” and implied that the likely growth of China’s grain imports may starve the world (Brown 1995). Ironically, his sweeping inference on the overall food prospects for China is based on circumstantial evidence on China’s grain production, demand and trade.4 The author has entirely ignored other major food products in terms of future trade trends, reflecting his implicit assumption that future trends in China’s food trade is identical to that of grain. Many professional economists and food analysts in the western world have dismissed Brown’s assertion that China’s possible food imports may 3 See World Bank (1985 and 1991); Anderson and Tyers (1987); China Academy of Agricul-

tural Science (1989); Cater and Zhong (1991); Chen and Buckwell (1991); Garnaut and Ma (1992 and 1996); Lu (1994); Huang et al. (1995); Overseas Economic Cooperation Fund (1995). 4 It should be noted that Brown’s analysis on China’s grain economy is incomplete and lopsided. This is in part reflected in his discussion of Taiwan’s experience. The decline of competitiveness in domestic grain production and growth of net grain imports in Taiwan during its rapid industrialization figures prominently in Brown’s study as an important evidence supporting his gloomy prediction on mainland China’s future food situation (Brown, 1995, pp. 25, 55–56, 61–62). Nevertheless he has completely ignored Taiwan’s enormous expansion of some major foodstuffs over the period of its economic transformation that will be reviewed in this study.

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starve the world. They have rightly criticized Brown’s study for its lack of any serious underpinning. Nevertheless, at least to my knowledge, no reference has been made to challenge the implicit assumption behind Brown’s analysis. On the contrary, this assumption has been implicitly adopted in many serious economic studies in China’s food economy. The argument has been made persuasively in many previous studies that there is likely to be a declining trend in China’s comparative advantage in grain production as a result of rapid economic growth. This has led to the further speculation that net imports for China’s food sector as a whole will also increase. It has also been often suggested that China’s net import of food can be financed by foreign exchanges generated by growth of exports on labor intensive manufactured products over which China shares comparative advantage. Mainstream Chinese opinion expressed in this debate by many Chinese researchers and officials tend to argue that China will be able to develop adequate capacity for domestic grain production to meet the growing demand from its population. However, significant disagreement exists among the Chinese researchers over the necessity and feasibility of substantial growth of China’s net grain import in future. Quite often grain and food are used interchangeably in Chinese discussion on the topic and in expression of the concerns that growth of grain imports will make China further dependent on the food supply from the outside world. The difference between grain and other major foodstuffs is absent, or more accurately, implicitly assumed away from the picture regarding the prospects of China’s further integration into the world food system. Interestingly, the debating parties take a common implicit assumption that is vital to the debated issue that they fundamentally disagree. Bearing in mind that grain problem has always been a central issue to China’s food policy, the validity of this implicit assumption is questionable. A major limitation of this conventional view relates to its oversight of heterogeneity of the food sector. As we know, food sector covers a host of diversified products which production vary in factor proportions and cost structures. Given the factor endowment of China, comparative advantage and competitiveness for different food products are likely to differ. Though China’s grain imports are likely to increase as a result of a decline in the comparative advantage of domestic activity, it is not necessarily true that other

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major foodstuffs will have their competitiveness eroded and become big net importers at the same time, and/or to same extent. Even in a period of rapidly structural change and under a liberalized trade policy environment, there may well be a possibility for certain food products to maintain or even strengthen their competitiveness while the ratio of self sufficiency for grain and other food items declines. This chapter investigates the likely pattern of China’s food trade in a liberalized trading environment. I start the investigation by exposing the assumption that the future trends in China’s food trade will be identical to that of grain against the empirical evidence. I examine the evolving food trade pattern not only for mainland China since 1980 but also for Taiwan over the last three decades or so. Taiwan’s experience is included because Taiwan had a similar structure of factor endowments with mainland China before its rapid industrialization from the 1950s–1960s. Consequently, its food trade experience during the period of economic transformation is useful in examining the validity of the implicit assumption. What will emerge from the observation is a remarkably similar pattern of exchanging food for food across the Taiwan Strait rather than monotonous decline of self sufficiency ratio for all food products. Then the economic causes for the observed food trade pattern is examined mainly through a comparison of the relative costs of alternative food products in China. The potential impact on China’s food trade pattern of changes in domestic consumption and distance factor is also discussed. The issue will be looked at in the broad context of the structural changes in the world food market with a view to investigating the potential for China to further develop the food trade pattern. Finally, the policy implication of the study are drawn.

2.

Structural Pattern of Food Trade during a Rapid Industrialization: The Evidence

2.1. Taiwan’s experience To place the evolving pattern of China’s food trade in context, it is useful to look at Taiwan’s experience. The relevance of Taiwan’s experience is obvious since Taiwan too was a densely populated economy before its rapid industrialization. Taiwan’s food trade pattern over the last decades 190

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may suggest potential trends for their mainland counterparts (Garnaut and Ma, 1992). Taiwan has experienced dramatic economic transformation over the last four decades or so. Its per capita GNP increased from US$197 in 1955 to US$12,439 in 1995. The agricultural share of GDP fell from 47.7 percent to 3.5 percent over the same period (Shei, 1983; Asia Pacific Economic Group, 1996). At the early stage of its economic development, Taiwan was a small open economy with abundant labor and scarce cultivated land in relation to the rest of the world. According to the conventional view, there should be a strong tendency for the comparative advantage of Taiwan’s food sector to decline as a result of rapid industrialization. This prediction is in part borne out by the massive increase in net imports of cereals and animal feeding stuff throughout the period. Starting as a small net exporter in 1965, Taiwan turned into a net grain importer in the 1970s (Table 1). Its net grain imports per annum increased to almost US$1 billion in the 1990s. Dairy products and animal feeding stuffs were also registered as major net import foodstuffs. Mainly due to the massive import of cereals, Taiwan’s overall food self-sufficiency ratio measured in terms of calories declined from 115.7 percent to about 40 percent in 1990 (Lin, 1993). These facts tell only one side of the story. On the other hand, Taiwan’s food exports also expanded enormously. Remarkably, in value terms, Taiwan even remained a net exporter for the food sector as a whole, albeit by a shrinking amount, until the 1990s.5 Three groups of food items played the leading role in promoting food export. They are meat and preparations (SITC: 01); aquatic products (03) and fruits and vegetables (05) (Table 1). The time sequence of the changing role played by each of these food products in promoting food exports is interesting. Fruits and vegetables generated over US$100 million net export revenue as of the mid-1960s, the beginning of economic take-off in Taiwan. Nevertheless their net export revenue peaked in 1980 and declined afterwards, even leading to a considerable deficit in 1994. Fish and preparations showed significant net exports in the 1970s. Since then, its net export has increased strongly and reached 5 The concept of food used in this study covers the commodity category of “food and live

animals” in the United Nations commodity classification (SITC: 0). Alternatively it may be more broadly defined to include commodity group of “beverage and tobacco” (SITC: 02) plus “animal and vegetable oil and fats” used as food (part of SITC: 04).

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192 Table 1.

Structure of Taiwan’s Food Trade (Selected Years From 1965 to 1994. Unit: Million US$).

Export

Import

1965 1970 1975 1980 1985 1990 1994

229.63 262.54 819.88 1691.81 1715.91 2660.30 3900.94

45.85 129.30 535.42 1204.34 1327.35 2527.31 3422.65

0.02 5.34 −3.25 31.71 167.20 526.85 1226.33

Fish and preparations (ISTC: 03)

Fruit and vegetables (ISTC: 05)

Cereals and preparations (ISTC: 04)

Dairy products and eggs (ISTC: 02)

Feeding stuff (ISTC: 08)

0.76 21.12 141.40 494.31 730.74 1022.14 952.85

109.99 158.44 258.01 570.98 427.41 220.02 −42.73

9.71 −91.22 −368.93 −645.20 −649.75 −984.53 −937.59

−4.94 −13.43 −48.45 −109.16 −165.57 −221.19 −250.17

−0.57 −9.77 −45.36 −114.06 −158.22 −267.03 −257.73

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Year

Meat and preparations (ISTC: 01)

Food total

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Net exports∗

∗ Negative sign implies net imports.

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Source: UN trade data, International Economic Databank, Australian National University.

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the record level of US$1 billion in 1990. However the growth of net exports seems to have peaked in recent years. Finally, meat and preparations is the latest foreign exchange generator in the food sector. Although not a significant net exporter until the early 1980s, the growth rate of their net export was the highest in the food sector over the last 15 years or so. It was by far the largest net exporter in Taiwan’s food sector in recent years. The evidence clearly demonstrates that Taiwan’s food trade pattern during rapid industrialization was shaped not only by grain imports but also by massive exports of other food products. Several groups of food products enjoyed competitiveness in the world market throughout the period. The cycles of growth and decline in competitiveness for the three export products indicates a dynamic process of rural structural adjustment in Taiwan. Taiwan’s food sector certainly did not lose on all grounds during the period of its rapid industrialization. Instead what we have observed is a dynamic evolution of exchanging food for food over the last three decades or so. This provides an indirect evidence challenging the implicit assumption that the future trade trends in food will be identical to that of grain in mainland China.

2.2.

Evolving pattern of China’s food trade

Now let us look at evidence from mainland China. Mainland China drove into the fast lane of economic growth from the late 1970s when it embarked on program of economic reform and opening up to the outside world. GDP in 1995 was almost five times higher than 1978 and the average growth rate per annum during the period was 9.86 percent (China Statistical Bureau, 1996). The share of the agricultural sector in GDP declined from 32.4 percent to 13.3 percent (Asia Pacific Economic Group, 1996, p. 133). The share of food exports as the percentage of total exports fell from 16 percent to about 7 percent in the same period. Table 2 presents the evolution of China’s food trade over the last 15 years. There are structural features that resemble to Taiwan’s experience. On the import side, grain has been the most important item. The share of grains and preparations in total food imports was 59 percent and 84 percent in 1995 and 1980 respectively. Though there was a clear increasing trend in China’s food imports, mainly pushed up by imports of grain and sugar, China has developed its position as a net exporter of food in value terms 193

1980 Commodity

384 361 71 380 423 746 221 328 58 49 2985 16.47

Import 5 1 5 13 2458 48 316 56 14 2 2927 14.62

Export 304 448 57 283 1065 825 79 435 241 66 3803 13.9

Import 18 6 31 44 982 52 274 40 83 23 1553 3.68

Export 430 791 55 1370 614 1759 317 534 623 107 6609 10.64

1995 Import 14 54 81 102 2353 83 390 30 182 46 3335 6.25

Export 503 1371 61 2853 285 3342 379 516 351 292 9954 6.69

Import 37 97 61 608 3629 184 936 75 421 82 6131

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(00) (01) (02) (03) (04) (05) (06) (07) (08) (09) (0)

Export

1990

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Live Animals Meat etc. Dairy Products etc. Fish etc. Cereals etc. Vegetables and Fruits Sugar etc. Coffee, Tea etc. Feeding Stuff etc. Others Total Food Total Food as % of Total Trade

(SITC)

1985

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194 Table 2.

4.64

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Sources: Data for 1980, 1985 and 1990 are from “China Foreign Economic Statistics 1979–1991 (1979–1991 Nian Zhongguo Duiwai Jingji Tongji Daquan)”, compiled by Department of Trade and Materials Supply, State Statistics Bureau (Guojia Tongjiju Maoyi Wuzisi), published by China Statistical Information and Consultancy Service Center, by “China Monthly Exports and Imports (1995, 12)”, (Zhongguo Tongji Xingxi Zixun Fuwu Zhongxing), 1992. The data for 1995 are from General Administration of Customs of the People’s Republic of China.

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during the period. Starting from the position of an almost balanced trade in food sector in 1980, net food export was US$2.3 billion in 1985 and reached the peak level of US$3.8 billion in 1995. The reason was simple: in some competitive food products export expansion has been significantly larger than the growth of food imports during the period. Among ten categories of 2-digit SITC food products, six were net exporters in 1995. All the six groups were net exports in 1980 and retained at the status throughout the period. Nevertheless the growth rates among them differed substantially. Apart from the category of “others” (09) that covers diversified items, live animals (00) and coffee, tea etc. (07) have been traditional food export products for China and their export only achieved modest growth rates over the last 15 years. Their average growth rate per annum were 1.8 and 3.1 percent respectively. On the other hand, three groups of food products, meat (01), aquatic products (03), vegetables and fruits (05) enjoyed enormous export expansion over the period. The annual growth rates for the three groups were 9.3, 14.4 and 10.5 percent, all higher than the average annual growth rate of 8.4 percent for total food exports. The different growth rates brought about significant changes in the profile of China’s food exports during the period. For example, in 1980 the magnitude of exports of aquatic products (03) was similar to those of live animals (00) and coffee and tea etc. (07) whereas in 1995 the former was more than five times as the latter two groups. The position of vegetables and fruits (05) as the leading export products in China’s food sector was further strengthened: its share in total food exports increased to one third in 1995 from a quarter in 1980. Due to higher growth rates of these three products, the share of the “big three” in total food exports increased to over 75 percent in 1995 from about 50 percent in 1980. This evidence indicates a remarkable similarity between trends in mainland China and Taiwan: China’s food export expansion since 1980 was mainly driven by three groups of food products which made similar contribution in Taiwan in earlier decades. The export specialization index6 of selected food products in 1994 and 1980 are reported in Table 3. In 1994, the index for aquatic products and vegetable and fruits are 1.95 and 1.86. For food sector as a whole the 6 The index is defined as the ratio of the share of export on certain commodity in total export

for one country to the same share measurement for the whole world.

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Lu Feng Table 3. The Export Specialization Index and the World Market Share of Selected Food Products for China (1980, 1994).

Commodity Live Animals and Meat Fish and Preparations Vegetables and Fruits Total Food

Export specialization index∗

World market share (%)

(SITC)

1980

1994

1980

1994

(00) and (01) (03) (05) (0)

2.95 3.04 3.65 1.82

0.78 1.95 1.86 1.21

2.7 2.8 3.4 1.7

2.3 5.8 5.6 3.6

∗ The index is defined as the ratio of the share of export on certain commodity in total export

for one country to the same share for the whole world. According to a conventional interpretation, value of the index over unity implies comparative advantage for the commodity and country in question in relation to the rest of the world, and vice versa. Source: UN trade data, International Economic Databank, Australian National University.

index is 1.2 that implying an overall comparative advantage with the rest of the world according to a conventional interpretation of the index. In comparison with 1980, the index for these products as well as for the total food sector has been reduced significantly over the last one and half decades. For example, the index for vegetables and fruit products almost halved and that for the total food sector decreased one third over the period. However the decline of the index for these two food products are mainly caused by much faster growth rate for China’s overall exports in relation to the rest of the world. The market share of these products increased substantially (from 2.81 percent to 5.82 percent for aquatic product, 3.37 percent to 5.56 percent for fruit and vegetables). The growth in the world market share indicates that the competitiveness for these food products was actually strengthened in the period. Most of China’s food exports go to its rich neighboring economies (Table 4). Japan and Hong Kong are by far the most important markets for China. Hong Kong has been a traditional food export market for mainland China. The geographical advantage for China to export food products to Hong Kong is in part reflected by the fact that about 80 percent of China’s export of live animals chiefly for food usually go to Hong Kong. However the expansion of Hong Kong’s food export market is much slower than 196

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Table 4.

Main Importers of Selected Food Products from China (1980, 1994) (Unit: Million US$). Fish etc. (03)

Fruit and Veg. (05)

1980

1994

1980

1994

1980

1994

1980

Hong Kong Japan South Korea Taiwan Singapore European Community United States

1096.24 465.00

1775.20 4652.60 913.89 207.31 297.74 985.09 589.85

168.10 59.19

201.86 347.16 8.49 5.80 27.69 115.91 1.00

127.10 181.99

289.26 1683.11 110.29 53.13 25.80 128.40 283.68

215.42 147.50

138.81 473.91 65.18

14.71 93.64 1.24

5.17 24.32 6.91

70.90 241.86 27.68

1994 516.72 1436.92 119.00 29.21 174.46 458.82 155.29

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Note: Blank space implies either data not available or amount less than US$1000. Source: UN trade data, International Economic Databank, Australian National University. Taiwan’s data are from “China Monthly Exports and Imports (1995.12)”, General Administration of Customs of the People’s Republic of China.

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Meat etc. (01)

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Total food (0)

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other markets such as Japan. In 1994, Japan’s food imports from China were US$4.65 billion, almost half of China’s total food export. Japan’s food imports from China in 1994 were about ten times as high as in 1980. Two products played the leading role in expanding Japan’s food market: aquatic products (03), vegetables and fruits (05). The export value of the two groups reached more than US$3 billion in 1994 from about US$300 million in 1980. The second group of major importers for China’s food products include other NIEs plus Malaysia. In 1994, the value of South Korea’s imports of aquatic products (03) and vegetables and fruits (05) from China was about US$100 million for each. Its total food import bill from China reached over US$900 million that year. Taiwan has been a traditional exporter in aquatic products and vegetables and fruits. However the competitiveness of its domestic production in these products has been eroded in recent years as a result of increases in wage and land prices, shortages of labor, appreciation of Taiwan currency. There is evidence that mainland China has a comparative advantage over Taiwan in these food products. For example, as far as vegetables and fruits are concerned, Taiwan has become a net importer in recent years while mainland China’s export of these foods are particularly strong. According to a comparative study on agricultural trade of Taiwan and mainland China, the costs in raising prawn and hog (two main competitive food products for Taiwan) in the mainland were only about 37 percent and 35 percent of those in Taiwan in recent years (Qiu and Duan, 1992). It is interesting to note that Taiwan started to import significant amount of these products from the mainland China in recent years. The trend may continue should the political relationship across the Strait improves in future. The United States and EEC are traditional grain exporters to China. On the other hand they are also important food importers from China. China’s food export to the United States increased from US$65.1 million in 1980 to US$589.9 million in 1994 at an average growth rate of 17 percent per annum. The two competitive products (aquatic products, fruits and vegetables) accounted for 74.4 percent of exports. In view of the strong competitiveness assumed by the Unite States in the agricultural sector as a whole, particularly in grains, China’s export expansion of the above foodstuffs into the US market clearly illustrates the simple point that it is possible for China

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to increase its exports of some food products while importing other food products, especially grains, during the course of rapid economic growth.

3.

Comparative Advantage and China’s Food Trade Pattern

The evidence across the Taiwan Strait suggests that in terms of the world market competitiveness, different groups of food products showed different trends over the period of rapid structural transformation. This observation raises some important questions: Why did certain food products maintain or even strengthen their competitiveness through the period of industrialization? Were these mainly caused by policy intervention and distortion? Or was there economic rationale behind the phenomenon? The potential impact of policy distortion on the issue is obvious. After all, the agricultural sector has been notorious for the heavy government intervention it has experienced. For example, high self-sufficiency ratio of rice in Japan, Taiwan and South Korea has been achieved mainly through domestic protection policies. Nevertheless, as far as the three competitive foodstuffs are concerned, the influence of policy intervention must not be substantial. First, it is well known that the old agricultural policy in mainland China was characterized by squeezing out agricultural surplus to support the urban industrialization. Though various reform measures have been implemented since the late 1970s, discrimination against agriculture has yet to be completely removed.7 Agricultural protection has been discussed by researchers as a future possibility (Garnaut et al., 1996), but is not yet a reality, and certainly not the case in the past. Second, and more importantly, the enormous expansion of the selected of food products happened in both Taiwan and the mainland China. The vast differences between the two economies in terms of institutional settings and policy environment imply that the policy effects on the observed food trade pattern is unlikely to be substantial. 7 For example, the Chinese government currently still makes a compulsory procurement of

about 50 million tons of grain per annum from peasants at administered prices that is usually lower than market prices.

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I shall argue instead that the observed phenomenon can be explained on the basis of economic analysis. International trade theory suggests that the world trade pattern of a commodity is primarily determined by the relative costs in delivering the commodity to the market by participant economies. The comparative advantage may be influenced by many factors of which the factor endowment is one basic determinant. According to the standard theory of comparative advantage, under various assumptions (including no distortions to producer incentives), a country tends to export commodities which require relatively intensive use of the country’s relatively abundant factors of production.8 Apart from the factor endowment, other factors such as distance factors, domestic consumption pattern have also been long recognized as potential determinants of patterns of trade. In light of the conventional trade theory, I shall approach the topic through an examination of factor combination and cost structure of alternative food production activities, then discuss the potential impact from other possible economic causes such as distance factor and changes in domestic food consumption. However, first of all, it may be appropriate to have a review of the structural features of China’s factor endowment.

3.1. The structural features of China’s factor endowment The fundamental feature of China’s factor endowment for China’s food production is a serious shortage of arable land and capital with an abundance of labor. It is highlighted by the fact that China has to feed 22 percent of the world’s population with only 7 percent of the world’s arable land.9 On the capital side, in spite of high speed economic growth in recent years, China remains a low income economy facing capital shortages. These features have been graphically demonstrated in Anderson (1991) using Leamer (1987) triangle. The triangle represents relative endowments of three factors for various countries; denoting N for natural resources, L for labor time and 8 Though some empirical tests failed to support the model of comparative advantage in its simplest form, it has been shown that the modified theory of resource endowment are consistent with trade patterns (Tyers and Anderson, 1992, pp. 38–39). 9 There is evidence that China’s reported arable land has been under-estimated. Its actual arable land may be 20–40 percent larger than what is reported. However China would still be a poorly endowed agricultural nation even if this under-estimation is taken into account.

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Grain versus Food: A Hidden Issue in China’s Food Policy Debate

C for capital. Anderson (1991) used agricultural land per capita and income per capita to represent the natural resources to labor ratio and the capital to labor ratio. A triangle diagram is produced using data in 1988. The diagram measures the ratios in log terms along the NL and LC sides of the triangle respectively. The mid-point of each line represents the world average which is taken as the numeriaire. Thus the point W represents the global average endowment of all three factors. The mid-point lines NB, LD and AC divides the triangle into six small triangles. Countries are located in different small triangles according to their given factor endowment. For example, Australia and New Zealand fall into the small triangle WDN indicating above average per capita endowment of capital as well as natural resources. On the other hand, Japan’s location inside WBC reflects above-average per capita endowment of capital and below-average per capita endowment of agricultural land. China’s endowment point is inside the area of WLA representing below average for both per capita endowment of capital as well as agricultural land. This position highlights China’s relative endowment status as densely populated low income level country. One noteworthy point here is that China’s agricultural factor endowment is influenced by seasonal patterns of labor demand. In a typical rural area of China, grain production has usually been the dominant activity. Labor demand for grain production is highly seasonal. As a result, shortages in labor supply can be observed in the relatively short peak seasons whereas in long off-peak seasons there is a large labor surplus. To the extent the seasonal labor surplus exists,10 the opportunity cost of labor at the off peak season is extremely low. There is a strong incentive for peasants in less developed rural areas to undertake any economic activities in the off-peak season, even though the return may be lower than living costs.

3.2.

Factor intensity and cost structure for different food commodities as farm products

It should be noted that the food commodities (vegetables and fruits, aquatic products, meats) of which China’s exports have expanded since 1980 are 10Although the expansion of town and village enterprise has absorbed many rural labors,

seasonal labor surplus is still a widespread problem in China’s rural areas, except a few economically advanced regions such as Guangdong, South Jiangsu etc.

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not purely farm products. Production of these foodstuffs often also involves manufacturing activities with farm added value and manufactured added value. In this section, I examine factor intensities and cost structures for these food products at the stage of farm activity. The similar issue for the stage of manufacturing process are dealt with in the next section. On the basis of the factor endowments, three simple predictions may be made with reference to the comparative advantage or competitiveness of alternative economic activities in China’s rural areas. Among alternative activities using good quality of land as input, other things equal, those make intensive use of labor tend to have comparative advantage or market competitiveness. Second, other things equal, those activities only need to use marginal land of inferior quality or without requirement of arable land as input tend to have comparative advantage or competitiveness. Third, those activities can utilize more labor surplus in off peak seasons tend to have comparative advantage or competitiveness. Given these predictions, we can examine factor intensity and cost structure for different foodstuffs as farm products so as to investigate whether there are economic rationale underpinning the pattern of exchanging food for food observed in China over the last 15 years. To highlight the issue, let us first compare the production costs between grains on one side and vegetables and fruits on the other side. Production of these food products are all traditional agricultural activities. Though different skills are needed for cultivation of grain, vegetable and fruit, difference in terms of technology level among them is not substantial. The different skills can be relatively easily acquired by peasants through traditional way of learning by doing provided there were sufficient incentives for them to do so. However, there is substantial difference in labor intensity between production of these two food products. Labor requirement per unit of land for vegetable and fruit production is much higher than that for grain. According to China’s cost survey data in 1994, average labor input requirements per mu for vegetables and fruits are 61.5 and 67.1 working days respectively whereas that for various grain crops is only 13.6 days (Table 5). The labor demand per unit of arable land for vegetables and fruits was about 4.5 times as high as the similar measurement for grain. Capital requirement for vegetable and fruit production was higher than that for grain. However this is unlikely to give significant impact on the structure of

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Grain versus Food: A Hidden Issue in China’s Food Policy Debate Table 5. Cost Structure for Selected Food Products in China (Year: 1994. Unit: Chinese Yuan). Labor cost

Grains (per mu) Vegetables (per mu) Fruits (per mu) Hog (per head) Beef Cattle (per head) Freshwater Fish (per mu)

Other input

Working days

Values

Value

13.61 61.52 67.13 20.53 57.54 30.90

75.26 355.59 406.93 128.31 295.76 278.10

108.87 434.03 416.55 531.58 1348.90 1576.40

Total ouptut Value 372.50 1915.50 2252.70 840.26 2378.20 2279.00

Notes: Data for grains are the average figures for six grain crops: paddy, wheat, corn, sorghum, millet and soybean. They are the survey data covering 1,356 counties, 9,283 farm households and 67,016 mu. (Mu is the area measurement used in China. 1 mu = 0.0667 hectare.) Data for vegetables are the average measurements for 14 vegetables. The survey data cover 359 counties, 940 farm households and 3,325 mu. Data for fruits are the average for apple and orange. Survey data for apple cover 73 counties, 208 farm households and 3,523 mu while those for orange cover 37 counties, 181 households and 856 mu. Data on hog and beef cattle refer to those raised by peasant households. The data sample on hog covers 327 counties, 1,664 households, 8,692 hogs while that on beef cattle covers 21 counties, 72 households, 374 cattle. Fish data cover 76 counties, 243 households and 60,427 mu of water. Source: State Planning Commission et al. (1995).

comparative advantage mentioned above due to two considerations. First, the absolute amount of capital costs for vegetable and fruit production is modest and there are unlikely serious difficulties for peasant to provide self finance for it. Second, the ratio of capital input costs per unit of product value for vegetables and fruit is even lower than that for grain because of much higher of product value for the former. The data indicate that given the current technology level for agricultural production, vegetable and fruit activities make use of labor much more intensively than grain. This tend to give comparative advantage to China’s vegetable and fruit production. As for the activities in producing aquatic products and meats, we cannot compare them with that of grain in terms of labor intensity relative to land as they do not need arable land as input. Nevertheless, the data indicate that production of meat and aquatic products such as fish, prawn etc. in China also use a great deal of labor. As shown in Table 5, one hog 203

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raising needs on the average 20.5 working days while on cattle 57.5 days in China. Assume that annual working days for a peasant are 300 days, about 15 hogs or 5 cattle will keep him or her fully occupied given the current level of technology in the sector. Of aquatic products, freshwater fish per mu on average needs 31 working days. Apart from intensive use of labor resource, two additional factors are important to the potential competitiveness for the products such as meat, fish, fruit and vegetables. First, as mentioned above, production of meat, fish, fruit either does not require arable land as input or only need marginal arable land. This simple fact has crucial implication. To the extent that the argument on comparative disadvantage of China’s grain production has been made on the basis of China’s scarcity of arable land, it does not apply to the activities on producing these two products. Second, highly seasonal demand for labor in grain production usually results in a large scale of labor surplus in the agricultural areas where economic activity is dominated by grain production. Since other food productions such as those of meat, fish, vegetables, fruit have different labor demand patterns, they can be organized to increase demand for labor in off-peak season and therefore contribute in absorbing the vast amount of labor surplus in the Chinese rural areas. Given the low opportunity cost of labor at the off peak season, motivation for Chinese farmers to engage in these activities is high. This may have strengthened China’s competitiveness in these food products.

3.3.

Factor intensity for selected food commodities as manufactured products

As mentioned above, many exported food items are processed foods or manufactured goods as they involve significant processing activities under factory conditions. The combined nature of farm and manufactured activities for many foodstuffs again has a direct implication for the topic of this study. As we know, manufacturing activity needs no arable land as input. This indicates a crucial difference in factor combination between processed food and bulk farm products such as grain. It renders a logic support to the simple argument of this paper: there could well be significant differences between grain and other foods in terms of world market competitiveness for a given country with a given factor endowment.

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Grain versus Food: A Hidden Issue in China’s Food Policy Debate

As for the relationship between the revealed competitiveness of certain foodstuffs for China and the processing activities involved, this section explores two issues. First, it discusses what percentage of food products exported by China falls into the category of processed food. Then it examines the factor intensity for the Chinese processed food sector by discussing the data on the fixed capital labor ratio for this sector. As for the first issue, difficulty arises from the conventional international classification system of trade data. As argued by Teital (1989) and Athukorala and Sen (1996), the SITC data cover the processed foods in the commodity group of primary goods. Processed food along with other commodities are not classified as manufactured goods though they are recognized as industrial products by industrial origins in the international standard industrial classification (ISIC). To identify the share of processed food in the total food export, Teitel (1989), Athukorala and Sen (1996) suggest to cross reference the SITC commodity listing at the 5-digit level to that of the ISIC at the 4-digit level, using the United Nations commodity concordance. This approach enables us to identify processed foodstuffs from the SITC food export data (see Appendix 1 in Athukorala and Sen, 1996). Using the lists of processed food for different food groups, the export values of processed food and their share in the total food export for China in 1994 are reported in Table 6. The value of processed food exported was US$6.41 billion. Its share in the total food export was 58 percent. The data on the ratio of manufacture value added in the total output value of processed food for China is not available. It was reported that the ratio for Latin America in the 1970s and 1980s was 30.2 percent (Teitel, 1989, pp. 327–328). Using this figure, a rough estimate of the manufacture value added for the food exported by China in 1994 was about US$1.93 billion. Data on the fixed capital to labor ratio for the food manufacture sector represent a quantitative indicator the factor intensity for the sector. Table 7 reports the data on the fixed capital labor ratio for different industrial sectors in China in selected years from 1952 to 1992. Food manufacture used to be the most labor intensive sector from the 1950s to 1970s. Though the ratio for food sector had become slightly higher than textile by 1984, it was still one of the most labor intensive sectors then. Nevertheless the picture had changed significantly by 1992. The growth rate of the ratio for food sector was much higher than most of the other sectors. For example, the ratio for

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Lu Feng Table 6. Value of Processed Food Export and the Share in Total Food Export for China in 1994 (1000 US dollars).

Commodity (SITC)

Export value of processed food (1)

Total food export value (2)

The ratio of (2)/(1) %

Live Animals (00) Meat etc. (01) Dairy Products etc. (02) Fish etc. (03) Cereals etc. (04) Vegetables and Fruits (05) Sugar etc. (06) Coffee, Tea etc. (07) Feeding Stuff etc. (08) Others (09) Total Food (0)

0 715749 20146 2596075 188933 1891322 328056 48699 449267 171199 6409446

463799 728444 65071 2596079 1989447 3430565 328062 598592 589685 171317 10961061

0 100 80 100 47 41 100 57 80 67 58

Source: UN trade data, International Economic Databank, Australian National University.

the sectors such as textile, paper making, building materials increased only about by one half from 1984 to 1992 while that for food manufactured sector increased by 1.4 times during the same period. Although the capital intensity for food sector was still much lower than utility, petroleum-chemical industries in 1992, it became one of the most capital intensive sectors among light manufacturing industries. It should be noted that the data for the period of 1952–1984 and those for 1992 are from two different sources. The first data set covers 11 industries whereas the second includes 29 more narrowly defined industries. As the two data sets are not entirely comparable, their implications for the sectorial changes in capital intensity must be treated with a caution. On the other hand, food manufacturing sector covers a variety of sub-sectors which capital intensities may differ somehow. For the purpose of this study, it would be useful to examine the data on the fixed capital labor ratio for the sub-sectors related to China’s food export structure. So fresh data are needed to make more accurate assessment on the issue. Nevertheless the data do suggest a trend with respect to the relative changes in capital intensity for the food processing sector. In view of the fact that China is still a capital scarce 206

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Grain versus Food: A Hidden Issue in China’s Food Policy Debate Table 7. Fixed Capital per Worker for Selected Industrial Sectors in China (Selected Years from 1952 to 1992. Unit: Chinese Yuan). Year Industry

1952

1957

1965

1978

1984

1992

(1) Metallurgy (2) Electricity (3) Coal (4) Petroleum (5) Chemistry (6) Machinery (7) Building Materials (8) Forest (9) Food (10) Textile (11) Paper Making (12) Industries as a Whole (13) Ratio of (9)/(12)

5418 24750 3607 19091 3090 2663 1479

9100 33675 5180 21702 4323 4386 2637 1770 2460 3203 5583 4473

16315 41234 7765 23216 10760 8275 5699 3840 4436 4469 10000 8401

16060 48455 7678 37596 11814 8881 6852 6689 5434 5731 10175 10501

21895 61985 11615 60493 15518 11346 10195 8977 8895 8721 13187 14393

n.a 151303* n.a 105229 31334 n.a 15260 n.a 21797 15453 18385 n.a

1758 2488 4217 2918

Note: The ratio refers to the sector of power generation. “n.a” denotes no availability of consistent data. Source: Data for 1952–1984 are from “China Industrial Economic Statistical Materials” (Zhongguo Gongye Jingji Tongji Ziliao) (1949–1984) while those for 1992 are from “China Industrial Economic Statistical Yearbook” (Zhongguo Gongye Jingji Tongji Nianjian) (1993), published in Beijing.

economy, the rapid increase in the capital intensity for the food sector may have some adverse impact on the competitiveness of China’s food exports. Two alternative inferences with respect to the relationship between China’s food export growth and the food manufactured activities involved may be drawn from this tentative investigation. First, the manufacturing activities per se may not be a significant factor contributing to China’s export expansion on its competitive food products. Second, though the manufactured activities involved used to be one important factor in this context, this role may have diminished as the relative higher growth in capital intensity may have potentially weakened China’s comparative advantage of food manufactured activities. Should either be the case, it has implications for the assessment of sources of comparative advantage for China’s food export. It suggests that from factor proportion point of view, China’s food export 207

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competitiveness at the current stage of its development mainly comes from agricultural activities rather than manufactured process. On the other hand, taking a dynamic perspective, it is also possible for China to increase the comparative advantage in food manufacturing activities in future as rapid economic growth may eventually shift China’s factor endowment in the direction in favor of more capital intensive activities.

3.4.

Domestic consumption pattern and the influence of distance

Relative commodity costs are not dictated solely by relative factor proportion. They are also potentially influenced by other factors, such as technical efficiency, domestic demand structure etc. (Baigwait, 1964, p. 18). Linder (1961) emphasized the importance of the pattern of domestic consumption in determining export potential for manufactured goods. He expounded through three arguments: (1) domestic needs make entrepreneur aware of and react to potential profit opportunity by starting or expanding a production; (2) domestic consumption provides incentives for innovation and invention; (3) easy feedback between producers and consumers through domestic markets nurtures development of the products (Linder, 1961, pp. 89–90). In light of the analysis, the factor of domestic consumption may have some effects on the food export expansion by many developing economies, including China.11 It is useful to distinguish Linder’s theory into two components. One is the analytical proposition outlined above and the other is its inference on the likely trade pattern derived from the analytical perceptive. The inference leads to Linder’s hypothesis that “the more similar the demand structures of two countries, the more intensive, potentially, is the trade between these two countries” (Linder, 1961, p. 94). Though there is empirical evidence rejecting the hypothesis using the level of per capita income as a gauge of domestic demand pattern (Hoftyzer, 1984), a moment reflection can reveal that the analytical perspective and the testable hypothesis are not entirely compatible in the context of food trade. Even though the empirical evidence 11 For example, Teitel (1989, p. 335) noted the domestic demand pattern as one important

factor for food exports in Latin America.

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may reject the hypothesis, it may not verify futility of the analytical perspective. To elaborate on this point, let us assume that there potentially exist intensive food trade between two groups of countries at significantly different income levels mainly due to the factor of resource endowment. Further assume that export competitiveness is on the side of low income economies. This potential trade pattern may be contradicting with the Linder’s hypothesis as it is dominated by the trade flow between groups of economies at different income level. Nevertheless the factor of domestic consumption could still play an important role in realizing the potential competitiveness for individual low income countries through the three effects mentioned above. China’s expansion in food export since 1980 coincided with unprecedented changes in its domestic food consumption. Consumption level only achieved limited growth for certain food products such as eggs, liquor etc. during the period of 1952–1978 (Table 8).12 For other food commodities such as grain, poultry, beef and mutton, there was no improvement in 12 Though rapid growth and structural adjustments in China’s food consumption have been

studied in numerous studies, accurate assessment of the changes is likely to be confronted with data problems. There are three sets of official data concerning the changes in China’s food consumption. The first is on quantity of annual per capita consumption of major consumer goods among which most is food. It covers foods (including processed food) supplied in the domestic market as well as self consumed by peasants. This data set is useful for our purpose here. However, unfortunately, release of the data series stoped after 1992. The second is a nationwide household survey data which are reported for rural and urban areas respectively. Although conceptually a household survey data may be most appropriate in reflecting the actual consumption changes, there are two drawbacks with the urban data. On the one hand, the data set refers to the quantity of per capita purchase of food and therefore may not cover various foodstuffs that some urban residents may receive from working unit as a welfare in kind. On the other hand, there are serious data inconsistencies. For example, per capita purchases of beef and button, poultry, fresh eggs for 1985 are reported in “China’s Statistical Yearbook, the volume of 1986” to be 3.0, 3.84 and 8.76 kilograms respectively whereas in the 1995 volume of the yearbook, the figures are 2.04, 3.24 and 7.08 kilograms respectively. The third data set is on per capita output. There are two difficulties in using output data to reflect the actual food consumption. On the one hand, to facilitate the purpose, output data need to be adjusted by net export and changes in stock. On the other hand, data collecting criterions on certain food products are inconsistent for food consumption. For example, quantity of output data on meat refer to the weight at slaughter (the live animal weight minus head, hoof, hair and internal organs) rather then net meat used in consumption data collection. The first data set is used in this study to reflect changes of food consumption pattern since 1980.

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Lu Feng Table 8. China’s per Capita Consumption of Selected Food Products (Selected Years from 1952 to 1992. Unit: Kg).

Year

Grain

Pork

Beef and mutton

Poultry

Eggs

Aquadic products

Liquor

Fruit

1952 1978 1985 1992 1992/1978

197.70 195.50 251.70 235.90 1.21

5.90 7.70 13.84 18.22 2.37

0.90 0.80 1.30 2.10 2.63

0.40 0.40 1.60 2.30 5.75

1.00 1.97 4.90 7.80 3.90

2.70 3.50 4.80 7.30 2.09

1.10 2.60 7.60 12.90 4.96

6.90 11.10 21.10 3.06

Sources: “China StatisticalYear Book” (1993). The data on fruit are from “A Statistical Survey of China” (1996).

consumption at all over the period. The situation has changed dramatically since the late 1970s. Apart from direct grain consumption that peaked in the mid-1980s and declined afterwards, other food consumption experienced enormous growth. The ratio of quantities consumed in 1992 to that in 1978 ranged from 2.37 for pork to 5.75 for poultry. The expansion of food consumption and improvement in quality of diet indicate substantial changes in the pattern of China’s domestic food consumption. These trends are likely to have had some positive impact on China’s food export expansion. The influence of distance factor on the pattern of international trade has also long been recognized. Empirical investigation of the impact is usually facilitated by a gravity model which is typically formulated as a log-liner relationship expressing bilateral trade between a pair of countries as a function of the two countries income levels, populations and distance. Studies using the gravity model have found a distance elasticity of about −0.6 (Leamer and Levinsohn, 1995, p. 1348). Distance may be more important for perishable foods such as vegetables and fruits, fish and shrimp. Most of China’s competitive food products are exported to Japan and Hong Kong. China’s proximity to these economies allows it to capitalize on its competitiveness. The following observation is indicative of the geographical advantage for China’s food export to these economies. On daily basis, there are three expresses from Zhengzhou (capital of Henan province at northern China), Wuhan (capital of Hubei in the middle of Yangzi river) and Shanghai to Hong Kong to supply perishable food products such as live animals, poultry. Of about 10,000 live hogs are slaughtered in Hong Kong 210

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everyday, about 80 percent are supplied from China (Chen, 1991, pp. 124, 135). It is possible that Taiwan and South Korea are likely to increase their imports of these food products. Close geographical links will be in China’s favor for the expansion of its competitive food products in these markets.

4.

China’s Food Export and Structural Changes in the World Food Markets

The preceding section has analyzed the economic rationale behind China’s food export pattern over the last 15 years or so. We will further examine the issue in the broad context of structural change in world food markets and food export performance of other developing economies. The world food market has witnessed striking structural adjustments over the last two decades or so, underlined by dramatic changes in the pattern of food import demand pattern. Total food imports in the world market increased to US$317.08 billion in 1994 from US$100.08 billion in 1975 at the average annual growth rate of 6.25 percent (Table 9). However the growth rates differ greatly among different food groups. Cereal and preparation (04) only increased at 2.9 percent per annum, the second lowest following sugar and preparation (06) which virtually had no growth over the period. On the other hand, fish and preparations (03) achieved the second highest growth rate of 11.5 precent per annum over the period while those for meat and preparations (01) and fruits and vegetables (05) were 7.3 and 8.1 percent respectively, all registered above-average growth rates. These growth rate differentials led to significant changes in the structure of the food import demand pattern in the world market. These have been in part reflected in changes in the ranking order of different food groups according to their share in total food imports. The structural changes are dominated by the relative decline of the share of cereal trade and upsurging importance of trade in the food products such as fish (03), fruit and vegetables (05), meat (01) in which China’s exports have expanded greatly. For example, cereal and preparation (04) occupied 28.4 percent of total food import in 1975, by far the single largest item. However its share declined to 15.5 percent in 1994 and has been surpassed by fruit and vegetables (05) 211

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Lu Feng Table 9. Growth and Changes of Food Import Demand in the World Market (Selected Years from 1975 to 1994. Unit: Billion US$, %). 1975 Commodities (SITC Code) Live Animal (00) Meat etc. (01) Diary (02) Fish etc. (03) Cereals etc. (04) Fruit and Veg. (05) Sugar etc. (06) Coffee etc. (07) Feeding Stuff (08) Others (09) Total Food (0)∗

Volume

Ratio∗

3.15 3.1 10.08 10.0 6.50 6.5 6.03 6.0 28.35 28.2 15.38 15.3 14.53 14.5 10.25 10.2 4.67 4.7 1.48 1.5 100.08 100.0

1985 Volume

1994 Ratio

5.31 3.4 18.14 11.1 12.04 7.4 17.08 10.5 35.70 21.3 30.31 18.7 6.81 4.3 23.77 14.6 9.78 6.0 4.23 2.7 163.08 100.0

Volume

Ratio

8.75 2.8 41.41 13.1 24.67 7.8 48.06 15.2 48.99 15.5 66.95 21.1 14.27 4.5 29.06 9.2 20.42 6.5 14.11 4.5 317.08 100.0

Growth rate per annum from 1975 to 1994 5.52 7.70 7.27 11.54 2.92 8.08 0.00 5.76 8.07 12.60 6.25

∗ This is the ratio to total food import. The import values do not add up due to rounding up.

