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title: AcceleratingChina'sRuralTransformationauthor: Nyberg,Albert.;Rozelle,Scott.
publisher: WorldBankisbn10|asin: 0821345761printisbn13: 9780821345764ebookisbn13: 9780585232096
language: English
subject Ruraldevelopment--China,China--Ruralconditions.
publicationdate: 1999lcc: HN740.Z9C6131999ebddc: 307.1/412/0951
subject: Ruraldevelopment--China,China--Ruralconditions.
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AcceleratingChina'sRuralTransformation
AlbertNybergScottRozelle
TheWorldBankWashington,D.C.
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Copyright©1999TheInternationalBankforReconstructionandDevelopment/THEWORLDBANK1818HStreet,N.W.Washington,D.C.20433,U.S.A.
AllrightsreservedManufacturedintheUnitedStatesofAmericaFirstprintingAugust1999
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Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthor(s)andshouldnotbeattributedinanymannertotheWorldBank,toitsaffiliatedorganizations,ortomembersofitsBoardofExecutiveDirectorsorthecountriestheyrepresent.TheWorldBankdoesnotguaranteetheaccuracyofthedataincludedinthispublicationandacceptsnoresponsibilityforanyconsequenceoftheiruse.Theboundaries,colors,denominations,andotherinformationshownonanymapinthisvolumedonotimplyonthepartoftheWorldBankGroupanyjudgmentonthelegalstatusofanyterritoryortheendorsementoracceptanceofsuchboundaries.
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CoverphotographbyFrederickW.Crook.SpringWheatGrowingonHighAltitudeTerraces,YuzhongCounty,Gansu,China.
ISBN0-8213-4576-1
LibraryofCongressCataloging-in-PublicationDatahasbeenappliedfor.
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CONTENTSAbstract v
Preface vi
Acknowledgments vii
AbbreviationsandAcronyms viii
ExecutiveSummary ix
PartI.TheRuralSectorChallenge 1
1.AVisionfortheRuralSector 1
PartII.AnEnablingEnvironmentforRuralDevelopment 7
2.RuralIncomeandMacroeconomicLinkages 7
A.DomesticMacroeconomicDimensions 7
B.TheInternationalMarket 14
3.RuralPublicFinance 17
4.RuralCreditandFinance 25
5.TheDevelopmentofMarkets 35
6.InternationalTradeandForeignCapitalFlows 43
A.Trade 43
B.CapitalandTechnologyFlows 51
PartIII.ManagingRuralDevelopment 59
7.CultivatedLand 59
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8.WaterResources 65
9.TechnicalChangeandTechnologyTransfer 75
A.AgriculturalResearch 75
B.Extension 83
10.RuralIndustry 87
11.PovertyReduction 95
12.NaturalResourceManagementandtheRuralEnvironment
103
Annex:PolicyandActionMatrix 113
Bibliography 119
TABLESINTEXTTable2.1:ResourceFlowsfromAgriculturalandRuralSectorstoNonagriculturalandUrbanSectors
8
Table3.1:TownshipFinanceinChina,1986-93 20
Table4.1:PercentofHouseholdsEngagedinDifferentActivitiesthatFinanceActivitywithLoansandAverageLoanAmount,byActivity
26
Table4.2:Deposits,Loans,andAssetsofChina'sFinancialInstitutions,1996
26
Table5.1:CostofCarryoverStocks 38
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Table6.1:China'sAgriculturalTradeBalance,1992-97 45
Table6.2:GrainPrice,Production,andSupplyVolatility(1990-97)
48
Table6.3:AgriculturalSubsectorDistributionofContractedFDIInflows(1994-96)
53
Table6.4:FinancialIndicatorsofAgriculturallyRelatedForeign-FinancedEnterprises'95
54
Table6.5:DistributionofForeign-FinancedEnterprisesinAgriculturallyRelatedManufacturing,byFactorIntensity,1995
55
Table6.6:ODAAllocationsbySubsector 56
Table8.1:WaterBalanceandEstimatedWaterRequirements,1993,2000,and2010
65
Table8.2:AverageGrainOutputandRevenueperCubicMeterofIrrigationWater
71
Table9.1:AgriculturalResearchBudgetsandResearchIntensity,1986-96
77
Table9.2:AgriculturalExtensionExpendituresinChina,1986-95
83
Table10.1:TVEEmployment,byOwnership 87
Table12.1:IndicatorsofRuralEnvironmentandNaturalResourceConservation
103
Table12.2:NationalInvestmentinEnvironmentalProtection,1991-95
105
Table12.3:ReforestationinChina(1980-93) 109
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FIGURESINTEXTFigure1.1:GrossValueofAgriculturalOutput 3
Figure1.2:RuralIncomebySource 4
Figure2.1:Rural-UrbanPerCapitaIncomeRatios 12
Figure3.1:China,NationalandSubnationalSharesofRevenuesandExpenditures
17
Figure3.2:Rural-UrbanPerCapitaIncomeRatios 18
Figure3.3:InvestmenttoWageSpendingRatio,Shaanxi,1983-92
19
Figure5.1:FreeMarketSalesIndexofAgriculturalProducts
35
Figure6.1:MajorCommodityGroupsasaProportionofAgriculturalTrade
45
Figure6.2:DomesticandInternationalGrainPriceVolatility
48
Figure6.3:ActualCapitalFlows 51
Figure6.4:FDIInflowasPercentofGrossFixedCapitalFormation,1991-95