Source: UN trade data, International Economic Databank, Australian National University.

that was 21.2 percent. The similar measurement for fish and preparations (03) increased from 6.5 percent in 1975 to 15.2 percent in 1994, almost catching the share of the ex-champion of cereal and preparations (04). In 1975 the first four largest food products (according to their share) were cereals (04), fish (03), sugar (06) and coffee (07). The order has changed substantially in the last two decades or so. In 1994 the first largest four food products were fruits and vegetables (05), cereals (04), fish (03) and meat (01). The share of the three groups of food products (01, 03, 05) in total food import demand increased by 18 percentage points from 31.3 percent in 1975 to 49.5 percent in 1994. If the trend continues, it is possible that the three food products will become the three largest food items traded in the world food market. Although the causes for the structural changes are many and complicated,13 a major factor is likely to be different demand elasticities with 13 For example, the policy distortion may have had an impact in this context. Agricultural

sector as a whole has been heavily protected by many economies. Nevertheless, the degree of protection for food grain may have been larger than other food products. This may in part explain the relative slow growth of grain import demand mentioned above.

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respect to income across various food commodities. It has been widely observed that when the consumer’s diet improves as a result of per capita income growth, expenditure on some foodstuff such as meats, fish and fruits tends to grow much faster than other food products such as staple grain. China’s recent experience on income-induced food consumption confirms this general pattern. As reported by Wu and Wu (1996), the income elasticity for food grain for rural consumers in 1991 was 0.05 while for meat and aquatic products was 0.91 and 2.60.14 On the other hand, food trade expansion in recent years may also have benefited from the agricultural trade liberalization process initiated with the Uruguay Round. A more liberalized trade environment facilities the transmission of a larger proportion of the income-induced demand for food into the growing food import demand in the world market. It should be noted that the impressive food export expansion in recent decades has not only happened in China and Taiwan but also in many other developing countries. Athukorala and Sen (1996) report that processed food exports by developing countries increased from US$6445 million in 1970 to US$71557 million in 1994 at the average annual growth rate of 10.6 percent. The share of processed food in non-manufacturing exports15 for developing countries increased from 23 percent to 37.5 percent during the same period. Of different processed food products exported by developing countries, processed fish enjoyed the highest annual growth rate. Its share in total processed food export from developing countries increased from 8.8 percent in 1970 to 30.7 percent in 1994. This is consistent with the structural change in the world food import demand as well as China’s food export pattern. To have a closer look at China’s export performance in relation with other developing countries, growth rates of export on the three food products as well as food sector as a whole for the period of 1980–1994 are reported in Table 10. It is clear that China has done relatively well comparing with the 14 The estimation is conducted using the Almost Ideal Demand System (AIDS) and the Chi-

nese household survey data in 1991. The estimated income elasticises are also reported for three urban consumer groups in town, city and large city respectively. Significant difference in income elasticises between food grain and meat, aquatic products also exist for urban consumers albeit with smaller magnitude. 15 Non-manufacturing export is defined as the total non-oil export less conventional manufacturing export defined by the SITC.

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Export on Selected Food Products by Selected Developing Countries. Average annual growth rate during 1980–1994 (%)

Commodity (SITC) Meat etc. (01) Fish etc. (03) Fruit and Veg. (05) Total Food (0)

China

Developing economies

Thailand

Chile

Indonesia

5.02 14.81 10.20 9.80

5.83 10.98 6.03 3.66

21.48 20.68 3.65 8.69

9.28 17.31 12.42 11.30

11.85 15.47 12.48 7.49

Source: UN trade data, International Economic Databank, Australian National University.

average export performance for developing countries in these three products. This is reflected by significantly higher growth rates of food exports on fish (03) and fruits and vegetables (05) as well as total food (0). Nevertheless China’s growth rate of export on meat (01) was lower than the average level for developing countries as a whole during the period. As for food export performance, there are some developing economies have done much better than China. For example, Thailand’s exports on meat (01) and fish (03) achieved the annual growth rate of over 20 percent over the period. Chile has achieved higher growth rates than China for exports of all the three food products as well as total food while Indonesia also did so for the three food products. The evidence indicates that there is room for China to pursue further expansion on food export in future. Several points emerge from the discussion in this section. From the global food market point of view, the exchanging food for food pattern evolved in China is not a phenomenon with any particular abnormal or strange nature. The strong export expansion in selected food products by China is consistent with the dramatic changes in the structure of food import demand in the world market. It is also in line with the trend of food export growth in many other developing economies. In view of the growth of food import demand in the past, coupled with the current process of global agricultural trade liberalization, the further growth of food export by China and other developing countries is likely to be of great potential.

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5.

Summary and Policy Implications

This chapter has examined the likely pattern of China’s food trade in future should China’s food trade policy be adjusted to accommodate her comparative advantage. It argues that in view of the heterogeneity of food products in factor proportion and cost structures, there may be diversified trade tendencies for different food products in a deregulated environment. Differing from the common perception that China’s overall food sector will follow the path of grain trade and face an ever growing trend in net import, this study has found an evolving pattern of exchanging food for food in China over the last 15 years. The pattern is in part characterized by strong export expansion of selected food products such as vegetables and fruits, aquatic products etc. The economic rationale behind the observation has been examined through a comparison of relative costs among alternative food productions in China and discussion of other potential causes. The consistency between the China’s food trade pattern and the structural changes in the world food market indicates the potential for China to further develop the food trade pattern. Although this study is preliminary in nature and questions remain with respect to many related issues, it yields important policy implications. For example, this study challenges the relevance of the question of “who will feed China”? The relevant question instead is “how will China feed its population”? This study suggests that China can feed themselves through trade: not only manufactured goods for food, but also, to a significant extent, food for food. More importantly, the exchanging food for food pattern and the underlying rationale analyzed in this chapter suggest a new choice for China’s future adjustment in its food policy. As for China’s future food trade policy, two choices have been often suggested. The first is to maintain self sufficiency policy in grain as well as total food sector. This is technically possible but costly in economic terms. The second is the free trade option which will, as widely believed, result in a large scale of growth of net food imports into China. Food import bills however may be paid by foreign exchanges generated by exports on labor intensive manufactured goods. If the pattern of exchanging food for food could be further developed, it

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perhaps represents a third option for the Chinese policy adjustments in this context. Potential benefits of this option for China are obvious. Food export can give positive impact on the Chinese economy through its strong backward linkages. A particularly important point for China in this context is that food export can make significant contribution to income growth in the rural areas due to its large rural resource elements. The rural income is widely recognized as a fundamental issue in China.16 Given the current structure of resource endowment in China, shifting resources to the food products with export competitiveness can at the margin led to income growth in rural areas. This study identifies three causes for this income growth effect. First, for those food products involved land competing activities such as vegetables etc., their production can make more intensive use of abundant labor per unit of scarce arable land. Second, production of some export food commodities either do not require arable land as input (i.e. raising animal) or only need marginal land (i.e. fruit). A policy adjustment in favor of food export can extend the scope to expand agricultural activities by breaking the vital constraint of land scarcity in rural China. Third, largely conditioned by grain production activity, demand for labor in rural China tends to be highly seasonal. Other food productions can be organized to absorb labor surplus in off-peak seasons and therefore increase rural income.17 16 It is due to at least three considerations. First, the current income level in most rural

area is still extremely low. The average income per capita for rural area as a whole was about US$188 at the official exchange rate in 1995. Even using the adjusted exchanged rate suggested by Garnaut and Ma (1992), the average income level was still less than US$600. The second factor is the sheer size of the rural population. In 1995 over 73 percent of about 1.2 billion Chinese population live in rural area. China simply could not achieve a sustainable development without delivering a substantial income growth in rural area. Third, a worrying problem emerged in recent years that the income gap between the rural and urban sector was widening as a result of the relatively slow income growth in the rural area. Against the background, income, along with grain production have been identified by the Chinese Government as the two most important policy objectives for the rural economy (Ministry of Agriculture, 1995). 17Apart from the desired income effect, food export has two additional spread effects. On the one hand, expansion on food export generates a derived demand for machinery and production process. This in turn produces favorable spread effect on domestic machinery industries. On the other hand, rural area and urban food processing sector may benefit from food export in terms of knowledge spill-over, i.e. learning through interaction with foreign buyers and improving quality standards in face of stringent export competition. It

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However, making full use of potential benefits associated with food export necessitates many policy adjustments. One crucial issue is to re-consider the traditional policy objective of grain self sufficiency. It is important to understand the linkages through which the future food export may interact with the potential adjustments in the grain self sufficiency policy. Three points are noteworthy here. First, to defend the traditional grain self sufficiency policy, China has to maintain high level of arable land utilisation in grain production.18 As discussed above, comparing with the other land competing foodstuffs (e.g. vegetables) with export competitiveness, grain production makes use of land much more intensively. To the extent that exports on land competing food products can be increased, the grain self sufficiency policy at the margin imposes high opportunity costs for peasants and therefore gives away the potential income growth in the rural area. It also imposes a constraint on China’s agricultural system in responding to changes in the world food market. Second, China’s grain prices are converging towards those in the world market prices (Garnaut et al., 1996). Adherence to the grain self sufficiency policy is likely to lead to a protection policy in grain sector in future. The resulting higher level of domestic grain prices in relation to the international prices may be more detrimental to the prospect of food export growth. The reason is simple: production of many food products for export uses grain as inputs. Relative higher domestic grain prices will inevitably feed into the cost of production of the foodstuffs and therefore erode China’s export competitiveness in these commodities.19 Taiwan’s experience is again useful at this point. Its food export expanded together with massive growth of grain imports especially of feed grain and feeding stuff. The linkage between the two sides is obvious: the cheap imported feed grain reduced is suggested that “in terms of ‘spread effects’, processed food would be even superior to conventional manufactured goods, which by their very nature, are highly import dependant” (Athukorala and Sen, 1996). 18 The proportion of the land used in grain production was about 73 percent in 1995. 19 The competitiveness of food export in China seems to be increasingly relied upon farm activities as the preliminary evidence discussed above suggests that the capital intensity for food manufacturing activity tends to be increasing relatively faster than other industrial sectors and China may not have strong comparative advantage in food manufacturing sector. It is therefore particularly important for China to maintain the competitiveness for farm activity in producing the exported food products by keeping production costs low.

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the costs for livestock raising and other food products using feed as input and therefore strengthened its competitiveness on food exports. Third, to approach the issue of grain self sufficiency in the food trade context yields an inference that the adjustment cost for China’s further integration into world food system can be reduced considerably. Food security has been one of the main concerns in China with regard to a liberalized policy scenario in the area of food trade. Central to the concern, the eventuality of grain trade embargo and its impact have been often mentioned by Chinese researchers in assessment of risk attached with a grain trade policy that accommodates a regular net grain import. If, as suggested by the pattern of exchanging food for food, the arable land released from grain import is partially used for vegetable and fruit plantation, the risk of the contingent food embargo will be reduced somehow because it is relatively easy to convert the land used in other food production into grain cultivation during a reasonably short period of time once it becomes urgently necessary. The study also has some broad implications for issues relating to the global food system and agricultural trade liberalization. On the one hand, if China adjusts its food trade policy in line with the pattern of exchanging food for food, it will inevitably have impact on the world food system. For example, it would be a piece of good news for grain farmers in the major grain exporters such as the United States, Australia, Canada as the adjustment is likely to result in a growth of grain import requirement from China on a regular basis. On the other hand, collaboration from the international community is a crucial factor for the potential policy adjustment. It is important that other countries shall accommodate China’s export on its competitive food products. On the other hand, vigorously defending the grain self sufficiency policy on behalf of the food security objective at enormous economic costs is not the phenomenon only confined in China. Policy makers in many other countries also face a tense conflict between adherence to the grain self sufficiency policy on one side and increasing adjustment pressure emanating from changes in the domestic economy and external environment on the other side. Bearing in mind that grain self sufficiency is a complicated issue concerning many economic and political factors, the conventional perspective confusing grain with food in economic and policy analysis also help, to some extent, overemphasis or exaggerate the necessity and importance

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of this traditional belief. Careful clarification of the simple logic difference between grain and food emphasized in this study may be also of relevance to these economies for their rational adjustments in food policy. As discussed in the Chinese case in this study, the policy adjustments may generate significant benefit to the economic development in the rural areas. They may also contribute towards strengthening the momentum of agricultural trade liberalization process under the framework of both WTO and APEC.

References Anderson, K (1991). Europe 1992 and the Western Pacific Economies. The Economic Journal, 101, 1538–1552. Anderson, K and R Tyers (1987). Economic Growth and Market Liberalization in China: Implications for Agricultural Trade. Working Papers in Trade and Development, No. 87/2, Research School of Pacific Studies, Australian National University. Asia Pacific Economic Group (1996). Asia Pacific Profiles 1996. Research School of Pacific and Asian Studies, the Australian National University, Canberra, Australia. Athukorala, P and K Sen (1996). Processed Food Export from Developing Countries: Pattern and Determinants. Paper presented for the 25th Australian Annual Conference of Economists, September 1996, the Australian National University, Canberra. Bhagwati, J (1964). The Pure Theory of International Trade: A Survey. The Economic Journal, 74(293), 1–81. Brown, LR (1995). Who will Feed China? Wake-Up Call for a Small Planet. New York: W. W. Norton Company. China Academy of Agricultural Science (1989). Chinese Academy of Agricultural Science: Studies on the Issue of Grain in China (Zhongguo liangshi zhi yanjiu). Beijing: China Agricultural Science and Technology Press (Zhongguo nongye keji chubanshe). Carter, AC and F Zhong (1991). China’s Past and Future Role in the Grain Trade. Economic Development and Cultural Change, 39, 791–814. Chen, J (1991). On the Export Oriented Agricultural Products (Chuanghui Nongye Chanpin Lun). Beijing: The Press of the People’s University of China. Chen, L and A Buckwell (1991). Chinese Grain Economy and Policy. UK: C.A.B. International. China Statistical Bureau (1996). A Statistical Survey of China 1996 (Zhongguo tongji zhaiyao) Beijing. Garnaut, R, F Cai and Y Huang (1996). A Turning Point in China’s Agricultural Development. In Garnaut, R, S Guo and G Ma (eds.), The Third Revolution in the Chinese Countryside. Cambridge University Press.

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Lu Feng Garnaut, R and G Ma (1992). Grain in China. Canberra: Australian Government Publishing Service. Garnaut, R and G Ma (1996). China’s Grain Demand: Recent Experience and Prospects to theYear 2000. In Garnaut, R, S Guo and G Ma (eds.), The Third Revolution in the Chinese Countryside. Cambridge University Press. Hoftyzer, J (1984). A Further Analysis of the Linder Trade Thesis. Quarterly Review of Economics and Business, 24(2), 57–90. Huang, J, S Rozelle and M Rosegrant (1995). China and the Future Global Food Situation. IFPRI 202 Brief, International Food Policy Research Institute, Washington DC. Leamer, EE (1987). Paths of Development in the Three-factor, N-good general Equilibrium Model. Journal of Political Economy, 95, 961–999. Leamer, EE and J Levinsohn (1995). In Grossman, GM and K Rogoff (eds.), Handbook of International Economics, Volume III. Elsevier. Lin, Q (1993). Food Security and Taiwan’s Strategy in Land Utilisation in Future (Liangshi Anquan ji Taiwan Weilai zi Nongdi Liyong Celue). Journal of Agricultural Finance (Nongye Jingrong Lunchong), 29, 13–20. Linder, SB (1961). An Essay on Trade and Transformation. New York: John Wiley & Sons. Lu, F (1994). China’s Grain Imports: Policy Evolution and Determinants. Ph.D Thesis, School of Business and Economic Studies, Leeds University, UK. Ministry of Agriculture of China (1995). Report on China’s Agricultural Development’ 95 (Zhongguo Nongye Fazhan Baogao’ 95). Beijing: China Agricultural Press (Zhongguo Nongye Chubanshe). Overseas Economic Cooperation Fund (1995). Prospects for Grain Supply-Demand Balance and Agricultural Development Policy. Overseas Economic Cooperation Fund Discussion Papers No. 6. Japan. Qiu, Yi and Q Duan (1992). Competition and Complementarity of Agricultural Trade across the Strait (Haixia Liangan Nongchanpin Maoyi de Jinzheng he Hubu). In China’s Agricultural Economics Association (Zhongguo Nongye Jingji Xuehui) (ed.), Forum on China’s Agricultural Development in the 1990s (20 Siji 90 Niandai Zhongguo Nongye Fazhan Luntang). Beijing: The Press of the People’s University of China. Shei, SY (1983). Food Trade and Food Security of Taiwan. Industry of Free China, October, 1–15 and November, 5–31. State Planning Commission et al. (1995). Compilation of National Cost and Return Data on Agricultural Products (Quanguo Nongchanping Chenben Shouyi Ziliao Huibian). Internal publication. Teitel, S (1989). Industrialisation, Primary Commodities and Exports of manufactures. In Islam, N (ed.), The Balance between Industry and Agriculture in Economic Development. Basingstoke: Macmillan, pp. 315–141. Tyers, D and K Anderson (1992). Disarray in World Food Markets: A Quantitative Assessment. Cambridge University Press. World Bank (1985). China: Agriculture to the Year 2000. Annex 2 to China: Long-Term Development Issues and Options, Washington, DC, USA.

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Grain versus Food: A Hidden Issue in China’s Food Policy Debate World Bank (1991). China — Options for Reform in the Grain Sector. Washington, DC. Wu, Y and HX Wu (1995). Urban Household Grain Consumption in China: Effects of Income, Price and Urbanisation. Paper presented for the Conference of Grain Market Reform in China and Its Implications, September 1996, East-West Center, Honolulu, Hawaii.

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Chapter

6

Wan Guanghua, Shi Qinghua, Tang Shumei1

Abstract This chapter represents a first attempt to analyze household level data on saving in rural China. As argued by Browning and Lusardi and many others, not much can be learnt from aggregate data about individual behavior. And yet, it is the individual behaviors that are of utmost importance. Majority of earlier studies on saving in China used national or provincial aggregate. With an average population of over 43 million in each province, much insights may well be lost at such a high level of aggregation. Another objective of this chapter is to estimate a saving function for rural residents in China. Given the noisy nature of saving data in general and the complexity of household characteristics in rural China, considerable efforts are made to construct the variables and to specify the model. This complexity and other considerations, as discussed at the beginning of Sec. 3, prompt an ad hoc model specification, rather than relying on standard or optimizing theories such as PIH or LCH. The rich specification adherent to ad hoc models enables assessment of the impacts on saving rates attributable to variables such as credit constraints, precautionary motives, taxation and other socio-economic determinants. Keywords: Farm household; savings ratio; saving model; heterogeneity.

1 Wan Guanghua, World Institute for Development Economics Research, United Nations

University. Shi Qinghua, College of Management, Shanghai Jiaotong University, China. Tang Shumei, Professor of International Economic Law. Beijing Normal University.

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1.

Introduction

There exist considerable interests in the studies of household saving in developing countries, as reflected by the recently completed projects of the World Bank and Princeton University (see Deaton and Paxson, 2000; Loayza et al., 2000b and references therein). While some of the existing researches focus on testing various theories such as permanent income hypothesis (PIH) or life-cycle hypothesis (LCH), others explore determinants of saving. Increasingly, data at the household level are being used. Saving in China has attracted more and more attention (see Kraay, 2000 for a summary and appraisal). However, most of previous researches on China are not directly towards saving per se. Rather, commodity demand and consumption function modeling are being analyzed. The exceptions are Qian (1988) and Kraay (2000). Lack of data is largely responsible for the scarcity of direct savings modeling. For example, Wang (1995) turned to wealth accumulation because data on annual saving were not obtainable. This chapter represents a first attempt to analyze household level data on saving in rural China. As argued by Browning and Lusardi (1996) and many others, not much can be learnt from aggregate data about individual behavior. And yet, it is the individual behaviors that are of utmost importance. Majority of earlier studies on saving in China used national or provincial aggregate, including Qian (1988) and Kraay (2000).With an average population of over 43 million in each province, much insights may well be lost at such a high level of aggregation. Another objective of this chapter is to estimate a saving function for rural residents in China. Given the noisy nature of saving data in general and the complexity of household characteristics in rural China, considerable efforts are made to construct the variables and to specify the model. This complexity and other considerations, as discussed at the beginning of Sec. 3, prompt an ad hoc model specification, rather than relying on standard or optimizing theories such as PIH or LCH. The rich specification adherent to ad hoc models enables assessment of the impacts on saving rates attributable to variables such as credit constraints, precautionary motives, taxation and other socio-economic determinants. 224

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2.

Data Issues: Construction of Saving Rate

Household survey data compiled by China’s Ministry of Agriculture are used in this study. For detailed description of the survey and other information, readers are referred to MoA (2001). Although the survey covers all provinces in China, accessibility to household-level data is very limited. In this paper, observations for some 3,202 households are to be used. They are from five provinces (Shanxi, Shanghai, Jiangsu, Zhejiang and Shandong) and 49 different villages. The balanced panel covers the period 1995–2000, which amounts to a sample size of 19,212. Such a large sample size allows liberal use of dummy variables in the models to be estimated (see Sec. 3). Since most studies on saving use saving rate as the dependent variable, it is necessary to define and calculate this rate. It turns out that this is not an easy task simply because typical households in rural China play a dual role as a producer as well as a consumer. Therefore, household income is more or less equivalent to production/business profit. Consequently, it can be defined that saving rate = 1 − consumption/profit. When profit is smaller than consumption, saving would be negative. When profit is negative, saving rate would be larger than 100 percent. This is clearly not acceptable. Equaling income with profit is valid only when farmers are viewed as producers. Viewed as consumers as should be in this study, the minimum income must not be negative. Further, as saving rate is not defined when income is 0, the minimum income is set to equal RMB1 per capita. This would cause little distortion because RMB1 is a negligible amount by any standard. In other words, non-positive income observations are replaced by RMB1 on a per capita basis. This replacement is necessary in order to avoid a positive and large saving rate when the profit is negative. After the replacement, negative saving would occur if and only if consumption exceeds actual income or 1 on a per capita basis, whichever is larger. Given consumption smoothing and inelastic demand for most consumption items, negative saving rate could be astronomical in absolute values when income or profit levels are very low. Suppose, for example, the subsistence level of annual consumption is RMB500 per capita. When income or profit is 0 or negative, borrowing must occur. In this case, income level is set to 1 and the saving rate amounts to (1 − 500/1) ∗ 100% = −49,900%. This rate is too high to make any sense and thus a ceiling of 225

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−1,000% is imposed on the saving rate. Such a ceiling may bring about distortions to modeling results and a technical solution will be discussed in the next section. Consumption data require adjustment as well. First, not all durable expenditure should be counted as consumption. It is assumed that 80 percent of current durable purchase are savings. The use of 0.2 as depreciation rate is arbitrary but considered to be reasonable. It implicitly assumes an average life of five years for household durables as a whole. At the end of the five-year period, durables are either to be replaced or written off. Second, education expenses are almost exclusively for school students. Following convention, they are treated as investment or saving rather than consumption. Finally, it is necessary to remove random effects on household expenditure caused by special events in a family. Such events add a considerable amount to the reported expenditure, which is not really consumed by members of the household. In case of celebrations such as marriage and major birthdays, durable goods such as TV, refrigerator and so on may be purchased as presents rather than consumables of the household. Unfortunately, these are all included in the expenditure data but not separately listed. In these years, past savings are often drawn out. Clearly, there is a need to identify such events and then adjust data accordingly. Major events are best signaled by unusually high per capita expenditure on food. This is so because food expenditure fluctuates little across successive years in the absence of major events. Further, major events are always celebrated with lavish banquets in China. It is assumed that major events would have occurred if five or more tables of guests were invited in a year (when celebrating, Chinese usually use “table” as a measure of the scale of the event). This amounts to 40–50 guests depending on the table used (a round table sits 10 but a square table sits eight). All guests would be treated with a formal dinner and a slightly less expensive lunch. Assuming banquet dinner is 10 times more costly than an ordinary family meal and banquet lunch costs half of a banquet dinner, 600–750 extra ordinary meals in a year would signal a major event. This translates into 200–250 days of food expenditure for a person or 0.55–0.68 person’s annual food budget. Given the mean household size in rural China being about four, the amount is equivalent to a 13.75–17 percent increase

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in the family food budget. Consequently, a 15 percent or higher rise in per capita food spending in a year relative to the previous or successive year is taken to indicate special event(s) in the family in that year. Once a special event is identified, the particular year’s consumption is replaced by the average of its previous and successive years’ amounts. When previous or successive observation is unavailable, it is replaced by whichever is available. Education and durable expenditures are adjusted in the same way. In identifying major events, no adjustment for income effects is considered. This is because (a) food is an inelastic commodity group; (b) real income growth in rural China had been at a rate of 30 percent or so (Wan, 2001) and is slowing down; (c) a large portion of increase in income is saved rather than consumed. Therefore, the income effects on food expenditure would be small if not negligible. In any case, the setting of signal is arbitrary. To examine the sensitivity of modeling results to the setting, other percentages will be used as well. See discussions at the end of Sec. 4. Although inflation or deflation does not affect the calculation of saving rate, expenditures and income need to be deflated. For this purpose, a price index is needed. Given the territory size of China, inadequate transportation and communication infrastructure in the rural areas and relatively underdeveloped rural markets, inflation rates can vary substantially across regions. It is thus necessary to deflate the income and expenditure data by regional inflation rates. There exist many different price indices, among which the Cost-of-Living Index or Consumer Price Index (CPI) for Farmers seems most appropriate. This index is published in various issues of China Statistical Yearbook and the name has been changed to Rural CPI as from 1994. The published regional CPIs take the preceding year as the base and they are all converted so to make 1981 as the common base.

3.

Model Specification

As pointed out by Browning and Lusardi (1996), most of the empirical work on saving is atheoretical. They conceive behavioral or ad hoc models as the only coherent alternative to the optimizing models (p. 1,850). In a most recent study of savings, Smith (2001, p. 109) points out that ad hoc

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specification is common in the literature and gives rise to a richer specification that allows for more saving determinants than the utility maximizing models. The ad hoc approach is also taken by all studies under the World Bank’s research project “Saving Across the World” (Loayza et al., 2000b). So are most of the studies published between 1991 and 1998 as quoted in Loayza et al. (2000a, p. 166). Loayza et al. (2000a) also adopted the ad hoc approach to model specification. A particular advantage of this approach is that it places saving at the center of attention rather than being treated as a residual of income and consumption (Browning and Lusardi 1996). Furthermore, standard frameworks, being based on western systems and society values, may not be applicable to China (Wan, 1995). We follow Loayza et al. (2000a) in choosing a linear specification with household saving rate as the dependent variable. Independent variables are chosen on the basis of theoretical relevance and data availability. Given the lack of previous findings on determinants of household saving in rural China, an encompassing principle is adopted in this study. Thus, both standard as well as non-standard variables are to be considered. Standard variables are those resulting from optimizing frameworks. Their inclusion offers the possibility to test various hypotheses such as PIH and precautionary motives. Other variables in the model are termed nonstandard variables. Their inclusion, if found significant, may provide useful policy implications. As far as the optimizing theories are concerned, the permanent income hypothesis suggests wealth level and expected future income as saving determinants. Many studies use current income as an instrument for expected future income. For applications to China, see Jian et al. (1996), Chen and Fleisherr (1996) and Kraay (2000). On the other hand, the life cycle hypothesis considers age to be an important variable. Since there is no such thing called household age, age of household head is used instead, as suggested by Browning and Lusardi (1996) and practised by Poterba (1994). It is our belief that the age-saving profile in rural China, if existent at all, is expected to display a U pattern. When a household head reaches middle age, they have to raise children and look after the elderly as well. Thus savings would be low. Young households typically would have working parents with no or small children, thus the dependency rate is modest and so is saving. When household head reaches 50 or older, his/her parents

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are likely to be deceased and own children would have joined labor force. Thus dependency rate is quite low and savings would be quite high. This pattern is exactly opposite of those in developed countries as many studies find humps in the age-saving profile (Deaton and Paxson, 2000). Apart from the age-dependency rate argument, it is important to point out that age is not related to work experience in rural China, as China has been undergoing rapid social, economic, institutional and structural transformations. In fact, educated and courageous youth are more likely to earn more than the middle aged and the old. Once the earnings capacity and age of household head are controlled in the model, dependency rate is expected to be of little relevance in explaining savings behavior. To account for the motive of precautionary savings, three variables are considered. The first is the presence of employees of government or state-owned enterprises in a family. They provide regular and guaranteed household income. Defined as a dummy variable, it could capture household ability to combat uncertainty in household income. From this point of view, its impact should be negative. However, these employees often contribute to household income but do not consume or consume little at home. From this point of view, its impacts should be positive. Overall, this dummy variable may have a positive or negative coefficient. Second, the wealth level of households, defined as per capita non-productive assets, is included in the model. This is because wealthier people are believed to be less risk-averse and thus save less. Moreover, in rural or urban China, wealthy families usually value face-saving more than others and thus tend to spend more or save less, ceteris paribus. Consequently, the wealth variable is expected to be negatively related to saving in China. Nevertheless, under the permanent income hypothesis, this variable is expected to exert a positive impact, as argued by Browning and Lusardi (1996). Finally, a dummy variable is constructed to differentiate cropping households from non-cropping households. It was argued that cropping households save more than the non-cropping counterpart as cropping involves more uncertainty than other production activities do. It is imperative to add that our treatment of precautionary motive is novel as we do not rely on artificial variables to represent uncertainty. Serious problems exist with respect to construction of artificial variables (see discussions in Browning and Lusardi, 1996).

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To account for the impact of liquidity constraints, status of capital or credit market must be considered. Although fragmented and inefficient, rural money markets do exist in most parts of rural China. As a matter of fact, money markets in rural China display typical financial dualism — a formal or organized component and an informal or unorganized component. It is discerning to note that the unorganized segment is growing while the formal segment is shrinking in rural China. Nevertheless, any money market, being formal or informal, is expected to enhance accessibility of credits, thus easing liquidity constraints. Under such reasoning, the total amount of borrowing (on a per capita basis) in the current year is included in the model. This amount accommodates both frequency of borrowing and credit limit and thus is a good indicator of liquidity constraints. Urbanization and industrialization are likely to lead to more investment opportunities thus helping create stimulus for household to save. In fact, entering town and village enterprises often requires contribution of funds, nominally as deposit but in essence as investment bonds. Therefore, it is expected that the more involved in non-agricultural activities a household is, the higher its saving rate. To assess these impacts, two variables are used. The first is the percentage of labor input into non-agricultural activities. The other is the percentage of capital input into non-agricultural activities. Note that these two variables may seem to be correlated with the non-cropping dummy variable. Since the latter is a binary variable, multicollinearity is not perceived to be a major problem. Further, the large sample size of our data would help to alleviate multicollinearity if present. Taxation is generally perceived to exert a negative impact on savings. This is so only when saving is viewed as a proxy for investment. In rural China, formal and informal taxes, including various fees and levies, have received tremendous publicity and attention. According to Zhu et al. (1996), adding up these financial burdens and in-kind contributions of rural households make overall government support to the rural economy a negative value. Indeed, this is one of the arguments of Ke and Wan (2002) for supporting China’s position to compromise on the support level in China’s WTO accession negotiations. Despite constant appeals for their reduction or removal, these fees and levies are becoming a most important source of local government revenues. A conservative estimate put a tag of RMB800 billion to this item. It is important to note that these burdens are mostly

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unrelated to income. Rather, they are proportional to family size and land holdings irrespective of household business operations and demographic composition. From this perspective, this variable may help raise the level of saving, as families must save for the expected payment (similar to savings for future spending, retirement, housing and so on). The way in which these taxes and fees are collected actually removes any links between them and investment, so the sign of this variable is expected to be positive. Apart from the above, education is incorporated into the model. This is prompted by Browning and Lusardi (1996, p. 1,814). In this paper, education is indicated by average years of education of family members. Certainly, years of education is better than enrolment rates because currently enrolled students will not reach decision-making age until many years later. In other words, the current enrolment rates bear little on the impact of human capital on production, consumption or saving. The sign of the education variable is uncertain as well. Educated families may face more certainty and thus can afford to save less (Wan, 1995). On the other hand, educated people may spend more on next or following generations’ education, which are treated as investment. In other words, more educated families tend to save more for educational purpose. Depending on the offsetting forces, the impact of education on saving could be positive or negative. Demographic factors may well affect saving. Three variables are considered: household size, dependency rate and family type. Families are classified into two broad groups: a complete family or an incomplete family. The latter refers to families with no more than one parent as main income earners. It also includes single member families (mostly old or disabled singles). One would expect complete families to save more simply due to psychological differences between these families. Being more forward-looking, complete families tend to spend more on children’s education and save more for housing. On the other hand, complete families may face more certain income and thus can afford to spend more or save less. Dependency rate is commonly perceived to have a negative impact on saving and is defined as (household size − number of laborers)/household size. This is slightly different from the conventional definition, which uses number of laborers as the denominator. We found the conventional definition inadequate as some households do not have laborers at all. In any case, the definition adopted in this paper will service our needs. Household size

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is included to capture economies of scale in consumption and saving. When household size, per capital income, per capita wealth and other variables are controlled in the model, dependency rate may not be significant, a result confirmed by our modeling outcomes. A most important factor is local culture. It is our belief that culture is fundamental in explaining many economic behaviors, particularly regional differences in these behaviors. For example, people from Zhejiang are wellknown for their talents in business dealings. Shanxi people are famous for their careful spending and strong desire to save. China experts will agree that a province is a reasonable territory to define culture. While culture may differ from location to location within a province, inter-provincial differences in culture are, by and large, distinct and significant. This provides us with the possibility to use dummy variables to gauge cultural impact. Note that data for several villages are available from each of the five provinces included in this study. Once village dummies (reflecting any impacts associated with locations) and household effects are considered, provincial dummies can no longer signal locational differences. The provincial dummies capture forces that are common to different villages within a province but are different from province to province (location and associated factors are controlled by village dummies). Clearly, these forces are either provincial policies or local culture. It is known that saving policy instruments are centralized in China with little involvement of provincial government, particularly regarding rural savings. Indirect policies working through income, education, taxation and so on would have been captured by those variables already included in the model. Therefore, one would expect provincial dummies to be redundant unless differences in culture play a role. Put it differently, significant provincial dummies could be taken to indicate culture impact. Since very few, if any, farmers in China would borrow (either unwilling or unable) against future income in order to finance consumption, negative savings essentially imply that profit cannot cover consumption, or households as business units were running at a loss (see earlier discussions). Under this circumstance, total revenue is not sufficient to cover variable costs, mostly labor cost. It is conceivable that a person with negative profit or running a loss-making business would have a different consumption/saving pattern than otherwise. Based on this, a dummy variable is defined to differentiate business losers from normal consumers. Also, the ceilings on saving

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rate, as discussed earlier, may lead to some distortions and such a dummy would be helpful in absorbing these distortions. Note, however, that such treatment is technical in that it does not affect the assessment of the impacts of the various determinants of saving. In addition to all the above, year dummies are included to capture the possible effects of nation-wide reform, preference changes and economic and social transitions. Table 1 presents a list of the variables to be included in the model and the expected signs of their impacts on savings. Given Table 1, the saving Table 1. Variable category

Variable Selection.

Variable

Expected impact

1. Permanent Income Hypothesis

Income Income squared Wealth

+ − +

2. Life Cycle Hypothesis 3. Precautionary Motive

Age Age squared State employee dummy

− + + or −

4. Liquidity Constraint 5. Urbanization/ Industrialization

6. Other Variables

Wealth



Amount of borrowing Non-farming labor share Non-farming capital share Tax and fees Education



Remarks

Precautionary motive and face-saving point to a negative impact

Family with state employee = 1 (0 otherwise) Permanent income hypothesis points to a positive impact Cropping dummy + Cropping household = 1 Non-cropping household = 0

+ + + + or − (Continued)

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(Continued )

Variable category

Variable

Expected impact

7. Demographic Variables

Household size Dependency rate Family type dummy

+ 0 + or −

8. Local Culture

Province dummies

+ or −

9. Control Variables

Dummy for business losers Year Dummies Village Dummies

+ or − + or −

Remarks

Complete family = 1 Incomplete family = 0 These dummies can only signalize the relevance not magnitude of cultural impact

’measured in RMB100 per capita; ’> measured as discrete values 1 (aged 30 or younger), 2 (aged 31–40), 3 (41–50), 4 (51–60) and 5 (over 60). ’measured as average years of education of household members.

function can be expressed in a compact form as Sit = β Xit + α Zit + γ  CDit + eit where X is a set of standard economic variables. Their inclusion is dictated by various theories of saving and consumption (Categories 1–4 in Table 1). Z is a set of other possible determinants (Categories 5–8 in Table 1), and CD is a set of control variables. The disturbance terms are household- and year-specific and the model allows for first order autocorrelation over time and heteroscedasticity across households, as further explained in the next section.

4.

Model Estimation and Results

Heterogeneity poses a great challenge to the estimation of the model discussed above. As argued by Browning and Crossley (2001), it is the most difficult issue with which to deal with (p. 20). It exists not only between households in a same village, between villages in a same province, but 234

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also between villages and between provinces. To tackle this heterogeneity problem, a number of dummies are defined in the preceding section. The village and province dummies are designed to handle inter-village (location) and inter-province (culture) heterogeneity. This fixed effects approach is preferred to the random effects or error components approach, as the former does not require the assumption of independence between these effects and other regression variables in the model. Regarding inter-household heterogeneity, it is partially accounted for by the inclusion of family-specific variables in the model. The remaining heterogeneity can be dealt with using either household dummies or household-specific disturbances. The former is not adopted given the large number of households in the data. Consequently, household errors are specified and are accommodated by the Kmenta procedure, which allows for heteroscedasticity across households and autocorrelation over time for each individual household. Suppose household heterogeneity can be classified into a deterministic and a stochastic component. It can then be said that the deterministic or systematic component is handled by family-specific variables while the stochastic component is incorporated in the model by the household-specific errors. The Kmenta procedure is assessed by Baltagi (1981), along with other alternative pooling methods (see Wan 1996a, 1996b for empirical applications of this procedure to Chinese data). We decide not to conduct extensive data mining in the sense that only limited testing and model reformation will be performed. The first test is to compare White’s heteroscedasticity-corrected OLS against the noniterative Kmenta procedure. This essentially tests for presence of household heterogeneity. The results (not presented but available on request from the first author) indicate that the Kmenta procedure produces a log-likelihood value that is 23,327 larger than the OLS counterpart. Clearly, the conventional OLS technique is inferior in view of the likelihood dominance criterion of Pollack and Wales (1991). Needless to say, a formal x2 test as performed in Wan (1996b) would also reject the OLS estimation. It is worth noting that the OLS estimation produces an adjusted R2 of 0.29, which compares favorably with Wang (1995, p. 535) who modeled wealth as a less noisy proxy of saving. It is much higher than what Kraay (2000) obtained despite his use of aggregate Chinese data. Also, most of our OLS estimates are of expected signs. These lend support to the rich

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specification of our ad hoc model. However, some OLS estimates seem to be unrealistic. For example, an additional RMB100 tax and fees would lead to a 0.9 percent rise in saving (far too large). A complete family would save 1.9 percent less than the incomplete counterparts (too large again). In particular, increase in household size by one member would cause saving to decrease by 0.2 percent (wrong sign). These are clearly out of expectations and are indicative of deficiency of OLS in fitting panel data. Pooling by Kmenta procedure improves the results considerably even without iterations. Although it is known that iterations may not lead to efficiency gains in small samples, a sample size of 19,212 here calls for iterations to be attempted. Iterative estimation increases the log-likelihood value by a further 796. Meanwhile, the Buse’s Raw-moment R2 improves from 0.918 to 0.928. Since no extra parameters are estimated, such small gains should not be neglected. Looking at the estimates, education is found to exert negative impact on saving rate (−0.26) without iterations and the parameter is significantly different from 0. On the other hand, the iterative counterpart is −0.04 and the parameter is not significant. As explained below, education is expected to play a non-negative role in saving accumulation. Based on these, discussions hereafter will be based on outcomes from the iterative estimation only. The final results are tabulated in Table 2. Given that savings data are typically noisy and panel data are used, the high value of Buse’s Rawmoment R2 signalizes successful estimation of the econometric model. Most parameters are different from 0 at the 5 percent or 10 percent level of significance. Although some estimates are of signs that are not consistent with earlier speculations, explanations are offered below to address these. It is pertinent to point out that all province dummies are significant at the 10 percent level, confirming the substantial impact of culture factors on saving. As expected, income plays a most prominent role in determining savings. Despite its statistical significance, the quadratic income term produces a very small coefficient, only −0.004. Ignoring this term, every RMB100 change would alter saving rate by 2.3 percent in the same direction. The negative quadratic term implies a diminishing marginal impact of income on saving rate. This, in turn, implies that total saving is affected by the cubic income term. Also as expected, household size yields a positive impact on

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Estimation Results of Saving Function.