51
Figure8.1:WaterRegionsandIrrigationZones 67
Figure8.2:ProportionofInvestmentsinWaterConservancy,byType
67
Figure10.1:PercentofTVEOutputValue,byOwnershipType
88
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Figure10.2:ManagerialContractEvolutioninTVEs,SampleData,1984-93
88
Figure10.3:BankBorrowingasaPercentofTVEOutputValue
91
Figure11.1:RuralAbsolutePoor 96
Figure11.2:RealInvestmentinPoorAreasPovertyReductionProgram
96
BOXESINTEXTBox9.1:IndiaGrowthAccountingAnalysis 79
Box9.2:AgriculturalResearchConsiderations 81
Box10.1:TypesofTVEOwnershipandControlinRuralIndustry
89
Box10.2:TVECreditConstraints 90
Box11.1:MicrofinanceinYilongCounty 97
Box11.2:India:GovernmentSpending,Growth,andPoverty
99
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ABSTRACTChina'sruraleconomicachievementsofthepasttwodecadesrapidgrowthanddecliningpovertyhavebeenremarkable.However,replicatingtheseachievementsandimprovingsustainabilityduringthenexttwodecadeswillbedifficultasmanyunderlyingconditionshavechanged.Economicreformswereinitiatedwhensupplyshortagesconstrainedgrowth,butcurrently,weakdemandismoreconstraining.Furthermore,theproductivitygainsarelargelyexhaustedfromtransitionpoliciesandinstitutions;futureproductivitygainswillcomefromefficiencies,stimulatedbymarketforces,andimprovedproductivityofscarcewaterandlandresources,throughresourceconservationandnewtechnologies.Therural-agriculturalsectorwillremaindependentonarobusturban-industrialsectortocreatejobsandabsorbsurplusruralandagriculturallabortherebypermittingtheremainingfarmersaccesstoadditionallandresources.Severalcrucialruralinstitutionsneedtobefosteredaneffectivefiscalsystem,amoreefficientfinancialsystem,aworkablelandtenurearrangementwithmarketableland-userights,andimprovedagriculturalinvestmentincentives.Continuedreformwillentailfurtherliberalizationofproduction,pricingandmarketingpoliciesandstronggovernmentpromotionofamarketenvironmentandinvestmentsinpublicservicesandinfrastructure.
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PREFACETheprimarypurposeofthisreportistoidentifyandconsolidateinformationoncrucialissuesthatimpactonruraldevelopmentinChina.Thereport,preparedwiththeassistanceofChineseandnon-Chinesescholarsandanalysts,assessesstrategicoptionsfromtheperspectiveofefficiency,equitabledevelopmentandgrowth.
Theauthorsacknowledgethatmanyreformsinthemacroeconomicenvironmentandinothersectorsareongoingandthatadditionalreformsareplanned;manyofthesegobeyondthescopeofthisreport.Werecognizethatconcurrentmacroeconomicpolicyandinstitutionalreformsacrossallkeysectorswouldbeunmanageableanddestabilizing;therefore,prioritiesconsistentwithGovernment'sgradualistreformapproachneedtobeestablished.Sucheconomy-widereformprioritiesandindividualreformsequencingaretheresponsibilityofGovernment,givingdueconsiderationtosocialstabilityissues(foodsecurity,employment,etc.)thattemporarilyoverrideeconomicefficiencycriteria,andrequire"second-best"reformsolutionsduringthetransition.
ThereportispresentedinthespiritofassistinggovernmentofficialsandWorldBankstafftoprioritizepolicyandinstitutionalreformsandpublicinvestmentdecisionsintheruralsector.Also,itishopedthereportwillsupporttheGovernmentindefiningruralreformprioritiesandprogramsfortheTenthFive-YearPlan.Asprioritiesareestablished,theWorldBankisreadytoworkwithgovernmentofficialstomovebeyondstrategyandhelpdesignandpreparethetacticalapproachestoimplementpriorityruralsubsectorreforms.
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ACKNOWLEDGMENTSThescopeofthisreportwasdeterminedindiscussionswiththeDirectorandstaffoftheInstituteofRuralDevelopment,ChineseAcademyofSocialSciencesduringavisittoBeijinginApril1998.ThereportwaswrittenbyAlbertNyberg(EastAsiaandPacificRegion,RuralDevelopmentandNaturalResourcesSectorUnit)andScottRozelle(Consultant)basedoninputsandworkingpapersfrommanyindividuals.MajorinputswereprovidedbyHuangJikun(CenterforChineseAgriculturalPolicy,ChineseAcademyofAgriculturalScience),DuZhixiongandLiZhou(InstituteofRuralDevelopment,ChineseAcademyofSocialScience),WenTiejun(ResearchCenterforRuralEconomics,MinistryofAgriculture),ChristineWongandAlbertKeidel(EastAsiaandPacificRegion,ChinaResidentMission),JohnWeatherhogg(FAO),LorenBrandt,AlbertPark,ChenChunlai,ColinCarter,AndrewWalder,GaryKutcher,andMadeleineVarkay(Consultants).InputsanddiscussionswithAbrahamBrandenburg,AlanPiazza,RichardScobey,andJuergenVoegele(EastAsiaandPacificRegion,RuralDevelopmentandNaturalResourcesSectorUnit)alsocontributedtothedevelopmentofideasandconclusions.