Variable Income Income squared Wealth Age Age squared State employee dummy Cropping dummy Amount of borrowing Non-farming labor share Non-farming capital share Tax and fees Education Household size Dependency rate Family-type dummy Non-interpretable dummies

Estimate

t-ratio

2.31 −0.003 −0.20 −1.66 0.34 0.67 0.24 −1.11 0.44 0.01 0.22 −0.04 1.61 0.04 −0.31 Not reported

98.54 −36.49 −27.56 −3.79 4.83 1.87 0.95 −29.67 13.39 2.40 1.03 −0.64 19.17 0.86 −0.70 Not reported

savings, largely attributable to economies of scale in consumption. When household size and per capita income are controlled, it is not difficult to deduce that the dependency rate are expected to be insignificant. The effect of liquidity-constraints is found to be statistically significant and large by magnitude. The estimate implies that if one can increase credit availability by RMB100 per head, the saving rate will come down by 1.1 percent. Suppose the term of borrowing averages six months not a year, this value would double to 2.2 percent on an annual basis. It is clear that liquidity-constraints are a most important determinant of savings in rural China. Our findings are consistent with the macro-modeling results of Zhang and Wan (2002), who concluded that liquidity-constraints impose formidable obstacle for China to stimulate domestic demand. Regarding the existence of precautionary motives, our results are mixed. While the wealth effect is supportive of the motive (see below for more discussions on wealth effects), the state employee dummy variable is not. The latter possesses a positive rather than a negative coefficient. That is, regular guaranteed income from government or state enterprises seem to help induce rather than reduce saving. As explained earlier, these family 237

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members, while contributing income, do not consume as much as normal members of the family. It is a well-known fact that government employees seldom spend their income as they are often offered presents and daily banquets. State employees often have in-kind payments as bonuses despite that many state workers in the cities are made redundant. Weak evidence supporting precautionary savings is shown by the positive estimate of the parameter associated with the dummy variable singling out cropping from non-cropping households. Farming is inherently more risky and it is well-known that farmers in developing countries tend to save more than non-farmers, ceteris paribus. However, this parameter is not significantly different from 0. The two proxies for urbanization and industrialization are found to exert positive effects on savings. Statistically, they are highly significant. Note that these proxies are expressed in percentage terms, and thus a 10 percent percentage reallocation of labor from agriculture to industry will lead to a 0.4 percent rise in the saving rate. Likewise, a 10 percent reallocation of capital from agriculture to industry will lead to a 0.07 percent rise in the saving rate. As argued earlier, these positive effects reflect increased and more attractive investment opportunities as households become gradually exposed to the non-farming sectors. Regarding the life-cycle hypothesis, age is found to be significant in explaining saving. Also, the quadratic term of age is significant, indicating existence of mild non-linearities. However, the signs of the age-related parameters are exactly opposite of those of Deaton and Paxson (2000) and many others. Our results show that the linear term has a negative sign while the quadratic term has a positive sign. This confirms a U pattern rather than a “hump”, as speculated earlier. Our results are consistent with Shi et al. (2000). Note that removing dependency rate from the model did not change these results. Four points can be put forward to explain the U-shaped age-saving profile found in this paper. First, age cannot be taken as a proxy for experience or earning capacity in rural China (see earlier discussions). Rather, the young and the courageous earn more than the middle-aged or the old. Second, the subsistence nature of most rural households means that it is difficult to undertake inter-temporal substitution. One cannot rely on borrowing from the future to finance current consumption. This argument,

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commonly used to back up the “hump” age-saving profile in developed countries, is not applicable in developing countries including China. This is why current income can be used as a proxy for future income and the impact of income is significant and large. Third, the evolving demography described in paragraph 4 of Sec. 3 can help explain the U-shaped pattern. Finally, our results are not inconsistent with LCH if the latter is modified along the lines as suggested by Paxson (1996, p. 258). The positive impact of taxes and fees is inconsistent with standard economic theory. However, as mentioned earlier, levies are collected on a per capita and per land holding bases in rural China with little provisions for exemptions and concessions. As such, many households may save for its payment in the following year to avoid physical and economic penalties. The negative impact of tax on saving largely works through its impact on disposable income. When income is given, increases in taxes and levies lead to reduction in disposable income, thus diminishing consumption and saving. This negative effect may cancel out the positive effect produced by anticipated future payment. Thus a positive coefficient is not entirely unexpected. Note that this parameter is not significantly different from 0, an indication of offsetting impacts associated with this variable. When taxes and levies are converted into income tax as proposed by many economists in China, their role will change and their impact on saving requires careful reassessment. Another interesting result is that, though statistically insignificant, complete families are found to save 0.31 percent less than the incomplete counterparts. This is unexpected as incomplete households, poor or not, may not have the desire to save as most of them live an unstable life, and they are not forward-looking psychology-wise. On the other hand, uncertainty is quite prevalent in these families. If this dummy variable picks up the precautionary motive, its negative coefficient would not be unreasonable. It is possible that the positive and negative impacts cancel each other out, leaving the overall impact statistically equivalent to 0. Education is found to be virtually unrelated to saving. The estimated coefficient is −0.04 and statistically insignificant. In rural China, education affects saving in two opposite directions. On one hand, more educated households possess higher propensity to save, largely for educating future generations. Less educated households are less motivated to do so. Moreover, saving for training and further studies are more likely to occur to those

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who are already educated. This point is consistent with the human capital model for developing countries, as outlined in Bardhan and Udry (1999). On the other hand, the educated are likely to occupy secure job positions with stable income and have more promising future. As a consequence, they face less pressure and may have weaker motives to save. Given these discussions, the insignificance of the education variable is not surprising. Nevertheless, education as a form of investment is beneficial to the society and individuals and must be encouraged. The Chinese government has tried to stimulate domestic demand by expanding the higher education sector. This is certainly ineffective in the long run as education is found to be unrelated to savings. Reforms in the education system, particularly introduction of free or semi-free technical and community colleges, will help to alleviate the pressure on savings for education and thus help stimulate domestic demand. In comparison with the bivariate analyses of Browning and Lusardi (1996), some of our results are consistent with theirs, such as the positive income effects. However, saving in rural China is not concentrated with the educated or the rich as they concluded. On the contrary, every RMB100 increase in wealth level will lower saving by 0.2 percent. How much of this is due to risk attitude (which is expected to be negative) or to facesaving (which is also expected to be negative) considerations remains an open question and is subject to further investigation. In any case, there exist no intuitive or theoretical arguments we could find to support a positive wealth-saving relationship. The contrary conclusion of Browning and Lusardi (1996) must be rooted in their two-dimension approach, within which the wealth variable may well pick up the effects of the uncontrolled yet large income effect. In passing, it is noted that a vast literature exists pointing to small and often insignificant risk aversion effects in savings and consumption (Ludvigson and Paxson, 2001). Ludvigson and Paxson (2001) attribute this incorrect finding to approximation biases in Euler equations. Our results, using non-optimizing framework and non-artificial measures of risk, confirm the relevance and importance of risk aversion, a finding refuted by Browning and Lusardi (1996) among others. As mentioned earlier, data are adjusted for major events in the family. It can be questioned that the rate of 15 percent is somehow arbitrary. In particular, this rate may be biased towards the lower end of the unknown range.

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Certainly, for households with less than four members, the percentage of adjustment should be larger. And there are more small families than larger families in China as a result of the strictly enforced family planning policy. Therefore, we alter the setting percentage to 20, 25 and even 30 percent. Estimation results presented in Table 3 indicate that all estimates have the same signs and that variations in the magnitudes are not substantial. Clearly, our findings and discussions presented so far will not change fundamentally in the presence of the limited sensitivity to data adjustment.

Table 3.

Estimation Results with Different Rates of Data Adjustment. Percentage of data adjustment for family event 20%

Variable Income Income squared Wealth Age Age squared State employee dummy Cropping dummy Amount of borrowing Non-farming labor share Non-farming capital share Taxes and fees Education Household size Dependency rate Family-type dummy

Estimate

25% t-ratio

2.2793 95.81 3.90E-03 −35.75 −0.19645 −26.83 −1.2168 −2.748 0.27877 3.916 0.99409 2.75 0.3352 −1.1762 4.19E-02 4.56E-03

1.316 −30.72 12.69 1.595

Estimate

30% t-ratio

2.2459 94.27 −3.84E-03 −35.63 −0.20072 −27.64 −1.0473 −2.363 0.23704 3.306 1.1542 3.086 0.2374 −1.2118 4.30E-02 4.97E-03

0.9486 −31.22 12.77 1.721

Estimate

t-ratio

2.2116 92.12 −3.77E-03 −34.88 −0.20269 −28.12 −0.98429 −2.186 0.21872 3.001 0.47595 1.286 0.22826 −1.2256

0.8963 −31.88

4.30E-02

12.63

3.25E-03

1.12

0.23191 1.087 0.45134 2.103 0.56237 2.609 −7.83E-02 −1.096 −0.16955 −2.342 −0.21971 −3.008 1.6034 18.82 1.336 15.79 1.2483 14.6 2.34E-03 0.4549 1.94E-03 0.3668 5.59E-04 0.106 −8.60E-02 −0.191

−0.27335

−0.6246 −0.44857

−1.035

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Finally, we note that coefficients for other dummy variables are not reported, not merely because it is conventional to do so. More importantly, joint use of year, village and province dummies renders their coefficients less interpretable. Although significant coefficients mean existence of differences in saving rates across years and among villages and provinces, the magnitudes are not readily subject to proper interpretations.

5.

Summary and Further Discussions

This chapter is motivated by the remarkably high saving rate observed in China. To explore the saving determinants, an ad hoc model is proposed and estimated. The rich specification of the model enables examination of an extensive array of variables. Findings from this study will help identify policy options to deal with the sluggish domestic demand, which has troubled the Chinese government and the international business community since 1997. A most interesting finding is that consumers remain liquidityconstrained in rural China. Development of rural capital market, although requiring time as well as careful policy design, will help consumption expansion, thus stimulating domestic demand. Any policies to curtail operation of informal credit market in China will prompt contraction in consumption and domestic demand. It is unlikely that informal operators can be eliminated. Rather, the Chinese government must consider regulating the rural credit market in general and strengthen the operation of formal credit market in particular. Confirmation of precautionary motives calls for initiation and development of social security system and safety net in rural China. While urban residents have been stripped of many privileges in the last 10 years or so, they are still protected by a much better social welfare framework and government-provided services. In contrast, such protections are nonexisting in rural China. Given the risky nature of the rural economy, it is precisely the rural, not the city residents, who are in need of supporting policies towards risk-reduction. Abolishment of the household registration system is a must to initiate alleviation of institutional discrimination against farmers. 242

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The significance of province dummies, in addition to village dummies, highlights the importance of culture in determining savings behavior. As the national economy advances and information transmission improves, cultural differences will narrow in the long run. However, notwithstanding five thousand years of history, it will take considerable time and perhaps deliberate efforts for culture to converge. Although beyond the scope of this paper, it would be very valuable to attempt quantification of the culture factor and assess its magnitude of impact on savings and other economic indicators. Despite careful treatment of data and model construction, this chapter can be improved in a number of directions. First, the handling of negative income and negative saving rate may be improved. Second, data adjustment for major family events might be done in a better way. For example, the percentage setting could be linked to household size. Finally, the extensive use of dummy variables in the model, while useful and necessary, may call for imposition of orthogonality and normalization conditions.

References Baltagi, BH (1981). Pooling: An Experimental Study of Alternative Testing and Estimation Procedures in a Two-Way Error Component Model. Journal of Econometrics, 17(1), 21–49. Bardhan, P and C Udry (1999). Development Microeconomics. Oxford and New York: Oxford University Press. Browning, M (2000). The Saving Behavior of a Two-Person Household. Scandinavian Journal of Economics, 102(2), 235–251. Browning, M (1995). Saving and the Intra-Household Distribution of Income: An Empirical Investigation. Ricerche Economiche, 49(3), 277–292. Browning, M and TF Crossley (2001). The Life-Cycle Model of Consumption and Saving. Journal of Economic Perspectives, 15(3), 3–22. Browning, M and A Lusardi (1996). Household Saving: Microtheories and Microfacts. Journal of Economic Literature, 34(4), 1797–1855. Chen, J and BM Fleisherr (1996). Regional Income Inequality and Economic Growth in China. Journal of Comparative Economics, 22(1), 141–164. Deaton, A and C Paxson (2000). Growth and Saving among Individuals and Households. Review of Economics and Statistics, 82(2), 212–225. Jian, T, J Sachs andA Warner (1996). Trends in Regional Inequality in China. NBER Working Paper 5412, Cambridge, Massachusetts.

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Wan Guanghua, Shi Qinghua, Tang Shumei Ke, BS and GH Wan (2002). China’s WTO Entry and Its Impacts on the Agricultural Sector. Paper presented at the Australian Agricultural and Resource Economists Society Annual Conference, Canberra, February 13–15, 2002. Kmenta, J (1986). Elements of Econometrics, 2nd ed. New York, NY: Macmillan. Kraay, A (2000). Household Saving in China. World Bank Economic Review, 14(3), 545–570. Loayza, N, K Schmidt-Hebbel and L Serven (2000a). What Drives Private Saving across the World? Review of Economics and Statistics, 82(2), 165–181. Loayza, N, K Schmidt-Hebbel and L Serven (2000b). Saving in Developing Countries: An Overview. World Bank Economic Review, 14(3), 393–414. Loayza, N and R Shankar (2000). Private Saving in India. World Bank Economic Review, 14(3), 571–594. Ludvigson, S and CH Paxson (2001). Approximation Bias in Linearized Euler Equations. Review of Economics and Statistics, 83(2), 242–256. MoA (Ministry of Agriculture, China) (2001). National Rural Social-Economic Survey Data Collection (1986–1999), Beijing: Agricultural Publishing House of China. Paxson, C (1996). Saving and Growth: Evidence from Microdata. European Economic Review, 40, 255–288. Pollak, RA and TJ Wales (1991). The Likelihood Dominance Criterion: A New Approach to Model Selection. Journal of Econometrics, 47, 227–242. Poterba, J (ed.) (1994). International Comparisons of Household Saving. NBER Project Report Series, University of Chicago Press, Chicago, IL. Qian, Y (1988). Urban and Rural Household Saving in China. International Monetary Fund Staff Papers, 35(4), 592–627. Shi, QH, AP Wang and LL Shen (2000). A Study of Consumer Behavior and Purchase Power at the Household Level. Taiyuan, China: Shanxi People’s Publishing House. Smith, D (2001). International Evidence on How Income Inequality and Credit Market Imperfections Affect Private Saving Rates. Journal of Development Economics, 64(1), 103–127. Wan, GH (1995). Peasant Flood in China: Internal Migration and Policy Determinants. Third World Quarterly, 16(2), 105–128. Wan, GH (1996a). Using Panel Data to Estimate Engel Functions: Food Consumption in China. Applied Economics Letters, 3, 621–624. Wan, GH (1996b). Income Elasticities of Household Demand in Rural China: Estimates from Cross-Sectional Survey Data. Journal of Economic Studies, 23(1), 18–34. Wan, GH (1999). An Empirical Assessment on Alternative Functional Forms of the Lorenz Curve. Applied Economics Letters, 6, 597–599. Wan, GH (2001). Changes in Regional Inequality in Rural China: Decomposing the Gini Index by Income Sources. Australian Journal of Agricultural and Resource Economics, 45(3), 361–382. Wang, Y (1995). Permanent Income and Wealth Accumulation: A Cross-Sectional Study of Chinese Urban and Rural Households. Economic Development and Cultural Change, 523–550.

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Saving Behavior in a Transition Economy Zhang, Y and GH Wan (2002). Monetary Policy and Sluggish Demand in China. China Economic Review, forthcoming in June 2002. Zhu, XG, GH Wan and XZ Liu (1996). Estimating the PSE in Chinese Agriculture in 1993– 1994. Problems of Agricultural Economy, 17(11), 37–42 (in Chinese).

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Township Enterprises and Their Interest Distribution in Reform: A Three-player Game Model∗

Chapter

7

Ke Rongzhu

Abstract We construct a three-player game to explain the property reform of Township enterprise. As a team including manager, local government and employee, Township enterprise’s performance is affected by the distribution of residual claims of these three agents. An equal distribution is not optimal even though all player’s production importance is equal. And the wave of reform started at middle 90s, leading to a concentration of residual claims (to the manager) can be implied by the change of supervision technology or some other exogenous factors. This paper shows a pattern how the distribution of residual claim/interest distribution affects players’ working effort and supervision effort and how these efforts interact cross individuals. Keywords: Township enterprise; a three-player game model; interest distribution; reform

1.

Introduction

Since the reform and opening-up, the high growth that township enterprises have lasted more than ten years has made enormous contributions to China’s economy, and compared with state-owned enterprises that are also of public ownership, the township enterprises have relatively higher economic performance. But the outstanding economic performance of the ∗ The author thanks Professor Jin Xiangrong and Professor Zhang Weiying for their guidance

and comments. The author is also grateful to Ren Xiao’s and Yu Jinhong’s assistance.

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township enterprises is not based on the well-defined property rights, and this fact has aroused people’s great attention. Some think it is a challenge to the theory of modern property right and the theory of modern enterprise (Weitzman and Xu, 1995). Many scholars put forward different theoretical models to explain the high efficiency of township enterprises, such as Tian (1995, 1996), Li (1995), among others. Though these theories and models have explained the performance of the township enterprises to a certain extent, but there are several facts that have not been explained consistently. First, the objects they observed and paid close attention to basically existed in the 1980s, not including the tides of the cooperative share system reform that rose and was popularized rapidly at the beginning of the 1990s and the township enterprises after system reform into the unified analysis model. The question is that, since traditional township enterprises have so high efficiency, even better than the performance of private enterprises with welldefined property rights, why must we reform then? And according to what logic is the reform carried out? A logically consistent explanation is still absent in the existing literature such as the cooperative culture (Weitzman and Xu, 1995), mechanism design (Tian, 1995, 1996), ambiguous property right (Li, 1995), among others. In fact, the logic behind the two facts that the high performance of township enterprises under traditional ownership, and the present property right system reform of township enterprises, should be consistent, and this change cannot be completely explained by the change of market environment multiplied by the formation of competitive market structure to offer abundant but not distorted information (Lin and Cai, 1994, 1995, 1996). We see clearly that, there is highly correlated interest relationship among the government, community, worker and manager before the reform of stock cooperation system, during the reform and even for a quite long period after the reform. The game among the three players for maximization of their respective utilities is the center clue for understanding this question. Further speaking, both the relatively high performance of the township enterprises under the traditional ownership and the present property right system reform of the township enterprises are reflected in the equilibrium and variation of equilibriums of the above three-player game. The logic of the reform should be like this: firstly, the interest pattern adjustment due to property right system reform is a Pareto-improvement process of gradually approaching the optimal interest distribution (maximization of 248

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output or welfare), if the property right distribution has not reached the optimal level; secondly, the change in the equilibriums of optimal interest distribution due to exogenous factors such as production technology and market risk requires the readjustment of interest pattern so as to ensure re-approaching the new Pareto-optimum, even if the original interest distribution has reached Pareto optimum. Here, we do not intend to make further fact-oriented explanation about the perform of township enterprises of traditional ownership, but mainly make analysis of whether there is optimal interest distribution, i.e. residual claim distribution, in the production team composed of the government, manager, community and employee, as well as its decisive factors. This also has theoretical reference significance to determining the principles of stock right distribution in the cooperative share system transformation.

2.

Model and Theory

Obviously, since the interests of the government, community and manager are highly correlated in township enterprises, and the government often directly participates in the production process, we think that the government should have direct contribution to the output of township enterprises. This is an important reflection of the difference between township enterprises and typical capitalist enterprises. Therefore, it is debatable to what extent that the model proposed by Zhang (1995) which is suitable for analyzing the typical two-player game is compatible with the three-player game. We attempt to establish a three-player model (see Appendix 1) based on the model proposed by Zhang (1995) so as to put the three players into the same production system and analyze the issue of optimal distribution of property rights in a more comprehensive way. To facilitate illustration, we use the following definitions: xi∗ (i = 1, 2, 3, denotes manager, government and employee respectively) indicates the optimal working effort of each player on Nash equilibrium, θ refers to the manager’s residual claim proportion, also called the first residual claim proportion, and λ refers to the government’s residual claim proportion after the manager’s claim, also called the second residual claim proportion. 249

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We have drawn the following conclusions after model deduction.

2.1.

Existence of optimal equity distribution without supervision

Lemma 1. In the team production where all players are risk-neutral and have identical preference, and supervision does not work: (i) For any player, there may exist an optimal combination (θi , λi ) that maximizes its working effort xi , but whether (θi , λi ) they will achieve their boundary conditions (corner solutions) depends on the appropriate combination of the relative importance of their efforts to the output, and it is possible that there exists a contract of residual sharing among the three players which cannot maximize a single player’s efforts (this will not occur in the two-player model). Especially, for the manager, whether it will have the optimal (θi , λi ) that maximizes xi under the share contract depends on the combination of α and β, the productive importance of manger and government, respectively. (ii) If there exists the optimal interior solution (θi , λi ) that maximizes 1 xi , (A) for the manager, the claim proportion will surely exceed 1+γ , and if β1 ≥ 21 , we get λ1 ≥ β ≥ 21 ; if β < 21 , we get λ1 < β < 21 . (B) For γ the government, the required manager’s claim proportion θ2 < 1+γ and γ λ2 ≥ 1+γ . (C) For the employee, the required manager’s claim proportion is zero, and requires λ3 < 1/3. (iii) from (ii), we can get θ1 > max{θ2 , θ3 } and λ2 > λ3 , but the comparison of λ1 and λ2 is to be discussed separately. (Proof see Appendix 2) The conclusion drawn from Lemma 1 is essential for studying the difference between three-player game and two-player game. The conditions for obtaining the extreme value of binary function are more complex, so in a production system participated in by three players, it is completely possible that there does not exist the combination of non-boundary conditions that maximizes the efforts of one player (θi , λi ), even if their first-order conditions and second-order conditions are all met (while in a production system participated in by two players, there surely exists an interior solution as long as the first-order condition equals zero and the second-order derivative is less than zero). This means that the extreme distribution pattern of equity (e.g. λ = 1, θ = 0, or λ = 0, θ = 0, etc.) may optimize the producing effort 250

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of one player or two players. The conclusion that one player’s monopoly of the principal-ship will not maximize the working effort of any player at all only applies to the two-player model and is not tenable here. Taking the manager as an example, the surplus share contract that maximizes his working effort can appear only under the following circumstances: firstly, the manager has a low-enough degree of productive importance so that he would rather let other players who have greater contribution to the output enjoy the residual, and its practical meaning is that any player who has little contribution to the output is not “qualified” to require others not to enjoy the residual, which is also unfavorable for himself; secondly, if the manager has high-enough degree of productive importance, in order to ensure the existence of a share contract that maximizes his working effort, he will be particular about the share proportion of other players, which exists only when the other two players have enough difference in the degree of importance, namely β > β¯ or β < β. It is easy to understand conclusion: a player who has greater contribution to the output always has more right to speak; otherwise he can threaten by quitting. This conclusion also applies to the government and employee. Take γ = 0.5 as an example, where the degree of teamwork is moderate. If there exists a combination of an interior solution to residual claim that optimizes the working effort of each player (θi , λi ) (i = 1, 2, 3), we can also draw the following conclusions: (i) The manager’s required residual claim surely exceeds 2/3 (in case of two players, if γ = 21 too, it also requires that θ > 23 ), and for the surplus share requirement of the other two players, the more important shares more, and due surplus share of the more important player exceeds the degree of productive importance (that is to say, if β > 21 , we get λ > β), and vice versa. In such case, the manager’s optimum claim proportion shall change in the same direction as that of the more important player of the other two. (ii) The manager’s residual claim proportion desired by the government is surely less than 13 , i.e. when the government’s working effort is optimal, it hopes that the manager’s claim level is lower than the average; but it hopes to get more than 23 of the surplus after the manager’s claim, and the economic meaning of λ = 23 is that the government can ensure its claim is no lower than the average level if the manager’s claim is no more than half. (iii) The employee hopes that there is nothing better than the manager having no residual claim, but he does not

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require monopoly, and hopes the government can get a small proportion, i.e. λ < 13 (this is exactly symmetrical with the manager’s requirement). This is somewhat different from the two-player game. θi and λi have subtle relationship: in case of two players, the increase of residual claim required by one player whose working effort is optimum will surely mean the decrease of the other player’s claim, while in case of three players, it is not necessarily the case, for it may require that the claim of either of the other two players is increased. It reveals that, since the three players have different productive importance, one player’s working effort is more restricted by the other two players, and the relationship among the three players becomes more complex, i.e. the maximization of one player’s working effort requires that the claim proportion of the other two players comply with certain standard. This is the basis for our understanding of the team production by three players. Lemma 2. In the team production (γ = 21 ) where all players are riskneutral and have identical preference, and supervision does not work: (i) as the manager’s residual claim proportion θi increases, the optimum working effort of both the government and the manager is a concave function of θ, which initially increases and then decreases with θ (this is similar to the two-player model). (ii) The manager’s optimum working effort initially decreases and then increases with the increase of the second residual claim proportion λ, and its turning point depends solely on β. It increases when β ≥ 21 , and decreases when β < 21 ; the government’s working effort initially increases and then decreases with the increase of λ, and its turning point is at λ > 23 , while the employee’s working initiative also initially increases and then decreases with the increase of λ, and its turning point is at λ < 13 . (iii) The working effort of both the manager and the government decreases marginally with the increase of θ and λ, but the declining rate of the employee’s effort increases marginally (Proof see Appendix 3). Lemma 2 basically reveals the characteristics of the relationship between producing effort and residual claim of each player in team production. It is not too different from the two-player game. With the increase of residual claim proportion, the working effort of any player always initially increases and then decreases, and its marginal effort always decreases, which demonstrates that under the conditions of team production, it is 252

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impossible to increase the total surplus unlimitedly by trying to increase the residual claim of one player or two players. For any player, the incentive provided by residual claim decreases marginally, and as he gets more and more surplus, his response to the surplus increase will become more and more indifferent; but as he gets less and less surplus, his response to the surplus decrease will become more and more sensitive. This can provide theoretical basis for our township enterprise reform. Under the traditional system, the employee gets fixed salary and scarcely enjoys the residual claim, so the approaches of surplus share by linking up the bonus and salary with the output, etc. won extensive popularity initially and rapidly increased the working effort, but with the increase of this proportion, such measures became more and more ineffective later; on the contrary, for an enterprise with poor operating performance, if the approach of decreasing residual claim proportion by deducting bonus is adopted, the working initiative of its members will decrease at a rate several times as that of the decrease of their residual claim proportion; especially for the manager, since his effort cannot be observed easily, people usually adopt the fixed salary system forcibly to deprive his surplus in order to avoid the insider control, and this is a great negative incentive to the manager who used to enjoy more surplus due to the insider control. This is an issue deserving attention in our township enterprise reform and salary reform in particular. Similarly, the decrease of residual claim proportion of the government in the stock system reform will also lead to the decrease of incentive to the government, and this is exactly the issue we have been paying attention to in reality. Lemma 3. The degree of relative importance of each player in the production has subtle influence on the claim proportion combination (θi , λi ) ∂θ1 1 required to optimize its effort. (i) For the manager ∂θ ∂α > 0, ∂β > 0, ∂λ1 ∂θ1 ∂θ2 ∂α = 0, ∂β > 0; (ii) for the government, ∂α > 0, ∂λ2 ∂λ2 ∂θ3 1 ∂θ2 17 ∂β > 0, ∂α = 0, ∂β > 0; (iii) for the employee, ∂α ∂θ2 ∂λ3 ∂λ3 β < 128 129 ∂β < 0, ∂α < 0, ∂β < 0. (Proof see Appendix 4).

and if β > > 0, and if

Lemma 3 reveals the relationship between the optimum surplus distribution combination (θi , λi ) and the productive importance combination (α, β). In a team production system, exogenous parameters are only α, β and γ. The (θi , λi ) that optimizes the effort of each player not only depends 253

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on α, β and γ, and their combination. A player with productive advantage may have greater optimal residual claim proportion, but if another player has greater (or enough) productive advantage, even he fails to get the surplus in proportion with his productive importance, his working effort may still be maximized, which is the positive externality in the team production of three players. To be more specific, with the increase of α, i.e. the manager’s productive importance, his required optimal claim proportion θ1 will increase too, but his required optimal second residual claim proportion is independent of α. For the government, if its desired manager’s residual claim increases if the manager’s relative importance increases. That is said, the government hopes that the manager claims more, because if the manager gets more surplus the working effort of the government can get more. This observation also applies to the employee. Lemma 4. For the maximization of EVi , and assuming θ1∗ > θ2∗ > θ2∗ , then we get the following inequalities: (i) ∗ ∗ ∗ ∗ ∗ ∗ θ1∗ > θ12 > θ123 > θ13 > θ23 > θ3∗ and θ1∗ > θ12 > θ2∗ > θ23 ∗ indicates the surplus distribution that maximizes the sum of where θijk surplus of i, j and k. (ii) Similarly, if there are λ∗i that satisfy the above conditions (generally λ∗2 > λ∗3 > λ∗1 ), we get:

λ∗2 > λ∗23 > λ∗123 > λ∗12 > λ∗13 > λ∗1 and λ∗2 > λ∗23 > λ∗3 > λ∗13 where λijk indicates the second residual claim proportion that maximizes the surplus of i, j and k (Proof see Appendix 5). Lemma 4 reveals an important conclusion in team production: the players who require more residual claim also require more associated residual claim, but it is a compromise that reflects the degree of claim of each player in the association. There does not exist a Pareto optimal residual claim proportion θ that not only maximizes the output surplus (benefit) but also optimizes the working effort of any one player. In other words, any residual claim proportion required under the condition that the individual (Nash equilibrium) surplus of any player is maximized cannot be optimum. 254

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In the meantime, the first residual claim proportion required by Pareto optimum is always only second to the player who requires the maximum first residual claim. This is the reflection of the difference between collective rationality and individual rationality in team production. On the contrary, usually no player will work more if not in exchange of more residual claim, so there will be no enough surplus to enable each player to reach Pareto optimum if not in cooperation. Moreover, in the three-player game, the alliance phenomenon is very complex. The association of any two players for maximum surplus (benefit) will decrease the manager’s optimum residual claim proportion as desired, which will be favorable for the third player. As his residual claim proportion increases, any third player will hope the other two associate, but just for this reason, the association of three players is usually impossible. Corollary 1. In case the compatible incentive to each player is satisfied, the maximum associated surplus (benefit) required by the players who require high residual claim proportion is higher than that required by the players who require low surplus (benefit) claim proportion, but surely no higher than that required by the player who requires the highest residual claim proportion, and no lower than that required by the player who requires the lowest residual claim proportion. The proportion of surplus (benefit) maximization by three-player association is higher than the proportion required by the association of any two players, which is only second to the highest proportion required by one player. There is no residual claim proportion that not only maximizes the total output surplus but also maximizes the effort of each player. The above corollary means that if the principal-ship of benefit or total surplus maximization is assigned to a player who has the lowest or highest requirement of the residual claim, it may maximize the social surplus (benefit) (assignment of the surplus to any one player cannot be optimum). Theorem 1. If all players have the same relative productive importance and the share is evenly distributed, then a three-player team production is inferior to that of two-player team production, and the a n-player production team is inferior to that of n-1-player team production (Proof see Appendix 6). 255

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In other words, in a team production participated in by multiple players, in order to increase the output surplus, equal distribution cannot be optimum, even if they have the same relative productive importance (here the output is independent of the degree of team production). Specifically for the manager, the optimal working effort of three players is always less than that of two players. The optimal working effort is equal only in pure team production. Theorem 1 reveals to us that, the more players who participate in the team production, the more inadvisable it is for equal residual claim, or the more necessary it is for centralized residual claim, even if the relative productive importance is the same. The reason why the case in Theorem 1 appears is that with the expansion of the team, although the degree of each player’s relative importance to the output remains the same, the degree of absolute importance will decrease, which results in the decrease of each player’s equilibrium effort, thus deteriorating the efficiency of entire resource allocation. This is one of the essential factors that restrict the team production scale. However, the decrease of one player’s working effort does not necessarily mean the decrease of the output surplus, and if the surplus share structure can be appropriately adjusted so that makes the manager claim more, the increase of output surplus is also possible.

2.2.

Existence of the optimal stock right distribution with possible supervision

We now analyze the situation when supervision is possible. Lemma 5. In case the supervision technology is possible (µij indicates the supervision of player i over player j), since the externality of supervision is unavoidable, there may exist the distribution pattern that optimizes the surplus share contract when the following combination of supervision technology exist (Proof see Appendix 7). 1 (i) µ21 > µ31 , µ23 > µ13 , µ12 > µ32 , 1+µ 2

21

>

µ223 1+µ223

+

µ212 . 1+µ212

Especially, when µ12 → 0, µ21 → 0, i.e. it is difficult for the government and manager to supervise over each other, the above inequality surely exists.

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Township Enterprises and Their Interest Distribution in Reform 1 (ii) µ21 < µ31 , µ23 > µ13 , µ12 > µ32 , 1+µ 2

Similarly, it exists when µ31 → 0, µ23 → 0.

>

31

µ223 1+µ223

+

µ212 . 1+µ212

1 (iii) µ21 > µ31 , µ23 < µ13 , µ12 > µ32 , 1+µ 2 >

µ223 1+µ213

+

µ212 . 1+µ212

It exists

1 (iv) µ21 > µ31 , µ23 < µ13 , µ12 < µ32 , 1+µ 2 >

µ223 1+µ213

+

µ232 . 1+µ232

It exists

1 (v) µ21 < µ31 , µ23 > µ13 , µ12 < µ32 , 1+µ 2 >

µ223 1+µ213

+

µ232 . 1+µ232

It exists

1 (vi) µ21 < µ31 , µ23 < µ13 , µ12 < µ32 , 1+µ 2 >

µ223 1+µ213

+

µ232 . 1+µ232

It exists

when µ21 → 0, µ12 → 0. when µ21 → 0, µ13 → 0.

when µ31 → 0, µ23 → 0. when µ31 → 0, µ23 → 0.

21

21

21

21

The case revealed by Lemma 5 is different from that in the two-player game. Since the externality of supervision is unavoidable, there may have two cases. In one case, the supervision can make the voluntary working effort of two players strategic complementary, then the surplus share contract may become optimum; in the other case, the supervision can make the voluntary working effort of two players strategically substitutes, where appears free-riding behavior. But just as the two-player game model, the conclusion, when supervision technology is possible, the voluntary working effort is greater than that when it is impossible, is also tenable, and it will not only increase the voluntary working effort of the supervised player but also increase the third player’s working effort. In this case, greater increase of output will result, thus offsetting the not too much supervision cost and achieving the Pareto improvement. However, among the above six combinations, interestingly, the combination (v) reveals the possibility of existence of optimum surplus share contract when it is not easy to supervise over the manager’s behavior, while the combination (ii) reveals the possibility of existence of optimum surplus share contract when it is comparatively not easy for the government and manager to supervise over each other. Theorem 2. Under the supervision technology that meets the conditions listed in Lemma 5, there is the optimum stock right distribution, when the combination ensures that there is non-supervision interval (Proof see Appendix 8). 257

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This is a brief summary of Lemma 5. During the marginal movement from one supervision interval to another, the increase of surplus is very little, while the supervision cost increases by leaps and bounds (see Attached Figure 2), which makes such change trend unable to reach the Pareto optimum, so the optimum share contract can only exist in the interval where is non-supervision over each other. Whether this optimum surplus share contract is superior to all boundary conditions (λ = 0, λ = 1, θ = 0, θ = 1) depends on the appropriate combination of α, β and γ. Corollary 2. When the government does not supervise over the employee (µ23 = 0), and the manager and government do not supervise over each other (µ12 = 0, µ21 = 0), it will create the existence of the optimum performance distribution pattern as long as

1 1+µ231

>

µ213 1+µ213

+

µ232 1+µ232

is

ensured, in which case the degree of democracy, i.e. the increase of the employee’s technology of supervision over other production players is not necessarily favorable for achieving the optimum combination (it shows that the improvement of supervision technology is not necessarily a good thing). The above corollary demonstrates that, in a team production where the degree of democracy is very high, the optimum contract is impossible, while conversely, if the degree of democracy is not high, the optimum surplus share contract within the enterprise may exist. Examples can be found in capitalist enterprises with perfect market standard. The advanced trade union organizations have not resulted in surplus share, and shareholders have monopoly of the surplus to a large extent. Corollary 3. When the government’s working effort has no direct contribution to the output, there will be non-supervision interval as long µ221 1 < 1+µ 2 , i.e. µ21 µ23 < 1, in which case the combination of 1+µ221 23 2 2 µ21 −µ23 > µ2 (1+µ2 ) will not ensure that there is non-supervision interval. When 21 23

as λ

µ21 µ23 > 1, there cannot be a non-supervision interval, and the government performs supervision over both the employee and the manager, but it is interesting that the change of the government’s supervision technology will affect the existence of mutual supervision between the manager and the employee (Proof see Appendix 9). 258

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This also means that, when the government has no direct contribution to the output, the share of surplus claimed by the government is strictly less than that when the government has direct contribution. Corollary 3 provides us with the theoretical justification of determining the government’s residual claim proportion in accordance with the effectiveness of its supervision when the government has no direct contribution to the output, and this result reveals to us the government’s principles of deciding the residual claim in such case. It reminds us that whether the government has direct contribution to the output may be not critical, and the most critical is how the government plays its role well, because the share contract can be optimum even if the government only serves as a professional supervisor. Corollary 4. In case the government’s supervision is neutral and has direct contribution to the output, the supervision interval will exist when µ13 µ31 < 1, and not exist when µ13 µ31 > 1. Besides, when µ13 µ31 < 1, 2 13 µ31 ) the optimal share contract will not exist if λ > 1−(µ (Proof see 2 1+µ Appendix 10).

13

The case in Corollary 4 is similar to that in Corollary 3. It reveals to us that, different from the two-player game, in a game participated in by three players, even if the government is strictly neutral, i.e. adopting the retiring attitude, its residual claim proportion cannot be too high and will be affected by the contrast of supervision technology between the manager and the employee. In case of a given cake, if one player takes more without supervision, the other two players will compete more fiercely for the remaining cake, thus having more initiative of supervision, even if the supervision technology is not high. The previous conclusion is drawn under the assumption that their risk attitude is neutral. Now, let us discuss the influence of risk attitude on the conclusion. Risk can change the optimum stock right distribution, so that the distribution of optimum property right (θ, λ) not only depends on the appropriate combination of productive importance (α, β), but also has something to do with the degree of risk aversion (Arrow-Pratt measure). Especially 259

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when the manager’s activities are not easy to supervise and even suffer produce risk, thus affecting the output variance, he may acquire the advantage in surplus distribution. But compared with the case of two players, such advantage is weakened, because the other two players further keep him at bay. When the government exits from the direct production sphere and becomes a supervisor, its risk attitude affects the output through its supervising effort. However, it may be favorable for the government, but will not necessarily increase the total output, because the supervision over the manager’s behavior will cause rapid increase of the supervision cost, while this will also affect its behavior (if the government is on the manager’s side and associates with the manager to maximize the surplus, it is the same case as the two-player model).

3.

Conclusion and Discussion

Let us briefly conclude as follows. The important conclusions we have drawn from the model demonstrate that: (1) For a team production, equalized distribution of residual claims cannot be optimal, even if they have the same relative productive importance. The centralization of residual claim is particularly important when the team scale is larger. Meanwhile, it should be pointed out that the relative concentration of producing right can improve the short-run efficiency, and what is equally important, it can enhance the incentive to the enterprise’s long-term accumulation, which makes great contribution to the enterprise’s continuous growth and long-term efficiency. (2) In case of three-player game, the surplus share contract may not ensure the optimal working effort of some players, the players with productive advantage not only require that they have advantage in residual claim, but also require that the other two players decide the residual claim proportion in accordance with the degree of their productive advantage. This is somewhat different from the two-player game. (3) In case supervision is possible, the appropriate combination of supervision technology will affect the possibility of achieving the optimum surplus share contract. In case of three-player game, the externality brought by supervision cannot be eliminated, so it will not only result in the choice of strategically complementary self effort, but also may result in the choice of strategically substitutable

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self effort. In the former case, it is possible to achieve the optimal surplus share contract among the three players. (4) When the government serves as a professional supervisor, in order to ensure the existence of optimal share contract, the maximum proportion of surplus it can claim is strictly less than that when it has direct contribution to the output. These conclusions remind us that: firstly, the absolutely equalitarian distribution of residual claim is not optimal in the past, today and in the future. Today’s cooperative shares system reform should be carried out in the direction of determining the well-defined property rights and relatively centralizing the residual claim on the agents with independent options for economic behaviors. Our investigations show that, many township enterprises after system transformation have clearly assigned over 1/3 residual claim to shareholders, and certain residual claim to the middle-level management and technical backbones, which can obviously improve the enterprise’s incentive mechanism substantially. Secondly, due to the change of relative importance of the three players in the production team, the government’s direct contribution to the output will decline over time, and the manager’s importance will increase, which could eventually lead to conflict among the three players bargaining about the reallocation of interest, and the manager may raise seemingly demanding requirements, so we need to pay attention to the gradualness of reform, progressing steadily and avoiding extremes. Based on the above analyses, if a contrast is made between individual cases and the above theories and models, we find in reality that, in most township enterprises after system transformation, the manager’s residual claim proportion is rather big, and the residual claim of a considerable portion of collective stock is controlled by the insider of the enterprise. The standard approach of the government’s residual claim is to decide on the share bonus to be withdrawn every year according to the government’s magnitude of equity participation in accordance with the law (agreement), while in specific practice, the government often converts this income into shares and contributes to become a shareholder again, leading to the continuous increase of the enterprise’s residual claim proportion anticipated by the government, which plays an important role in ensuring the government’s target. Actually, when the government’s residual claim proportion is small enough, as a rational player, the government will not choose to supervise over the

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manager. Therefore, a well-defined and standard government-enterprise interest distribution is essential for the enterprise and government. Seen also from the general fact that the largest shareholding individual of a township enterprise is often the enterprise’s top manager, the insider control is very obvious in enterprises of cooperative share system. But due to the complex combination of supervision technology and externality existing in the three-player model, under the condition of complete information, it is possible to reach the equilibrium un-achievable in the two-player model, even if it is difficult to supervise over the manager. This is also what is special about the three-player game, which is different from a two-player game. It must be pointed out that, the theoretical model proposed in this article is abstract though its assumption comes from the reality, and especially that the model does not take into account the influence of the endowment constraint of different player on their behavior.Actually, under the condition of extremely different endowment, we have reasons to believe that, people are more concerned with the absolute amount of residual claim, instead of the relative residual claim proportion, which must be analyzed by establishing another kind of model (Zhu, 1995). In the meantime, the model basically assumes perfect information when discussing about the game, but information is often asymmetric in reality, and people may not know by themselves to what extent their supervision can work, which makes it very difficult to carry out precise cost-benefit accounting, and the model has not elaborated on the behavior characteristics of each player in a team and their influence on performance under the condition of asymmetric information. A possible supplement is a conclusion about the principal-agent problem in modern information economics (Alchian, 1972; Demsetz, 1982; Holmstrom, 1982b), i.e. the principal’s role in breaking the budget balance in the team can be used to eliminate the agent’s free-riding problem. There are many examples of this in the system transformation practice of township enterprises. Nevertheless, the model proposed in this chapter is very helpful for analyzing the position and role of the government, manager and employee in the township enterprise. Of course, with the scale expansion of the township enterprises and the increase of township enterprises in communities, it will have influence on the degree of correlation among the interests of the three

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players, thus affecting their performance, which does not constitute a threat to the conclusions of the model. This chapter discusses the game and equilibrium among the government, manager and employee in township enterprise. The model explains the stylized facts during the development and reform of township enterprises. We logically and consistently provide an explanation for township enterprises and their reform. But many specific and in-depth problems still need further study.

4. 4.1.