Thereportbenefitsfromdiscussionswithstaffofvariousinternationalorganizations(InternationalFoodPolicyResearchInstituteandAsianDevelopmentBank),internationalnongovernmentalorganizations(FordFoundation),andbilateralagencies(EconomicResearchService,UnitedStatesDepartmentofAgriculture).ThereportincludesideasgeneratedduringdiscussionsandinterviewswithnumerousChineseandinternationalscholars,particularlythoseassociatedwithChineseresearchinstitutions.Also,itcitesthefindingsandconclusionscontainedinawideselectionofliterature.
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TheauthorsworkedcloselywithcounterpartsfromtheRuralDevelopmentInstitute,ChineseAcademyofSocialScience,andparticularthanksaredueProfessorsChenJi-yuan(FormerDirector),ZhangXiaoshan,(CurrentDirector),andAssociateProfessorDuZhixiongfortheirinsights,discussions,andassistance.Also,particularthanksaredueDr.HuangJikun,DirectoroftheCenterforChineseAgriculturalPolicy,ChineseAcademyofAgriculturalScience,andhiscolleagueswhoprovidedsignificantstafftimeandeffortinpreparingworkingpapersaswellasreadingandcommentingonvariousportionsofthereport.
Severalagenciesandindividualsprovidedphotographsforinclusioninthereport.TheWorldBankPhotoLibraryprovidedseveralslides;otherinstitutionalcontributorsweretheCGIARphotolibrary,theNationalHybridRiceResearchandDevelopmentCenter(YuanLongping),andtheNationalZoologicalPark(JesseCohen).Inaddition,R.Jaisaard,A.Piazza,F.Crook,A.Whitten,S.Shen,R.Zweig,G.Li,T.Tsutsumi,andF.Gillamcontributedphotographsandslidesfromtheirpersonalcollections.
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ABBREVIATIONSANDACRONYMSABC AgriculturalBankofChina
ADBCAgriculturalDevelopmentBankofChina
bcm Billioncubicmeters
CAASChineseAcademyofAgriculturalScience
CASS ChineseAcademyofSocialScience
CCAPCenterforChineseAgriculturalPolicy
DDT Dichloro-diphenyl-trichloro-ethane
EPBs EnvironmentalProtectionBureaus
FAO FoodandAgricultureOrganization
FDI ForeignDirectInvestment
FFW FoodforWork
HRS HouseholdResponsibilitySystem
GDP GrossDomesticProduct
GVAOGrossValueofAgriculturalOutput
HRS HouseholdResponsibilitySystem
IFPRI InternationalFoodPolicyResearchInstitute
IOU IOweYou
IPM IntegratedPestManagement
IPR IntellectualPropertyRight
IRD InstituteofRuralDevelopment
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IRD InstituteofRuralDevelopment
LGPR LeadingGroupforPovertyReduction
MFIs MicrofinanceInstitutions
MOA MinistryofAgriculture
MWR TheMinistryofWaterResources
NEPA NationalEnvironmentalProtectionAgency(nowSEPAStateEnvironmentalProtectionAgency)
NGO NongovernmentalOrganization
ODA OverseasDevelopmentAssistance
PBC People'sBankofChina
PPP PurchasingPowerParity
R&D ResearchandDevelopment
RCCs RuralCreditCooperatives
RCFs RuralCreditFoundations
RFIs RuralFinanceInstitutions
SMEs SmallandMediumEnterprises
SOE State-OwnedEnterprise
SPC StatePlanningCommission(nowSDPCStateDevelopmentPlanningCommission)
TFP TotalFactorProductivity
TVEs TownshipandVillageEnterprises
VAT Value-AddedTax
WUA WaterUserAssociation
WTO WorldTradeOrganization
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EXECUTIVESUMMARY
Initstwodecadesofreform,Chinahasachievedremarkableagriculturalandrural-industrialgrowth,impressivelyreducedpoverty,andreversedsomeoftheenvironmentalandnaturalresourcedegradation.Thepopulationgrowthratealsocontinuestodecline.Since1978aggregategrossdomesticproduct(GDP)hasgrownatanaverageannualrateof10percent;agriculturalGDP,at5.2percent;andruralindustrialoutput,at31percent.Thenumberofresidentslivinginabsolutepovertyhasdeclinedby210million,toabout6percentoftheruralpopulation.However,thesetrendshaveslowednoticeablyinrecentyearsandChina'sruralsectorstillfacesconsiderablechallengeinachievingfurtherdevelopment.
Ruralreformshavebeengradual,deliberate,andlargelyeffectiveastheruralsectorhasincreasinglymovedawayfromaplannedeconomydespiteseveralremainingremnantsoftheplanninglegacyandcontinuingmarketinterventionsbygovernment.However,theproductivitygainsfromtransitionpoliciesarelargelyexhausted.Sustainingruralincomegrowthwillrequireacarefullycraftedeffortforseveralreasons:Manyoftheconditionsthatfacilitatedearliergrowthnolongerprevail.Inaddition,China'sruralproducts,input,labor,andlandmarkets,whileimproving,arestillintheirinfancy.Finally,Chinastillneedstofosterseveralcriticalinstitutions,suchasaneffectivefiscalsystem,amoreefficientruralfinancialsystem,aworkablelandtenurearrangement,andarevampedtradeandinvestmentenvironmentforagriculture.
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Increasingruralstandardsofliving,eliminatingpoverty,andreversingthedivergenceinruralandurbanincomelevelswillrequireadelicatebalanceofproductivity-enhancinginvestmentsandboldpolicymeasurestoremovetheconstraintsthatarepreventingtheemergenceofinstitutionsthatfullyincorporatemarketprinciples.Inthelongrun,thegovernmentshoulddivestitselfofindustrialandothercommercialactivitiesandfocusinvestmentsonpublicservices,researchandextension,andinfrastructure.Policyshouldfocusmoreondevelopinggovernment'sregulatoryroleandlessondirectmarketintervention.OurultimatevisionofChina'sruraleconomyisoneinwhicheconomicadministratorsfocusonpromotingpolicies,creatinginstitutions,andtargetingpublicinvestmentsthatimproveresourceallocationandcomparativeadvantage,enhanceproductivity,andfacilitatemoreefficientmarkets.Inthisvision,economicadministratorsinterveneonlywheremarketsareinefficientorhavethepotentialtopositivelyaffectnationalwelfare,suchasalleviatingpovertyandredistributingwealth,controllingenvironmentalpollution,andimprovingmanagementofnaturalresources.
RuralFiscalPolicy'sUnderminingofSectoralGrowth
Aninefficientruralfiscalsystemisoneofthemostimportantproblemshamperingruraldevelopment.Decentralizationhasledtoaself-sufficientruralfiscalstructurethat,coupledwithadevelopmentlegacyorientedtowardtheurban-industrialsector,hashardenedbudgetconstraintsanddistortedruralinvestmentstowarddevelopingpotentiallytaxablelocalindustryattheexpenseofrural-agriculturalinfrastructureanddevelopmentinvestmentsthatarelongtermandgrowthoriented.Overthetwodecadesofreform,nationaltaxrevenueshavedeclinedtoabout12percentofGDPaportionthatisamongtheworld'slowest.The1993fiscalreformandadoptionofavalue-added
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taxincreasedcentralcontroloverrevenuesandstemmedthedecliningtrendincollectionsinbothrichandpoorregions.However,revenuereallocationsarestillurbanbiased,regressive,andineffectiveinredistributingresources.Thus,theequalizationoftaxation,redistribution,andexpenditureforpublicgoodshasdeclined,particularlyinthepoorestregions.Furthermore,netrural-to-urbanfiscaloutflowshaveincreasedandnowexceedY100billionannually,starvingtheruralsectorofinvestmentandoperatingresources.Themassivemovementoffundsoutoftheruraleconomyindicatesitsimportanceinthenationaleconomyandemphasizesthenecessityofkeepingithealthy.
General(untied)fiscaltransferstotownshipsandvillageshavedeclinedbytwo-thirds,inrealterms,overthepastdecade.Thusintheenvironmentofreducedsubventionsandintheabsenceoftaxingauthority,localgovernmentshaveimposedunofficial,nontaxleviesandfeesonruralproducersandconsumersandrelyonothercreativemechanismstofinancegovernance,socialobligations,andunfundedcentralgovernmentmandates.Sincethemosteasilytappedsourceofoff-budgetrevenuesarederivedfrommiscellaneousfeesassessedonruralenterprises,poorareasthatlacksuchenterprisesarefurtherdisadvantaged.Off-budgetcollectionsarenotofficiallysanctioned,arenottransparent,frequentlyareregressive,areinconsistentlylevied,distortinvestmentallocations,andhaveoccasionallycausedruraldissention.Becauseoftheurgentneedforadditionalresources,thegovernmentshouldconsiderconvertingsomeofthesefeesandleviesintotransparentcomponentsofthetaxsystem.
Inadequatebudgetsforruralsocialserviceandadvisoryinstitutions(forexample,natureandforestpreserves,agriculturalresearchandextension,schools,andruralclinics)frequentlyresultinthediversionofstaffandfinancialresourcesfromtheirprimarymissiontocommercialactivitiestosupplementbudgets.Infrastructure
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investmentfundsareoftenredirectedtopotentialtax-producingenterprisesordivertedtomeetsalariesandotherrecurrentcosts.Also,togeneraterevenuesomeprotectiveagenciesresorttoexploitingtheresourcestheyarechargedwithprotecting.
FurtherfiscalreformisimperativetoenableChinatomaintainruralinfrastructureandservices,sustainlong-rungrowth,andreducepoverty.Furtherassessmentoftheconsequencesofsuchahighlydecentralizedeconomyisneeded,alongwithoptionsforadditionalrevenuesourcesandexpenditurereduction.Aradicaloptionwouldbetotransferthebasicunitoffiscalresponsibilityfromtownshipstocounties(exceptperhapsforthemostindustrializedtownswithsurplusbudgets).Thiswouldreduceadministrativestaff,amovethatwouldsignificantlyreducecosts,aswagesaretheprimaryexpenditureatthetownshiplevel.Reducingnumbersof''grassroots"staff,however,mayhinderpolicyimplementation.Localgovernmentconsolidationandreformshouldbehighonthepolicyagenda.