Appendices Appendix 1

Assuming that the production surplus is distributed according to the rules determined by the following equations: Y1 = W1 + θ(Y − W1 − W2 − W3 ) Y2 = W2 + (1 − θ)λ(Y − W1 − W2 − W3 )

(1.1)

Y3 = W3 + (1 − θ)(1 − λ)(Y − W1 − W2 − W3 ) where Yi (i = 1, 2, 3) is the return obtained by the player i and Y is the enterprise’s total output; and Wi (i = 1, 2, 3) is the fixed salary obtained by the player i, which is independent of the output (in order to ensure that he can always get a fixed salary, we assume that W1 + W2 + W3 < Y , and Y is the lower limit of Y ). And we assume 0 ≤ θ ≤ 1 and 0 ≤ λ ≤ 1, where θ is the manager requests residual claim proportion, while λ is the government requests residual claim proportion after the manager’s claim. In the production involving risk, the output should be the conditional distribution (Yi , x1 , x2 , x3 ) of each player’s working effort xi ∂ (i = 1, 2, 3), and it satisfies the following conditions: (i) ∂x ≤ 0, (ii) i ∂2  ∂xi2

≥ 0, (iii)

∂2  ∂xi ∂xj

= 0. These three assumptions ensure that the produc-

tion system composed of three players is appropriate for team production, and that there is possibility of existence of contractual surplus. We define the supervision technology as the mapping from the player i to the player

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j and k, i.e.: xi = xih (yji , yki )

(1.2)

where yji indicates the effort of the player j in supervising over the player i, while yki indicates the effort of the player k in supervising over the player ∂xi ∂xi i, and assuming that (i) ∂y ≥ 0, ∂y ≥ 0, if the effort under supervision is ji ki 2

2

greater than the voluntary working effort; (ii) ∂∂yx2i ≤ 0, ∂∂yx2i ≤ 0, it indicates ji

ki

2

xi that the marginal effect of supervising effort decreases; (iii) ∂y∂ji ∂y ≤ 0, it ki indicates that the cross-marginal effect of the supervision of the player k over the player i and that of the player j over the player i cannot increase. Consequently, if the utility function of the players satisfies additivity (i.e. von Neumann-Morgenstern utility function)

Vi (Yi , ei ) = V(Yi ) − Ci (xi , yij , yik ) with effort ei = (xi , yij , yik ). And assuming that equation (1.3) satisfies (i)

∂V ∂Yi

(1.3)

> 0,

∂2 V ∂Yi2

≤ 0,

indicating that with the increase of return, the positive marginal utility does not increase; (ii)

∂Ci (xi ,yij ,yik ) ∂xi

> 0,

∂2 Ci (xi ,yij ,yik ) ∂xi2

≥ 0, indicating that with

the increase of working effort, the cost of effort increases and the marginal ∂C (xi ,yij ,yik ) ∂C (xi ,yij ,yik ) cost non-decreases; (iii) i ∂y ≥ 0, i ∂y ≥ 0, indicating ij ik that with the increase of supervising effort, the cost does not decrease; ∂2 C (x ,y ,y )

i i ij ik (iv) > 0, indicating that the marginal cost of supervision ∂xi ∂yij effort does not decrease. Since it is not decided beforehand whether a certain player has the advantage of residual claim, the participation constraint requires that the concluded contract has Pareto efficiency, so accepting supervision (and only when accepting supervision) can bring more benefit than not accepting supervision, although when given the supervising effort of a player, under the given supervision technology, the supervised working effort of another player is strictly determined. (A popular explanation for this assumption is that, you are free to choose to sign or not sign the contract beforehand, but once the contract is signed, you must obey the rule, and if you think this rule is unfavorable for yourself, you have to exit the contract, instead of not

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obeying the rule. This is equivalent to a package agreement and complies to reality.) Under the above assumption (Zhang, 1995), if the incentive compatibility conditions and participation constraint are met, the social planner’s problem becomes figuring out the maximum value of the following formula, which is also called the optimal residual claim arrangement (cooperative game): max{EV1 EV2 EV3 } (θ,λ)

and meeting the incentive compatibility conditions xi ∈ arg max{EVi } and the previously mentioned supervision technology and supervision acceptability rule, given player i’s expected utility  (i = 1, 2, 3) EVi = V(Yi )d(Y, x1 , x2 , x3 ) − Ci (xi , yij , yik ) To simplify the analysis, we particularly assume that: 2 Vi = Yi − 0.5xi2 − 0.5yij2 − 0.5yik

(1.4)

which indicates that all players are risk-neutral. EY = f(x1 , x2 , x3 ) 1−γ

= [αx1

1−γ

+ (1 − α)βx2

1−γ

+ (1 − α)(1 − β)x3

1

] 1−γ

(1.5)

Equation (1.5) shows that, α is the elasticity parameter of the effort of x1 on the output, (1 − α)β is the elasticity parameter of x2 on the output, so (1 − α)(1 − β) is the elasticity parameter of x3 on the output, and we call them the degrees of relative productive importance of player i accordingly; γ (0 ≤ γ ≤ 1) can be called the degree of teamwork, which indicates the degree of reliance of the marginal effort contribution of player i on the contribution of other players, and there is: xi = µji yji + µki yki

(i  = j = k; i, j, k = 1, 2, 3)

(1.6)

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So after substituting (1.4), (1.5), (1.6) into max{EV1 EV2 EV3 }, and meeting the participation constraint and compatibility constraint, we can start to derive the subsequent lemmas.

4.2.

Appendix 2

(i) Substituting (1.4), (1.5) into each party’s maximization problem, we can obtain the Nash equilibrium effort level:    1−γ 1+γ (1 − α)β(1 − θ)λ ∗ x1 = θα α + (1 − α)β αθ  + (1 − α)(1 − β)

x2∗

(1 − α)(1 − β)(1 − θ)(1 − λ) αθ

1+γ

 

 1 (1 − α)β(1 − θ)λ 1+γ ∗ = x1 αθ   1−γ  1+γ αθ  = (1 − θ)λ(1 − α)β α (1 − α)β(1 − θ)λ 



x3∗

 1−γ

=

+(1 − α)β + (1 − α)(1 − β)

(1 − β)(1 − λ) βλ





(1 − α)(1 − β)(1 − θ)(1 − λ) αθ

1 1+γ

 1−γ 1+γ



γ 1−γ



x1∗

= (1 − α)(1 − β)(1 − θ)(1 − λ)   1−γ  1+γ αθ × α (1 − α)(1 − β)(1 − θ)(1 − λ)  +(1 − α)β

266

βλ (1 − β)(1 − λ)

 1−γ 1+γ

 + (1 − α)(1 − β)

γ 1−γ

γ 1−γ

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We have 

1−γ 2 ∂x1∗ − 1−γ  = α α + α 1+γ ((1 − α)β) 1+γ λ 1+γ ∂θ

+ ((1 − α)(1 − β))

2 1+γ

(1 − λ)

1−γ 1+γ

 γ  1−γ 1−γ  1 − θ 1+γ  θ





1−γ 2 θαγ  − 1−γ  α + α 1+γ ((1 − α)β) 1+γ λ 1+γ 1+γ

+ ((1 − α)(1 − β))

2 1+γ

 − 1−γ 1+γ

×α

2

= α α + α

 1−γ

 2γ−1 1−γ

1−θ θ

1−γ 1+γ

 1−γ  1 − θ 1+γ −1 1 θ θ2

1+γ



1−γ

((1 − α)β) 1+γ λ 1+γ

+ ((1 − α)(1 − β)) 

(1 − λ)



1−γ 1+γ

2 1+γ

1−γ  − 1+γ

(1 − λ) 2

1−γ

((1 − α)β) 1+γ λ 1+γ

2

+((1 − α)(1 − β)) 1+γ (1 − λ)

1−γ 1+γ



1−θ θ

 1−γ 1+γ



γ 1−γ −1



 1−γ 2 − 1−γ   α + α 1+γ ((1 − α)β) 1+γ λ 1+γ      1−γ    1+γ 1−γ 2  1 − θ   + ((1 − α)(1 − β)) 1+γ (1 − λ) 1+γ  θ × 1−γ  1−γ 2 γ −  α 1+γ ((1 − α)β) 1+γ λ 1+γ −    1+γ     1−γ −1   1+γ 1−γ 2 1 − θ    + ((1 − α)(1 − β)) 1+γ (1 − λ) 1+γ θ

                   1    θ

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when θ → 0, ∂x1∗ ∂λ

∂x1∗ ∂θ

→ ∞, and when θ → 1,

 = θα α + α

 − 1−γ 1+γ

1−γ

2

((1 − α)β) 1+γ λ 1+γ

+ ((1 − α)(1 − β)) γ − 1−γ × α 1+γ 1+γ

→ −∞.



2 1+γ

1−θ θ

(1 − λ)  1−γ 1+γ

1−γ 1+γ



2

−2γ

((1 − α)β) 1+γ λ 1+γ −2γ

2

 2γ−1   1−γ 1−γ 1 − θ 1+γ  θ

− ((1 − α)(1 − β)) 1+γ (1 − λ) 1+γ



Therefore, 

∂x1∗ sign ∂λ



1−γ 1−γ  1−γ +1 1−γ −1 +1 −1 = sign β 1+γ λ 1+γ − (1 − β) 1+γ (1 − λ) 1+γ

implying that ∂x1∗ >0 ∂λ

iff λ <  1 β

1 . 1 γ −1 +1

The above formulas imply that fixing λ or θ, the effort level of party one is not monotone in his own share of the profit. And fixed his own share, his optimal effort level is inverse-U shape in responding to the second party’s share. Meanwhile, the judgment of whether there is some appropriate combination of (θ1 , λ1 ) that maximizes x1∗ must be made according to the validity of Hessian Matrix. We take γ = 0.5 as an example.  1    1    ∂x1∗ 1−θ 3 1−θ 3 2 1 α + t1 1 − = α α + t1 ∂θ θ 31−θ θ 268

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where t1 = (1 − α)β



(1−α)βλ α

1 3

+ (1 − α)(1 − β)



(1−α)(1−β)(1−λ) α

1 3

∂2 x1∗ ∂θ 2 

 2    1     1 2 1 1−θ 3 1 − θ −3 1 t1 − 2 α+ 1−  t1  θ θ 31−θ θ 3        1   1     2 1 1−θ 3 1−θ 3   = α  + α + t1 t1 −  θ 3 (1 − θ)2 θ      2           1 1 − θ −3 1 2 1 − 2 + 1− 31−θ 3 θ θ        1  1 2 1 1−θ 3 1 − α+ 1− t1   3  θ 31−θ θ  − 2       1     3 1 1−θ   3 2 1 1−θ = αt1   + α + t1 − θ θ θ 3 (1 − θ)            2 1 1 1 + 1− − 31−θ 3 θ      1   2 1 1−θ 3 1 α+ 1− t1 −   3θ  31−θ θ   − 2      1    3 1 1−θ  3 2 1 11 = αt1 + α + t 1 − θ  − − 1 θ θ θ 3 (1 − θ) 3 θ         2 1 + 9 (1 − θ)θ     2 1 2 2 1 α − −  2   9 (1 − θ)θ 3θ 3 (1 − θ) 1 − θ −3 1    = αt1   1     θ θ 1 2 1 2  1−θ 3 4 +t1 − − θ 9 (1 − θ)θ 3 (1 − θ) 3θ  1   2 1−θ 3 − 53 − 43 = αt1 (1 − θ) θ −2α − t1 1+γ . Especially when γ = 0.5, θ1 > 23 . At the same time, since

1 β

1 1 γ −1 +1

1 2

as well. Particularly, when γ = 0.5,

λ1 =  therefore, if β ≥ λ1 ≥ β ≥ 21 . (B) Based on

1 2,

then λ1 ≥

∂x2∗ ∂θ

= 0, 

  1−γ 1+γ ∂x2∗ αθ  + (1 − α)β = λ(1 − α)β α ∂θ (1 − α)β(1 − θ)λ 

 1−γ



 1−γ

 2γ−1 1−γ

(1 − β)(1 − λ) 1+γ  + (1 − α)(1 − β) βλ    1−γ  1+γ αθ × −α − (1 − α)β  (1 − α)β(1 − θ)λ (1 − β)(1 − λ) − (1 − α)(1 − β) βλ 

+

γ α α 1+γ (1 − α)βλ

 1−γ  1+γ

1+γ

θ (1 − θ)

 1−γ 1+γ

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we have θ2 < ∂x2∗ ∂λ

γ 1+γ .

Based on 

= (1 − θ)(1 − α)β α



∂x2∗ ∂λ

= 0, we have, λ2 >

αθ (1 − α)β(1 − θ)λ



(1 − β)(1 − λ) + (1 − α)(1 − β) βλ 



αθ × α (1 − α)β(1 − θ)λ

1 1+γ .

 1−γ 1+γ

+ (1 − α)β

 2γ−1

 1−γ

1−γ

1+γ



 1−γ 1+γ

+ (1 − α)β



 1−γ (1 − β)(1 − λ) 1+γ + (1 − α)(1 − β) βλ   1−γ 1+γ αθ γ − 1−γ −1 λ 1+γ λα − 1+γ (1 − α)β(1 − θ) γ − (1 − α)(1 − β)λ 1+γ  = (1 − θ)(1 − α)β α





(1 − β) β

(1 − β)(1 − λ) + (1 − α)(1 − β) βλ α × 1+γ



αθ (1 − α)β(1 − θ)λ 

 1−γ 1+γ

1−λ λ

 1−γ −1 1+γ

 λ−2 

 1−γ 1+γ

+ (1 − α)β

 2γ−1 1−γ



 1−γ 1+γ

(1 − β)(1 − λ) + (1 − α)(1 − β) βλ

272

1+γ

αθ (1 − α)β(1 − θ)λ





 1−γ 

+ (1 − α)β   γ  1− (1 − λ)(1 + γ)

 1−γ  1+γ

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(C) Similarly for the employee: ∂x3∗ = (1 − α)(1 − β)(1 − λ) ∂θ   1−γ  1+γ αθ  × α (1 − α)(1 − β)(1 − θ)(1 − λ) 

βλ + (1 − α)β (1 − β)(1 − λ) 

 1−γ 1+γ



 2γ−1 1−γ

+ (1 − α)(1 − β)

αθ × −α (1 − α)(1 − β)(1 − θ)(1 − λ)

 1−γ 1+γ



 1−γ 1+γ βλ − (1 − α)β − (1 − α)(1 − β) (1 − β)(1 − λ)   1−γ 1+γ γ α + (1 − θ)α 1 + γ (1 − α)(1 − β)(1 − λ)   1−γ −1  1+γ 1 θ  × (1 − θ) (1 − θ)2 and ∂x3∗ = (1 − α)(1 − β)(1 − θ) ∂λ   1−γ  1+γ αθ × α (1 − α)(1 − β)(1 − θ)(1 − λ) 

βλ + (1 − α)β (1 − β)(1 − λ)

 1−γ 1+γ

 2γ−1 1−γ

+ (1 − α)(1 − β)

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αθ × −α (1 − α)(1 − β)(1 − θ)(1 − λ) 

βλ − (1 − α)β (1 − β)(1 − λ) − (1 − α)(1 − β) + (1 − λ) 

 1−γ 1+γ

 1−γ 1+γ

γ 1+γ

  1−γ 1+γ αθ − 1−γ −1 (1 − λ) 1+γ  α    (1 − α)(1 − β)(1 − θ)   ×  1−γ  1−γ    −1   1+γ 1+γ 1 λ β +(1 − α)β 2 (1 − β) (1 − λ) (1 − λ) We have θ3
0 iff β > 21 . 275

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It is shown before

∂λ1 ∂α

= 0 and

1

4

1

4

4

∂λ1 ∂β

> 0.

1

4

1

t1 = α− 3 (1 − α) 3 [β 3 λ 3 + (1 − β) 3 (1 − λ) 3 ] 2

= α− 3 (1 − α) 3 [(1 − β)2 + β2 ] 3   1   1    ∂x1∗ 1−θ 3 2 1 1−θ 3 α + t1 1 − = α α + t1 31−θ θ ∂θ θ (ii) By ∂x2∗ ∝ ∂θ





1 3 αθ −α − (1 − α)β (1 − α)β(1 − θ)λ 1  (1 − β)(1 − λ) 3 − (1 − α)(1 − β) βλ 1    1  3 3 1 α θ 1 + α 3 (1 − α)βλ (1 − θ) θ

we can get, ∂θ2 >0 ∂α due to ∂2 x2∗ ∝ ∂θ2 ∂α

Note that



1 3 1 1 4 θ2 α 3 (1 − α)− 3 (4 − 3α) β(1 − θ2 )λ 3  1 (1 − β)(1 − λ) 3 + β + (1 − β) > 0. βλ 1 −1 3θ2



    ∂2 x2∗ 4 1 1 1 −4 θ2 − ∝− β 3 − (1 − α) − 1 α 3 (1 − α) 3 ∂θ2 ∂β 3θ2 (1 − θ2 )λ 3 1   2  1 (1 − λ) 3 1 1 − β − 3 + (1 − α)(1 − β) 2 β λ 3 β 1  (1 − β)(1 − λ) 3 + (1 − α) βλ

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(1 − β)(1 − λ) = −(1 − α) β + (1 − β) βλ

1  3

1 −1 β − (1 − α) 3

1   2  1 (1 − λ) 3 1 1 − β − 3 + (1 − α)(1 − β) 2 β λ 3 β  1 (1 − β)(1 − λ) 3 + (1 − α) βλ   1  1 (1 − β) (1 − β)(1 − λ) 3 ∝− −1 1+ 3 β βλ 1  1 (1 − β)(1 − λ) 3 (1 − β)(1 − λ) 3 + βλ βλ  1 4 2 (1 − β)(1 − λ) 3 =− + . 3 3 βλ 1 + 3β



Note also that λ2 > 23 , therefore, Based on

∂2 x2∗ ∂θ2 ∂β

< 0 if β >

1 17 .

1 3 αθ + (1 − α)β (1 − α)β(1 − θ)λ  1 (1 − β)(1 − λ) 3 + (1 − α)(1 − β) βλ   1 × 1− , 3(1 − λ)

∂x2∗ 2α ∝ ∂λ 3



we have 1  3 ∂2 x2∗ 2 1 θ − 43 3 ∝ α (1 − α) (4 − 3α) −β ∂λ2 ∂α 9 β(1 − θ)λ2   1  (1 − β)(1 − λ2 ) 3 1 − (1 − β) 1− βλ2 3(1 − λ2 ) 277

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1  3 4 2 1 θ − = α 3 (1 − α) 3 (4 − 3α) −β 9 β(1 − θ)λ2  1 3 2α αθ + +β 3(1 − α) (1 − α)β(1 − θ)λ2 >0 2 Therefore, ∂λ ∂α > 0. Note also that,

∂2 x2∗ ∂λ2 ∂β 1 3 4 αθ β− 3 + (1 − α) (1 − α)(1 − θ)λ   2 1    1 1 − β − 3 1 (1 − λ) 3 1 − (1 − α)(1 − β) 1− 3 β β2 λ 3(1 − λ)  1   (1 − β)(1 − λ) 3 1 − (1 − α) 1− βλ 3(1 − λ)  1 3 4 2α αθ =− β− 3 + (1 − α) 9 (1 − α)(1 − θ)λ     1  3 1 2α αθ 1 + (1 − α)β + 1+ 3β 1 − β 3 (1 − α)β(1 − θ)λ 2α ∝− 9



> 0 2 Therefore, ∂λ ∂β > 0. (iii) Note that

 1  3 ∂x3∗ αθ ∝ −α (1 − α)(1 − β)(1 − θ)(1 − λ) ∂θ 

βλ − (1 − α)β (1 − β)(1 − λ) 278

1 3

− (1 − α)(1 − β)

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  1  − 2 3 3 α 1 θ 1 + (1 − θ) α 3 (1 − α)(1 − β)(1 − λ) (1 − θ) (1 − θ)2 

  1  1 3 3 1 α θ ∝ −1 α 3θ (1 − α)(1 − β)(1 − λ) (1 − θ)  1 3 βλ3 − (1 − α)β − (1 − α)(1 − β) (1 − β)(1 − λ3 ) We have ∂2 x3∗ ∝ ∂θ3 ∂α

 4 1 1 1 −1 α 3 (1 − α)− 3 (4 − 3α) 3θ3 3  1 3 θ3 − 13 × ((1 − β)(1 − λ)) 1 − θ3 1   3 βλ + (1 − β) +β (1 − β)(1 − λ)



>0 3 implying ∂θ ∂α > 0. And note that 1  1    3 3 1 ∂2 x3∗ 4 θ3 α 1 (1 − β)− 3 −1 α ∝ 3θ3 (1 − α)(1 − λ) 1 − θ3 3 ∂θ3 ∂β  1 3 1 4 λ 1 − (1 − α) β 3 (1 − β)− 3 (4 − 3β) + (1 − α) 3 (1 − λ)    1 3 1 βλ = (1 − α)β + (1 − α)(1 − β) 3(1 − β) (1 − β)(1 − λ)

 1 3 1 4 1 λ − (1 − α) β 3 (1 − β)− 3 (4 − 3β) + (1 − α) 3 (1 − λ)  1 3 1 βλ 4 = − (1 − α) + (1 − α) 3 (1 − β)(1 − λ) 3

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Since λ3 < 13 , so if β
θ3∗ , then when ∂θ ∗ ∗ ∗ ∗ θ1 and θ2 . It can be similarly proved that θ123 is between θ12 and θ1∗ . we can determine the sequence (1) and (2). See Fig. 1 for an illustration.

4.6.

Appendix 6

Assuming that the team production is constituted by n players, since all players have the same residual claim proportion and degree of productive importance, the effort of every player is the same. Therefore, according to the equation (1.5), we can get the total surplus: n EV = f(x1∗ , . . . , xn∗ ) − xi∗2 2

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Ke Rongzhu ∂ EV1 =0 ∂θ

∂ EV 2 =0 ∂θ

∂ E [V1 + V 2 + V3 ] =0 ∂θ

∂ EV 3 =0 ∂θ

θ3

θ 123

θ2

θ1

Figure 1.

with xi∗ = x∗ =

1 ∂f n ∂x .

By the implicit function theorem,  ∗  1 ∂f ∂EV ∗ ∂x − xi∗2 − xi =n 2 ∂xi ∂n ∂n = n(n − 1)xi∗

since

∂xi∗ ∂n

∂f = − n12 ∂x + i

1 ∂2 f n ∂x2

∂x∗ 1 ∗2 − xi < 0 ∂n 2

< 0.

i

So under the above condition the expansion of the size of the team does not increase the total output, instead it increases the cost. For a particular example, by comparing the x1∗ in case of three players with that in case of two players, we can know that x1∗ in case of three players is less than x1∗ in case of two players.

4.7.

Appendix 7

If assumptions in Appendix 1 (Zhang, 1995) are met, the supervision is creditable threat. In case of three players, the supervision can lead to the combination of 43 = 64 output levels. We analyze a typical case, and 282

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Supervision Game. Employee

Government

Supervise

Not supervise

Supervise

1 Y h ,1 Y h 2,3 2 2,3 3

1 Y h ,1 Y h 2 2 2 3

Not supervise

1 Y h ,1 Y h 3 2 3 3

Y2s , Y3s

Note: ji , kYjh indicates the return obtained by j when i is supervised by j and k.

the others can be done similarly. First, if we suppose only the manager is supervised, we have the following game: Any strategy combination could be an equilibrium under certain combination of parameters. For example, to sustain equilibrium (Not supervise, Not supervise), we can start the following derivation. (i) Given the employee’s not supervision, the government will not supervise; and given the government’s not supervision, the employee will not deviate. The detail is as follows: When the employee does not supervise, but the government supervises, the government’s objective is: max (1 − θ)λ(E[12 Y2h ] − C(x2 , y21 )

{x2 ,y21 }

(7.1)

The employee’s objective is: max(1 − θ)(1 − λ)(E[12 Y3h ] − C(x3 ) x3

(7.2)

The Nash equilibrium will be: 



1 2

 13

αµ21   + (1 − α)β x2∗ = (1 − α)β(1 − θ)λ αµ21  (1 − α)β 1 2

 + (1 − α)(1 − β)

(1 − β)(1 − λ) βλ

1 3

  

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 ∗ y21 =

x3∗

 =

1 2

 23

αµ21  x2∗ (1 − α)β

(1 − β)(1 − λ) βλ

2

3

x2∗ 1

2 1 αµ21 3 αµ21 (1−α)β 1 2



+ (1 − α)β + (1 − α)(1 − For convenience, let τ21 =  (1−β)(1−λ) 1 3 , we can write the government’s payoff as: β) βλ 1 2 (1 − α)β(1 − θ)λτ21 − [(1 − α)β(1 − θ)λτ21 ]2 EV2 = (1 − θ)λτ21 2  2  23 1 2 αµ21 1  (1 − α)β(1 − θ)λτ21  −   2 (1 − α)β  = (1 − α)β((1 − θ)λτ21 )

2

1 τ21 − (1 − α)β 2 

 43  1 2 1  αµ21  (1 − α)β −  2 (1 − α)β The government will supervise if

  13  43 1 1 2 2 αµ αµ21 21   −1 αµ21  (1 − α)β 2 (1 − α)β (1 − α)β 

1 2



αθ >α (1 − α)β(1 − θ)λ

1 3

This is 1 23 µ > 2 21 284



θ (1 − θ)λ

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and the government will not supervise if 2 3

µ21
max

"

θ (1 − θ)(1 − λ)

µ221 µ231 # , , 2 1+µ21 1+µ231

both the government and the

employee will not supervise. The rest are similar. If we may assume that 12,3 Y2h > (31 Y2h ) ⇔ θ < (21 θ2 ), which indicates the relationship between the return and θ if the government supervises even if the employee is already supervising, and similarly assume that 12,3 Y3h > (21 Y3h ) ⇔ θ < (31 θ3 ). Then, within the interval θ < (21 θ2 ) the supervision is strategically complementary for the government; and when θ < (31 θ3 ) the supervision has strategic complementarities for the employee. We thus know that, for some value of parameters (for µ21 > µ31 , if 13 θ2 >

µ221 , 1+µ221

then θ ∈ (0,13 θ2 ) is the interval of common supervision of the two players, because within this interval, the mutual supervision of the two players is an equilibrium), while θ ∈ [13 θ3 , 1] is the interval of non-supervision. If 2 2  1 θ < µ21 , then 0, µ21 is the interval of common supervision; and 3 2 2 3 1+µ21 1+µ21  µ221 1 within interval 1+µ2 ,3 θ3 , only government supervises; and [13 θ2 , 1] is 21

the interval of non-supervision. We summarize them in the following figure 285

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Ke Rongzhu θ

3 1 3

0

2 µ 21 2 1 + µ 21

1 1 + µ 132

θ

(1 −θ )(1 − λ ) =

µ 132 1 + µ 132

(1 −θ )λ =

1 1 + µ 132

µ 132 1 + µ 132

µ 122 1 + µ 122

1

λ

Figure 2.

(see Figure 2). By analyzing various cases shown in the figure, we can get Lemma 5.

4.8.

Appendix 8

This is because during the marginal movement from one supervision interval to another, the supervision cost will increase sharply while the output will only slightly increase. The shaded part in the above figure is superior to other parts, but it needs discussion when compared with marginal conditions.

4.9.

Appendix 9

This is an exception, and can be obtained just by removing curve on the bottom left corner of Attached Figure 2.

4.10.

Appendix 10

This is also an exception, and can be obtained just by removing the curve on the bottom left corner and θ = (31 θ3 ) curve. 286

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References Department of Township Enterprises, Ministry of Agriculture of PRC (1990), Farmer Shareholding, Enterprise. Law Press China. Du, Ying (1995). Morphological Characteristics and Institutional Innovation of Township Enterprises. China Rural Survey, 4. Hang, Jun and Qingzhong Zhang (eds.) (1993). Theory, Practice and Policy of China’s Rural Shareholding Economy. Economy& Management Press. Jin, Xiangrong and Rongzhu Ke (1997). Comments and Thoughts on Theories of Property Right Reform and Performance of Township Enterprises. Zhejiang Social Sciences, 3. Jin, Xiangrong, Rongzhu Ke and Wenhong Lai (1997). Reform with Focus Transferred to Improvement of Dynamic Efficiency of Institutional Arrangement—Taking Cooperative Share System of Township Enterprises as Example. Draft. Originally published in Chinese Social Sciences Quarterly (Hong Kong), Summer 1998, 23. Ke, Rongzhu (1997). Equilibrium Problem in Long Term Negotiation: Institutional Change and Game. Chinese Social Sciences Quarterly (Hong Kong), Spring and Summer. Kong, Jingyuan (1995). Analysis of Rural Joint Stock Cooperative Economy and its System. Economic Research Journal, 3. Li, Daokui (1995). Theory ofAmbiguous Property Right in Transitional Economy. Economic Research Journal, 3. Tian, Guoqiang (1995). Property Right Structure and Reform of China’s Township Enterprises. Economic Research Journal, 3. Wenzhou Municipal People’s Government (1991). Circular on Several Problems in Standardization of Joint Stock Cooperative Enterprises. Zhang, Weiying (1995). Entrepreneur of Enterprise—Contract Theory. Shanghai People’s Publishing House, Shanghai Sanlian Bookstore. Zhang, Weiying (1995). Game Theory and Information Economics. Shanghai People’s Press, Shanghai Sanlian Bookstore. Zheng, Zigeng and Huixiong Chen (1993). General Theory of Joint Stock Cooperative Economy. Hangzhou University Press.

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Chapter

8

Zhang Ping

Abstract Since 1979, when an output-related contract system was introduced in rural China, the average household income per capita of rural regions, as well as income inequality among regions, have increased substantially. A growing imbalance has emerged in the regional pattern of economic development, and this has led to serious inequality in rural areas. The problem has received much attention from both Chinese and foreign scholars, as well as from policymakers. Much research and analysis has focused on two issues. One is the trend with respect to interregional income inequality, with emphasis on the breakdown of inequality into between-region and within-region components. The other concerns the main reasons for the rise in rural inequality. Previous studies (e.g., Zhang, 1992; Zhu, 1992; Tsui, 1993, 1997; Rozelle, 1994; Wei, 1996; World Bank, 1997; Li et al. 1998) have analyzed the sharpening inequality in per capita income of households in different rural areas, and basically come to a common conclusion, namely, that income from off-farm activities — especially from township enterprises — has become an increasing and dominant contributor to overall rural income inequality. The growing contribution of rural non-agricultural activities to overall rural income inequality can largely be explained by the increasingly uneven regional development of such activities. Experience in other developing countries shows that off-farm activities, especially those of labor-intensive medium- and small-scale enterprises, often exert an equalizing influence on income distribution. The Taiwan example is typical. During the period from 1964 to 1980, when industrialization was proceeding rapidly, income inequality among Taiwan residents sharply fell. The fast-growing labor-intensive industrial enterprises on the island exerted a strong equalizing influence on income distribution (Fei et al., 1979; Zhu, 1997). The question is, why has the same practice 289

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Zhang Ping of developing off-farm and labor-intensive township enterprises in rural areas on the mainland not achieved the same favorable result? In fact, it has led to a widening rather than a narrowing income gap. This chapter tries to extend previous work to explore the reasons for this paradoxical problem in rural China. It first analyzes the changing tendency of overall inequality and the inequality between region and within region by means of a breakdown of inequality by population subgroups. Second, it examines the influence of economic and geographical conditions on regional income, including total disposable income, income from farming, individual wages from TVEs, and so forth. Third, it analyzes the most important factors that determine income inequality between regions by means of decomposing inequality by factor components. Fourth, it focuses on the two basic elements affecting interregional income inequality during industrialization in rural areas: one is the earned wage from township enterprises, and the other is the opportunity for rural laborers to obtain industrial employment and thus earn an industrial wage. Nowadays, inequality of access to industrial employment is playing a more important role than industrial salary. Fifth, we discuss the convergence conditions on interregional income inequality. Finally, the chapter makes some policy suggestions based on the foregoing analysis. Data on rural household per capita net income by province from the State Statistical Bureau are employed along with data from the 1988 and 1995 disposable income surveys. The discussion treats the province as the unit of analysis, and the terms “interregional” and “interprovincial” are used interchangeably. The author also follows the traditional division of China into eastern, central, and western parts. Keywords: Inequality decomposition by population subgroups; inequality decomposition by factor components; rural regional income inequality; Gini coefficient; inequality of “Employment Opportunity”.

1. 1.1.

The Changing Tendency of Interregional Income Inequality in Rural China Changes in regional income differentials at different stages in the transition period

The Household Responsibility System (individual family farming) was adopted in rural China in 1979 and had spread to virtually all farmers by 1984. Also, prices for farm produce were raised, which greatly increased incentives. Consequently agricultural output rose rapidly, along with farm 290

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Rural Interregional Inequality and Off-Farm Employment in China Table 1.

Regional Income Inequality of Rural Residents (1980–1995).

Year

(1) Per capita real net income

(2) Gini coefficient of provincial average net per capita income

(3) Gini coefficient of all rural net income

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Increase 1980–1995 (%)

184.50 210.83 248.88 280.11 316.54 348.96 357.91 371.94 386.91 381.83 401.74 424.58 438.34 452.37 474.95 501.53 170

0.14 0.13 0.13 0.14 0.15 0.15 0.18 0.18 0.19 0.19 0.20 0.20 0.20 0.22 0.22 0.23 68

0.24 0.24 0.23 0.25 0.26 0.26 0.29 0.29 0.30 0.30 0.31 0.31 0.31 0.32 0.33 0.34 42

Sources: Columns (1) and (2): State Statistical Bureau (1997); China Statistical Year Book. Column (3): Tang Ping (1995). Income distribution in China’s rural areas. Management World, 2 (in Chinese).

income (Table 1). The per capita net income of rural households increased by 72 percent between 1980 and 1984, an annual average rise of 14 percent. But regional inequality in farmers’ income did not change nearly as much as income itself during that time, the Gini coefficient rising only by about seven percent altogether. The main reason why the sharp increase in income did not bring about much change in regional income differentials is that farmers’income during this period came mainly from agriculture; and differences in farm output were caused chiefly by differences in natural resource endowments, which did not accumulate. Therefore, there was not much possibility for a big gap to develop in agricultural income. But since 1985, the development of rural industries has greatly changed the rural economic structure. The 291

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interregional income gap had become quite obvious by 1988: the interregional Gini coefficient was up by 27 percent over 1985, more than twice the increase in per capita net income (11 percent), and much higher also than the 14 percent rise in the Gini ratio for rural income as a whole. The off-farm activities in rural areas, especially industrial development, showed strong local characteristics that were quite significant in accelerating regional differences. During the period from 1989 to 1991, macroeconomic policy adjustments by the state slowed the increase in farmers’ income, while significant changes also occurred in the industrial structure. The pace of industrialization was slower than in 1988, and the comparative income gap rose only 0.01. Since 1992, China has accelerated its system reform program by moving strongly in the direction of a market economy. The national economy has grown rapidly, and rural industrial reform has accelerated, with the following features: (1) fast development of off-farm economic activities, (2) burgeoning rural labor migration, and (3) a resumption of rural income growth. During this period, the outstanding characteristics in rural development were further structural adjustment and an increasingly evident imbalance between different regions. The regional income gap widened from 0.20 in 1991 to 0.23 in 1995, an increase of 15 percent. Viewed as a whole, income inequality among farmers widened by 42 percent during the period from 1979 to 1995, while the regional income gap widened by 68 percent. The interregional income gap has increased faster than overall income inequality in rural areas, and this is probably because off-farm development in rural China is regionally specific.

1.2.

Aggregate inequality and its breakdown into intraprovince and interprovince components

This section makes use of the 1988 and 1995 survey data and the Theil index of inequality.1 Here, we break total income inequality down into that within provinces and that among provincial averages, and analyze the contribution 1 The Theil index, while an arbitrary formula for measuring inequality and without a simple

intuitive interpretation, has the advantage of being directly disaggregable into component parts, making it possible to analyze the contributions of each component to overall inequality. See Sen, 1973, pp. 35–36.

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Rural Interregional Inequality and Off-Farm Employment in China Table 2.

Theil Index of Inequality, 1988 and 1995.

1988 Contribution to inequality (%) 1995 Contribution to inequality (%) Change in inequality index (%)

Aggregate inequality

Inequality within a province

Inequality among provinces

180.34 100 267.34 100 48

139.86 78 183.75 69 31

40.48 22 85.58 31 111

of each to overall inequality. We also make a comparison of the changes in inequality between the two years.  Aggregate inequality is given by the Theil index: I0 = (1/N) i log(µ/yi). Aggregate inequality = intragroup inequality+intergroup inequality I0 = SkVkI0k + SkVk log(1/1k)

(1)

where Vk = the population share of group k; m = the mean income of the total population; yi = the income of unit i; I0k is the inequality index of group k; λk = group k’s mean income relative to the population mean. Aggregate inequality is broken down into inequality within groups (provinces) and among groups. It can be seen clearly in Table 2 that: (1) overall inequality rose by 48 percent from 1988 to 1995; (2) within-province income inequality was dominant in the two years, contributing 78 percent of overall inequality in 1988 and 69 percent in 1995; (3) however, inequality among provinces increased much faster than inequality within provinces. The former rose by 111 percent and the latter by 31 percent. The contribution of inequality among provinces to overall inequality increased from 22 percent in 1988 to 31 percent in 1995. Thus, interprovincial income inequality played an increasingly important role vis-a-vis overall inequality.

2.

The Influence of Regional Factors on Income

This section builds the income function of rural residents with 1995 data and analyzes the influence of regional factors on household income differences. 293

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The income function model is as follows: ln(y) = a + b ∗ r + c ∗ ln(labor) + d ∗ ln(p) + e ∗ ln(land) + g ∗ zi

(2)

where y is household disposable income, r is a dummy variable representing the characteristics of individual provinces, labor is number of working members in the household, p is productive fixed assets of the household, land is productive land of the household, zi is a set of dummy variables, i, representing regional characteristics such as flat, hilly, or mountainous terrain, national minority area, poor county, and so forth. With the income function, household income from agriculture and from industry (wages, etc.) in rural China can be calculated. When calculating industrial income, the function includes only regional features and household labor variables, because industrial income is individual income and it is not related to land or productive fixed assets of the household. Three models are tried. Model I uses total household disposable income as the dependent variable, Model II, household farm income, and Model III, household industrial (or non-agricultural) income. The results are as follows (see Table 3): The parameter of the model variable is significant. The coefficient of the provincial dummy variable shows the logarithm of the income gap caused by residing in a particular province relative to the omitted province (Gansu), holding all other factors constant. (1) Income distribution among the provinces. The per capita income in Gansu Province is the lowest in the country, and Gansu is the omitted province. Model I shows that the coefficients for the provinces except Shaanxi are significant. The signs on all other province coefficients are positive, and the figures reveal that total disposable income of all other provinces is higher than that of Gansu. Converting the logarithms, we find that estimated household incomes in Beijing, Guangdong, Jiangsu, and Zhejiang are, respectively, 2.92, 2.51, 1.56, and 1.27 times that of Gansu, ceteris paribus. It can be inferred that location plays an important role in influencing the total disposable incomes.2 2 In this statement and others like it, the reader should remember that only some possible

influences on income other than regional location are represented in the models. Others, such as education level, are not represented, and might well be contributing to the regional coefficients.

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Rural Interregional Inequality and Off-Farm Employment in China Table 3.

Income Functions of Rural Residents in 1995 (Estimated Coefficients).

Variable code Name of variable P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 P11 P12 P13 P14 P15 P16 P17 P18 P19 B401_1 B401_2 B403_1

B404_1 B405_1 B406_1 B407_1

Beijing Hebei Shanxi Liaoning Jilin Jiangsu Zhejiang Anhui Jiangxi Shandong Henan Hubei Hunan Guangdong Sichuan Guizhou Yunnan Shaanxi Gansu Plains Hilly land Mountains Old liberated areas Other areas Frontier areas Other areas Minority areas Other areas City suburbs Other areas Poor countiesa

Household total disposable income

Household agricultural income

Household non-agricultural income

MODEL I

MODEL II

MODEL III

1.37∗∗∗ 0.29∗∗∗ 0.12∗∗ 0.25∗∗∗ 0.12∗∗ 0.94∗∗∗ 0.82∗∗∗ 0.41∗∗∗ 0.52∗∗∗ 0.34∗∗∗ 0.24∗∗∗ 0.35∗∗∗ 0.49∗∗∗ 1.26∗∗∗ 0.13∗∗∗ 0.36∗∗∗ 0.10∗∗ −0.01 — 0.23∗∗∗ 0.09∗∗∗ — −0.15∗∗∗

0.16 0.17∗∗∗ −0.06 0.19∗∗∗ 0.19∗∗∗ 0.59∗∗∗ 0.46∗∗∗ 0.37∗∗∗ 0.56∗∗∗ 0.32∗∗∗ 0.29∗∗∗ 0.50∗∗∗ 0.57∗∗∗ 0.95∗∗∗ 0.26∗∗∗ 0.48∗∗∗ 0.19∗∗∗ −0.09∗ — 0.29∗∗∗ 0.10∗∗∗ — −0.06∗∗

2.11∗∗∗ 0.71∗∗∗ 0.29∗∗ 0.62∗∗∗ −0.12 1.42∗∗∗ 1.22∗∗∗ −0.04 0.19 0.39∗∗∗ 0.12 −0.53∗∗∗ 0.35∗∗∗ 1.65∗∗∗ −0.12 −0.13 −0.27∗∗ −0.08 — 0.02 −0.03 — −0.23∗∗∗

— 0.04 — −0.05 — 0.10∗∗∗ — −0.22∗∗∗

— 0.08 — −0.02 — −0.11∗∗∗ — −0.15∗∗∗

— 0.07 — −0.43∗∗∗ — 0.16∗ — −0.39∗∗∗ (Continued)

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Zhang Ping Table 3.

Variable code Name of variable

B407_3 LLABOR LLAND LP

Adj. R2 F -value Sample size

Non-poor countiesa Don’t knowa Household labor Household arable land Household production fixed assets

(Continued )

Household total disposable income

Household agricultural income

Household non-agricultural income

MODEL I

MODEL II

MODEL III







−0.34∗∗∗ 0.23∗∗∗ 0.06∗∗∗

−0.17∗∗∗ 0.19∗∗∗ 0.16∗∗∗

−0.81∗∗∗ 0.27∗∗∗

0.09∗∗∗

0.37 139.94 6,929

0.12

0.26 85.00 6,894

0.23 66.55 5,873

Note: *** means significant at the one percent level, ** at the five percent level, and * at the 10 percent level. a “Poor count” means a county officially designated as poor. “Non-poor” means not so designated, rather than not poor. “Don’t know” means respondent did not know whether his/her county had been so designated.