RuralIncomes,Off-FarmEmployment,andTownshipandVillageEnterprises
Recentincreasesinagriculturalincomehaveresulted,inpart,fromincreasedfarmgatecommodityprices.ThisoptionhasbeenfullyexploitedasdomesticpricesarenearinternationalpriceequivalentsunlessgovernmentdecidestoembarkonacostlyfarmersubsidyprogramandignorethecommitmentsmadeintheyetunfinishedWorldTradeOrganizationaccessionnegotiations.Otheroptionsforimprovingagriculturalincomegrowthinclude(a)increasingfactorproductivity;(b)diversifyingproductionintolabor-intensive,higher-valuecommodities;and(c)investingintransportandothermarketinginfrastructuretoreducemarketingcostsandenablefarmerstoincreasetheirshareofconsumerexpenditures.FactorsaffectingthesealternativesarereviewedinthisreportandinotherrecentWorldBankpublications.
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ThetransformationofChinaintoamoreaffluent,modernindustrialeconomydependsonsharplyincreasingincomesandshiftingalargepartofthepopulationoutofagriculture.
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Obtainingoff-farmemploymenthasbeenthesurestroutetoimprovingincomes.Inthepast,ruralandurbaninstitutionsrestrictedthemovementoflaboroffthefarm.Therecentexplosionofoff-farmworkprovesthatmanyofthesebarriershavebeenremoved.(Nearly140millionofChina's450millionrurallaborforceworkinnonfarmjobs.)However,obstaclesstillpreventfarmfamiliesfrommovingtolocationsthatpromisethemhigherreturns,particularlyfeaturesoftheurbaneconomy,suchasstrictprohibitionstojobaccess,urbanresidentpermits,andrestrictedaccesstourbanservices.Ruralbarriersarelessrestrictive,althoughdebatecontinuesregardinghowlandtenurearrangements,quotas,andotherinstitutionsaffecthouseholddecisionstoseekemploymentorresidenceoutsideofagriculture.Chinashouldmakeeveryefforttoeliminatethebarrierstothemovementoflaboroffthefarm.
Typically,off-farmemploymentisassociatedwithrural-urbanmigration,butinChina'scasetownshipandvillageenterprise(TVE)employmentandrural-ruralmigrationalsoisanoption.Millionsofruralworkershavemigratedtourbanjobsinthepastdecade,butforthenextdecadesuchmigrationmaybecomealessviableoption,asrestructuringofstate-ownedenterprises(SOEs)andrationalizationofemploymenthasbegun.Asurplusofunemployedurban-industrialworkerswillhavepriorityfordeploymentinanynewlycreatedurbanjobs,makingagriculturallabor'ssearchfornonruralemploymentincitiesmoredifficult.Off-farmmigrationtoruralindustriescouldplayanimportantjob-creationrole.Ruralindustryprovidesthefastest-growingsubsectoroftheoff-farmlabormarket.Continuedout-migrationwouldpermitthoseremainingintheagriculturalsectortocombineadditionalland,water,andcapitalwiththeirlaborandimproveincome.Improvementintheland/laborratiowillbeacrucialelementinincreasingfutureincomewithinagriculture,particularlyifwaterdevelopmentandconservationschemesandcredit-institution
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reformincreasewaterandcapitalavailability.Giventheinevitableconflictthatwillarisebetweenlaid-offurbanworkersandcity-boundruralmigrants,Chinashouldpromotepoliciesthatencouragetheefficientexpansionofruralindustries.
ConsolidatingPastGainsfromRuralEnterprises
ThecontributionofTVEstoChina'srapideconomicgrowthduringthereformperiodhasbeenextraordinary.TVEscontribute40percentofthenationalgrossindustrialoutputandemployabout130millionworkersrepresentingthemajoremployerofruralnonfarmlabor.Unfortunately,outputandemploymentgrowtharedecelerating,accesstocredithasbeencurtailed,andseveredebtproblemsareappearing.However,ownershipandmanagementareevolvingfromcollectiveandcooperativetoprivateownershipinresponsetothechangingeconomicenvironment.By1997,90percentofTVEswereprivatelyownedandaccountedformorethanhalfofTVEemployment.Also,themanagementstructureofthosefirmsthatremaincollectivelyownedisrapidlyshiftingawayfromfixed-wagemanagementcontractstomoreresponsiveprofit-sharingandfixed-leasearrangements.
Theinitialconditionsthatfavoredtherapiddevelopmentofruralindustriesnolongerprevail;productcompetitionhasincreased,productionhasbecomemoreefficient,andcompetitivepressureshaveeliminatedthelargeprofitsofearlieryears.However,theinlandprovinceshaveafewadvantagesthattendtooffsetthedisadvantageofbeingdistantfrommajor,high-incomemarketsalongthecoast,includinglower-costlaborandoftenbetteraccesstoagriculturalrawmaterials.SomecoastalTVEshavesoughttorelocateinlandtotakeadvantageofthesebenefits.However,anattemptbythelessdevelopedregionstoemulatethepoliciesandinstitutionsofanerathatnolongerexistswouldbecounterproductive.Localgovernmentsininlandandotherdisadvantagedareasshouldpromote,butnot
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subsidize,small-scalefamilyenterprisesthattargetlocalnichemarketsandenterprisesthatcanexploitlocal
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comparativeadvantage,oraidfirmsthatemphasizeagricultureandrelatedsidelineproductionmorethanindustry.Officialspromotingruralindustryinlandshouldalsoseektoelicitthemanagementandcapitalinputsofthosewhohavesuccessfullydevelopedenterprisesinotherareas.
ThefinancialneedsofTVEsarenotwellmetbythefinancialmarkets,whichisaseriousconstraint.Ruralfinancialreformshavecurtailedformalcredit,andascreditbecomesrestrictive,TVEsareamongthefirsttoloseaccess.AportionofthecreditproblemisduetouncertaincreditworthinessoftheTVEs.However,thisisparadoxical,asTVEsarethemostdynamicsegmentoftheindustrialsector.Giventheirimportanceinthenationaleconomy,Chinamustfindawaytoincreasetheiraccesstocredit.Explicitfinancing(foronlendingorloanguarantees)forsmallandmediumenterpriseschanneledthroughexistingfinancialinstitutionsisanoption.However,atrainingprogramtoimprovefinancialmanagementandoperationalskillsofboththelendinginstitutionandborrowingenterpriseshouldaccompany,orbeacomponentof,afinancingprogram.
ReformingRuralCredit
Thefinancialsectorhasreformedmoreslowlythansomeothersectors,andthegovernmentmaintainsstrongcontrols.Severalfinancialinstitutionshavedevelopedtoservetheruralsector,butmostlendingistoruralenterprisesandtostateagenciestoprocuregrainandcotton(policylending).TheRuralCreditFoundationsystem,thesmallestandnewestquasi-statecreditinstitution,istheonlyinstitutionalcreditsourcethatlendsprimarilytoagriculturalhouseholds.Informalcreditamongvillagers,bothwithandwithoutinterest,isanimportantcomponentofagriculturalproductioncredit.
Adefinitiveseparationofpolicyandcommerciallendingisclearly
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needed.Chinashouldfullyunderstandthatpolicylendingtostateagenciesformandatoryprocurementofgrainsparticularlythatwhichgoesintograinprocurement,strategicreservesorbufferstockswillincurlosses.Concentratingpolicylendinginasingleinstitutionwouldpermitbettermonitoringofcosts,subsidyrequirements,andimpacts.
Chinamustdecontrolinterestratesifruralcreditinstitutionsaretoadequatelyservethesector.Ruralfinancialinstitutions(RFIs)focusprimarilyonlending,buttheycouldimproveservicetotheruralcommunitybycreatingnewsavingsdepositinstrumentsthatprovideattractivecombinationsofreturnandliquidity.Suchinstruments,combinedwithimprovedruralmarkets,maypersuadefarmerstoholdincreasedsavingsintheformofdepositsandlessintheformofgrain.Regulationmustbeprudenttoensurestabilityandsafeguarddepositswhileavoidingexcessiverestrictions.
Ruralcreditisconstrained,inpart,bythelackoftechnicalandfinancialskillsofRFIstaff,whichlimitstheirabilitytoevaluatealternativeprojectsandmonitorloansappropriately.ChinashoulddevelopinstitutionsthatsupportRFIsinimprovingtheircapacitytoscreenloans,enforcerepayment,improvetheuseofloanhistoriesandcreditratings,developandstandardizeaccountingandreportingprocedures,evaluateassetsandcollateral,anddevelopresalemarketsforcollateral.Also,ChinashouldcreateadiversityofRFIstocompeteandspecializeinmeetingtheneedsofdifferentdemandcharacteristicswhichmightrangefromfull-servicebankingtospecializedbanksforruralindustrytomicrofinanceinstitutions.
Productivity-EnhancingPoliciesandInvestments
ResearchandExtension:AMeansforRaisingTotalFactorProductivity
Historically,theagriculturalsectorhasbeenwellservedbythepublicresearchsystem.Bycreatingnewtechnologiesandcropvarietiesand
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improvingagronomicpractices,theresearchsystemraisedtotalfactorproductivityinagriculture,expandedproductionfrontiers,reducedlong-termproductioncosts,andimprovedruralincomes.Growthaccountinganalysesindicatethatcropgrowthoverthepastdecadewas
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overwhelminglyattributabletoresearchinvestments.Unfortunately,agriculturalresearchinvestmentshavedeclinedinrealtermsandresearchexpendituresasaproportionofagriculturalGDPhavefallenbelowtheaverageofdevelopingcountries,creatingconcernforlong-termagriculturalgrowth.Withoutaccesstonewefficientproductiontechnologies,China'sfarmerswillbedisadvantagedincompetitiveinternationalmarkets.
Governmenthasseveraloptions:(a)increasepublicinvestmentsinagriculturalresearchandtechnologytransfertodevelopacontinuingstreamofapplicablemodernagriculturaltechnologyforagriculture;(b)encouragedomesticprivatesectorinvestmentinnewagriculturaltechnology;(c)provideincentivesforforeignentrepreneurstodevelopandproducenewtechnologiesforthedomesticmarket;and(d)encouragetheimportoftechnologydevelopedelsewherethroughminimalimportconstraintsandtariffs.Themostefficientprocessislikelytobeacombinationoftheseactivities;somegovernment-financedresearchisnecessarytoensurepriorityissuesandpublicgoodsareaddressed.Thisisespeciallytruewhereresearchbenefitsarelongtermorcannotbereadilycapturedandwouldnotbeundertakenbytheprivatesector(suchasresearchonsubsistencecommoditiesforresource-poorareasandnaturalresourcemanagement).