In Model II, with household farm income as the dependent variable, Beijing and Shanxi are not significant. Comparing the coefficients in Models I and II, it is clear that residing in a very high income province (e.g., Beijing, Guangdong, Jiangsu, Zhejiang) affects farm income much less than it does total income, while location in some middle-developed regions (Hunan, Hubei, Jilin) affects farm income more than total income. This suggests that the gap between middledeveloped areas and underdeveloped Gansu Province lies mainly in farm income, while that between very developed regions and Gansu lies mainly in non-farm income. Model III, with non-farm income (i.e. principally wage) as the dependent variable, makes even clearer the relative advantage of developed areas over underdeveloped ones in non-farm income: the estimated non-farm incomes of Beijing, Guangdong, Jiangsu, and Zhejiang, 296

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respectively, were 7.22, 4.19, 3.15, and 2.39 times that of Gansu, ceteris paribus. Indeed, the non-farm incomes of “second tier” developed provinces, such as Liaoning, Hebei, Shandong, and Shanxi, more powerfully differentiate these regions from Gansu than either their farm or total incomes. Unlike for the very developed provinces, the coefficients for Jilin, Anhui, Jiangxi, Henan, Sichuan, Guizhou, and Shaanxi provinces are not significant for non-farm income. It can be concluded that the income gap between the most developed areas, such as Beijing, Guangdong, Jiangsu, and Zhejiang, and other provinces comes mostly from industrial income. 2. The geographical influence. Topographical character greatly affects total income and farm income, as Table 3 shows clearly. The estimated total incomes of flat plains areas and hilly lands, respectively, are 23 percent and nine percent higher than that of mountainous regions. The equivalent differences for farm income are higher indicating that geographical elements have a bigger effect on farm income. Farm income on the plains is 29 percent higher, and that of hilly land is 10 percent higher than that of mountainous regions. But for off-farm income, the coefficients of geographical factors are very small and not significant, indicating that the influence of these factors on off-farm income is negligible. 3. The influence of economic regions. Besides topographical differences, there are several other economic or policy-related criteria for distinguishing regions, including whether or not a region is an old liberated area, a frontier area, a home of minority nationalities, a designated poor area, or a suburb of a large or medium-sized city. The three coefficients for old liberated area are all negative and significant, indicating their income disadvantage relative to other areas. The frontier area designation is not significant in any of the models. Being a minority area is not significant in Models I and II but is significant in Model III, where is negative sign indicates lower non-farm income. The poor counties, as one would expect, are disadvantaged with respect to all three measures of income, relative to non-poor areas, ceteris paribus; the gap in farm income is 15 percent, while that in off-farm income is as high as 39 percent. Ironically, the category “don’t know” (bu qingchu) carries an even greater income disadvantage than living in a poor county.

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Respondents who chose this category were not clear as to whether their county was an officially designated poor county or not. Such people probably did reside in poor counties, but ones that most likely had not received the resources of China’s poverty alleviation effort, which have been funneled almost exclusively into officially chosen poverty areas. This may explain why the income deficit for “don’t know” is greater than that for “poor county”. The suburbs of big and medium-sized cities get a negative in farm income, but a positive and a high of 16 percent in off-farm income. This reflects the fact that the development of these suburbs mainly depends not on farming, but on off-farm activities. Location on the east coast, central China, or the western regions is often taken as a convenient indicator of the level of development, with the eastern coastal region being the most developed and the west the least. In Table 4, r1 and r2 represent provinces in eastern and central China respectively, while provinces in western China and their income figures are taken as the default value. It is easy to see that the locations of the three regions have great influence on their incomes. The geographical elements of eastern and central China have a positive effect on the total local income. With all other factors remaining the same, and converting the logarithms, the impact of an eastern and central Table 4.

Income Functions of Three Regions in 1995. Variable code

Eastern region Central region Labor Land Means of production Constant term Adjusted judgment coefficient F-value

r1 r2 labor land lp constant Adj. R2 F

Household total income 0.68∗∗∗ 0.29∗∗∗ 0.28∗∗∗ 0.013∗ 0.11∗∗∗ 7.38∗∗∗ 0.22 393.9

Household farm income 0.41∗∗∗ 0.27∗∗∗ 0.24∗∗∗ 0.11∗ 0.14∗∗∗ 6.80∗∗∗ 0.17 280.58

Household off-farm income 1.35∗∗∗ 0.24∗∗∗ 0.26∗∗∗ — — 6.59∗∗∗ 0.15 354.67

Note: *** means significant at the one percent level, ** at the five percent level, and * at the 10 percent level. Table items are estimated coefficients of regressions of the logarithm of income on the independent variables.

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region location on total income is 97 percent and 34 percent, respectively, compared to the western region. For farm income, the figures are respectively 50 percent and 31 percent, and for non-farm income, 286 percent and 27 percent. The gap between the eastern and western regions mainly lies in off-farm income, while the gap between the central and western regions is fairly evenly divided between farm and non-farm income. The advantage of the central region compared with the western region lies in land resources, and some industrialization in the former, while in addition to good land resources, the eastern region benefits from much greater industrialization of the countryside.

3.

Decomposing Interregional Inequality by Source

The above information shows that the regional factor is obviously important in affecting household income. We now decompose rural interregional household incomes in both 1988 and 1995 by source in order to study the contributions of the various types of income to interregional aggregate inequality. Based on income sources, to study the inequality of overall income,  we use the formula G = ui ∗ ci, where G = the Gini ratio of disposable income, ui = the share of the ith source of income in total disposable income, ci = the concentration ratio of the ith source of household disposable income per capita. The concentration or pseudo-Gini coefficient ci is similar to the Gini coefficient except that it measures the distribution of a given source of income over all income recipients, not only recipients of that particular source. Unlike for the Gini, the individual ci’s can have a negative value, which indicates larger shares of the income source going to lower income groups than to higher income groups. The percentage contribution to total inequality made by each income source is given by the formula gi = 100 ∗ (ui ∗ ci)/G. The gi’s sum up to 100 percent of the Gini ratio for total income.3 We calculated the interprovincial Gini coefficient based on rural average household disposable income per capita in 19 provinces, and 3 See Khan et al. 1993 for a detailed explanation of concentration curves and their relation

to the Gini coefficient.

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Inequality of Provincial Average Incomes in 1988 and 1995. 1988 (1)

(2)

Individual wages 103.06 0.13 Income from household 579.86 0.73 production activities Income from agriculture — — — — Income from household operations, non-agricultural Self-consumption 312.46 0.41 Property income 1.31 0.00 House rents 76.40 0.10 Transfer payment −14.20 −0.02 income Other income 48.81 0.06 Total disposable income 795.25 1.00

1995 (3)

(4)

(1)

(2)

(3)

0.45 0.12

0.35 0.49

603.11 1,290.4

0.28 0.61

0.50 0.13

0.55 0.31

— —

— —

1,047.9 243.66

0.49 0.11

0.09 0.31

0.17 0.14

0.16 0.19 0.26 0.00 0.21 0.12 0.08 −0.01 0.19 0.18

0.07 1.00

— — 12.25 0.01 190.97 0.09 −61.11 −0.03 93.65 2,129

0.04 1.00

(4)

— — 0.42 0.01 0.34 0.12 0.04 −0.01 0.13 0.26

0.02 1.00

Note: Column: (1) Average income from source; (2) Share of source in total income; (3) Concentration ratio of income source, or, for total income, the Gini coefficient; (4) Proportion of total inequality contributed by the income source. Separate data on net income from farm and non-farm activities were not collected in 1988. Self-consumption in 1988 is in terms of gross value; its distribution was not calculated in 1995. See Khan and Riskin (1998).

decomposed inequality by income sources. Table 5 shows that the interprovincial Gini ratio increased by about 44 percent from 0.18 to 0.26 between 1988 and 1995. The most rapidly growing source of income inequality is individual wages, whose contributed share of total inequality rose from 35 percent in 1988 to 55 percent in 1995, an increase of about 57 percent. The contribution to inequality of income from household production activities dropped from 49 percent in 1988 to 31 percent in 1995, indicating a basic change in the traditional production pattern of rural households. Table 5 also contains information concerning the change of shares and of concentration ratios for various sources of income. A concentration ratio lower (higher) than the Gini coefficient means that the corresponding source of income has an equalizing (disequalizing) effect on the overall 300

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distribution income. In 1995, the most unequally distributed income source was wages, followed by property income, rental value of owned housing, and income from household non-agricultural business. Increase in the share of any of these items, ceteris paribus, will enlarge the inequality of total income. Let us study this further. The formula for the Gini coefficient consists of two parts: one is each income source’s share of disposable income, the other is the concentration coefficients for each income source. Suppose the 1988 concentration coefficients were unchanged. By multiplying them by the 1995 income shares, we can derive the inequality change coming from change in income structure alone: (1995Ui) ∗ (1988Gi) = 0.226. That is, if only the structure of income had changed, the Gini coefficient would have increased from 0.18 in 1988 to 0.23, a large proportion of the actual increase to 0.26. On the other hand, if we keep the 1988 income shares unchanged and only change the concentration coefficients to their 1995 values, we obtain (1988Ui ) ∗ (1995Gi ) = 0.199, a quite small change in overall inequality. Clearly, structural change — the increase in share of more unequally distributed income sources in total income — was a much more important reason for increasing interprovincial inequality than was the increase in inequality of individual income sources.4 Off-farm income, particularly income from individual wages, is the most important contributor to interprovincial income inequality, responsible for more than half of total inequality in 1995, and its share of average provincial rural income rose sharply, from 13 percent in 1988 to 28 percent in 1995. According to international experience, the development of medium and small enterprises, particularly labor-intensive firms, are important ways of narrowing the income gap, as happened notably in Taiwan. However, the appearance of a contrary trend on the mainland should be noted. Its most likely cause is the extremely uneven geographical disposition of rural industry, which has arisen mostly in the more developed eastern coastal regions and in the Yangzi valley, and thus helped mainly rural residents who were already well-off relative to their interior compatriots. The much greater size of the mainland, relative to Taiwan, makes it more difficult for 4 Compare Khan and Riskin, 1998. They make a similar analysis for rural household per

capita disposable income (rather than for provincial average household income, as is done here), with broadly similar results.

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rural industry to diffuse and reach all segments of the population. The next section explores this issue further.

4.

Inequality of Wages and Employment Opportunities among Regional TVEs

There are two possible reasons why rural industrial income causes differences in household per capita income. One is regional differences in wage levels in rural industries; the other, regional differences in the level of rural industrial development, which means regional differences in opportunities for farmers to gain industrial wage employment. The traditional analysis of income inequality assumes homogeneity of labor, then compares incomes among households. However, given the structure of China’s traditional rural sector, labor is heterogeneous, and there is inequality in employment opportunities, so that some people with access to industry can get wages from TVEs, but most farmers do not have the chance to work in TVEs and are limited to getting income from farming. We thus have the following formula: Aryw = Awage ∗ IN/N Aryw means household wage income per capita, Awage means average wage of wage-earning family members, IN is the number of household wage earners, N is the number of household members. IN/N can be taken as a measure of industrial employment opportunity. Alternatively, this can be represented by the ratio of wage earners to working members of the household. The formula above can account for differences in household income per capita by the statistical technique, ANOVA (Fields 1980). These differences can be explained by two factors: one is the differential in average wages of industrial employees, and the other involves differing employment opportunities for rural workers in the industrial sector. From the wage perspective, increasing market competition caused by the spread of capital and technology-intensive industries means that further development of enterprises requires high quality workers, including welleducated staff with good work experience. As there is a shortage of such people in the rural areas, those who do possess the necessary skills have seen 302

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their wages increase rapidly. Thus, where this type of industry exists, wage levels will tend to rise relatively fast. However, if all area is dominated by labor-intensive enterprises that only need simple skills, with a ready availability of labor, then wage levels will be relatively low and have little upward trend. The difference between these two situations is thus associated with differences in wage level between township enterprises in different regions. Income inequality among regions is also based on differences in opportunity to participate in the industrial process. In developed regions, the high level of township industry development offers many employment opportunities, so that household income from industrial sources is much higher than that from farming. However, in underdeveloped regions, such employment opportunities are more limited, so that farmers experience difficult in obtaining any income from industrial work. As development proceeds, households will have more and more equal access to industrial employment. The industries of more backward regions will grow up faster as development begins to take hold, so that employment opportunities will expand and backward regions will gradually gain equality in this regard. When relatively equal access to industrial employment has been achieved, income inequalities will mainly come from wage differentials. (In a competitive market environment, these, too, should eventually trend downward, ceteris paribus.) Of course, equalization of employment opportunities assumes convergence of speed of the various regions’ industrial development. Increased regional wage inequality, on the other hand, is based on a differentiation of rural industrial structure, in the short and medium term, into those that require high-quality labor and those that do not. Regionally unequal income expansion is thus based on regionally unbalanced development, a condition that will not be eliminated in a short time. Again taking Taiwan as an example, the rapid development of its industry and its limited land area meant that its industrial expansion could attract sufficient rural workers in about four years. Employment opportunities for rural laborers are fairly equal, and workers in labor-intensive enterprises receive relatively equal wages. Therefore, industrialization in general proceeded in a relatively egalitarian way. In trying to study the pattern in China, however, one is faced with a lack of complete data. Here, I only present data for provincial wage and employment levels (see Table 6). My study of the 1995 data involves 303

237 1,184 647 712 707 1,349 1,035 1,207 1,060 1,877 1,838 1,085 1,213 1,383 2,190 841 930 730 872

0.152 0.025 0.012 0.031 0.006 0.162 0.158 0.020 0.004 0.059 0.037 0.006 0.006 0.065 0.011 0.001 0.001 0.015 0.002 0.628

0.671 0.112 0.121 0.112 0.031 0.262 0.234 0.099 0.090 0.115 0.071 0.047 0.047 0.173 0.037 0.037 0.017 0.084 0.039 0.47

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159 133 78 80 22 353 242 120 95 215 131 41 57 239 143 31 16 61 34

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36 30 8 22 4 218 164 24 4 111 68 7 7 90 23 1 1 11 2

Number in labor force

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470.00 297.43 358.75 335.14 364.50 413.84 503.37 268.67 449.00 347.14 317.12 217.00 227.86 549.33 390.52 250.00 300.00 313.82 370.00 0.14

Non-agricultural labor force

Proportion of non-agricultural workers in labor force

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Ordinary and skilled workers

Proportion of unskilled and skilled workers in labor force

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Monthly average wages of ordinary and skilled labor

1995 Employment and Wages in Rural Non-agricultural Work.

Zhang Ping

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Table 6.

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the following: (1) According to occupation, and subtracting individuals without fixed income, we extract skilled and unskilled workers from the rural labor force and show average individual wages (including bonuses and subsidies) of this group from rural industries. The interprovincial Gini coefficient is 0.14, indicating that wage inequalities are very small within the industrial sector. (2) Deleting from the sample “agricultural workers”, “unemployed and those without work”, those under 16 and over 60, disabled and chronically ill people, the unemployed, and enrolled students, we define the residue sample as the employed non-agricultural labor force. We then take the proportion of workers, skilled plus ordinary, and that of non-agricultural workers in the total labor force to produce interprovincial Gini coefficients of 0.628 and 0.47, respectively, both of which are much larger than the Gini ratio of interprovincial average household incomes, and represent big interprovincial differences in employment opportunities in industry or other off-farm activities. For the distribution of wages of ordinary and skilled workers among provinces, the Gini coefficient is 0.14, well below the inequality in regional household per capita income, demonstrating that if farmers can find employment in rural enterprises and obtain relatively fixed wage incomes, regional income inequality will be reduced. Currently, the reason for the increasing income inequality is the unbalanced development of regional industry. Workers in developed regions have good opportunities for participating in off-farm work, while in the underdeveloped regions, they have fewer such opportunities.

5.

Tendency of Future Regional Inequality

The differences in wages and off-farm employment opportunities cause the inequalities in rural household wage income. In view of the continuing development of non-agricultural activities and rural industry, the lessdeveloped regions are likely to speed up their development, and the gap in employment opportunities will eventually decline. At the same time, wage inequalities will become the new focus of regional differences. If a region is dominated by labor-intensive enterprises, there will be general wage equality; if such enterprises convert to a technology-intensive orientation due to market competition, however, the wage gap will widen. 305

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China’s Regional Rural Industrial Employment and Wages. 1988

1995

Rural industrial Average monthly Rural industrial Average monthly employment rate wage of township employment rate wage of township enterprise workers (%) enterprise workers (%) Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong Henan Hubei Hunan Guangdong Guangxi Hainan Sichuan Guizhou Yunnan Shannxi Gansu Qinghai Ningxia Xinjiang Gini coefficient between provinces

28.91 31.34 10.45 11.25 3.06 12.56 4.79 5.29 49.08 20.51 20.59 5.39 6.84 7.52 9.71 5.48 7.37 5.56 10.64 2.36 2.78 4.81 3.01 2.27 5.09 3.48 2.82 2.49 2.38 0.48

Source: State Statistical Bureau (1996).

306

125.11 100.77 94.03 92.53 83.76 102.49 95.86 107.37 123.14 91.10 102.95 70.32 102.78 78.43 86.15 69.43 75.85 81.53 146.87 70.76 73.70 67.17 87.64 70.58 68.14 109.67 71.34 79.22 92.79 0.12

27.83 27.83 12.63 13.00 3.02 9.74 3.76 5.81 46.01 19.18 21.33 6.69 9.13 6.37 10.02 7.03 7.23 6.16 13.99 3.05 2.96 4.71 3.03 2.59 5.03 3.98 3.67 2.77 2.5 0.46

326.75 326.75 100.25 91.05 71.43 155.84 76.40 86.32 384.20 240.44 204.22 152.24 160.65 87.10 137.46 117.43 114.65 103.33 229.61 153.17 79.16 90.60 54.45 84.74 64.59 69.34 125.45 151.52 138.33 0.28

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The proportion of China’s rural off-farm labor in 1995 was 28 percent, compared with 22 percent in 1988; the proportion of employment in rural industry was 8.82 percent in 1995, compared with 8.52 percent in 1988 (State Statistical Bureau, 1996). While rural off-farm activities and industry have been developing slowly, the development of regional inequalities has taken quite a long time to appear (Table 7). We present the differences in wage levels and employment opportunities in the township enterprises from data provided by the State Statistical Bureau. From the table, we can see that: (1) the gap in employment opportunities has declined somewhat, with a general slowing of TVE employment growth; and (2) wage inequalities have expanded rapidly, with a doubling of the Gini coefficient. This is a matter of concern as it may enlarge the income gap among regions. The present regional inequalities belong to the question of the development process. Only through regional economic development can such gaps be reduced.

6.

Conclusions

1. China is one of the most unequal countries in Asia, with a 0.416 Gini within rural areas (Khan and Riskin, 1998; World Bank, 1997). The increasing contribution of the rural non-agricultural sector to overall rural income inequality can largely be explained by uneven regional development of rural non-agricultural activities. 2. Income from non-agricultural activities has become a dominant contributor to interregional income inequality. This is closely related to the emergence of rural off-farm work opportunities, particularly the unbalanced development of township industries. Thus the regional inequality of employment opportunities in off-farm industry far exceeds interregional wage inequality. 3. Because rural off-farm employment is the key to regional income inequality, especially unbalanced industrial development, the further development of township industry and other off-farm activities in lessdeveloped regions is the key issue to be tackled. Only when the industrial level is more balanced in disposition can non-agricultural employment opportunities achieve relative equality and regional differences be 307

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narrowed. We must also pay attention to wage inequality in China’ s rural industry, which is not good for balanced regional development, and may be related to the overdevelopment of capital and technologyoriented township enterprises.

References Fei, JCH, G Ranis and SWY Kuo (1979). Growth with Equity: The Taiwan Case. Oxford and New York: Oxford University Press. Fields, GW (1980). Poverty, Inequality and Development. Cambridge and New York: Cambridge University Press. Khan, AR, K Griffin, C Riskin and R Zhao (1993). Household Income and Its Distribution in China. In The Distribution of Income in China, K. Griffin and R. Zhao (eds.). London: Macmillan. Khan, AR and C Riskin (1998). Income and Inequality in China: Composition, Distribution and Growth of Household Income, 1988 to 1995. The China Quarterly, June, 154. Li, S, R Zhao and P Zhang (1998). China Economic Transition and the Change in Income Distribution. Jingji Yanjiu (Economic Research), 3. Rozelle, S (1994). Rural Industrialization and Increasing Inequality: Emerging Patterns in China’s Reforming Economy. Journal of Comparative Economics, 19. Sen, A (1973). On Economic Inequality. New York: W.W. Norton. State Statistical Bureau (1996). Statistical Yearbook of China, 1996. Beijing: China Statistical Press. Tang, P (1995). Income Distribution in China’s Rural Areas. Management World, 2 (in Chinese). Tsui, K-Y (1993). Decomposition of China’s Regional Inequalities. Journal of Comparative Economics, 17. Tsui, K-Y (1997). Factor Decomposition of Chinese Rural Income Inequality: New Methodology, Empirical Findings and Policy Implications. Unpublished paper. Wei, H (1996). Income Difference in China’s Rural Areas. Jingji Yanjiu (Economic Research), 8. World Bank (1997). Sharing Rising Income: Disparities in China. Washington, DC. Zhang, P (1992). China Rural Household Income Difference. Jingii Yanjiu (Economic Research), 2. Zhang, P (1997). Income Distribution During the Transition in China. Working paper No. 138, World Institute for Development Economics Research, Helsinki. Zhu, L (1992). The Difference in Income in China’s Rural Off-Farm Households. Jingii Yanjiu (Economic Research), 3. Zhu, Y (1997). Employment Expansion and Payment. Unpublished paper, Economics Department of Taiwan University, Taipei.

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Food Demand and Nutritional Elasticity in Poor Rural Areas of China

Chapter

9

Zhang Juwei, Cai Fang1

Abstract Using farmer household level data from the poor areas of China, this chapter studies the relationship between total consumption and the demand for food and nutrition. The results show that the demand for food is very elastic, with an estimated elasticity of 0.74, but the demand for nutrition is relatively inelastic, with an estimated elasticity of 0.14. This suggest that the growth in food consumption does not necessarily lead to an increase of nutritional intakes, but rather to improving the “quality” or “taste” of the food. So, implementing nutritional intervention to some extent may be of important significance to improving the nutrition status of the poor areas in China. Keywords: Nutrition; consumption; elasticity.

1 Zhang Juwei and Cai Fang are Professors at the Institute of Population and Labor Eco-

nomics, Chinese Academy of Social Sciences. Zhang Juwei expresses gratitude to the support from the basic research program of Chinese Academy of Social Sciences; to the Ford Foundation for providing the opportunity for his visiting and doing research in the U.S.A. (it is during the one-year visit and research in the U.S.A. that he finished most of this research); to Professor Albert Park from University of Michigan and Professor Zhang Linxiu from Center for Chinese Agricultural Policy of CAS for allowing him to use their respective data; to Mr. Wang Yuying from Institute for Nutrition and Food Safety, Chinese Center for Disease Control for his help; and to the anonymous referees for their comments and suggestions on the revision of the paper.

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1.

Introduction

Poverty is often measured by income (or consumption),2 but in measuring the poverty, income standard must be converted into nutritional indicator that can better reflect the deprived state of welfare. For example, absolute poverty must be defined as an income (consumption) level above which it is possible to buy minimum nutrition and other survival necessities. So, compared to income, nutrition is an indicator that measures poverty more directly. A consequent question is: does the increase of income necessarily lead to the improvement of nutrition? If income can improve nutrition, then economic growth, or income increase in other words, is undoubtedly a good recipe for eliminating poverty; conversely, the strategy of alleviating poverty through economic development should be re-examined. The important relationship between food demand and income has been paid close attention to by economists since long ago. Schultz mentioned in his classical work Transforming Traditional Agriculture (1964), “Even 20 years ago, I had some reasonable impulse to attempt to estimate the income elasticity of agricultural products for farmer households … with the growth of per capita income, the growth of food demand in high-income countries is lower than that in low-income countries … This is an absolute fact, namely the income elasticity of the demand for agricultural products in high-income countries is close to zero, while it is still up to 0.9 in lowincome countries … many researches on the demand for agricultural products and the findings which have been extensively adopted show that, there is no inevitable reason to pay more attention to the effect of income increase on the growth of product demand”. It is thus clear that, in case of low income, the fact that income increase will lead to the growth of food demand has been generally acknowledged by the academic circles since several decades. If there is a one-to-one relationship between food demand and nutritional demand, the growth of food demand will lead to the growth of nutritional demand; accordingly, the elasticity of food demand means the

2 The measurement of poverty from other perspectives such as education and health is also

a traditional approach, and can be traced back to classical economists including Malthus, Ricardo and Marx (World Bank, 2000).

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elasticity of nutritional demand. But the problem is: there does not necessarily have a one-to-one relationship between food demand and nutritional demand. In food consumption, if there is a substitution relationship between food variety and food category, the growth of food demand will not necessarily lead to the growth of nutritional demand. Nutritional demand does not simply identify with food demand. So, although the fact that food demand is elastic in case of low income has already been confirmed by research, it seems not certain about whether nutritional demand is elastic. Just because of this, since the late 1970s, the study on elasticity of nutritional demand has become a hot issue in development economics. Earlier studies, especially those before the late 1980s, all seem to show that, nutritional demand is really elastic (Strauss, 1984; Behrman and Deolalikar, 1987; Sahn and Alderman, 1988; Bouis and Haddad, 1992; Shankar and Deaton, 1996). But recent researches give a stronger indication that, the elasticity of nutritional demand is far lower than thought in the past, and some researches (Behrman and Deolaliker, 1988) even indicate that, the elasticity of nutritional demand is actually close to zero. Such findings have greatly shaken the traditional viewpoints in development economics, because if such a conclusion is correct, the traditional viewpoints of economic development should be revised. By summarizing the various estimations of the elasticity of nutritional demand over the past 20 years, we find huge differences between them, with the estimated value fluctuating in the range of 0–1. One important reason for such differences in estimations of the elasticity of nutritional demand may be related with the different estimation approaches adopted by researchers (Behrman and Deolaliket, 1988). For example, Bouis and Haddad (1992) argues that, the difference in estimations of the elasticity of nutritional demand can be basically explained by the difference in the specific estimation techniques used. The estimations of higher elasticity of nutritional demand mostly use indirect approaches, namely obtaining the elasticity of nutritional demand indirectly by estimating the equation of food demand. In contrast, the estimations of lower elasticity of nutritional demand mostly use direct approaches, namely obtaining the elasticity of nutritional demand directly by estimating the equation of nutritional demand (Bouis and Haddad, 1992). Why are the results of estimating indirectly from the equation of food demand obviously higher than those of estimating directly from the equation 311

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of nutritional demand? This is mainly because that, in order to estimate the elasticity of nutritional demand indirectly from the equation of food demand, we must firstly calculate the elasticity of demand for different food categories, and then convert such elasticity to the elasticity of nutritional demand according to the standard food nutrition composition table. In doing this, we often assume that the elasticity of price relative to income in a certain food category is zero, namely there is no substitution among different food varieties, thus, once this assumption is incorrect, the elasticity obtained finally will be “deviated”. In theory, the elasticity of nutrition price relative to income may not always be positive, and when the elasticity of price is negative, the elasticity of total nutritional demand calculated by the equation of food demand will be underestimated (Shankar and Deaton, 1996). Generally speaking, with the increase of income, people often tend to choose food of better quality, in which case, the elasticity of price is positive, and this is exactly the reason why the elasticity of nutritional demand calculated by the equation of food demand is always on the high side. Even if there is no substitution among different varieties of each food category, there may still have substitution among different food categories. That is to say, with the increase of income, consumers will turn from mainly consuming one kind of food to mainly consuming another kind of food. If this is the case, there will be greater difference between the elasticity of total food demand and the elasticity of total nutritional demand. When the expenditure share of one food category is greater than its nutrition share, the elasticity of its food demand will be greater than the elasticity of nutritional demand. So, even if the food demand is very elastic, the nutritional demand may not be elastic. In case of income increase, if there is substitution among different food categories and substitution among different varieties of each food category, then these two substitutions will probably use up the “increment” of food consumption expenditure brought by income increase, thus making the total nutritional demand lack elasticity. At present, it is generally acknowledged by the academic circles that, the elasticity of nutritional demand may neither be as high as estimated by early researches nor totally lack elasticity, but have a truth-value interval from 0.1 to 0.3. Moreover, it is fully possible that different areas have different nutritional demand. Then, does the nutritional demand in poor areas of China have elasticity?

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2.

Food Demand in Poor Rural Areas

Before answering the question of whether the nutritional demand in poor areas of China is elastic, let us take a look at the basic situation of food demand in these areas. The data used in this research mainly includes three sources. The most fundamental data comes from Survey on Credit and Poverty in Poor Areas of China conducted at the end of 1997 in six counties that were designated by the central government as poverty-incident counties. The survey investigated the production and living conditions of farmer households, and gathered information of all aspects of farmer households including production, income, consumption, deposit, credit, education, health, etc. The sampling method of this survey exactly follows that of the Sampling Survey on Rural Households (SSRH) by the National Bureau of Statistics, both adopting the multi-stage random sampling method, i.e. firstly selecting the counties and villages to be investigated, and then selecting the specific families at random. As a result of sampling, altogether 460 farmer households in 43 villages of six poor counties were chosen, all of which are sample families from SSRH. The SSRH collected the data on the status of income and consumption of the households in detail, and recorded the specific varieties and quantities of food consumption on a monthly basis in detail too. The indicators of nutrition used in this research are obtained mainly by calculating the data of this survey, so the SSRH is the second source of data used in this research. The third source of data is another supplementary survey conducted to the 446 sample households. This survey mainly collected the information about health status of the farmer households, including height, weight, nutrition knowledge, disease status, self-reported health status and daily living ability, etc. In these poor rural areas studied by the author, the per capita income (represented by per capita total consumption expenditure) still wanders around low level, and the majority of consumption is still on food. Among them, the food expenditure of the poorest 20 percent farmer households accounts for over 70 percent of total consumption expenditure, and even the richest 20 percent farmer households spend nearly 60 percent of total expenditure on food consumption. Moreover, with the rise of per capita 313

Percentage of food consumption expenditure in the total consumption expenditure

Price of calorie (yuan/ kilocalorie)

Price of protein (yuan/ 100 grams)

Price of fat (yuan/ 100 grams)

Lowest 1/5 group Second lowest 1/5 group Third lowest 1/5 group Fourth lowest 1/5 group Highest 1/5 group

482.60 749.11 997.34 1,302.64 2,081.55

343.98 520.45 683.21 872.96 1,228.97

71.28 69.50 68.55 67.48 60.71

0.67 0.90 0.94 1.11 1.32

2.16 2.93 3.20 3.76 4.57

4.85 6.33 5.28 5.83 6.63

Average

1,121.21

729.05

67.51

0.98

3.32

5.78

Groups by per capita consumption level

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314 Table 1.

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Food Expenditure Per Capita (Log)

consumption level, farmer households will pay higher prices for nutrition. For example, seen from the price of calorie, the poorest 20 percent farmer households pay a price of RMB0.67 for each kilocalorie, while the richest 20 percent farmer households pay RMB1.32, almost twice that of the poorest families. The price change pattern of other nutrients like protein and fat is basically similar (see Table 1). In order to observe the relationship between per capita total consumption level and food consumption more clearly, the author has drawn a scatter diagram to reflect their relationship (see Fig. 1). In Fig. 1, the horizontal axle represents the logarithm of per capita total consumption expenditure, the vertical axle represents the logarithm of per capita food consumption expenditure, every point represents a sample family, and the straight line represents the fitted value after the regression of food consumption expenditure to the total consumption expenditure, and its slope measures the elasticity of food demand relative to the total consumption expenditure. Fig. 1 shows clearly that, in poor rural areas of China, there is a very close relationship between food consumption demand and total consumption level, which are positively correlated: the higher the total consumption expenditure is, the

Total Expenditure Per Capita (Log) Figure 1. The Relationship Between Food Expenditure and Total Expenditure.

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Percentage of Food Expenditure in Total Expenditure

more food is consumed, with the latter depending on the former; meanwhile, food consumption seems very elastic in these poor areas. In Fig. 2, non-parametric estimation technique is used to further estimate the change pattern of the relationship between food consumption and total consumption. In Fig. 2, the horizontal axle still represents the logarithm of per capita total consumption expenditure, but the vertical axle represents the proportion of per capita food consumption in the total consumption expenditure. In non-parametric estimation, there is not any assumption whatsoever about the relationship among variables, so the curve in the figure illustrates the true relationship between the two variables. The results of estimation shown in Fig. 2 (curve in the figure) indicate that, on the whole, with the rise of consumption level, the proportion of food consumption in the total consumption tends to fall, but there is not a simple linear relationship between the two, instead their relationship is non-linear: in the space of most samples measured by the total consumption level, the proportion of food consumption expenditure decreases very slowly with the rise of the total consumption expenditure level, and gains speed only after the consumption reaches a high enough level. This relationship means that,

Total Expenditure Per Capita (Log) Figure 2. The Proportion of Food Consumption Varies with Total Consumption Level (Non-Parametric Estimation).

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most sample families spend expenditure on food consumption. The fact is exactly like this. In these poor areas, the distribution of consumption is more concentrated on the low-level side, and most families spend a very high proportion of total consumption expenditure on food, among which this proportion in some cases is even close to 100 percent. That is to say, these families nearly spend all the consumption expenditure on food. Despite the high proportion of food consumption expenditure in the total consumption expenditure of the poor farmer households under research, there are still a lot of families that are unable to get sufficient nutrition. By regarding the average intake of 2,200 calories of heat energy per day as the standard nutrition required to meet the normal physiological needs of a person, the author calculated the status of nutrition shortage in sample farmer households. The results of calculation are summarized in Table 2. As shown in Table 2, on the average, about 17 percent families Table 2.

Per Capita Consumption Level and Nutrition Status (1997). Per capita nutrient intake Calorie intake

Protein (gram)

Fat (gram)

Degree of malnutrition (%) (ri − kj )/ri∗∗

Lowest 1/5 group Second lowest 1/5 group Third lowest 1/5 group Fourth lowest 1/5 group Highest 1/5 group

1,607.37 1,948.52 2,377.19 2,628.78 2,780.90

49.76 58.69 69.41 79.40 84.99

26.46 31.45 47.07 52.63 58.53

30.12 23.52 11.53 11.13 7.98

Average

2,267.07

68.41

43.19

16.89

Groups by per capita consumption level

Notes: (1) Due to the influence in such aspects as the age, gender composition and body mass of the household population, the per capita nutrient intake indicator calculated according to food consumption can hardly reflect the true nutritional level of a family accurately. In order to eliminate the above influence, on the basis of the energy demand criteria by age and sex provided by FAO/ WHO and the energy demand calculated from field survey in China, the author chose 2,200 calories intake as benchmark, and converted the household members with the same age, gender and weight into “standard people”, then calculated their per capital nutrient intake. Through comparison, the author found that the adjustment using chosen data from the field survey conducted in China seems to better reflect the real nutrition status of a household, so the nutrient indicator used here is the indicator obtained after adjustment using the data from real survey in China. (2) ∗∗ In the formula, ri equals 2,200 calories, kj is the per capita nutrient intake.

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are in short of nutrition. The proportion of nutrition shortage among the poorest 20 percent families is up to about 30 percent, and even among the richest 20 percent families, there is also certain degree of nutrition shortage (in short of about eight percent heat energy supply). So, nutrition shortage remains an important problem faced by poor rural areas. In order to accurately understand the change of food demand, the author further estimated the elasticity of food demand relative to total consumption expenditure, and the results of estimation are summarized in Table 3, in which Model I shows the OLS estimation results without controlling any influence factor; Model II shows the estimation results after adding the logarithm quadratic term of per capita total consumption expenditure in Model I; Model III shows the estimation results after controlling the influence of age and gender composition as well as geographical position (eliminating the influence of geographical position at village level by adding various price indicators at village level); Model IV shows the estimation results after adding the logarithm quadratic term of per capita total consumption expenditure in Model III.

Table 3.

Estimated Elasticities of Food Demand (OLS). Logarithm of per capita food consumption expenditure

Model Logarithm of per capita total expenditure Squared logarithm of per capita total expenditure Number of family members

I 0.846 (0.026) –

– Is the variable of age and gender structure No included? Is the variable of village (price indexes of No various food categories) included? 0.75 R2 Number of observed amounts 446

II 1.022 (0.061) −0.086 (0.028) – No

III

IV

0.735 (0.036)

0.878 (0.056)

−0.057 Yes

−0.69 (0.028) 0.056 Yes

No

Yes

Yes

0.75 446

0.79 446

0.80 446



Note: The value in parentheses refers to the Robust Standard Error after correcting the influence of heteroscedasticity.

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Since both independent and dependent variables in the models are in logarithmic form, in the models without adding quadratic terms, the coefficient before the logarithm variable of per capita total expenditure is directly the elasticity value of food consumption expenditure, i.e. how large proportion of food consumption will be created by one percent increase of total consumption expenditure. The estimation results show that, in these poor rural areas studied by the author, on the average, the elasticity coefficient of food demand ranges from 0.74 (results of Model III) to 0.85 (results of Model IV). That is to say, in these poor areas, on the average, for every one percent increase of total consumption expenditure, the food consumption expenditure increases by about 0.74–0.85 percent. Just as stated in preceding paragraphs, there does not necessarily have a linear relationship between food consumption and total consumption, and by adding quadratic terms in the models, this research has further verified the existence of a non-linear relationship between the two, which is specifically represented by the significant quadratic terms in Model II and Model IV in Table 3. The author specifically studied this non-linear relationship between food consumption and total consumption through two approaches. One approach is to divide the samples into five groups by consumption level and use OLS to separately estimate the elasticity of food demand in each group. The Cases I and II in Table 4 show the results of estimation using this approach, among which Case I shows the estimation results without controlling the influence of age and gender structure as well as geographical position, while Case II shows the estimation results after controlling these variables. The second approach is to firstly create the dummy variables that respectively represent five groups at different consumption levels, then add a cross term to the models that multiplies each dummy variable by the variable of total consumption expenditure. In this way, the coefficient preceding each cross term is the elasticity coefficient of food demand in the group at this consumption level. The Cases III and IV in Table 4 show the results of estimation using this approach. While Case II shows the estimation results without controlling the influence of age and gender structure as well as geographical position, Case IV shows the estimation results with these variables controlled.

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Estimated Elasticities of Food Demand by Quantile of Total Expenditure (OLS). Estimated elasticities

Quantiles Lowest 1/5 group Second lowest 1/5 group Third lowest 1/5 group Fourth lowest 1/5 group

Elasticity of Food Demand

Highest 1/5 group

Case I

Case II

Case III

Case IV

0.914 (0.067) 1.050 (0.197) 1.057 (0.452) 0.823 (0.410) 0.694 (0.132)

0.907 (0.061) 1.058 (0.242) 0.718 (0.391) 0.725 (0.404) 0.567 (0.100)

0.888 (0.071) 0.966 (0.047) 0.928 (0.040) 0.901 (0.032) 0.853 (0.027)

0.846 (0.068) 0.871 (0.049) 0.796 (0.046) 0.792 (0.038) 0.748 (0.034)

Case I

Lowest group

II

Case II

III

Case III

Case IV

IV

Highest group

Consumption Level by Quantile Figure 3. Elasticities of Food Demand by Quantile.

On the whole, no matter which approach is adopted, the non-linear relationship between food consumption and total consumption is further verified. That is to say, the elasticity coefficient of food demand declines with the rise of consumption level (see Fig. 3). For example, the results of estimation using the first approach show that, the elasticity coefficient of food demand in the lowest 1/5 consumption group is 0.907, which presents a trend of firstly increasing and then decreasing with the rise of consumption 320

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level, and this elasticity coefficient drops to 0.567 in the lowest 1/5 consumption group. The results of estimation using the second approach display basically the same pattern, though showing less significant fluctuations in elasticity coefficient. The following questions are: Will the nutritional demand display a similar or the same change pattern as the food demand? Does the situation of food demand increasing with the rise of consumption level observed here mean that the nutrition status will be improved with the rise of consumption level? All these questions can be answered only by estimating the elasticity of nutritional demand.

3.

Is the Nutritional Demand Elastic?

Just as pointed out in preceding paragraphs, the elasticity of nutritional demand can be estimated using either direct approach or indirect approach. This research adopts the direct approach to estimate the elasticity of nutritional demand: namely obtain the elasticity of nutritional demand by regressing the nutrition indicator calculated from the data of food consumption with the total consumption expenditure. Generally, the model of estimating the elasticity of nutritional demand using the direct approach can be expressed as the formula (1). In this formula, N represents nutrition index, such as the per capita heat energy intake; x represents total consumption expenditure; Zi represents control variables that influence the nutritional demand, such as family characteristic variables like family population, age and gender structure, etc.; Cj represents variables that control regional influence; β0 , β1 , β2 , i and λj represent parameters to be estimated; µ represents the residual term. LnN = β0 + β1 LnX + β2 (LnX)2 +

n  i=1

θi Zi =

m 

λj Cj + µ

(1)

j=1

In the estimation of total expenditure elasticity of nutritional demand, it is essential to control the family characteristic variable. For example, when the per capita consumption expenditure is fixed, it is obvious that the population scale and structure have a direct bearing on the possibility of obtaining enough nutrition. In this case, the per capita nutrition consumption of a 321

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family with high proportion of children members will certainly be lower than a family totally formed by adult members, but this does not necessarily mean the nutrition status of the latter is better than the former. Even if we take the influence of age and gender structure into consideration, and convert the population into “standard adult population”, the population scale of the family still concerns the status of nutrition consumption. Normally, a family of double “standard adult population” should consume double resource, but considering the influence of “public products” of the family and the effect of “scale economy” in the family’s food consumption, a family of double population does not necessarily consume double resource in order to obtain the same nutritional demand. So, when the consumption expenditure is fixed, because the population scale of a big family will bring down the per capita nutrition consumption level, if the family’s population scale is not controlled in estimating the elasticity of nutritional demand, the estimation value will be higher than the truth value. Other variables of the family will influence the nutritional demand too, such as the family’s educational level. Families with different educational levels may have different consumption habits and nutrition knowledge, so the educational level may be closely related with people’s choice of food for consumption, and thus influence the change of food consumption pattern. Certainly, it is very difficult to determine the direction in which the variable of educational level exerts its influence, because it can produce positive influence on the total nutritional demand (e.g., in case of low income) or negative influence (e.g., in case of high income). Another family characteristic variable that should be controlled is the weight status (or the physique in other words) of the family’s population. Bouis (1978) argues that, in the long run, the weight status should be in direct proportion to the energy intake. As a result, in terms of per capita consumption expenditure, even if one family may be three times better than another family, the weight of the former may still be much heavier than the latter. But in many researches, the weight status is not observed, thus certainly affecting the accuracy of the elasticity of nutritional demand. The relationship between weight and energy consumption is not necessarily as simple as Bouis (1995) said. For example, a recent experimental research by Leibel et al. (1995) shows that, when the weight exceeds the “normal” value, the metabolic rate will be accelerated so as to offset the effect of

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nutrition intake increase without increasing the weight. However, in any case, if the influence of weight can be controlled, it would be better to control than not to control. But, the weight status of a family is generally thought to have stronger “endogeneity”. In this case, the author has studied the situation when this variable is controlled and the situation when this variable is not controlled respectively. In terms of the relationship between consumption and nutrition, the form of equation adopted by the estimation model is very important too. It is generally acknowledged that, with the increase of income or consumption expenditure, the family will turn to consuming food with higher price, but such food does not necessarily have higher nutritive value. So, intuitively speaking, the nutrient intake and income of low-income families are positively correlated. But with the increase of income, the income elasticity of nutrient intake will fall and may become zero, and even become negative when income level is high enough. This means that the relationship between nutrition and income is not linear, but non-linear. In fact, a lot of existing researches have confirmed the “convexity” characteristic of their relationship. For example, the research of Xiao and Taylor (1995) on rural areas in north China, research of Timmer and Alderman (1979), research of Pitt (1983), research of Behrman et al. (1988), research of Sahn (1988), research of Ravallion (1990), etc. This non-linear relationship means that, even if the estimated income elasticity of total nutritional demand is relatively low, the elasticity of nutritional demand of the lowest-income family may still be relatively high, so Ravallion (1990) argues that, when estimating the nutrition elasticity, it is also very important to consider the influence of income distribution. In order to measure this non-linear relationship between nutrition elasticity and income, the author added the quadratic term of expenditure variable in the model so as to detect the existence of this relationship.

3.1.

OLS estimation of the elasticity of nutritional demand

Table 5 summarizes the results of the author’s estimation of the OLS model for the elasticity of nutritional demand. Due to concern over the possible “endogeneity” of the family’s “per capita years of education”, “average weight of members”, “proportion of non-agricultural members”, Model I 323

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Estimation of Elasticity of Nutritional Demand (OLS).

Logarithm of per capita energy intake Model Logarithm of per capita total consumption expenditure Squared logarithm of per capita total consumption expenditure Cross term 1

I 0.262 (0.142)

II –

III 0.243 (0.042)























– –

– – 0.035 −0.029 (0.009) (0.007)

−0.013 −0.013 (0.003) (0.003) −0.814 −0.197 (0.113) (0.116)



−0.013 −0.003 (0.004) (0.003) −0.187 −0.228 (0.114) (0.093)





Cross term 5 – Family’s per capita – average years of education Average weight of – – family members Proportion of – – non-agricultural family members Number of family −0.001 −0.0008 members (0.016) (0.016) Structure variable of Omitted Omitted age and gender Village variable Omitted Omitted (various food price indexes) R2 0.26 0.27 Number of 446 446 observed values

0.504 (0.042)



0.389 (0.142) 0.318 (0.094) 0.342 (0.076) 0.356 (0.060) 0.256 –

Cross term 4

0.371 (0.091)

0.325 (0.146) 0.340 (0.093) 0.329 (0.073) 0.341 (0.058) 0.241 0.035 (0.009)





0.394 (0.093)





Cross term 3



VI

−0.062





V

−0.066



Cross term 2

IV

Logarithm of energy price VII

– – – – 0.035 (0.009)





−0.007 −0.007 −0.0007 (0.015) (0.015) (0.016) Omitted Omitted Omitted

−0.006 0.001 (0.015) (0.014) Omitted Omitted

Omitted Omitted

Omitted Omitted

0.32 441

0.33 441

Omitted

0.27 446

0.32 441

0.43 441

Note: The value in parentheses refers to the Robust Standard Error after correcting the influence of heteroscedasticity.

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is the case not including these variables. Model II is the case that converts the per capita total consumption expenditure in Model I into the cross term which multiplies the dummy variable by the variable of total consumption expenditure for groups at different consumption levels, so as to detect the non-linear relationship between nutritional demand and consumption expenditure. Model III is the case that includes the control variables such as the family’s “per capita years of education”, “average weight of members” and “proportion of non-agricultural members” on the basis of Model I. Model IV is the case that converts the per capita total consumption expenditure in Model III into the cross term which multiplies the dummy variable by the variable of total consumption expenditure for groups at different consumption levels. Model V is the case that adds the “squared logarithm of per capita total consumption expenditure” to Model I so as to detect the non-linear relationship between nutritional demand and consumption expenditure. Model VI is the case that adds the “squared logarithm of per capita total consumption expenditure” to Model III. Model VII estimates the relationship between the price change of nutrient and total consumption expenditure. Variables included in all models are: number of family members; gender-specific proportion of population aged below three, gender-specific proportion of population aged 3–6, gender-specific proportion of population aged 6–9, gender-specific proportion of population aged 9–16, genderspecific proportion of population aged 16–60, and gender-specific proportion of population aged above 60 (12 variables in total); various weighted price indexes at village level, including such five variables as grain price index, meat price index, vegetable price index, edible oil price index, and egg price index, which are used to control the influence of various market factors due to the difference of geographical position. Through analysis of the OLS estimation results in Table 5, we can roughly arrive at several conclusions: Firstly, the nutritional demand has certain elasticity relative to the total consumption expenditure, with the estimated average elasticity ranging from 0.24 (results of Model III) to 0.26 (results of Model I). Secondly, a non-linear relationship is demonstrated between nutritional demand and total consumption expenditure, as shown by the results of Models II, III and Models V, VI (represented by statistically significant

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Calorie Per Capita (Log)

Lowess smoother, bandwidth = 0.1

Total Expenditure Per Capita (Log) Figure 4. Relationship Between Nutritional Demand and Total Consumption Expenditure (NonParametric Estimation).

coefficient of quadratic term). For the lowest consumption group, the estimated elasticity of nutrition ranges from 0.26 (results of Model II) to 0. 24 (results of Model IV), while for the highest consumption group, the nutrition elasticity is about 0.33 (results of Model II and Model IV are basically the same). At the same time, the author used the non-parametric estimation technique to further study the non-linear relationship between nutritional demand and total consumption expenditure, and the results are as shown in Fig. 4, from which we can see that the non-linear relationship between the two is not as obvious as revealed by the OLS estimation results. Thirdly, with the rise of consumption level, the families do pay higher price for nutrition, and for every one percent rise of consumption level, the price paid for energy increases by 0.5 percent on the average (results of Model VII).

3.2.

Does OLS over-estimate the elasticity of nutritional demand: Results of 2SLS

Though the estimation results of OLS show that, the nutritional demand in poor rural areas of China has certain elasticity, but in terms of method, it is 326

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still early to totally accept this conclusion, because there are many difficulties to be overcome in order to obtain the “truth value” of the elasticity of nutritional demand. These difficulties can be summarized and divided into several aspects as follows: (1) the problem of measurement error; (2) the problem of omitted variable (i.e. unable to obtain the required control variable and observe the influence of factors); (3) the “endogeneity” problem of explanatory variables (mainly income variable or expenditure variable); (4) the problem of “simultaneousness” between income (or expenditure in other words) and nutrition, i.e. the problem of mutual influence between nutrition and income. (3) and (4) are in fact the same problem, i.e. (4) is a special case of (3). Generally speaking, when there is the problem of “endogeneity”3 (Cor(x, e) = 0, i.e. the covariance between explanatory variable and error term is not zero), the estimation results of OLS must be “biased” and “inconsistent”. Even if the problem of “endogeneity” is not considered, when there has measurement error, the estimation results of OLS cannot be “consistent”. If e represents the error when measuring X, and E(e) = 0, Vae(e) = σe2 , then the probability limit of OLS estimation value is: P lim bˆ OLS = b +

−bσe2 σx2 + σe2 + 2σX,e

(2)

If X is the only explanatory variable with measurement error, then as formula (2) shows, the estimated value of OLS undoubtedly deviates towards zero. When LD variable is energy intake and independent variable is income (assuming that there is error in income measurement), the OLS estimation is the case described above. However, the measurement error of nutrition index may be closely related to the measurement error of income index. If the nutrition index is the energy intake and the income index is consumption expenditure, since they all come from the data of consumption, their 3 This endogeneity may have many sources, such as the influence of the factors that cannot be observed. If these factors are related with explanatory variables, the explanatory variables will have endogeneity due to the influence of these factors that cannot be observed; meanwhile, when the variables that should be controlled cannot be controlled because of the lack of data, if these omitted variables are related with the explanatory variables, the problem of endogeneity will occur too; Certainly, the problem of “simultaneousness” caused due to the mutual influence between explanatory variables (income) and the explained variables (nutrition) is also a source of endogeneity.

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measurement errors have much in common. In such case, the estimated value of OLS may deviate upward, i.e. over-estimating the truth value. The nutrition and income indexes used in this research belong to the latter case. In order to correct the possible “endogeneity” in the estimation equation, the econometrics theory provides the solution of instrumental variables, i.e. finding out some variables that are related with the explanatory variables with “endogeneity”, but not related with the error term. If we can really find such variables, we can obtain “unbiased” and “consistent” estimation results by firstly using these variables to “clean up” the explanatory variables polluted by “endogeneity”, and then performing the quadratic regression with “clean” explanatory variables. This is the so-called 2SLS approach (2 stage least square method). With the measurement error not to be considered, the biggest problem of the previous OLS estimation is that the variable of “per capita total consumption expenditure” in the model may be “endogenous”. Certainly, in this case, the elasticity of nutritional demand obtained is “biased”. In order to overcome this problem, the author adopts the 2SLS approach to further study the elasticity of nutritional demand. The estimation results are summarized in Table 6. Through analysis of the results in Table 6, we can see that the influence demand elasticity obtained using 2SLS is very low, only about 0.14, and this result has little changing effect on whether to control more variables (comparing the results of Model I and Model III), which indicates that the above 2SLS model is very robust; meanwhile, after adding the quadratic term of “per capita total consumption expenditure”, 2SLS model still does not show a “non-linear” relationship between nutritional demand and total consumption expenditure. By comparing the results of OLS and 2SLS, we can see that the elasticity of nutritional demand estimated using 2SLS approach is far lower than the results of OLS estimation, with a difference of 0.1, and the results of 2SLS estimation is about 70 percent lower than the results of OLS estimation. If we are sure that the results of 2SLS estimation are true, then the results of OLS estimation greatly over-estimate the elasticity of nutritional demand in poor areas of China. In 2SLS estimation, if the instrumental variables chosen are OK, or in other words, “effective” instrumental variables are used, 2SLS can undoubtedly provide “unbiased” estimated value. Otherwise, 2SLS approach may

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Food Demand and Nutritional Elasticity in Poor Rural Areas of China Table 6.

Estimation of Elasticity of Nutritional Demand (2SLS). Logarithm of per capita heat energy intake

Model Logarithm of per capita total consumption expenditure Squared logarithm of per capita total consumption expenditure Family’s per capita years of education Average weight of family members Proportion of non-agricultural family members Number of family members Structure variable of family age and gender Village variable (various food price indexes) Over-identification test of instrumental variables (X2 ) 2 R Number of observed values

I

II



−0.291 (0.472) 0.76 (0.186) –

– –

– –

−0.019 (−0.018) Omitted

0.145 (0.061) –

III 0.142 (0.062) –

IV

−0.032 (0.025) Omitted

0.035 (0.009) −0.013 −0.187 (0.115) −0.022 (0.017) Omitted

0.767 (0.353) −0.217 (0.152) 0.037 (0.008) −0.013 −0.189 (0.116) −0.012 (0.017) Omitted

Omitted

Omitted

Omitted

Omitted

4.46

3.6

7.05

21.7

– 446

– 446

441

441

Note: The value in parentheses refers to the Robust Standard Error after correcting the influence of heteroscedasticity.

not improve the results of estimation, and may even make the results of estimation quite far away from the “truth value” than OLS estimation. Therefore, the results of 2SLS estimation depend on whether the instrumental variables used are effective. However, effective instrumental variables or instrumental variable series must satisfy two basic conditions: firstly, the instrumental variables must be related with the explained “endogenous” variables; secondly, the instrumental variables must be “exogenous” or is not related with the error term in the model. Then, do the instrumental variables used in this research satisfy these two conditions? This requires statistical test of instrumental variables. This research adopts an instrumental variable series, including 12 variables. These variables are respectively: five variables of weighted price 329

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indexes at village level, including grain price index, meat price index, vegetable price index, edible oil price index and egg price index; six variables in aspects other than food, including clothes, house, durable consumer goods, medical treatment and health, culture and education and amusement; and the value of the family house. In order to test whether the instrumental variables used are related with the explained “endogeneity” variable, we only need to construct an F test. Specifically, if the structure equations to be estimated are (3) and (4), y1 = Z1 δ1 + α1 y2 + u1 ,

(3)

y2 = Z1 β1 + Z2 β2 + e1 ,

(4)

where Z2 is a group of instrumental variables that explain y2 , and Z1 are other exogenous variables in the structure equation, then the purpose of constructing F test is to see whether all coefficients of Z2 are zero in the regression equation (4). Therefore, the zero hypothesis H0 of this F test is: all instrumental variables are not related with y2 (i.e. all the regression coefficients of these instrumental variables are zero simultaneously); its alternative hypothesis Ha is: at least one of all the instrumental variables is not related with y2 (i.e. the regression coefficients of these instrumental variables are not zero simultaneously). If the zero hypothesis is rejected, it means that instrumental variables can satisfy the first condition of “effectiveness”. Table 7 shows the results of F test with regards to whether the instrumental variables are related with the “endogeneity” explanatory variables. Table 7. F Test of Correlation Between Instrumental Variables and Endogeneity Explanatory Variables (The First-Stage Regression).

Variable to be tested Log of per capita total consumption expenditure Square of the log of per capita total consumption expenditure

Model I in Table 6

Model II in Table 6

Model III in Table 6

Model IV in Table 6

48.6 (7420) –

48.6 (720) 103.3 (7420)

47.3 (7412) –

47.3 (7412) 96.6 (7412)

Note: The value in parentheses is the degree of freedom.

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The Models I to IV correspond with models in Table 6, respectively. As Table 7 shows, no matter in which model, the instrumental variables used in this research all pass the test of correlation with the “endogeneity” explanatory variables. The method of testing the correlation between instrumental variables and the residual term is the over-identification test often used in research. Specifically, to practice this method of test, we firstly obtain the predictive value u1 of the residual term in the structure equation (3), and then use this predictive value to perform regression of all exogenous variables (including all instrumental variables and non-instrumental variables), i.e. u2 = Z1 β1 + Z2 β2 + ε1 .

(5)

In the regression equation (5), the product of R2 and sample size IV complies with X2 distribution, i.e. X2 = R2 • N.

(6)

Here, the statistical value X2 can be used for conducting statistical test. The zero hypothesis H0 of this Chi-square test is: all instrumental variables are exogenous; the alternative hypothesis Ha is: at least one of the instrumental variables is endogenous. So, if the zero hypothesis is rejected, it means that instrumental variables cannot satisfy the second condition for effective instrumental variables. The results of over-identification test to the instrumental variables used in this research are included in Table 6. According to X2 distribution, in case the degree of freedom is 10, X2 value must be greater than 23 in order to reject the zero hypothesis at the significant level of 0.01.According to this standard, we can see that all models in Table 6 have passed the over-identification test. By summarizing various tests of instrumental variables, we can deem the instrumental variables used in this research as effective, and thus the estimation results of 2SLS are reliable. Therefore, we can arrive at the conclusion here: compared with OLS estimation, 2SLS estimation is more reliable, and the results of OLS estimation over-estimate the nutrition elasticity in the poor rural areas of China.4 4 Partial reason of the over-estimation may be as stated in preceding paragraphs, see

equation (2).

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4.

Conclusion and Policy Implications

China has made magnificent achievements in eliminating poverty through economic development. In the initial stage of reform, the fast economic growth helped large quantities of Chinese farmers shake off poverty rapidly. According to the estimation of the World Bank, there were 260 million poor people in China in 1978, but just several years later in 1984, this population decreased to only about 89 million, reducing the poor population of over 20 million every year on average. But after the mid 1980s, the role of economic growth in eliminating poverty began to weaken, and the poor population was not reduced at the once great pace. Though during 1986–1993, the government implemented some organized, planned and large-scale anti-poverty strategies (Zhu and Jiang, 1994), the figures from the National Bureau of Statistics show that, the rural population shaking off poverty annually decreased to only 6.4 million on the average during this period; especially in 1991 and 1992, the decreased quantity of poor population was only 2.5 million every year. According to the estimation of the World Bank, the quantity of poor population wandered in the latter half of 1980s, even slightly rallied by the end of the 1980s. In 1994, the Chinese Government unveiled the Seven-Year Program to Help 80 Million People Out of Poverty, which was intended to help the remaining 80 million rural poor population shake off poverty before the year 2000. Since 1996, the Chinese Government directed poverty alleviating efforts away from poor counties to poor villages and poor households, and strengthened the input of anti-poverty fund (anti-poverty discount loan, providing work as a form of relief, and development fund). Practice has proved that, the above antipoverty efforts of the Chinese Government have realized positive results. By 1998, the poor population of China has dropped to 42 million (Social and Economic Investigation Team of National Bureau of Statistics, 2000). But we should see that, with the decrease of the absolute quantity of poor population, it has become more and more difficult to eliminate the poverty, and the effect of economic growth has become more and more restricted. By 2000, the population of China without adequate food and clothing is still over 30 million.

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The latest research of modern economics indicates that, there is a very close relationship between nutrition and labor productivity. For example, a research (Strauss, 1986) conducted to farmer households of Sierra Leone indicates that, for every 10 percent rise of calorie intake level of the rural laborers, the agricultural output will increase by 3.3 percent. Another research conducted to Sri Lanka (Sahn and Alderman, 1988) shows that, on the labor market of Sri Lanka, for every 10 percent rise of calorie intake level of the laborers, the salary level will increase by 25 percent. Therefore, from the perspective of nutrition, the reason why it has become more difficult to help the remaining poor population of China out of poverty at present may be closely related with nutrition shortage discussed in this chapter. By summarizing the results of research in this chapter, we can see that, in poor areas of China, the food demand is very elastic, with estimated average elasticity around 0.74. Meanwhile, a non-linear relationship is demonstrated between food consumption and total consumption. The elasticity coefficient of food demand of the families in the lowest 1/5 consumption group is up to 0.907, but this elasticity coefficient in the highest 1/5 consumption group is reduced to 0.567. However, in sharp contrast with food demand, the elasticity of nutritional demand is very low, only slightly above 0.14 (results of 2SLS estimation). Even seen from the results of OLS estimation, the elasticity of nutritional demand is only about 0.24, but OLS has obviously over-estimated the “truth value”. The above research findings show that, in poor areas of China, with the increase of income, families spend more on food, but the increase of food consumption has not led to equivalent improvement of nutrition status, and food consumption is more on the “quality” of nutrition instead of the “quantity” of nutrition. This pattern of food consumption in poor areas is a problem to which enough attention should be paid, because on the whole the family in poor areas are not “rich”, the overall nutrition intake level is not high. In this case, the increased food consumption expenditure is spent on improving the “quality” of food to a great extent, which will inevitably be counterproductive to nutrition improvement in these areas. When the poor population is in a state of “absolute poverty”, the lack of elasticity of nutritional demand will limit the effect of economic growth on alleviating poverty. So, as for China’s poor population without adequate food and clothing, it seems that the country needs to implement some

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nutritional intervention measures and accelerate the development of poor areas, starting from improving nutrition. For example, the country can consider implementing some projects in the poor areas to ensure the essential nutrient intake level of the families on one hand, and guide the change of food consumption patterns of these poor areas towards more nutritional direction on the other hand.

References Behrman, JR and AB Deolaliker (1988). Health and Nutrition. In Handbook of Development Economics, H Chenery and TN Srinivasan (eds.). Volume I. Amsterdam: North-Holland. Behrman, JR, AB Deolalikar and BL Wolfe (1988). Nutrients: Impacts and Determinants. World Bank Economic Review, 2, 299, 320. Bouis, HE and LJ Haddad (1992). Are Estimates of Calorie-Income Elasticities Too High? A Recalibration of the Plausible Range. Journal of Development Economics, 39, 333–364. Bouis, HE (1978). The Effect of Income on Demand for Food in Poor Countries: Are our Food Consumption Databases Giving Us Reliable Estimates? Journal of Development Economics, 44, 331, 398. Jere, RB and AB Deolalikar (1987). Will Developing Country Nutrition Improve with Income? A Case Study for Rural South India. Journal of Political Economy, 95, 492, 507. Leibel, RL, R Michael and H Jules (1995). Changes in Energy Expenditure Resulting from Altered Body Weight. New England Journal of Medicine, 332, 621–628. Pitt, M (1983). Food Preferences and Nutrition in Rural Bangladesh. Review of Economics and Statistics, 65, 105, 114. Ravillion, M (1990). Income Effects on Undernutrition. Economic Development and Cultural Change, 38, 489, 515. Sahn, D and H Alderman (1988). The Effects of Human Capital on Wages, and the Determinants of Labor Supply in a Developing Country. Journal of Development Economics, 29, 157–183. Sahn, D (1988). The Effect of Price and Income Changes in Food-Energy Intake in Sri Lanka. Economic Development and Cultural Change, 36, 315–340. Shankar, S and A Deaton (1996). The Demand for Food and Calories. Journal of Political Economy, 104, 133–161. Social and Economic Investigation Team of National Bureau of Statistics (2000). Poverty Monitoring Report of Rural Areas of China. Beijing: China Statistics Press. Strauss, J (1984). Joint Determination of Food Consumption and Production in Rural Sierra Leone: Estimates of a Household — Firm Model. Journal of Development Economics, 14, 77–103.

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Food Demand and Nutritional Elasticity in Poor Rural Areas of China Strauss, J (1986). Does Better Nutrition Raise Farm Productivity? Journal of Political Economics, 94, 297–320. Timmer, CP and H Alderman (1979). Estimating Consumption Parameters for Food Policy Analysis. American Journal of Agricultural Economics, 61, 982–221. Wofe, BL and JR Behrman (1983). Is Income Overrated in Determining Adequate Nutrition? Economic Development and Cultural Change, 31, 525–549. World Bank (2000). World Development Report 2000/2001: Attacking Poverty. Beijing: China Financial & Economic Publishing House. Xiao, Ye and JE Taylor (1995). The Impact of Income Growth on Farm Household Nutrient Intake: A Case Study of a Prosperous Rural Area in Northern China. Economic Development and Cultural Change, 43, 805–819. Zhu, L and Z Jiang (1994). Public Works and Poverty Alleviation in Rural China. Shanghai: Shanghai Sanlian Publishing House and Shanghai People’s Publishing House.

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Reform in China’s Rural Areas: The Changes in the Relationship between the State and Land Ownership — A Retrospect on the Changes in Economic Institutions1

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Chapter

10

Zhou Qiren

Abstract China’s economic reform is widely changing the property right forms and efficiency of resource utilization. The reform was initiated against the backdrop in which the socialist country’s original control mode over economic activities was loosening and failing. This chapter discusses the source of this great evolution — the experience of the reform in rural area. The reform of 1980s in the countryside led to a weaker state centralized control over rural socio-economic activities and the expansion of rural communities and farmers’ private ownership. After 10 years’ gradual reform of decentralization, substantial changes have taken place in the relationship between the state and rural society. This paper explains the introduction of state behavior into the establishment, implementation 1 This paper and its earlier draft were published on the forum of “Socialist Agricultural System Transformation: Soviet Union, Eastern Europe and China” held at UCLA China Research Center (Shanghai, August, 1993) and the forum of “Chinese Rural Reform and Development in 1990s” held at Agriculture Research Center of the Ministry of Agriculture of PRC (Beijing, December, 1993). The author appreciates their invitation and thanks MacArthur Foundation and Ford Foundation for financial aid to author’s attendance at the two conferences. The author benefitted a lot from the discussions at the conferences, and expresses special gratitude to the review and suggestions of Du Runsheng, Philip Huang, Kathryn Bernhardt, Chen Xiwen, Du Ying, Lin Yifu (Justin Lin), Liu Shouying and James Kung. In the course of writing and revising this paper, the many discussions with Song Guoqing, Cui Zhiyuan and Luo Xiaopeng are most important to the author. However, the responsibility for the viewpoints in the paper lies with the author, instead of any of the above institutions or individuals.

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Zhou Qiren and variation of the farmer ownership system, through a retrospect on the experience in rural reform. The central argument of this paper is that the key to long-term economic growth is the state protection of efficient property right system. However, such protection does not come from the state automatically, and farmer households, various emerging property right agents and elites of rural communities need to widely participate in the formation of new property right system, and gradually reach mutually beneficial transactions with the state through communication and bargaining. The experience from China shows that valid private property rights can be gradually formed in the original public ownership system. This chapter is divided into the following: Section 1 discusses the theories on the relationship between the state and property rights. Section 2 summarizes the features and origin of the rural property right system prior to the reform. Section 3 investigates the factors of evolution involved in the people’s commune system. Section 4 analyses the experience of rural property rights reform in 1980s. Section 5 is a conclusive comment. Keywords: Paradox of owernership; state-controlled collective economy; transaction-generated owernership; policy retreat.

1. 1.1.

Previous Discussions: Ownership and State Paradox of ownership

The common concepts people used in their extensive discussions about the ownership or property right include contract, incentive mechanism, supervision expense, exclusive earning right, risk, opportunistic tendency, organization cost and asset specificity, etc. All of these concepts basically involve private considerations of social members and relationships between individuals. This mainly refers to the work of Coase (1937, 1960), Alchian and Demsetz (1972), Cheung (1969a, b) and North (1973, 1981, 1990), etc. The main literature in this field has been translated into Chinese by Sheng and Chen (1990), Liu et al. (1991) and Chen et al. (1991) in recent years. The paper of Yang (1993) introduces the latest progress of property rights economics and its mathematical models as well as his own achievements in this field. Reference can be made through Bardhan (1990) for articles by another school of new institutional economics (i.e. “School of Incomplete Information”) that criticizes the shortcomings of the above “School of Transaction Cost”. This shows that since the pioneering work of Coase 338

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and other economists, the understanding of a realistic world characterized by non-zero transaction cost and asymmetric and incomplete information has been greatly deepened in the economics theories. The concept of Transaction Cost raised by Coase (1937, 1960) challenges some seemingly selfevident hypotheses of neo-classical economics, focusing on the argument that the institutional cost of maintaining a perfect competitive market is zero. Eventually, just as Schultz (1953) sharply criticized, “the viewpoints of economists often give an impression that markets, enterprises and families alone are enough to realize the operation of economic system. “In this world, the arrangement of property rights is no longer insignificant to economic development. However, a further problem comes, i.e. if the behavior of the state and its agents is not introduced, can we truly understand the arrangement and the change of property rights system? Furubotn and Pejovich (1972) pointed out that we should not expect property rights to become unlimited rights, although they are exclusive rights. Since most limitations are imposed by the state, the theories of property rights are not accomplished unless there is a theory on the state. If property rights are simply contracts between private individuals, and can be fulfilled by private promise keeping, the state does not constitute an essential element of property rights arrangement. Coase Theorem seems to emphasize the importance of private mitigation of right disputes, but it is only under the precondition that transaction cost is zero. When the cost is not zero, not only the property rights arrangement is very important, but the institutions and ideologies related to its execution are more important. Sheng and Chen (1990) divided Coase Theorem into first theorem and second theorem, which facilitates our understanding of this point. Unfortunately, such a world does not exist in the reality of any largescale transaction. The issue of state is unavoidable in the discussions about the origin of property rights. Cooter and Ulen (1988) created a model to explain this issue. Therefore, when property rights economists expound the “exclusive earning right” of property rights, they usually emphasize that the property rights are forcibly implemented, so the strength of property rights inevitably concerns the effectiveness of protection provided by the government (Alchian, 1965, p. 243). The state certainly will not protect the property rights free of charge, and the resources at its disposal for protection of the property rights

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ultimately come from the “endowment” of the property rights. In other words, the ownership right is not so complete and independent from the very beginning, and destined to be entangled by the state. Of course, the property rights can purchase the state protection through tax payment, in which case, the state is just the only organization that can legitimately use violence and have “scale economy”, and the relationship between property rights and state is no different from any other equal contractual relationship. This is also the viewpoint of Buchnan and Tullock (1962), and reference can be made to Cooter and Ulen (1988). However, there are other methods of analyzing the state behavior, and reference can be made to the quotations (23–24) of Lin (1989). The problem is: why the state cannot demand a higher price, as it holds a monopoly position with legitimate violence? If the state also tends to serve its own interest, when it could demand a rent unable to be justified by the service it provides or even gather wealth by completely depriving private property rights with its unique position, what mechanism can stop it from doing so? Just as we see in the history of economics, the lessons of longterm economic recession due to the state’s infringement of property rights are not a strong enough deterrent to the state and its agents tempted by shortterm rent increase. After all, any agent of the state has limited life, tenure and rationality degree. Maybe just for this reason, when raising the important concept of “the truncation of ownership”, Demsetz had to particularly mention the state. He pointed out that, the truncation of ownership means a part of the complete bundle of rights of ownership has been deleted, and the reason is that “the position for controlling and abolishing the restraints of private rights has been granted to the state or already assumed by the state” (Demsetz, 1988, pp. 18–19). Obviously, the truncation of ownership is a result of state infringement, which is completely different from the state service purchased by private property owners at equal price. Demsetz did not carry out further discussion on this point, because he thought that economic theories concerning the state have not developed to such a level where we can fully understand the behavior of the state and its members (1988, p. 19). Now, we see the logic which I refer to as the paradox of ownership. On one hand, the ownership cannot be effectively implemented when completely separated from the state; on the other hand, the involvement of state is so likely to lead to the truncation of ownership that even

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we theoretically assume that there exists a rational state, the consequences of invalid property rights cannot be avoided completely.

1.2.

Puzzle of north

North and Thovnas (1973) once drew a concise conclusion for the modern economic growth of western world, i.e. effective economic organizations (property rights) are the key to economic growth. However, North later found that effective property rights arrangement is just one of the many possible results of the interaction between the state and private efforts, instead of the only and inevitable result under the condition of varying relative factor price (1981, 1990). Later, when North tried to answer a more significant question, i.e. why a large number of inefficient economic organizations existed for a long time in the history of economy, he proposed an analytical framework concerning the state, where the state is considered to have the motive of maximizing the rent of rulers, while willing to reduce the transaction cost under this precondition so as to increase the tax revenue. Nevertheless, North (1981) noticed that the above two objectives of the state are not always consistent, because “long-lasting conflict exists between the ownership structure for maximizing the rent of the rulers and their groups and the effective system for reducing the transaction cost and promoting economic growth” (1981, p. 25). It is just this basic contradiction that explains why many economies cannot achieve long-term growth. Thus, the early success of Netherlands and Britain, i.e. the consistency between the state rent maximization and effective saving of transaction cost, is rather a coincidence. Why are just these two places so luckily different? “The existence of the state is the key to economic growth, but it is also the root of man-caused economic recession” (North, 1981, p. 20). This brilliant summary by North gives each nation hope both of growth and decline. The research by Habermas (1989) based on the early modern western social structure transformation may facilitate our understanding of this issue. The central concept he abstracts from the history of Britain in 17th century and France in 18th century is “bourgeois public sphere”, i.e. a public space composed of private citizen class, which functions not only in coordinating the various private authorities but also in representing the civil society to supervise, restrict, inhibit and oppose the state’s behavior that may infringe the society (Habermas, 1989, pp. 14–26). According to 341

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the research by Habermas, the key to the successful transformation of the early Western European society towards modernization is that such “public sphere” maintains the balance mechanism between the civil society and the state. However, the theories of Habermas are too philosophized and seem difficult to be applied in the empirical research of other non-Western European societies. Huang (1993) commented on this as follows: as a historian, Habermas focuses on the reproduction of early Western European history, but as a moral philosopher, he tries to generalize his central concept, then comments on contemporary reality and regulates the world. One problem is that, similar non-official civil societies have appeared in many early modern societies, but not every such society has the ability or opportunity to reach the balance with the state power. For example, the public spheres composed of urban bourgeoisies, local gentlemen and citizens are found by Rowe (1984) before 1889 respectively in Hankou, by Rankin (1986) in later half of the 19th century in Zhejiang, and by Strand (1987) in the 1920s in Beijing. However, Wakeman (1993) found negative evidences proving the characteristics of these “public spheres” are different from the early Western Europe in their own works. In addition, the logic of Habermas also seems unable to explain the difference between British economy and French economy. In fact, both the British civil society and state are mature enough to arrive at compromise, while in France lasting conflicts more often occur between the two sides. Therefore, we may summarize the above discussions as follows: a mutually beneficial result can occur only when the collective action of emerging property rights and their agents is so powerful that the state and its agents can pursue their own interests only by protecting the effective property rights. On such basis, the state pursues rent maximization and the property rights become the gauge of wealth pursuing behavior. This does not mean that the right relationship between the state and society can be clearly defined once for all. On the contrary, a new era of institutional bargaining between the state and civil society began. Mann (1984) defines the “infrastructural power” as follows: the state power is able to permeate into the civil society, but must and will increasingly rely on the institutional negotiation with the civil society to execute political decisions (1984, pp. 185–213). He pointed out that the basic trend of politics modernization is the enhancement of infrastructural power, because only an infrastructural power can mobilize public resources more effectively.

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For example, every state expects to collect more tax, but even the strongest despotic power cannot have up to 50 percent tax revenue as contemporary northern European countries. This perfectly reflects the characteristics of this new era.

1.3.

A new hypothesis

Now, let’s go back to the question of North, i.e. why some countries achieve long-term economic growth by protecting the effective property rights, and other countries only achieve short-term maximization of state rent and get stuck in the long-lasting trouble of invalid system. Based on the discussions of Habermas and Mann, this chapter raises a new hypothesis: the maximization of state rent and protection of valid property rights innovation can become consistent only when a kind of equilibrium is reached between the society and the state in dialogues, negotiations and transactions. Here, a few emerging valid property rights may come into being spontaneously in response to the changing relative price of resource, but they cannot obtain the protection from the state independently. On the other hand, the state usually will not do it naturally, because its rent maximization is often inconsistent with the protection of individual new property rights. The only possibility of breaking the ice is the collective action of emerging property rights beyond the individual level, and they all raise the cost for the state to guard old forms of property rights and the earning for the state to protect the property rights innovation, until the new restrictive structure of rent acquisition by the state is re-established, so that the rent maximization of the state becomes consistent with the protection of the new property rights. In a word, the key to long-term economic growth is neither the isolated state (no matter how wise it is) nor the isolated forms of property rights (no matter how effective they are), but the firstly random and then institutionalized tacit agreement between the property rights and the state. The above discussions omit many details, but this rough new hypothesis helps us to avoid separately discussing the inseparable questions. This is essential for research on large-scale institutional change. Now, let’s validate and modify this hypothesis through a retrospect on the institutional change process of reform in Chinese rural areas. In view of the insufficiency of 343

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research in the past, we must start from the characteristics and mechanisms of the economic system before the reform.

2.

State-Controlled Collective Economy

2.1. What is collective economy? Collectivizational economy is absolutely not the private property rightsbased cooperative relationship among farmer households in the rural communities, and in nature it is a form of control over the rural economic rights by the state. Literally interpreting the collective public ownership as a kind of cooperative agriculture can often mislead the recognition of collective economy and cause misunderstanding of the reform. As for how does the state control the operation of rural collective economy, much more requires to be said. Here, I’d just like to point out that, by mandatory production plan, state monopoly purchase and sale of products, prohibiting long-distance transportation and restricting free commercial trade (even collective businesses), closing rural factor markets, and blocking labor migration between urban and rural areas, in fact the state has already made itself the first decision-maker, dominator and beneficial owner for allocating the economic factors (land, labor and capital) by the collective ownership system (Comprehensive Work Group of Development and Research Institute, 1988). Collective is just the implementer and executor of the will of state in the legal extent. It only occupies the economic resource at the utmost, and is often unable to prevent the state from infringing such collective right of possession. Actually, as early as 1958, CPC central committee has made it clear in the Resolution on Establishment of People’s Communes in Rural Areas that, people’s communes have elements of the ownership by the whole people, and such elements “will grow continuously and gradually replace the collective ownership” (quoted from Bo, 1993, Vol. 2, p. 746). Therefore, unlike the farmer cooperative economic organizations, the collective public ownership economy is under the state control from the very beginning. Note that, here the state no longer plays the role of external protector and arbitrator of the ownership and its transaction; instead, it has already been invading and controlling the rural ownership. It is interesting

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that, when the state does this in the name of the whole people, it not only eliminates the traditional farmer family private rights, but also eliminates the ownership in its general sense. As Demsetz (1988) said, the reason is that, in the institutional arrangement of ownership, the most important thing is the exclusive right to benefit from and transfer economic resources. The “whole people” economy controlled by socialist countries makes all the exclusive institutional arrangements (at home) redundant. And the cancellation of the exclusiveness of rights means the cancellation of market transaction of resource utilization. In my opinion, this is the key to understanding the anti-market trend of the traditional socialist economic system. As far as this institutional characteristic is concerned, the rural collective ownership is consistent with the state ownership. Besides, the collective ownership does not necessarily mean a more liberal form of state control. The real difference between the collective ownership and the ownership by the whole people lies in that the state dominates and controls the former, but does not take direct financial responsibility for the consequences of such control. However, when the state controls the whole people economy, the state guarantees its employment, salary and other benefits with public finance. Thus, the state control and intervention on the collective ownership tend to be dominated by “romanticism” and carried out with little regard to consequence. Almost the entire history of people’s communes can explain this viewpoint. However, the most ridiculous behaviors occurred during 1958–1959 in a centralized way (see the article by Bo, 1993, Vol. 2, Chapters 26–27). The collective can neither completely decide what to produce, how many to produce and even how to produce, nor has right to sign contracts on the market for purchasing the productive factors and selling the products. All of these are first decided by the state and implemented from the top to the bottom. Of course, the collective must assume the economic consequences of the top-down orders, i.e. determining the final distribution level, including the quantity retained by the collective and the amount of value of social work points. Only at this time, the collective economy is worthy of its name. In summary, the collective public ownership is neither a kind of “common and cooperative private property right” nor a kind of pure state ownership. It is a kind of rural socialist institutional arrangement controlled by the state, where the collective assumes the consequences of such control.

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The collective economy is not applicable for analysis by the theories of Western “cooperative economy”, because the basis of this kind of institutional arrangement is entirely not the contract among privates that have the ownership.

2.2.

State industrialization versus equal division of land rent by population

The first question in understanding Chinese rural collective economy is what the motive mechanism is that extends the state control deep into the village level since 1950s (China never achieved this during any traditional period). Then, we must answer why the massive farmers accept such noncontractual institutional arrangement. The state control penetrated into the rural society in an unprecedented manner and this is closely related to the objective of the state industrialization. Firstly, in 1949 following the revolution victory, factors contributing to China’s poverty and weakness piled up since the 19th century comprise: firstly there is no powerful state apparatus, and secondly there is no advanced big industries at home. Therefore, to enhance the state’s centralized mobilization and utilization of economic resources, and accelerate the promotion of industrialization, especially give priority to developing the heavy industry, has become the most important basis of the legitimacy of a new regime. As a term frequently appearing in China’s official documents in 1950s, “state industrialization” not only refers to an urgent objective of the development of entire national economy, but also implies that the state must play a predominate role in the process of industrialization. The capital accumulation of state industrialization mainly originates from the agricultural surplus of the home country. Song (1982) firstly provided an analytical framework for understanding this question, which is published in Vol. 1 of Chinese Rural Development Research Group in 1984. Lippit (1974) once estimated that the surplus provided by Chinese farmers through land tax and rent prior to the revolution would account for approximately 30 percent of the gross output of agriculture. This shows that China has not been a country of insufficient surplus since a long time ago. Elvin thought that the traditional China got caught in a “high-level equilibrium trap”. When illustrating this concept, he pointed out that the population

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pressure consumed the surplus beyond necessity (1973, p. 313). The problem is that only a small portion of these surpluses of agriculture is used for modern accumulation of industrialization. When the revolution reconstructed the unified nation state and basic social order, the new regime may convert the surplus of agriculture more into the industrialization accumulation. However, to achieve this, the state must firstly gather the surplus of agriculture in its hand to a larger extent. This means that, the state after the revolution must not only replace the old state to control the tax from land, but also must control and make utilization of land tax in place of former landlords. In terms of tax, the agricultural tax rate in the early period of 1950s amounted to 11 percent of the total output. See the articles by Wang and Zhang (1992); Gao and Xiang (1992); Cui (1988); Walker (1984). However, the rural areas in South China were once subject to a 30 percent tax rate after the land reform (Yang, 1959, pp. 56–57, 155–156). See the articles by Huang (1990, pp. 170–171). This tax rate is higher than that in Ming and Qing Dynasties as well as the Kuomintang Government before the Anti-Japanese War, but lower than that in the Chinese regions ruled by Japan and during the period after the War. The tax rate during the Ming and Qing Dynasties accounted for 2–4 percent of the land output (Wang, 1973). The tax rate of Kuomintang Government in North China before the Anti-Japanese War accounted for 2–5 percent of farmers’ income (Huang, 1985, pp. 290–292). The agricultural tax rate increased during the period of puppet Japanese, straight from 6–8 percent in 1941 in North China, and even to 50 percent in southern areas (Huang, 1990, p. 172). The actual tax rate in the areas ruled by Kuomintang during the same period was approximately 20 percent, and approximately 13 percent in the ShaanxiGansu-Ningxia Border Areas (Selden, 1971, pp. 181–183). As far as this point is concerned, the new regime of the communist party has become the most effective tax collector in the peacetime of this country, but it seems not satisfied. However, the major part of the traditional Chinese agricultural surplus, i.e. land rent (plus interest) is equally divided among the whole rural population in the land reform. According to the above estimation of 30 percent agricultural surplus quoted from Lippit, after the land reform, at least some 20 percent of agricultural gross product came to the hands

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of farmers, excluding the agricultural tax. The equal division of land rent among the farmers enhanced their political support of the new regime, but the established strategy of accelerating the state industrialization cannot tolerate 20 percent agricultural products being converted from surplus (i.e. possible accumulation of industrialization) to the private consumption and investment of the farmers. The tension in the relationship between the state and the farmers started since 1953 (Bo, 1993, Vol. 1, Chapter 12). From the phenomenon, the farmers’ reluctance to sell their grains and other agricultural products after the land reform made it difficult for the state to purchase the agricultural products, but in nature this is a conflict between the small peasant economy in which the land rent is equally divided among the farmers and the ambitious objective of state industrialization. The state tried to take back some of the lost land rent through expansion of tax collection. However, several times of high taxation in 1950s triggered the farmers’ collective protest actions, showing that the limit is reached when the tax plus various additional fees accounts for 15 percent of the agricultural products (Cui, 1988). Beyond this limit, the taxation cost of the state will increase substantially, causing loss more than gain. After all, it is more difficult to turn over some land rent into the state treasury in the face of the entire rural population than to do the same in face of landlords and owner peasants. The conclusion is obvious. i.e. if the state still serves as a traditional tax collector, it will be incompetent to gather the equally divided land rent for use in the state industrialization.

2.3.