Alargequantityoffiscalresourcescontinuetobedirectedintothegrainsubsector.Theseresourcesconsistprimarilyofstoragefacilities,stocks,andmonetarysubsidiesallofwhichabsorbfinancesbuthavenoinvestmentmultipliereffectongrowth.Redirectingsomeoftheseresourcestoagriculturalresearchwouldhaveabetterimpactonlong-termgrowth.However,pendingfiscalrestructuring,severalactionscouldimprovetheefficiencyoftheexistingresearchfunds,increaseresearchfinancing,andincreasedaccesstonongovernmentresearchresults.Toensurethemostimportantresearchissuesareaddressed,
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thegovernmentshouldmakethecompetitivegrants-awardingprocessfullytransparentandwidelypublicizedandensurebroadscientificrepresentationonjudgingpanelsandaccessforyounger,recentlytrainedscientists.Toincreaseresearchfinancing,thegovernmentcouldimposecessesonagriculturalcommoditiesthatareprocessed(suchascotton,tobacco,andtea)orattransitpointswhereacesscanbeadministrativelycollected,suchasanexportport.Afterenforcingofintellectualpropertyright(IPR)protectionandlicensingbecomebetterestablished,commercialactivitiesofresearchinstitutesshouldbediscontinued.However,intheshorterterm,implementingamatchinggrantprogramtoprovidefundsequaltoaninstitute'scommercialearnings,ratherthanautomaticfundingreductions,couldstrengthentheresearchprogram.ChinacooperateswithseveraloftheInternationalAgriculturalResearchCenters.IncreasingitsinteractionwiththeseinstitutionsandwithadditionalcentersthatfocusonlivestockandcropsinaridandsemiaridzonescouldimproveChina'saccesstoagriculturaltechnologiessuitedtopovertyareas.
Extensionservicessufferfromsubstantialfinancialproblems,staffingshortages,andstaffskilldeficiency.Fundingshortageshavedrivenawaymanyfieldstaff.Thoseremainingin-postrequireincreasedtrainingtoupgradetheirexistingskillsandacquirenewskillsrelatedtoproductionofnontraditionalcommodities,andnewmethodsofunderstandingandaddressingmarketingissues.Giventhesmallscaleofitsfarms,Chinamustrevitalizeitspublicextensionsystem.Someactivitiesofthepublicextensionservicecouldbeassumedbytheprivatesectorifcommercialcompanieswerepermittedgreaterparticipationindomesticmarketing.Suchactivitieswouldincludeintroducingnewseedvarieties,managingpests,applyingagrochemicals(includingfertilizer),andcontrollingthequalityofcommodities.
ForeignDirectInvestmentinAgriculture
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Chinahasbeenenormouslysuccessfulinattractingforeigndirectinvestment(FDI)primarilyinlabor-intensivemanufacturingwhich
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hasbeenanimportantsourceofnewjobcreation.However,onlyabout4percentofactualFDIinflowsduringthe1990swasforagriculturalandagriculturallyrelatedmanufacturinginvestments.FDIintechnology-intensiveagroindustries(seed,agrochemicals,veterinarypharmaceuticals,andagriculturalmachinery)haveimportantmodernizationpotentialandcouldsupplementorsubstituteforresearchthatiscurrentlybeingcarriedoutbyChina'sown,already-stressedresearchsystem.Giventhepotentialcontributiontosectoralgrowth,thegovernmentmightactivelyseekforeigninvestmentintechnology-intensiveindustriesaswellascapital-intensiveindustries,suchasfertilizer,whichisinshortsupplydomestically.
AlthoughthegovernmenthasenactedIPRlegislation,legalprotectionisperceivedtobepoorandChina'slargepotentialmarketfornewinputtechnologyhasnotattractedsignificantprivateinvestments.Consequently,technologydevelopedbytransnationalcorporationsandmadeavailableforChinesefarmersprimarilycomprisesinputsthatareverydifficulttoreplicate,thusthepropertyrightsaretechnicallyprotected.Iftransnationalcorporationsaretoprovideandpromoteproprietarytechnology,ChinamustshowthatitwillresolutelyenforceitsrecentlyenactedIPRlegislation.Inaddition,officialsoftransnationalcorporationshaveindicatedthattheweakregulatoryenvironment,opaqueforeigninvestmentpolicy,andfragmentedwholesalingandretailingnetworksinhibitsinvestmentintechnologyandcapital-intensiveindustries.Incentivesneedtobecraftedtostimulateinvestmentandresolvethevariousmarketinganddistributionconstraints.
ResourceDevelopmentandProductionInputs
Water:TheMajorConstrainttoFutureAgriculturalProductivity
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Chinahasabundantlaborbutotherresourceinputsareinshortsupply.Waterisagriculture'smostlimitingagriculturalresource,particularlyinnorthernChinaandthegovernmenthasidentifiedseveralhundredwaterdevelopmentprojectstoassistinalleviatingthisconstraint.Despitemassiveinvestmentsinwaterdevelopmentandconservationoverthereformperiod,wateravailableforirrigationin1993wasmarginallylessthanthatof1980.Giventheunmetwaterrequirementsinsomesectorsandthehigherproductivityofwaterinothersectors,largeinvestmentsindevelopingnewresourcesandinimprovingdistributionanduseefficiencyareneededifsuppliestoagriculturearetobemaintained.Themostprobablesourceofnewsuppliesarewatertransfersfromthemorewater-abundantsouth,asbothsurfaceandgroundwaterresourcesarefullyoroverexploitedinmostnorthernlocations.Chinashouldinitiateworkononeormoreofthesouth-northtransferroutesasearlyaspossible,ascompletionwillbecostlyandtimeconsuming.