Deprive the farmers of private ownership

The new state must act beyond the traditional code of state behavior. It not only penetrates into the village level, but also intervenes in decision-making of farmer families and clans. It not only reconstructs the rural political life and spiritual life, but also controls the production, transaction and distribution of agricultural products. Especially, it must control the urban and rural relationship. In a word, for the society, the state after 1950s is no longer a moral state “outside the government’s control”. The government’s control and influence on the society is almost everywhere. Although it originates from the grand aspiration of the new regime to transform the entire old society, but in economy, to equally divide the land rent from small peasants 348

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in a centralized way by using means except taxation is a more practical and urgent objective at that time. Since the farmers’ average share of land rent is the result of the cultivators’ equal division of land, the re-concentration of land rent inevitably entails radical transformation of small farmers’ individual ownership. The state power invades farmers’ ownership gradually. At the first stage, the state policies only limit farmers’ individual ownership, but not eliminate it legally. For example, the state stipulates the grain and cotton production target of each household, establishes the quota system for purchase and marketing of the output, forbids hiring laborer, renting and debit and credit, and closes the country fair trade and cut off farmers’ connection with businessmen. All these have not changed farmers’ nominal ownership, and only impose a certain restriction, control and intervention on the use, earning and transfer of farmers’property rights. Or according to the analysis of the property right economists, the state causes the “truncation” of farmers’ ownership. The important thing is that, this part of truncated ownership for farmers is in fact grasped in the hand of the state and constitutes the source of agricultural surplus obtained by the state beyond the tax revenue. We once called the state’s forced monopoly purchase at a low price a kind of “informal tax” (Institute for Development Studies, 1988). Now, it seems more appropriate to call it so. The state obtains tax through establishment and protection of farmers’ private ownership, and then invades farmers’ land ownership and obtains some land rent again. The tax is integrated in the hand of the state of centralized power. The collectivization has eliminated the truncated farmers’private ownership further. The movement of mutual-aid team has united the farmers’ production activities, the elementary cooperative has merged the farmers’ main properties, the advanced cooperative has eliminated the dividends generated by the lands and livestocks, and the people’s commune pursues socialization in a larger scope (Du, 1985, pp. 10–18). So far, the state has removed the ownership hedge of the rural society, and its administrative power invades the village in an all-round way. The highly centralized mobilization system for farmers’ surplus is finally established. The collective public ownership that unifies government and society has constructed the institutional and organizational foundation completely different from that of the traditional countryside of China.

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2.4.

State-created ownership

Now we might as well discuss from the perspective of farmers why farmers will allow the state to change and deprive them of ownership. With the theory that considers the institutional arrangement of the state as an organization of violence potential, we certainly can assume that the socialist agriculture collectivization is only a result of state coercion. But in fact, at least compared with Soviet Union, China’s agriculture collectivization depends less on the direct violence and force. On the other hand, the individual farmer’s land ownership is regarded as the main economic incentive causing farmers to follow the revolution, so farmers will surely regard the individual land ownership as their lifeblood. Then, the real difficult question to answer is: by what means does the state actually cancel the farmers’ land ownership, in a way generally deemed legal? The origin of the problem lies in the nature of the farmers’ individual ownership itself, instead of the so-called beyond-stage drastic actions in the process of collectivization. We will see, it is the former that lays down the foundation for the latter to happen on a large scale. The property rights system formed in the land reform are undoubtedly a kind of private land ownership of the farmers. But this private ownership is neither the result of long-time spontaneous transactions on the property rights market, nor the result of some of the state’s restrictions on the transaction of property rights; instead, it is the result of direct redistribution of the original land property rights after the extensive masses’ class struggle organized by the state. Because the organization and leadership of the state and the party played a decisive role in breaking through the unavoidable “hitchhiking” of farmers who have little or no land in the movement of equally dividing the land, and at the same time the results of equally dividing the land can be approved by the state and become legal very quickly, the state that led a privatization movement like the land reform infuses its own will into the farmers’ private ownership. When the will of the state changed, the farmers’ private ownership should change accordingly.

2.5. Three kinds of private land ownership The above argument is quite important to this paper, so it is necessary to provide a bit more explanation. We might as well compare the three possible 350

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ways for a farmer with little or no land to obtain the private land ownership. On the traditional land market, this farmer can buy land ownership. Perhaps he cannot afford quickly, but may buy it after renting for a while, or via the intermediate process of mortgage. The purchasing power of this farmer may come from the savings of his family, his work income, an unexpected good harvest or other lucky chances. In the process of obtaining the property right, perhaps he received formal legal service provided by the state, or perhaps he only depended on the custom of the traditional community and the brokers in the village. In any case, he obtains the property right through free exchange contract. The second way is a land market intervened by the state. Perhaps the state only limits the transaction price of land property right, e.g. during the period of the Anti-Japanese War, the government of Communist base and Taiwan Kuomintang authorities in 1950 respectively limited the land rent rate to be no more than 37.5 percent of the total output. At this moment, this farmer perhaps could accumulate the principal for buying the land ownership more easily, but when he needs to hire out the land in the future, he must also accept the equal intervention by the state. The state can also do further intervention on the transaction of property right, e.g. the land reform of Japan, S. Korea and Taiwan after the war, in which the government or the authorities forcibly purchase the land of the landlords that exceeds the stipulated area at fixed price, then sell to the farmers with no or little land. In this case, this farmer could still purchase the land property right in form, but he would know that without the intervention of the government or authorities, he could not become the owner of land under such conditions of purchase. Finally, this farmer gets his land without any transaction. He throws himself into the masses’ political movement of depriving landlords’ property rights, and gets the land according to the number of his family members. This kind of deprivation is organized and legally approved by the state. His land ownership is not bought even in form, but assigned. He benefits from the political movement and the state, because it is impossible for him to equally divide the landlords’ property with only his personal efforts. The three kinds of private land ownership above result in totally different relationship between the ownership and the state. In the first situation, the farmer has independent negotiation status, he can appraise the quality

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of the service provided by the state and then determine to pay (pay tax), or in case he does not think it is a good deal, he can totally alienate the property right and not required to buy the service provided by the state again. The farmer’s such independent negotiation status is impaired in the second situation, and nearly all gone in the third situation. So, there can be different private land ownership, with different intensity, different stabilities, and totally different logic of further change. So, as Alchian said, the different hardness of property right perhaps can reflect totally different relationship between the property rights and the state. The private ownership of farmers formed in the land reform of China mainland is the result of direct redistribution of the land property right after the social political movement. So, the individual private ownership of farmers formed in the land reform has already included all possible forms of the later collectivized public ownership, because the state that created the ownership through the political movement can also change the ownership through the political movement. The fact that can support this judgment is, as far back as the first half of 1950s, when the policy-maker of the state argued in the top whether to continue implementing the economic policies of new democracy, whether to keep the farmers’ individual private ownership, in 1951 the Shanxi Provincial Committee Party of CPC submitted a report, challenging and even denying the farmers’ private ownership and expanding the socialist factors of agricultural mutual-aid team to develop it into a collectivized agricultural organization. Liu Shaoqi criticized this report as representing a kind of dangerous and unreal agricultural socialism thought, while Mao Zedong agreed to the suggestion of the Shanxi Provincial Committee Party of CPC, criticized the view of Liu, and launched the agricultural cooperative movement. This kind of argument about the rural problem at supreme policymaking level, as recalled by Bo Yibo, happened three times in all during the 1950–1955 period (1993, Vol. 1, pp. 184–203). Farmers have neither much right to speak before policymaking nor much right of option after policymaking. This provides a case for the “dependent path” in the theory of institutional change, i.e. the former choice often influences the later orbit of development (North, 1990). This also explains an argument held by the author for a long time, i.e. the fundamental problem of socialist property right reform is not that the state confirms a certain form of ownership (even the purest private ownership), but the

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limit of power of the state in the property right should be firstly defined. Zhou (1988, see the article edited by Li, 1990, p. 711). In an environment where the state can appoint ownership freely and change the ownership contract without negotiating with the society, even duplicating the most effective property rights system will not be conducive to long-term economic growth.

2.6. Why is collective economy inefficient? We have seen why and how the state created the collective ownership. However, the state cannot ensure that its “system product” will be effective. It is an irrefutable fact the economic efficiency of collectivized agriculture is low. According to the calculation of Wen (1989), except that there was a rise with extremely small increment in the agricultural total factor productivity in China from 1952 to 1957, the entire productivity of agricultural collectivization before 1983 was obviously lower than the level of individual agriculture in 1952. This outcome is completely contradictory to the expectation of the initiator of the collectivization movement. A generally accepted explanation is that, in the agricultural production, the collective organization has incomplete supervision and measurement of the work of its members, thus causing insufficient motivation to the members’ efforts. Lu and Wang (1980), Du (1982–1985, 116) and Chinese Rural Development Research Group (1983) all found and emphasized, from field investigation, the uncertainty of agricultural production and the difficulty in work measurement, and cite this to explain why the family organizations achieved very low supervision expenses, or the efficiency was not affected even under the conditions of insufficient measurement and supervision, while the collective production organizations failed. Lin (1988) proposed a production team model, and analyzed that under the production team system, the administrator chooses a lower degree of supervision because of the difficulty of supervision, and the laborers choose to loaf because of insufficient measurement and unreasonable remuneration, so the failure of the production team system can be explained by the insufficient motivation towards the efforts of the laborers. This explanation takes into account the efficiency loss due to the low enthusiasm of laborers in the cooperative production, but may have neglected another kind of efficiency

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loss, i.e. the insufficient motivation of the collective economy towards its administrator causes inefficiency. Any production team faces the problem of measurement, supervision and operation and management. Therefore, the effective supervision is the essential condition that the members of collective economy make enough efforts. However, what does the collective production use to motivate its administrator to offer sufficient effective supervision? Alchian and Demsetz (1972) have proved the economic meaning of ownership just in this sense. They pointed out the ownership of economic organization is actually a kind of residual claim, and it is such residual claim that encourages the owners to make great efforts to supervise. In fact, the assets owner of economic organization can independently take the responsibility of supervision and enjoy the residual claim alone, also can pay the surplus caused by supervision to a specialized manager who will take on the responsibility of supervision. In any case, the supervision effectiveness of collective production is guaranteed with the supervisor enjoying the residual claim. When the property right is corroded, the incentive mechanism of residual claim certainly will be weakened. If the collective production really has a scale economic effect (i.e. the sum of cooperative production is greater than the sum of output of specific producers), the ownership, i.e. the residual claim will offer the institutional guarantee for realizing this kind of scale economy. Therefore, the difficulty of supervision in the collective production comes from technical factors on one hand, i.e. the difficulty of information gathering and processing; and institutional factors on the other hand, i.e. the truncation of property right causes the insufficient motivation to the supervisor.

2.7. The administrative level substitutes the residual claim The collective economy eliminates the residual claim mechanism in institutional arrangement, but it cannot thus cancel the need to offer economic incentive to the supervisor of collective production. In fact, the publicowned economy controlled by the state has to resort to the bureaucratic hierarchy system of the party and government, which exactly demonstrates that the socialist system still needs to motivate its economic managerial cadres. For example, the expectation of official position promotion is the most

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important positive motivation of this system, while hopeless promotion, position descending and dismissing constitute the main means of negative motivation. In this sense, the official rank standard of the economic system can be regarded as a kind of substitution to the property rights system. However, a special difficulty is encountered in utilizing the administrative promotion mechanism to substitute the arrangement of residual claim in the collective economy of the countryside of China. Because of the vast territory and a large population, the formal administrative system of centralization is only extended to the level of township (the people’s commune) in the rural areas. Under the township, the administrators of village (group) and the production team are unofficial bureaucrats, but there is a wide identity gap between them and formal cadres of the state. In fact, in the entire period of collectivization, most cadres of the groups and production teams are not listed on the candidate list of state bureaucrats. There are sporadic exceptions, such as the cadres of Shanxi Xiyang Da Zhai group who became the state’s leaders during the Cultural Revolution. In other words, the administrative promotion mechanism is inoperative to the grass-roots cadres of the people’s commune. At the same time, because the formal promotion is hopeless, the negative motivation of the original system loses the punishing effect on them. But these grass-roots cadres are exactly the direct supervisors of collective production activities. The ineffective motivation to them makes the effect of collectivized scale economy unable to be realized at all. This can explain why the rural collective economy seems more inefficient than the whole people’s economy, and proposes the reform at earlier stage, i.e. the demand of introducing the residual claim. In short, the collectivized economy controlled by the state has inefficient conditions due to the lack of motivation to common production supervision activities, which makes the already difficult problem of measurement and supervision in agricultural production almost insolvable. The original agricultural system snuffs out the enthusiasm of both supervisors and laborers, and the key problem is the serious property right truncation caused by the state behavior. From a different perspective, a system of poor efficiency hides a greater system correction effect, and possibly makes property right reform profitable. However, will the state take the initiative to change its own institutional product just because of the poor efficiency of collective economy?

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3. 3.1.

Famine Due to Crop Failure, Retreating and Making Changes According to Specific Conditions First impetus of institutional reform

The efficiency of the economic system can only be estimated in hindsight. When we do this in various ways, we suppose the direct relationship of mutual interaction exists between the institutional efficiency and institutional change. But this supposition will encounter very huge trouble in theory. Here, it means that the measurement of institutional efficiency can be used for appraising the consequences of the policy and institutional change, but cannot fully explain the motive force mechanism and process of the policy and institutional change, because the efficiency of the same system will lead to different appraisal of welfare by parties concerned, and strictly speaking, we have no idea to aggregate the social welfare function of each individual into an unique social welfare function. This is the thought expressed by the “Impossibility Theorem” of Arrow (Arrow, 1963). If different social welfare functions (or more exactly the group welfare functions) mean different attitudes of the groups concerned towards the institutional change and lead to different behaviors, the problem of initial motive force of institutional change will be complicated and turned into the strength contrast between different groups. But the nature of collectivized public ownership has simplified this question. The fact that the people’s commune is controlled and dominated by the state ensures that the state can dictatorially regard its appraisal of the social welfare of the people’s commune as the unique social welfare function. Accordingly, we should firstly look for the origin of institutional change in the change of income-expense structure of the state control of collective economy.

3.2. The income and expense of the state control of the rural economy The direct impetus causing the initial change of the people’s commune system is the gradual change of the expense-income structure of the state control of this system. The state, defined by North (1981) as a monopoly of violence potential, certainly can create any form of property right. Within 356

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Figure 1. The Income and Expense Indexes of the State Control of the Countryside (1952–1982).

a certain period, it can even do at will. After all, however, the state is run in a world where the organization expense is not zero. The state itself and its created economic organizations will eventually be dominated by those economic rules revealed by transaction cost and property right economics. Figure 1 has intuitively shown the change trend of the expense and income indexes of the state control of the rural economic system during 1952–1982. The income index of the state control of the rural economy is the weighted average of the agricultural tax, the purchase of agricultural byproducts (and the variable land tax and other levies included in the state purchase), foreign exchange earned by agricultural products, farmers’ deposit in the national bank, and farmers’ recognition and political support of the system (indirectly measured by the increase rate of agricultural gross output value and the per capita net income obtained by the farmers from the collective business operation). The expense index is the weighted average of the financial funds to agriculture, the sales allowance to agricultural capital goods, administrative expenses of the state, administrative expenses of collective economy, loans of national bank to the countryside and ideology investment that prevents the farmers from being at odds with the community or the leadership (measured by the net income obtained by the farmers from their household sideline production). For the data and description, see 357

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Table 1 and remarks. We see firstly that, in most years during 1952–1982, i.e. 23 years out of the 30 years, the expense index of the state control of the rural system increased faster than the income index. Undoubtedly this does not mean that the rural system always definitely “suffers the loss” for the state, but it means that the state bears the pressure of relatively faster increase of institutional expenses in most years. During this period, the inversion of income index increase against expense increase of the state control has presented two remarkable peak periods. The first is within 1957–1961 period, with 1960 as the peak; the second is within 1972–1981 period, with 1980 as the peak. Just around these two peaks, the rural economic policies of the state underwent great adjustment. According to the analytical framework of this paper, these are certainly not two coincidences. They respectively demonstrate under what condition the country does not scruple about the existing power structure and ideology continuity, and the adverse effect of the government policies on the authority of the original policy maker and even the legitimacy of the state, but consider the change of economic policy. The rest of this section will discuss how the first institutional incomeexpense inversion high peak period in the figure gives rise to the adjustment of the rural policies of the state in the beginning of 1960s, and how it prepares the conditions for the later reform. The research on the second high peak period will be carried out in the next part. Figure 1 shows that, the decisive factor during the 1957–1961 period is the substantial drop of the income index of the state to the level of minimum demand that threatens survival of the state. All the efforts of the state since 1957 for improving the degree of public ownership of agriculture caused the rapid increase of institutional expenses on a yearly basis, and faster than the growth of the income index of the state on a yearly basis. In 1958, the overall cost rate of the state increased 66.82 percent over the past year, which was 33.8 percent higher than the growth of income index (33.02 percent) (see Table 1, same below); in the two years thereafter, the expense index increased to as high as 582 points (1952 = 100), but since the income index was still on the rise (in 1959, increased by 23.4 percent in comparison with the previous year), or slightly dropped (in 1960, decreased by 9.77 percent in comparison with the previous year), the policy makers of the state decided not to make any retreat, and launched the Movement for struggling against

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Table 1. 1

Chinese Rural Asset Structure in 1992. 2 Quantity

3 Assets valuation

4 Proportion

I Rural Total Assets

RMB9,519.612 billion

II Collective Property Rights Collective Operation 2.1 Cultivated Field

RMB34.3416 billion

3.61%

RMB22.0159 billion

2.31%

RMB27.789 billion

0.29%

2.2 Mountain area

4.1931 million hectares 182.31 million hectares approx. 304,000

100.00%

2.3 Enterprise Fixed RMB51.718 billion 0.54% Assets 2.4 Enterprise Fluid RMB81.276 billion 0.85% Capital 2.5 Enterprise Debts RMB36.786 billion −0.39% 2.6 Collective Net −RMB740 million −RMB740 million 0.01% Deposit RMB7,013.825 billion −73.68% III Collective Property Rights Farmer Household Contracting Operation 3.1 Cultivated Field 120.9619 million RMB6,351.099 billion 66.72% hectares 3.2 Mountainous Areas 18.2309 million RMB277.894 billion 2.92% hectares 3.3 Enterprise Fixed approx. 1.216 million RMB206.872 billion 2.17% Assets 3.4 Enterprise Fluid RMB325.104 billion 3.42% Capital 3.5 Enterprise Debts RMB147.144 billion −1.55% (Continued)

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IV Farmer Household Property Rights Private Operation 4.1 Agricultural Fixed Assets 4.2 Enterprises 4.3 Private Domestic Premises 4.4 Net Deposit 4.5 Cash and Other Financial Assets

(Continued )

2 Quantity

3 Assets valuation RMB2,162.371 billion

RMB111.432 billion

RMB111.432 billion

19.272 million 126,811.95

RMB100.782 billion RMB1,434.903 billion

RMB310.78 billion RMB204.47 billion

RMB310.78 billion RMB204.474 billion

4 Proportion 22.71%

1.17% 1.06% 15.07% 3.26% 2.15%

Note: 1. The total area of cultivated field across the country in 1992 was 95.4258 million hectares (i.e. 1.43 billion mu) according to report from the State Statistics Bureau, but this figure is indicated as smaller (ZTN, 1993, p. 332). According to the same volume ZTN (1993, p. 356, 357), the area of cultivated field operated by each person of the farmer household on the average in 1992 was 0.1373 hectares (2.06 mu), mountain area 0.022 hectares (0.33 mu), calculated with the then total rural population of 911.544 million (ZTN, 1993, p. 329), and the area of cultivated field across the country was 125.1550 million hectares (1.877 billion mu) and the operated mountain area was 20.0540 million hectares (0.3 billion mu). In this table, the national land is calculated using the latter figures. 2. The assets valuation method of cultivated field is as follows: calculated assuming the land rent rate accounts for 40 percent of gross agricultural output value, the land rent totaled approx. RMB363.388 billion in 1992 (ZTN, 1993, p. 333), additionally calculated with the loan rate for rural self-employed individuals as 11.23 percent (ZTN, 1993; 671), deducting the price index of 5.4 percent in that year (ZTN, p. 199, 237), real interest rate of approximately 5.53 percent; therefore total land price is approximately RMB6,571.212 billion, calculated with the price of cultivated land as 125.1550 million hectares (see Note 1), RMB5,225.05 million per hectare or RMB3,500.33 per mu on the average. 3. Woodland price is calculated assuming that the land rent accounts for 40 percent of the total product value of forestry (RMB42.261 billion in 1992, ZTN, 1993, p. 335), totaling RMB16.904 billion. The real interest rate is calculated as 5.53 percent (see Note 2), total estimated operating value of mountain area is RMB305.678 billion, nationwide operated mountain area is 20.0540 million hectares (see Note 1), RMB1,5243 per hectare on the average, or RMB1,016.2 per mu.

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Right Deviations. However, one year later, in 1961, the agricultural income of the state suddenly decreased by 77.42 percent as compared to the previous year, and only reached 70 percent of the level in 1952 (the population increased by 15 percent and the general scale of industry increased nearly four times during the same period), and the agricultural expense index of the state was also kept at a level close to that in 1952. Only by then, the state was forced to execute the retreat of the rural economic policies. It is a kind of policy adjustment that has to be made due to sudden drop of the state income.

3.3.

Political failure or policy retreat

The adjustment of rural economic policies in the early period of 1960s was due to the sudden bad harvest of agriculture during 1959–1961. In fact, the real growth index of agriculture in 1958 decreased by about 5 percent in comparison with 1957, and that in 1959 decreased by 15.9 percent in comparison with the previous year, then it decreased by 22 percent in 1960, and decreased by 51 percent in 1961. In agriculture, the grain production in 1959 decreased by 15 percent as compared to the previous year, while the grain production in the two years thereafter was only 70 percent of that in 1958 (quoted from Lin, 1990, p. 17). Due to the lagging of the state policies, the agricultural tax and informal tax in the export of agricultural products and the purchase of agriculture byproducts in 1959 continued to rise, so the income index of the state in 1959 still increased by 66 percent as compared to the previous year. This lagging response caused the grain ration of a considerable proportion of rural population to be lower than the need for survival, thus leading to the death of approx. 30 million people due to famine (Ashton et al., 1984; Lin, 1990). The number of lives lost in this famine is greater than that caused by other natural disasters of China in the 20th century, and the unnatural death ratio even exceeded that of the famine in Soviet Union after collectivization in 1920s (MacFaquhar and Fairbank, 1987, Chapter 8). Since the agricultural crisis during 1959–1961 period was an absolute food shortage, it could not be relieved by increasing notes issuance; due to the closure of the national economy at that time, the crisis could not be solved through regulation by international market either; since the agricultural accumulation at that time still accounted for a considerable proportion of the state income, the substantial drop momentum 362

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of rural income would surely affect the situation as a whole; lastly, due to the spreading of the serious famine, the economic crisis escalated into political crisis that challenged the power of the decision makers and the legitimacy of the government. When Chinese people say “food is the most important concern of the people”, they neither mean the importance of eating nor mean the importance of agriculture; instead, they mean that when the state takes control of the people’s life, the survival of the people becomes the bottom line of the legitimacy of the state. All of the above factors took effect at the same time since 1961, forcing the state to make a decision between political failure and policy retreat. The economic situation was so dangerous that the state had no way but to employ all the possible policies to mobilize the farmers to increase production and carry out self-rescue. This serves as a dear lesson, i.e. the system characterized by the state’s complete control on the social economy is so unsafe for the state itself.

3.4.

Long-term influence of short-term adjustment

The adjustment in 1960 includes two kinds of completely different contents. The first adjustment is to maintain the institutional framework of people’s commune, but make substantial amendment of policies, e.g. reduce the scale of people’s commune and establish the ownership system based on production team, restrict the upper administrative bureaucracies’ transfer of the assets of lower levels and farmers (criticize the “Sharing-All-Possessions Tendency”), dismiss the public canteens, improve the workpoint system and internal management of production team. The second adjustment is to recognize the position of farmers’ family operation in the collective economy (private farm plots, privately-owned livestock and household sideline production), open the urban and rural free markets, allow fixing output quotas on a household basis and even dividing the collective field. These two adjustments with completely different long-term directions show that the state has to fully retreat in terms of the rural economic policies. However, such retreat of the state under the pressure exerted by substantial decrease of income curve is shortlived. When the total rural output was restored to the original level (1964–1965), many effective policies were abandoned as temporary expedient. The short-term decline of total income did not 363

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shake the foundations of the protection structure of the original institutional arrangement, and the people’s commune as the rural economic organizations controlled by state are still remained and continued in institution. During 1961–1962, the proportion of people’s communes and production brigades fixing the output quotas on a household basis was 80 percent in the countryside of Anhui, 74 percent in Linxia region of Gansu, 70 percent in Xinchang of Zhejiang and Jiangbei of Sichuan, 42.3 percent in Longsheng of Guangxi, 42 percent in Liancheng of Fujian, 40 percent in the whole province of Guizhou; and it is estimated to reach 20 percent in the whole country. During this period, the disputes over whether the system of fixing output quotas on a household basis should be legalized occurred among CPC senior leaders, and finally Mao Zedong’s criticism of the idea of individual peasant farms (i.e. fixing output quotas on a household basis) gained the upper hand (see article written by Bo, 1993, Vol. 2, pp. 1078–1090, and by Du, 1985, pp. 14–15). The income index of the state control over the rural economic system began to restore its growth in 1962, and although its expenditure index also increased, the two indexes were basically synchronized until the beginning of 1970s. Once the crisis was resolved, the retreat of policies was over, though the rate of total-factors productivity after adjustment only reached 87.8 percent of the level in 1952. See the calculation by Wen (1989). However, the short-term adjustment of policies in 1960s also left some long-term aftermath. From the institutional perspective, the most important two points are the recognition of the legal position of household sideline production and the establishment of the system based on production team. The former is the safety valve for preventing the repetition of great famine, while the latter is the result of reconciliation between farmers objecting to the “Sharing-All-Possessions Tendency” and the state reserving the institutional framework of people’s commune. The so-called “three-level ownership system of capital goods in the people’s commune, with ownership by production team as basic form” attempts to protect the property rights of the production team under the precondition of administrative obedience. This is still full of contradiction from the perspective of property rights exclusiveness. However, in the Chinese rural policy environment at that time, the contradictory propositions in policy documents often provide legal basis for different strengths struggling for power in reality. In this example, the

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people’s communes and production brigades can emphasize the “three-level ownership system of capital goods in the people’s commune”, while the production teams can emphasize the “ownership by production team as basic form”. As nobody would anticipate it, at these two supporting points, the farmers enhanced their negotiation position against the collectives, while the collectives enhanced their negotiation position against the state, thus preparing the conditions for reforming the collective public ownership.

3.5.

Make voice, exit and go slow

The farmers do not have the initiative in the economy of people’s commune, so they have no institutionalized negotiation position in the further change of collective economic system. As the farmers’ property rights are finally denied, the isolated urban and rural household registration systems, grain coupon systems and ration work-point systems within the people’s communes are completed. Qiu (1988). The farmers can neither exit the communes with their land and draught animals nor exit such system by themselves. If depicted with the term provided by Hirschman (1970), under the people’s commune system, the farmers have neither the “exit right” nor the right to freely “make voice”; they remain in the system not because of their loyalty towards the collective, but because they have no choice. However, the farmers can still express their dissatisfaction towards the people’s commune system. One of the common legal forms is to decrease the amount of labor they put into the collective production; or more commonly, reduce the quality of labor, or other artificially increased expenses for supervising the collective labor. As is well known, in collective labor, the opportunist attitude of any member is contagious to other members. As a result, after a spreading process of “laziness expelling diligence”, the productivity of collective economy decreased, and the per capita income level has stagnated for long time. Huang (1990) discovered that, even in the wealthiest rural areas in Yangtze delta of China, the several-decadeslong collectivization there is still not enough to break away from this basic agricultural type characterized by “growth without development” (refers to the fact that despite the increase of gross agricultural output value and per unit yield, the per capita income has not increased). He calls this “collectivist involution” (1990, pp. 16–17). Finally, when the “subsisted rights”, 365

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so-called by Scott (1976), of some members of the people’s commune are threatened, the state is forced to make a decision among letting the damage of legitimacy take its own course, increasing financial relief or changing the system. In a word, since the farmers who lost property rights cannot exit or vote for changing the collective system, they can only require the state to make concessions by adopting the passive step of cutting back production.

3.6.

Partial exit right

The above mechanism plays its fundamental role in the entire socialist agricultural system reform. However, we still need to carefully understand the conditions for this mechanism to take effect. If the degree of public ownership of collective economy is high enough so that all income of farmer families comes from collective production, we have reasons to believe that even the possibility of farmers’ negative labor is small. Logically speaking, some members of people’s commune can obtain more leisure by decreasing the labor input, but such leisure is worthless for the farmers at subsistence level. In addition, there is not necessarily a rational member who is willing to decrease his own labor input just for punishing his lazy neighbor, thus absolutely reducing the living standards of himself and his family members. Therefore, a more rational assumption seems to be that, the higher the degree of public ownership of collective economy, the lower the possibility of the members being lazy, at least the opportunist attitude of labor tends to show some restraint when a limit (related to subsistence level) is reached, because this time the spontaneous mutual-supervision mechanism of the laborers will take effect. The real problem of the economy with high degree of public ownership is the management of scale economy, because even it is unnecessary to measure and supervise the labor, the collective economy is faced with a number of complicated problems such as “enterprise strategy”. When a kind of large-scale production method rejects the incentive of residual claim and only obeys the stimulation of administrative levels, its managers perhaps lead the originally not very low labor enthusiasm to the direction of economic irrationality and thus cause economic failures. For example, during 1958–1959, the people’s communes of China reached its peak of public ownership degree, the labor morale of the commune members in the construction of agriculture, irrigation and drainage and other infrastructure as 366

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well as industrial production was misused by the commune managers who were keen to obey superiors, the Utopian central government and chairman of central government (e.g. tens of millions of laborers were transferred to the campaign of making steel and iron, instead of the harvesting of mature crops). In 1958, the number of rural laborers engaged in small industries (mainly coal digging and steel making) reached the peak of over 60 million (Bo, 1993, Vol. 2, p. 708), causing it hard to reap the autumn harvest that year (Bo, 1993, Vol. 2, p. 714). Therefore, we might look for micro reasons for great decrease of production in 1959 and great famines in the following several years from factors except for the enthusiasm of laborers. This argument does not mean that there is no problem with the labor morale of commune members, instead it emphasizes the relationship between the labor enthusiasm and other institutional arrangements, especially the correlation between the incentive of supervisors and the exit right. In summary, according to the viewpoints of this paper, in an economy with high degree of collective ownership, even the possibility that the farmers exercise the veto right over the system by negative labor is weak. However, after the degree of public ownership of collective economy decreased, especially after introducing the self-retaining economy of farmer families, the farmers’ above veto was obviously strengthened. Firstly, the farmers now have living source they can control by themselves, and no longer need to completely live on the collective; secondly, the labor input decreased by farmers for being unsatisfied with the collective system now has economic significance because it can be transferred to their own family operations; thirdly, the farmers now can thereby carry out the strategies as “punish laziness with laziness”. Perhaps the farmers are still not allowed to completely exit the people’s commune, but they can partially exit the collective labor within the system. It is just this partial withdrawal right that enabled the farmers to express their dissatisfaction with negative labor under the conditions of insufficient collective supervision and measurement as well as poor management, compete with the big but useless public economy through small family operations within the public ownership system. Chinese farmers still deserve the reputation of diligence and endurance. People who see the private plots of farmers will all agree to this. The yield of private plots is estimated to be 5–7 times that of public plots. See Comprehensive Task Group of Development Research Institute (1988, p. 5).

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However, now how to make the farmers cultivate the public plots well has become the most important issue of economic strategy of this state. This is exactly the situation when the farmers’ household sideline production was restored and developed after the adjustment of policies in early 1960s. By the end of 1978, the farmers’ pure income obtained from their household sideline production accounted for 26.8 percent of their total pure income, which was close to the level in 1957. In 1957, the farmers’ pure income obtained from their household sideline production accounted for 29.4 percent of their total pure income (NJZ, 1983, p. 523). Since there is no data for the period from 1958 to 1961, the data array in Table 1, the vacant years are estimated by the annual average increase rate during the span, so it shows steady tendency of rise. A more reliable estimation is that, the farmers’ income from their household sideline production decreased during 1958–1959, but it increased rapidly after 1960. Of course, the average proportion of farmers’ family operations during 1960–1978 is lower than one fourth, and the positive influence of this part of effective labor on overall productivity is not enough to offset the negative effect of the farmers’invalid labor in collective production, so the agricultural total-factors productivity during this period could not reach the level before 1957. The family economy within the collective may have complicated influence on the overall productivity of collective economy. This is because that firstly the higher efficiency of family operations may drive the overall efficiency to rise up, and secondly the farmers have partial withdrawal right that enhances the negative degree of their doing collective labor, thus causing the decline of overall efficiency. However, in the meantime, the overall agricultural productivity rose whenever the policies of family operation were confirmed (1961–1967 and 1972–1973), and declined whenever they were not confirmed. For data, see the estimation by Wen (1989) and the graph drawn by Lin (1990, p. 37) using the data of Wen (1989). Anyway, by introducing the concept of “partial exit right”, we can explain all the changes of agricultural total-factors productivity after 1960. Using this concept, we can also answer why since 1960s the great famines during 1959–1961 have not reoccurred although the farmers still have no right to exit from the people’s commune. Lin (1990) explained the great famines during 1959–1961 using the cancellation of the farmers’ right to exit from the people’s commune, and suggested that cooperative agriculture can still be successful,

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but the members of cooperative organizations must reach a tacit agreement of self restriction. Only when the members of cooperatives have the right to exit if other members fail to observe the agreement can this kind of self-implemented contract be maintained. Using this point, Lin explained why the productivity of cooperatives increased during 1952–1957 when the members have the withdrawal right while the efficiency of cooperatives suddenly declined and stagnated for a long time when the withdrawal right is forbidden. See also the articles of Kung, MacLeod and Dong and Dow published in the Journal of Comparative Economics Vol. 17 (1993) that discusses this paper. More importantly, the family operation indicates a possible direction of the collective economy reform. In this direction, the family organization is regarded as the basic unit of agricultural production, thus fully saving the supervision expenditure. This mode reduced the scale economy in exchange for increased labor incentive. If the benefit loss due to reduced scale economy can be offset with surplus by the part increased by labor incentive, the overall productivity can be improved by reforming the collective economy into the mode of family operation. Finally, the partial withdrawal right helps us to understand how on earth the farmers gradually establish their own negotiation position in the collective economy under full control of the state. This has decisive significance to the property rights reform in the future.

3.7.

Anti-substitution

In the above text, the collective economy under state control was patterned as that the state uses the party-government level promotion mechanism to substitute the residual claim, but for the cadres of production brigades and production teams below the formal bureaucratic hierarchy, the incentive of such substitution is not sufficient, which causes insufficient supervision supply and thus leads to the low willingness of the commune members to work in the collective economy of non-voluntary cooperation. If the unclear prospect of people’s commune upgrading to national economy before 1962 made the grassroots cadres still have some expectation of promotion, I believe this is a main source of the many ridiculous phenomena contrary to common sense appeared during 1958–1959. After emphasizing the collective ownership nature of people’s commune and announcing the foundation of production team, such expectation lost its institutional foundation. Now 369

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the problem is, will these real supervisors of collective economy be willing to accept the embarrassing position of obtaining neither the incentive of promotion nor the residual claim? Observations show that, the supervisors of collective economy are not willing to take the huge responsibility of supervising the surplus production just because they can have the slight “subsidies for missed working time”. They cannot change the bureaucratic hierarchy of centralized authority in order to increase the incentive to them. The cadres of production brigades have higher chance of getting promoted to clerks at the level of people’s communes or counties, and some few can even get urban registered resident or the status of state cadres. In China, the competition over the status of agricultural-nonagricultural transfer is extremely fierce anywhere, which constitutes a material content of the political struggle in the production brigades. However, these collective supervisors actually control the residual production and preliminary distribution of agricultural economy, so they just take advantage of such “residual control” to share the residual. Cui Zhiyuan emphasized the difference between the “residual claim” and the “residual control” in one of his recent theses (1993). He pointed out that due to insufficient information and incomplete contract, the residual claim cannot be defined clearly in advance. Therefore, the important thing is the control over the residual production process, but this is usually the result of cooperation among multiple parties. He used the concept of “joint ownership” to understand the organizational characteristics of China’s township enterprises, and balance the actual supply amount of supervision efforts with the obtained amount of actual residue. That is to say, the spontaneously seeking after the economic residual claim by the supervisors of collective economy has become irrepressible, and gave rise to an “anti-substitution” mechanism, i.e. substituting the incentive of bureaucratic hierarchy promotion with the actual residual share right.

3.8.

Privileges of supervisors

One existence form of such actual residual claim is the privileges of supervisors, i.e. the grass-roots cadres gain private benefits by taking advantage of their managerial positions. The people’s commune is a system of “integrating of government administration with commune management”, so the supervisors of collective economy not only undertake the managerial 370

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functions of the brigade and team production, e.g. dispatching workers and assigning work, labor measurement, distribution of workpoint and money, grain and firewood, but also undertake many public functions of state administration, e.g. residence registration, military conscription, marriage approval, family planning, dispute mediation, public security and local politics. It is difficult for the state to effectively monitor the actual exercise of such highly centralized rural grass-roots power, because the information cost is too high; it is difficult for the farmers to effectively check and balance such power, because they lack the foundation for independent economic and political power. For this, the grass-roots supervision power of collective economy will be easily distorted into privileges of supervision, which give the supervisors additional benefits in material and non-material forms, objects and currencies. This kind of residual share right that appears in the form of corruption comes from the infringement of the benefits of farmer households and collective welfare, and the vested interests of the state. It is difficult for us to measure the total amount of resources occupied by such privileges, but from the fact that the settlement of economic problems of the grass-roots cadres of communes and brigades were called upon in the many rural political movements that occurred during 1960–1978 period, we can see the degree of generalization. For example, in 1962, Liu Shaoqi had extremely high estimation of corruption in the rural grass-roots cadres, and he even suggested dispatching task forces composing of tens of thousands of state cadres to take over the rural grass-roots regime (see the article by Bo, 1993, Vol. 2, pp. 1118–1136). The privileges of collective supervisors are non-productive, because they will not increase the total amount of wealth. However, it is just these privileges, i.e. the non-institutional residual claim that make up for the deficiency of incentive of the people’s commune system towards its grass-roots supervisors, thus keeping the operation of the system. No matter how the state and society morally condemn such “humble” privileges of the grass-roots personages, these privileges are actually an indispensable part of the people’s commune system. It shows that, it is in fact not feasible to substitute the institutional arrangement of residual claim with other mechanisms, unless the state has unlimited financial budget and complete monitoring capability. From this perspective, we can also understand why the state has been relying more on political movement and cadre purging to carry out rural

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economic mobilization since the middle 1960s. This is actually because that after the positive incentive of the system weakened the state had no way but to rely more on negative incentive, i.e. the punishment mechanism, to keep the economic efficiency of the people’s commune. Nevertheless, people have not thus invented a mechanism comparable to the residual claim in efficiency. The political movements that occurred one after another not only consumed economic resource, too, but also damaged the political legitimacy, ideological persuasiveness and rational managerial expectation of the state apparatus. The over-everything centralized state eventually found that, neither positive nor negative incentive can secure loyalty and efficiency of the rural grass-roots supervisors, unless a blind eye is turned to the privileges of the grass-roots supervisors. In the “four clean-ups” movement, a serious discrepancy between Mao Zedong and Liu Shaoqi is how to evaluate and treat the “four unclean” rural cadres. Liu advocated strict purging, while Mao required to set free those cadres who embezzled only several hundred yuan as soon as possible so as to direct the brunt at those high in authority who followed the capitalist road. Mao later told the American journalist Snow that, Liu’s mistake of “leftist in form but rightist in reality” is one of the reasons why he decided to eliminate Liu (see the article by Bo, 1993, Vol. 2). Here, the problems of institution, organization and mechanism have become the personal moral problems of cadres and led to infinite political struggles.

3.9. “Collective capitalism” The residual claim also has more positive forms, i.e. the collective supervisors endeavor to develop the collective industry and sideline occupations directly controlled by them instead of the state, in order to create more disposable residue. The early organization form of the collective industry and sideline occupations is the commune and brigade enterprise, and its history can date back to the end of 1950s, but it gained the upper hand until 1970s. As for the historical development of commune and brigade enterprises, a lot of literature can be quoted. For comparatively systematic researches, refer to articles by Sun and Bai (1982), Luo (1986), Byrd and Gelb (1988), and Huang (1990, especially Chapter 12). In addition, the former Development Research Institute of Rural Development Research

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Center of the State Council cooperated with the Rural Sampling Investigation Contingent of the State to carry out continuous tracking and sampling investigation of the large township enterprises in ten provinces since 1986, which provided the most systematic data for this research field (DXGC system). For the introduction and analysis reports of this investigation, see the articles by Ren et al. (1987), Zhou and Hu (1987), Qiu (1987–1988) and Chen (1988), which are all published in the publication edited by Li (1990, pp. 265–288, 293–322, 482–511, 625–646, 744–768, 816–840). This is the most rapidly developing sector in the rural collective economy. Calculated according to the fixed price in 1970, the total output value (RMB38.2 billion) of industrial enterprises at commune and brigade levels in 1978 increased by 3.9 times compared to that in 1971 (RMB7.79 billion), with annual average growth of 25.5 percent, much higher than 4.25 percent, the annual average growth of total agricultural output value in the same period. For the output value of the enterprises run by the people’s communes, see ZTN (1983, p. 215); for the output value of industrial enterprises run by production brigades, see GJTY (1985, p. 43); for the statistics of total agricultural output value, see GJTY (1985, p. 43). This part of economy growing outside the planning responded with the stimulation enjoyed by the processing industry under the original system, and broke through the state’s monopoly over the high profit of the processing industry. Therefore, from the standpoint of orthodox state planning, the sideline industrial economy of communes and brigades is always the alien result of the state control over rural economic system. Today urban people praise the township enterprises as “emerging as a new force”, but for the leaders of rural communities, they are “re-emerging of the original force”. During the people’s commune era, the repeatedly criticized “collective capitalism” referred to exactly such economic activities organized by the collectives that broke through the state planning control and took possession of the residual. In this sense, if we say that the farmers’ self-owned family economy is an individual breakthrough in the system of state controlling the countryside, while the industry and sideline of communes and brigades is a collective breakthrough. The description of the development of enterprises run by communes and brigades as the result of the state policies is just a compliment after this sector gained the upper hand. The founders of early enterprises run by communes and brigades were almost all criticized for

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“disrupting the state plan”. In terms of resource utilization, the enterprises run by communes and brigades have long been subject to system and policy discrimination. The capital formation of the collective industrial sideline production mainly relied on the accumulation of the communes and brigades and bank credit, so the nature of its property rights is certainly the public assets of the collectives. According to the data of DXGC system, only less than 10 percent of the initial investment of the enterprises is allotted by the State finances and low-interest government loans, and the majority comes from the collective accumulation (23.6 percent), and various credits guaranteed by the collectives (61.13 percent), see the article by Ren (1987, published on the publication edited by Li, 1990, pp. 265–288, same below). However, when comparing such collective property with the land property of the people’s commune, we found there is actually great difference between the two kinds of properties. The former’s production is market-oriented and therefore the residual can be obtained by communities, while the residual of the latter is monopolized by the state; the former can be reconstructed with fluid assets while the latter is prohibited from being bought, sold or leased; the former is controlled by the cadres of the communes and brigades and community elites authorized by them, while the latter is almost fully controlled by the state. These differences can explain one of the main dynamic mechanisms for the rapid growth of the sector of enterprises run by communes and brigades, i.e. the communities strive to control selfowned resources and share the surplus of rural economy that used to be monopolized by the state. The cadres of communes and brigades played a decisive role in the early founding process of the enterprises run by communes and brigades. Under the system of integrating of government administration with commune management, the supervisors of collective economy play a dual role. They are not only the agents of state power in the countryside, but also the representatives of collective economy. After long-term rural socialist transformation, only this class has the legitimacy for establishing the economic organizations that exceed the family scale in the rural areas. Therefore, the earliest rural entrepreneurs mainly grew out of rural grass-roots cadres. According to the data of DXGC, among the early founders of rural enterprises, 55 percent are cadres of communes and brigades, 21 percent are

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skilled craftsmen among farmers (Ren, 1987). Although the final ownership of the property rights of the collective enterprises run by communes and brigades is unclear, the control right is always in the hand of the cadres of communes and brigades. The surplus of the early enterprises run by communes and brigades was mainly used as the expenditure for supporting agriculture (buying agricultural machinery, constructing farmland irrigation works, supporting poor brigades), community welfare and enterprise accumulation, while the cadres of communes and brigades can only get very small monetary income that belongs to themselves. However, the domination of these property rights, especially the control of non-agricultural employment opportunities means absolutely great power and very high social status in an agricultural community. In other words, although the early entrepreneurs of communes and brigades cannot fully enjoy the surplus of the enterprises, they dominated the utilization of the surplus. More importantly, all these monetary and non-monetary benefits are not directly granted by the state, instead they came from the ability of the cadres of communes and brigades to establish the enterprises independently. This constitutes an effective incentive mechanism, which propels the elites of rural communities to become the earliest rural entrepreneurs. The second possibility of rural enterprises to improve the efficiency of collective economy is to reserve the scale economy, but introduce the incentive mechanism of residual claim to improve the supervision efficiency. The existing literature has not paid enough attention to this, though this change of direction actually played an extremely important role in the future reform of collective economy. Interestingly, once the community has economic undertakings under their own control, it need not absolutely obey the state control, just as the farmer families obviously enhanced their negotiation position against the collectives after having their own family operations. From the perspective of community, the configuration of economic resources has two directions: one is the agriculture that meets the needs of state taxation and farmers’subsistence, and the other is the industrial sideline that meets the needs of rural employment and profit maximization. The difficulty for the state to control such a dual system is obviously increased. The state cannot bypass the rural grass-roots cadres to execute the control, but now the rural execution system of the state policies has its own “private plot”. Under the condition

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of diminishing marginal effect of enhanced political control, the state had no choice but to relax the monopoly on rural surplus. The fact that can validate this is, just after 1970s when the enterprises run by communes and brigades achieved great development, the state added investment to agriculture. During 1970s, the agriculture supporting national finance expense was RMB10.86 billion on the average every year, an increase of 82.02 percent compared to that in 1960s, see Table 1. Anyway, the residual claim is partly introduced into the rural collective economic system. It has not been institutionalized, and even not legalized, but its existence has changed the non-tradable stiff nature of the people’s commune system. We can find the origin of institutional evolution driven by interest transaction in the history of people’s commune before 1978.

4.

Transaction-Generated Ownership

The rural reform at the end of 1970s is, above all, a large-scale repetition of those short-term policies and arrangements at the beginning of 1960s. The original system formed and changed the logic of ownership through the state-dominated political movement, and eventually gave way to a new logic, i.e. forming new effective property rights through the transactions between the state and farmers and the transactions among the farmers. In an environment where the transactions can be done around the formation and change of the system, the state withdrew in great strides from the omnipresent control of rural economy, in exchange for steady tax revenue, low-cost control system and farmers’ political support; the farmers guarantee their turnover to the state and take operating responsibilities in exchange for their long-term land use and transfer right, the private property right of the resources left after the turnover, as well as the partial and entire ownership of non-agricultural resources. A property right system composed of multi-form residual claims is generated through gradual transactions. Most importantly, the state has changed its policy direction to protect new effective property rights in transactions, and it can no longer change the property rights unilaterally without further transactions with the farmers. This part will discuss how to generate tradable new property rights in the background that all economic processes are under the state control. 376

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4.1.

Second retreat of the state

The curve of the second peak period in Fig. 1 shows characteristics different from the first peak period. The rural returns of the state were steadily increasing during the entire period of 1970s, and except for slight fluctuations in 1972 and 1976, the return index of the state in 1979 increased by 121.6 percent in comparison with 1970, with an annual average rise of 8.74 percent. However, in the same period, the expense index of the state increased more rapidly, with a total increase of 152.17 percent during 1970–1979, and annual average of 10.82 percent. Especially after 1976, the expense index of the state obviously widened its gap with the return index increase, forming another peak that lasted for long time with large difference. We can see from the figure that, the driving force for the state to adjust agricultural economic policies is expense restriction, i.e. when the state is unable to add the expense, the policy retreat began. By investigating the expenses of the state during this period, it is easy to find that the most rapidly increasing is the agriculture supporting financial expenses and the sales of agricultural production materials (respectively increased 186.96 percent and 112.66 percent in 1979 in comparison with 1970). After 1970s, the state has become increasingly like a “manager” of the national agriculture, and must manage the input and output of agriculture. Faced with the grass-roots agents attracted to the collective capitalism or the privileges of supervisors, as well as the farmers who have partial exit right, the state had no choice but to maintain the increase of returns with higher input. While launching political movements as it once did, the state knew that without very material means, the agricultural returns of the state would not increase automatically. This does not mean that, the state will make purely economically rational response to the unfavorable change of the return-expense structure of the people’s commune system. The state still needs to consider the chain influence of changing policies, especially the consistency of state authorities and ideologies. However, exactly in the later 1970s, great changes took place in the upper political structure of the state, which were completely different from the changes 20 years ago. Firstly, the absolute authority of the state over the society was greatly weakened due to long-term erroneous economic policies, the leaders’ misuse of the state authority as well as the crisis of inheriting the supreme authority; secondly, the challenge confronting the 377

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ruling legitimacy and the “potential substitution threat” not only comes outside the system (e.g. Kuomintang counterattacked the mainland in 1960s), but also comes from the potential of pragmatists to substitute the “whatever faction” and vice versa in the Chinese communist party inside the system; thirdly, the international environment tends to alleviate, reducing the external pressure for strengthening the centralized government. When analyzing the international trends in December 1977, Deng Xiaoping predicted that, China “may enjoy a longer period (for development) not disrupted by wars”, because America adopted the conservative global strategies after defeat in Southeast Asia, while the Soviet Union was not ready yet (Deng, 1983, p. 74). Few people discussed the influence of the alleviated international situation on China’s adoption of power delegating reform polices since then. But in the economic history of institutional evolution, this is very important. For example, the taxation right of Britain in the 17th century was controlled by the representative assembly composed of merchants and middle and upper-level land class, and their aim was to put an end to the various restrictive measures, and protect private property rights and competition by limiting the power of the king. However, in Spain and France, the unrestrained right of taxation was controlled by the royal, and the income of the royal was obtained by transferring the right of monopoly to the guild. A reason for such difference is that, in an island as England, the invasion of foreign country does not constitute a threat as serious as in European mainland, so “the royal lacks the reason to centralize the property rights and taxation rights, and lacks the reason to establish a huge central government” (North, 1981, pp. 155–156). In this background, the state carried out substantial adjustment of the rural economic policies again.

4.2.

Bottom reform

Observed from the rural grass roots, the return index of the state exceeded the growth of agricultural output value and farmers’ pure income, which means that the state’s proportion in the rural income distribution increased while the farmers’ benefits decreased relatively. During 1970–1979, the national agricultural output value increased by 79.21 percent, the per capita pure income obtained by farmers from collective operation increased by 40.24 percent, which were respectively 60.39 percent and 21.42 percent after deducting the influence of price, obviously lower than the growth of 378

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the return index of the state quoted previously (112.6 percent, influence of price deducted). This proves that after the institutional adjustment in early 1960s, the people’s commune is not immune to the state’s infringement on property rights. Yang et al. (1992) pointed out several forms of the state’s infringement of property rights during the people’s commune period. The poverty of countryside and farmers is still dreadful. The farmers’ negative response to this is slowdown in collective labor, and positive response to this is expanding family operation.According to the data of Wen Guanzhong, in the middle and late 1960s, an inevitable result of criticizing capitalists seriously during Cultural Revolution is continuous decrease of the agricultural total-factors productivity, which was a record low in 1972. The index of agricultural total-factors productivity in 1972 was only 72.22 percent of that in 1952, and 5.8 percent lower than that in 1961 (see the article by Wen, 1989). After short rebounding during 1972–1973 (criticizing the extremely “leftist” policies), the agricultural total-factors productivity declined all the way in the direction of policies criticizing the bourgeois rights during 1974–1977, and the index was 74.2 percent in 1977, even lower than that in 1961 (Wen, 1989). Just in the same year, in some extremely poor areas faced with serious natural calamities, the farmers are no long satisfied with inputting the “residual” resources in the collective production activities into the family sideline production, because this is not enough to guarantee adequate food and clothing; they want to occupy all land resources with the method of family operation, but in exchange of the contract yield. This is the origin of another round of fixing output quotas on a household basis. The farmers put forward the three principles of fixing output quotas on a household basis, showing their consideration of transactions with the state and collective. It also shows that the system of fixing output quotas on a household basis is a contract involving the state, the collective and the farmers. With the experience in 1960s, the system of fixing output quotas on a household basis can no longer be called institutional innovation; instead, it is a kind of institutional spreading and promotion. However, when the farmers in Fengyang county of Anhui province further transformed the system of fixing output quotas on a household basis into the system of contracting work to households [see the field investigation report of China Rural Development Research Group written by Chen and Sun (1981), published

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on the selected articles edited by Zhou, (1993a)], the farmers’ families developed their contracting of output into the contracting of land property operation. In the system of fixing output quotas on a household basis, the production teams reserve the uniform planning and uniform distribution, while the farmers produce according to the output contract, and for the part exceeding the contracted output at year end, a portion of it will be given as a reward. In the system of contracting work to households, the collective expenses for measuring and supervising the contracted output and extra output are saved, the collective land is contracted by the farmers, under the condition that the turnover to the state and collection by the collective is carried out according to the annual output of the land. The farmers proposed the new institutional arrangement of “hand in enough to the state, leave enough to the collective, possess all the remaining”, i.e. firstly investing all the disposable land resources into family production, then the farmers can increase the production and gain their own benefits under the precondition that no damage is done to the vested interest of the state and collective. The plain creation of farmers at the bottom shows that to cut down the operating expenses of system, the arrangement form of property rights needs to be handled. The more important thing is that, the system of fixing output quotas on a household basis and the system of contracting work to households in Anhui, Sichuan, Guizhou, the Inner Mongol and Guangxi and other areas happened during 1977–1978 [see the article edited by China Rural Development Research Group (1981)], i.e. prior to the famous Third Plenary Session of the Eleventh Central Committee of CPC. As we would see, it is just the bottom that upgrades the policy adjustment at the top into reform. The system of fixing output quotas on a household basis or contracting work to households is only a kind of expansion of the family private plot economy. But the former is different from the latter at one key point, i.e. it must make public choice at least within the scope of a production team, e.g. balancing different opinions, facilitating the conclusion of land contracting agreement, making and providing guarantee to the new game rules, and keeping secret together, etc. The production team leaders have comparative advantages in supplying the essential public goods in the course of these institutional innovations. For example, Xiao Gang production team that firstly practiced the system of fixing output quotas on a household basis in

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Anhui was led by the production team leader surnamed Yan (see the field investigation report written by Chen Xiwen and Ma Suyuan [published by China Rural Development Research Group (1984, Vol. 1)]. Therefore, the backward areas were the cradle of rural reform in 1970s. Except that the farmers’ poverty gave rise to a desire for change, it is also an un-negligible condition that the collective industrial sideline production was too weak or totally not existed, which forced the production team leaders into the leaders of the system of fixing output quotas on a household basis.

4.3.

Difficulties of the land privatization

After decades of the agricultural socialist transformation, the grown-up Chinese farmers are still keeping the dream of having family privately owned land. “The land is just there, you can see it every day. The robber cannot snatch it away. The thief cannot steal it. People die but the land is still here.” “The money will be used up but never the land.” These are views of villagers in the south of Jiangsu on the land, written down by Fei in the 1930s (1939, p. 182). Understanding this is an essential condition for understanding why the farmers’ revolution happened and why setting aside private plots worked. In places where the collective economy is not enough to let farmers have adequate food and clothing, the dream of privately owned land is naturally stronger. So long as the control mode from top to bottom is relaxed, the demand of re-privatization will be proposed from the bottom. In fact, when the system of fixing output quotas on a household basis was still being carried out secretly, some farmers proposed their scheme of land re-privatization — “land and mountain forest go back home”, i.e. restoring the distribution pattern of the real estate after land reform. Such incidents happened during 1977–1982 were seldom reported publicly. This is not only because it is not allowed, but also because farmers are usually unwilling to tell strangers the details of this secret. However, in some proclamations and survey reports of local government at that time have reflected indirectly the existence of this kind of phenomenon. For example, the announcement of the government of Fengyang county of Anhui in 1980 and the survey report by the Survey Research Office of Qinghai Provincial Committee in 1980, etc. were all published on the publication edited by China Rural Development Research Group (1981, pp. 322–333, 221–230). In fact, these 381

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farmers regard the land ownership assigned after the land reform as the unique legal basis for reallocating land ownership. The first rival met by the above-mentioned privatization is not conservative officers (because at this moment no group at the top knew what happened in the village), but another group of farmers in the village. Land reform is after all a thing that happened 30 years ago. From the land reform to the system of fixing output quotas on a household basis, another 100 million families and approximately 300 million people added to the countryside of China. Will it be possible to drive out these younger, more productive people and laborers who are more powerful in competing for resources? At the village level, even without the pressures of politics and ideology, the radical argument of privatization is unfeasible. The method after revision is perhaps that the land should be divided among the entire current population. But the trouble of this amendment is whether to acknowledge the different rights of laborers and non-laborers in the land distribution. If acknowledged, that is to say the laborers represent a larger distribution weight than non-laborers. The next trouble is that when the proportion of laborers in a farmer family changes, should the land be redistributed? If the land should be redistributed, it equals to no privatization, or results in a system of “yearly privatization”; in case of refusing the redistribution, how can the new private property system bear the pressure due to the change in the proportion of laborers in each family. Now let’s go back to treat all people equally without discrimination, divide all land and issue the land ownership certificate as one-off, then allow farmer families to buy and sell and rent freely. The simplicity of this scheme is unquestionable, but from which day should we begin this great revolution? No matter which day you decide, all the farmer families who would give birth to child the next day would object. You can say the majority overwhelms the minority, but for such issues the minority is always more powerful than the majority. Because for families that are going to increase population, even there is only one such household in a village of 30 households, the interest the household strives for may be 1, while for the other 29 households, each household is faced with the possible loss of only 1/29; the organization cost is required for uniting the 29 households.You may say deciding by the democratic voting procedure, then there must be next time. You may say implementing the authoritarianism

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of production team leader or the president, then the farmer who suffers loss would overthrow this production team leader or president so long as this is cheaper than buying land. From the above explanation, there are two key points: firstly, different farmer families are in their different family life cycles, with different proportions of laborers, so they have different varying demand for the land distribution. As evidence of that, Chayanov (1986) thought that the farmers’ differentiation in the countryside of Soviet Union is not the differentiation among different classes, but economic difference among farmer families in their different life cycles; secondly, the stable property boundary cannot be obtained anyway by regarding the population as the basis for distributing the land ownership. The former determined the procedure predicament of land privatization, while the latter caused real trouble. During the early stage of the reform, a lot of villages have spent a lot of sleepless nights for the above-mentioned difficulty of public choice. Not only that the new contract cannot break away from continuous production, but it must be signed before cultivation. The system of fixing output quotas on a household basis has become the general trend instead of the one-off land privatization, and there are deep reasons even at the village level. As what we saw later, no matter how close the land contract right is to private property and quasi-private property, it still keeps some means for village communities as final owners to deal with the pressure of varying population on land distribution. The arrangement of fixing output quotas on a household basis acknowledges the private ownership after handing in the contractual amount, and this opened up a way for farmers who are not pestered by the tradition of equal division according to population to form private properties. This is what happened latter, but the task of top priority for the moment is to complete the legalization of the system of fixing output quotas on a household basis.

4.4.

Decentralized decision-making

It is undeniable that, there is a rather big gap between the adjustment of rural economic policies to be implemented by the top political structure of the state at the end of the 1970s and the change to the system of fixing output quotas on a household basis that has taken place in the rural social grass roots. References show that, the keynote of the rural policies newly made at the end of 1978 was “to recuperate and multiply” and strengthen 383

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the grass-roots autonomous right. The former includes raising the national purchasing price of agricultural byproducts of the state, reducing the quantity of fixed quotas and purchase by the state and expanding the import of agricultural products; the latter re-emphasized the autonomous right of production teams. Neither of these two respects indicated the launch of system reform, especially property right reform, in the countryside. According to the resolution on agricultural issues adopted at the famous Third Plenary Session of the 11th Central Committee of CPC, the system of fixing output quotas on a household basis was officially prohibited. This proposal was still kept in the draft resolution revised at the Fourth Plenary Session of the Central Committee one year later. These two files are all published in China Agriculture Yearbook (1980, pp. 56–62). As a result of carrying out the policy of recuperating and multiplying, the level at which the state obtains the agricultural surplus dropped to the level of agricultural tax on the whole. In 1980, the total agricultural accumulation equaled RMB36.074 billion, and after deducting the part the state used for the countryside, the agricultural net outflow fund was RMB27.862 billion (Feng and Li, 1993), accounting for 12.78 percent of the gross agricultural output value in that year, i.e. RMB218 billion (Ztn, 1983, p. 13) (the same index was 15.73 percent in 1977, and 14.05 percent in 1978). This was already lower than the index in 1955 (12.83 percent), and was only slightly higher than the index in 1952 (11.49 percent, data same as above). As a result of the state’s preferential policies towards the countryside, the national expense index of 1979 increased sharply to a historical peak (See Fig. 1), leading to the lasting financial deficit. At that time, the purchasing price of agricultural byproducts was raised, but the selling price to urban population remained unchanged, so the state finance born the subsidy for the contradiction of purchasing price and selling price. These expenses that increased day by day in the 1980s were not calculated into the national rural expense index in Fig. 1, because this reflects the relationship between the state and urban inhabitants. The problems caused by the production team’s autonomy are more complicated. The first problem is, to what extent the business activities of the production team can be allowed to break away from the control of state planning; the second problem is, whether the production team has the right to change the form of its own property right. This simple slogan nearly

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disillusioned all the wishful hopes of the so-called collective ownership. The system of contracting work to households practiced by Xiao Gang production team in Anhui was an unanimously decision of the production team. But, is it lawful? Nobody can give a straight answer, because no law had ever written down the rights of production team and the procedure of its right adjustment. Traditionally, though scholars of comparative institutions found that China’s planning degree is much lower than Soviet Union, but China’s centralization degree is rather high in terms of economic organization and property right form. Especially, for the issue of rural ownership, the Central Committee and chairman of the Central Committee always had the final say. In the early and late 1950s, Deng Zihui and Peng Dehuai were respectively leading members of the Central Party Committee and the State Council, but they both had no right to speak again because of having divergence on the rural issues from the chairman of the Central Committee Mao Zedong. And according to the latest resolution of the party at the end of 1978, as mentioned above, the system of fixing output quotas on a household basis was still explicitly prohibited. It was then impossible for the Central Committee to legalize the system of fixing output quotas on a household basis. The property rights arrangement influences people’s economic behavior through expectation (Demsetz, 1988, p. 104), so it has a demand for legalization from the very beginning. If a property rights arrangement is illegal itself, or people expect that it could be banned at any time, it is not surprising to find that such property rights make the party concerned to behave like an opportunist. The predicament lies in the possibility that illegal property right innovation may be accountable for resources looting, and the “property right” arrangement that loots resources appears more unlikely to be accepted. This is the real difficult point of socialist property right reform. The socialist property right reform is very apt to move towards radicalism, which may have much to do with this. The personal reason of farmers or community elites is not enough to totally solve this difficult problem. The main experience of Chinese rural reform is province-specific policy-making, i.e. each administrative province can use its own political resource to determine through its own political procedure whether to admit the legal status of the system of fixing output quotas on a household

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basis. The legal bases for province-specific policy-making have been the appeal to stimulate local initiatives and the principle “Practice is the Sole Criterion for Testing Truth”, both put forward at the Third Plenary Session of the Eleventh Central Committee. In addition, the qualifications of the province leader and his relationship with the central leading group have great influence on the strength of provincial decisions. As everyone knows, it is such large poor provinces of agriculture asAnhui, Sichuan, Guizhou and the Inner Mongolia that first provided political protection and lawfulness acknowledgement for the system of fixing output quotas on a household basis practiced by the farmers underground or half-underground. Taking Anhui as an example, the system of fixing output quotas on a household basis practiced in Xiao Gang production team sparked a wide debate in the Town of Fengyang County, and finally the members of the standing committee members of Anhui Provincial Party Committee conducted field investigation at Xiao Gang and decided that it could be tried. This is not accidental. In China, the distribution of natural calamities is not even, and the proportion of rural population and economic development level differ widely among provinces. So, each province is faced with totally different famine probability, disaster relief pressure and corresponding political risk and responsibility. Developed provinces may find it unworthy of taking the initiative in the issue of fixing output quotas on a household basis, but backward provinces find it can solve the matter of great urgency; just as backward provinces will not be keen on pleading on behalf of the enterprises run by communes and brigades at the very beginning, while developed provinces spared no effort in doing so. In brief, different provinces have different restraint structures for the spontaneous property right innovations from the grass roots, so they may offer different political protection. The decentralized decision-making accomplished partial legalization of the new property right arrangement. To Chinese farmers, county government — not to mention provincial government — certainly represents the state. This notably increased the farmers’confidence that their invented new property right contracts can be carried out, thus reducing the risk of property right system change, and increasing the demonstration effect of partial success and the possibility of system reform competition among different areas. The characteristic of gradual advancement of China’s reform is not only shown in the continuation of time, but also in the uneven space distribution.

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Experience shows that, the decentralized decision-making is an indispensable key link in the property right system change of a big country like China. Some famous domestic economists have criticized the policies of decentralization reform since 1989. The representative work published by Wu Jinglian in December 1989 systematically criticized the “action fault” of economic reform committed by former leaders of the State Council, in which an important content is that, the leader confused the “administrative power delegation” with “economic power delegation”, causing market separation and decentralization of macro regulation, and resulting in “feudatory state’s economy”. Wu’s article was written in the style of academic discussion, and the moral courage of challenging big authorities could be sniffed when reading (the author specially noted that this article is “prepared by the reports made by the author on June 9, 1987, July 1, 1988 and January 11, 1989 at the Party School of the CPC Central Committee”, see p. 51), although the people criticized could no longer answer any criticism publicly at this moment. Thereafter, the “feudatory state’s economy” was continuously condemned in Chinese-language newspapers and periodicals at home and abroad. The representative work of opposite opinion was written by Li Xianglu and published in 1990 on an American intellectual magazine. In his opinion, in order to reform the planning bureaucracy system, we must divide it first, and have no way to rely on the central planning bureaucracy to mobilize and promote the reform; only by making policies on decentralization reform can we see the social mechanism for launching the reform in the totalitarian system. The experience of rural reform shows that, fortunately there was “action fault” in making policies on decentralization at that time, or the greatest possibility would be that we will still be caught in a standstill within the framework of the people’s commune today.

4.5.

Central policies formed by local policies

Partial legalization is certainly different from total legalization, and this difference means some risk. The system of fixing output quotas on a household basis practiced in Anhui in 1961 was the first to obtain silent approval by first secretary of the province Zeng Xisheng and leaders of the central authorities including Mao Zedong, but when the famine crisis was over, Zeng was criticized for this and dismissed from his post (see the article

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by Bo, 1993, Vol. 2). After obtaining initial success of the system of fixing output quotas on a household basis, the provinces that took the lead in the reform demanded the total legalization of this system. At this point, local political interests are highly consistent with the new property right arrangement. In 1980, the Central Government held the meeting for first secretaries of all provinces to rediscuss the system of fixing output quotas on a household basis, only less than one year after the last plenary session of the Central Committee that prohibited the system. Western political scientists studying the Chinese decision-making process have noticed that, the central working conferences with the participation of regional leaders are of great significance (Lieberthal and Oksenberg 1988, p. 29, 152). But in the past the majority of such conferences did not change the from-top-to-bottom nature of policy making. The 7,000 people meeting in 1962 is an exception, which mainly summarized the serious lessons during 1959–1961 from various decision-making aspects. This meeting in 1980 brought a new characteristic, i.e. all places strived to write their local experience into central policies, i.e. strived to totally legalize their mode. Since there was a huge gap in experience among different places at that time, and different places had different standpoints, it is very difficult to reach unanimous consensus. Intense debate even extended from the meeting table to the dining table. During a meal, Chi Huaqing, the first secretary of Guizhou, who was in support of the system of fixing output quotas on a household basis, said to Yang Yichen, the first secretary of Heilongjiang who was opposing the system, “you go your way, I’ll go mine”. And this was exactly what they were able to do, as the meeting promised co-existence of various modes. Finally, the policy documents passed at the meeting allowed the production teams to practice multiple arrangements of responsibility system, including the system of fixing output quotas on a household basis. This is the No. 75 document of the Central Committee in 1980. For the background of formulating this new policy document, refer to the speech by Du Runsheng at the first secretary meeting of the provinces, municipalities and autonomous regions at which this police document was drafted (Du, 1985, pp. 1–9) and the article by Wu (1980). This equals to changing the original position of the Central Committee, and accomplishing the nationwide legalization of the system of fixing output quotas on a household basis.

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The most important contribution of the decision-making mode in 1980 is more procedure than content. Different regions can bargain for their interests and opinions in the central decision-making process, and their opinions will finally be integrated into a new central policy. The mode of transaction between the Central Government and the farmers around property right innovation is developed into the negotiation, communication and “transaction” among “farmers-communities-local areas-central government”. We need not overestimate the institutionalization degree of this decision-making mode. But from long-term perspective, it includes the key elements for rebuilding the relationship between the state and the society. For the importance of procedure in the course of change, see the article by Ji (1993).

4.6.

Step-by-step progressing transactions

Then the farmers demanded a guarantee that the new policy will be followed for long time, because they are afraid this adjustment of rural policy will most likely be the same as that in the early 1960s, and only a short-term “makeshift”. Historical experience shows that, if the state still dominates the rural society, the lowered national tax can be raised again due to economic recovery; delegated power can be reclaimed due to various reasons. On one hand, the farmers and community elites responded by increasing production to the state policy of increasing the price of agricultural products and permitting the system of fixing output quotas on a household basis, but on the other hand, they alternately used the two strategies of “make voice” and “exit” to force the state to guarantee the long-term existence of reform policies. A key fact here is that during 1978–1982 the nationwide application amount of chemical fertilizer increased progressively at an average rate of 14.4 percent every year (ZTN, 1993, p. 349), which seem to verify the reports of many journalists, local officers, agriculturists and policy investigators on the farmers’ engagement in “robbing local operation” for fear of policy alteration at that time. Short-term actions are usually condemned, but why not regard the farmers’ short-term actions as a rational response to short-term institutional restraint? More importantly, the farmers’ shortterm actions indicate the existence of short-term restraint, which forces the change of short-term restraint structure. This argument also applies to the analysis of other rent seeking during the reform. Many people condemn 389

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the rent seeking, but they totally neglect the role of rent seeking in institutional innovation. At the beginning of 1984, the central policy documents stipulated that the land contract term should be over 15 years; in order to adapt to the long-term contract system, the same documents also allowed the paid transfer of land contract right. For the circular of the Central Committee of the Communist Party of China on rural work, see the article mainly edited by Ma (1992, p. 133).

4.7. Transaction-generated ownership The legalization and long-term existence of the system of fixing output quotas on a household basis allowed the farmers to accumulate increasing economic resources in their own hands. This part of surplus after handing in the “quota tax” to the state and collective was initially only enough to meet the needs of sufficient food and clothing of the farmers, but as time went by, some farmers in some areas owned the economic resources enough for investment. If the state still pursues the nationalization or collectivization of these resources, and forcibly adopts the state planning control according to the classical requirements of socialism, this would be equivalent to the state ripping up the contract of fixing output quotas on a household basis unilaterally; on the contrary, the farmers may not fulfill their promise of handing in sufficient amount to the state and collective, and the result is unbearable by the political structure of the state at that time (otherwise the state would not accept the system of fixing output quotas on a household basis). Another possible choice is to arrange the farmers’ “own” resources according to the private property system, and regulate through the market. This can guarantee the stimulation from the system of fixing output quotas on a household basis on the farmers, while improving the social utilization efficiency of the farmers’ own resources. Throughout the 1980s, after the state acknowledged the system of fixing output quotas on a household basis, the basic trend of the rural economic policies was to acknowledge the private property system of the farmers’ own resources under stipulation by the farmers’ spontaneous institutional innovation. During this period, the state reduced again and again the varieties and quantity planned to purchase (1983–1984), changed the state monopoly purchase to contractual purchase (1985–1987), announced that the agricultural byproducts can be freely traded after the state purchase (1979–1985), allowed private long-distance transportation 390

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(1980), futures trade and farmers doing business in city (1984–1985); the state announced to reform the rural supply and marketing cooperative and credit office system, restore the private nature, and reimplement the profit sharing system (1983); the state allowed the private persons to invest in large capital goods and establish individual capital (1983), gave tacit consent to and then formally acknowledged the legal status of private enterprises having over eight employees (1981–1987); the state encouraged the farmers to get engaged in non-agricultural activities (1979–1984), opened the employment and business undertaking in small market towns and small and medium-sized cities (1984–1985), then reformed the recruitment systems of the state-owned enterprises in large and medium cities, opened the urban labor market to farmer workers (1986–1987). The policies and legal documents mentioned here can be found in the China Agriculture Yearbook over the years. In English works, the papers by Yang et al. (1992) perfectly summarized the rural reform policies and laws during that period. However, their measurements of the environment of the policy and system formulated from those documents still need further improvement in my view, because the documents sometimes lag behind the true life, and sometimes are not fully executed, so not totally equal to the institutional restraint in reality. During this period, the lawfulness of “collective capitalism”, i.e. the former enterprises run by communes and brigades, is fully acknowledged by the law. Under the system whereby local authorities took full responsibility for their finances, the local political power structure of the developed areas provided the most sufficient protection to the enterprises run by communes and brigades and contributed to winning the acknowledgement of central policies for them. This process is consistent with the protection of the system of fixing output quotas on a household basis in backward areas. The state still restrained the activities involved the private financing and pooling of land, but open to the collective. Most importantly, the collective can sell the license plate to the individual, enabling those individuals still doubting the state policies to carry out private capital activities in the name of collective. Roughly by the end of 1980s, a commercial revolution, probably greatest ever of all time, was finished in the countryside of China, and its institutional foundation was the farmer household contract system of collective public land, the enterprise system of “collective capitalism” and private property system of farmer households and individuals. In a word,

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the residual claim mechanism deprived by the state since 1950s is now rebuilt in the rural society with various forms.

4.8.

All-round exit and stability

The new policy and institutional arrangement has strengthened farmers’exit right. Now, the farmers control the production and preliminary distribution of agricultural products, so if the state unilaterally breaches the contract of fixing output quotas on a household basis, it means that the farmers are authorized to take back the promise of hand-in, i.e. exiting the game. The farmers not only can carry resources to exit the production of a specific agricultural product, and turn to another kind of production, but also can turn to the sectors of industry, construction, traffic transportation and service. The farmers can also exit from the market transactions with which they are not satisfied, turn to production only for the consumption of their own families. For example, if every farmer household stores an additional 200 kilograms of grain on the average, the national grain market will see a decrease of 36 billion kilograms in supply. This fact formed the basic motive force for the reform of the system of grain buying and selling since 1985. At last, those most productive farmers could leave the countryside for the city. That is to say, the farmers’ partial withdrawal right has developed into full exit right. The farmers’ full withdrawal right strengthened their bargaining power. People see everywhere that the farmers are bidding price on the market of property rights and organization in order to strengthen their rights, just as they are bidding price for their products on the market of products and elements. Similarly, the negotiation position of rural communities against the state has also been strengthened. Since the community economy has comparatively larger initial scale and stronger human capital, the community has more power to buy and protect their property rights, or more methods to fight against the right infringing behavior. Since the local financial interests are closely linked with the development of township enterprises, the local political structure of developed provinces has become a shield for township enterprises, just as the backward provinces were previously keen on protecting family operation. In developed areas and developed villages in other areas, the community economy forms the organization backbone of the rural society. 392

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Under the background of changed relationship between the state and the rural society, the new arrangement of property rights includes the selfprotection mechanism. It is certainly still an irreplaceable function of the state to legalize the new property rights and protect them in implementation, but now when the state does it in an effective way, it will obtain the increased long-term return of financial turnover by the society. Conversely, when the state repeats the mistake of infringing the valid property rights, it will meet with a strong backlash of the community and farmer households, and suffer financial losses for this. In brief, the state can no longer unilaterally transform the society at will, especially the property rights. The latest evidence is that, an “updated version” of rural socialist education movement initiated by some leaders of Beijing during 1990–1991 but ended up without substantial fruits. So far, the rural economic policy adjustment that began at the end of 1970s has turned into a property right reform which is difficult to reverse. It is neither just because the state has made wise and foresighted policies, nor just because the farmers and community elites have made great efforts spontaneously. The true reason is that the state and the farmers spent up to ten years concluding a mutually favorable transaction focusing the rebuilding of valid property right system within the framework of analysis and decision making.

4.9.

General picture

Since the reform, fundamental change has taken place in Chinese rural property right structure. Table 1 lists the estimation of the present rural total assets structure according to the data issued by the State Statistics Bureau in 1993. If this estimation is acceptable, within the present total assets of the rural areas in China (RMB9519.612 billion, in 1992), 77.29 percent is the collective land properties (cultivated lands and mountainous areas) and enterprise assets, 22.71 percent is private assets of farmer households; while over 95 percent of the total collective assets has been contracted to farmer households and individuals for a long term, and that of collective operation is less than 4 percent. This newly formed property right structure has some extremely important characteristics. Firstly, the community and collective assets operated by farmer households and individuals on contractual basis account for over 70 percent of the total rural assets, which constitute the most important 393

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institutional form of present rural production activities of China. Coase (1992) emphasized that it is just the institutional structure of production that he and other institutional economists are studying. The institutional characteristic of this part of contracting economy is a contract between the community collective and farmer households regarding how to utilize the collective assets. The final ownership of contracting economy belongs to the community collective; but the right of utilization and allocation belongs to farmer households and individuals. However, the contracting economy is locality, case and individual specific almost everywhere, subject to the localized power balance of different stakeholders, instead of consistent institutional regulations. Secondly, the property right contract itself of contracting operation is changing. Important changes have taken place and are taking place in the land contract system formed in early 1980s and collective enterprise contract system formed in middle 1980s. For example, the land contract system changed from short term to long term (recently the documented policies of the Central Government announced that it can be as long as 30 years), quoted from Du and Yuan (1993), and in some backward areas the early arrangement of re-distributing the contractual land according to newly increased population was eliminated. The early system of fixing output quotas on a household basis does not exclude the right of farmer families to demand readjustment of the contractual land due to the change of family size, which gave rise to the intrinsic instability of land contracting. Meitan of Guizhou pioneered the institutional innovation to eliminate this right, where the local government provides low-interest loans to support the farmer households to develop waste mountains and hills, as a trade-off to make the farmers give up the right for land re-distribution due to population increase. The author once thought that this is the most important reform innovation since the launch of the system of fixing output quotas on a household basis, because it attempts to resolve a long-standing unfavorable cycle in the population and land utilization (see the investigation report written by Zhou and Liu, 1988b). This method now has aroused interest and is imitated by many other places (see articles written by Du and Yuan, 1993); in addition, the right to transfer contracted land is legalized and developed into a market of land contracting rights in some areas, e.g. the experience in Pingdu county of Shandong (see the article by Land System Research

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Group of Agriculture Department of Development Research Center of the State Council, 1990). The contract system of rural enterprises are developed into the joint-stock cooperative system (Du andYuan, 1993). It is combined with the development of the rural community foundations, which may lead to further innovation of the rural property right system (Chen, 1992, 1993). It can be expected that as the mobility of rural economic elements is enhanced, the contracting property rights will be further developed. These actual changes and farmers’ demand for “fixed policies” as well as the government’s commitments in response are complementary to each other. The latter demands preventing repetition of creation and change of property rights by political means from top to bottom, while the former demonstrates the necessity of adjusting the property right contracts in a changing transaction environment. The important thing is that, roughly since late 1980s, the demand for institutionalization and legalization of the rural new property right structure is taken into consideration by the reform. It is certainly not just writing the most complete forms of property right into the legal documents; instead, it records the rights formed through transactions in the form of law, and increases the means for protecting valid property rights and cost for infringing the property rights, and on such basis forms the procedure for modifying the contract of property rights between interest parties concerned. Secondly, the private assets of farmer families and their free associations have accounted for 23 percent of the total rural assets. The private assets of the farmers are mostly private houses (accounting for 66.4 percent of total private assets), while the scale of private assets available for production investment is still small. However, in the entire rural property right structure, the farmers’ private assets grow most rapidly. The author once estimated the rural assets structure in 1985: at that time, the private assets of farmer families that are not included into the private-owned enterprises are worthy of approximately RMB700 billion, and with the addition of the assets of various private enterprises worthy of RMB22 billion, the total private assets of farmer families amount to RMB722 billion. Since the agricultural land was valuated with nominal interest rate instead of real interest rate at that time, thus the price of land was undervalued. The result of re-valuation with real interest rate is approximately RMB5,000 billion for the agricultural lands, and approximately RMB6,000 billion for the total

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rural assets. Therefore, the private assets of farmers that year accounted for approximately 12 percent of the rural total assets (see the article of Zhou, 1987, published by Comprehensive Task Group of Development Research Institute, 1988, pp. 65–80). Since then, the private assets of farmers have increased nearly three times, with an average yearly growth rate of 16.97 percent, 12 percent faster than the average yearly growth rate of nonprivate assets. The private assets of farmers are mainly from the residual increment of contracting economy, i.e. the part of “self-possessed remaining”, so the contracting economy is its historical precondition. Additionally, in actual operation, the private assets of farmers blend with the contracting economy, meaning farmers and individuals are responsible for decisionmaking, management and allocation for both of them, though they allocate the products according to different contracts. These two points decided the close correlation between today’s Chinese rural private assets and community public assets, or vice versa. However, the private assets of farmers do not depend on the collective public assets in terms of legal rights, and enjoy an independent status. For example, today a farmer can completely withdraw from the contracting economy, but this does not mean that he must submit his private assets, because his private assets are not obtained freely; instead he has handed in all that is required to the state and collective under the contract, and made great efforts to generate the private assets, while assuming risks and responsibilities. In this sense, today the private assets of Chinese farmers are different from the private land system formed after the land reform. Here the state offers no benefit to individual farmer households by organizing large-scale mass political movements, so there is no the historical rational to change the contract of property rights at the will of the state. Lastly, the new property right form of Chinese rural areas, including contracting economy and farmer household private property, is a kind of power structure growing with the development of its execution and protection system. Or in Alchin’s words (1972), the hardness of rural property rights is gradually improved during the growth of its protecting constitution. Actually, it is neither that the state unilaterally takes the initiative to provide a system for executing and protecting valid property rights, nor that the rural communities and farmer households just depend on the village customs or other arrangements at their own cost; instead it takes

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advantage of the transactions gradually concluded among “policies of Central Government-local government-rural communities-farmer households” to firstly eliminate the state’s infringement on the contract of the rural social property rights to the utmost extent, then enhance the exclusiveness of internal resource utilization of the rural society. Up to now, this exclusive institutional arrangement of double significance has not been relying on statutes and their execution agencies; instead, it has been mainly depending on the not-yet-legalized information communication, negotiation, bargaining and especially the de facto withdrawal right. Therefore, unlike the property rights generated through allocation of the political movement, the property rights generated by transactions can only be executed and protected by mutual check and balancing between the transaction parties. Good transactions will benefit both parties, thus becoming long-lasting, and such transactions are in need of and can possibly provide institutionalized rules. Many people are used to the ideology of free institutions or rules. For example, Bater (1990) provided a game theory model to explain the establishment of property right order among the cattle-breeders in the upper reaches of the Nile. In this model, when there is no arbitrator, the two cattle-raising households always rationally choose the strategies of attacking each other. The result of this kind of “prisoner’s game” that causes waste of resource is changed only after introducing the third party who is capable of sanctioning the attacking behavior. The problem is that, this third party does not consume any resource in the model B, but the institutions, orders and regulations cannot be free of charge in real life. Therefore, only after over ten years of reform can people surely predict that the demand for legal services about many kinds of property right contracts in rural areas of China will increase substantially.

5.

Conclusive Review

This chapter regards the rural reform of China as the institutional change centering on the rebuilding of property rights. The theories and practice of the transformation of classical socialist agriculture attempt to accelerate the state industrialization by eliminating the incentive mechanism of farmer property right, i.e. residual claim. The failure of this mode is testified to 397

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by the low economic efficiency and slow improvement of people’s living standard, as well as by the high operation expenses of the system and the rigidity of self-regulation function. Under this mode, the state intrudes into the social life in rural areas, executing direct control and command over all of the rural economic organizations. This not only led to the suffocation of the rural social vitality, but also damaged the normal exertion of the state functions and the legitimate authority of the political institutions. When the socialist rural system is in need of reform, it is confronted by the compound consequences of long-running chronic institutional defects, random outbursts of disaster and top political crises. This is when it finds itself in a real dilemma. The problem here is not how the two cattle-raising households in the upper reaches of the Nile find a free or charged middleman so as to avoid waste to both due to mutually-attacking strategies; the problem here is also not how the hunting tribes in Eastern Canada determine the hunting scope when the fur price increases so as to avoid the too fast extinction of “common animal resources”; here is also not the U.S.A. where the great principles of private assets have already taken root in the laws and customs, and it is necessary to resolve the right disputes that are not or cannot be written into the original property right contract, just because of the noise disturbance due to the invention of airplane., etc. The socialist property right reform is faced with at least a difficult problem of North, i.e. why and how the state with violence potential strictly keeps the boundary of protecting the property right contract, or conversely, why and how a private person can prevent the boundary-crossing action of the state. For this problem, the surface of the mature contemporary western system civilization has disappeared, and the answer can be found only in the history of its early great institutional change. However, this is still not enough, because the real problem is that, the powerful state shaped by the war, state industrialization and great aspiration of rebuilding the old China has intruded in the rural society and kept a longterm record of creating, changing and depriving the farmer ownership. In such circumstances, the existing problems include: on one hand, why and how the state changes the property right policies; on the other hand, why and how a farmer can expect the new policies of the state to be stable for a long time, and regard it as the basis of restriction on fulfilling the contract

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