Whilewatertransfersfromthesouthwillhelpshortagesinthenorthinthenearterm,theywillnotincreaselong-termwatersuppliesinthenorth,asthetransfervolumeswilllikelybelessthancurrentoverabstractionofgroundwaterintheNorthChinaplain.Investinginprojectsforimprovingirrigationefficiencyisequallyimportant.Thesewouldincludeimprovingdeliveryefficiencythroughrehabilitatingsystemsandliningcanals(orbuildingpipelines),andimprovingon-farmefficiencythroughimplementingadvancedapplicationtechniquesandnewwater-savingtechnologies.Achievingthetargeteddeliveryefficiencyof78percentwoulddeliveranadditional100billioncubicmetersofwatertofarmers'fieldsincreasingproductionandfarmers'incomeenormously.
Applyingfinancialresourceconstraintsmeansthatfarmerswillberequiredtoshoulderthecostsofmanaging,operating,andmaintaininglateralcanals.Somesuccessfulpilotprogramsintransformingirrigationmanagementagenciesintoself-financing
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entitieshavedevelopedandshouldbereplicatedasrapidlyasinstitutionalmanagerscanbetrained.However,farmershavelittleincentivetoconservewaterandaltertheircroppingpatternsifwater
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costsareloworunrelatedtotheamountused.Therefore,toensurewaterconservationandefficienton-farmwateruse,weencouragerapidimplementationoffull-costvolumetricwatercharges.Chinamustbegintoaddresswaystobegintoimplementwaterpricingschemes.
InsouthernChina,controllingtheflowofabundantwateristhegreaterissue.Floodcontrolisanintegralcomponentofaninvestmentprogram,andChinashouldclearlydirectadditionalattentiontowatershedmanagement.
LandResourcesandLandUseRights
NearlyeveryfarmhouseholdinChinaisendowedwithland.Bylaw,landownershiprestswiththevillage(orcollective),whichcontractsorotherwiseallocatestheuseofthelandtohouseholds.Thecentralgovernmentrecentlyextendedlegaltenuresecurityoncontractedlandfrom15to30years,butvillageleadersfrequentlydonotfollowthesepolicydirectives.Thedynamicsofhouseholdandvillagedemographicsandotherpolicypressuresofteninducelocalauthoritiestoreallocatelandbeforecontractexpiration.Althoughsignificantlong-termgainstoproductivitywouldlikelybeassociatedwithbettertenure,severalanalyseshavedemonstratedthatChina'slandtenuresystemhasonlyamarginalimpactonagriculturalproduction.However,theabsenceofsecuretenurerightsdoespreventfarmersfromusinglandascollateralandlimitstheiraccesstoformalcreditmarkets.
Formalland-rentalmarketsareinfrequentlyfoundinChina.Informalarrangementsallowhouseholdstotransfershort-termuserightstoothersforafeeincludingtaxandquotaliabilitiesalthoughtheproportionoflandrentedisverysmall.Farmersfindrentingouttheirlandincreasinglydifficultasincreasingnumbersofruralresidentsmigrateorotherwiseobtainnonagriculturalemployment,leadingto
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inefficienciesinlandutilization.Findingamechanismtopermittheremainingfull-timefarmerstoaccessadditionalfarmland,andthusimproveincomesbyraisingtheland/laborratio,isimperative.
Despitethebenefitsthatfarmerswouldreceiveiflandwereprivatizedoriflandrightsweremoresecure,anumberofhouseholdsurveyshavedeterminedthatmostfarmersprefercollectiveownershipandperiodiclandadjustmentsbasedondemographicdynamics.Therefore,anabruptchangeinlandpropertyrights,suchasprivatization,wouldhavesignificantsocialcostsandbeilladvised.GiventheimportanceoflandinChina'sruralsociety,continuingexperimentsinthelandmarketandtenuretocarefullyassessimpactsonsecurity,income,equality,investmentsandefficiencyarecrucial.
ImprovingResourceUseandAllocationEfficiency
ExternalAgriculturalTrade
Agriculturaltradeincreasedabout50percentoverthepastdecadesomewhatlessthanoveralltradeandtheagriculturaltradebalancehasbeenpositiveinallbutoneofthoseyears.Althoughthetradedataseriesareshort,theyimplythatthecompositionofagriculturalexportsincreasinglyreflectsaproductionandtradepatternconsistentwithcomparativeadvantageexportsoflabor-intensivehorticultureproductsandimportsofland-intensivecerealshavebothrisen.
Intheinterestofstabilization,statetradingcompaniescontinuetomonopolizemuchofChina'sagriculturaltrade.Butseveralfactorscombinetodenyachievingthestabilizationgoal.Statetradingcompaniesrespondslowlytochangingtradeconditions,implementtradequotasplannedfarinadvanceofharvest(bythetimethetradeoccursitmaybeunrelatedtoprevailingsupplyconditions),andintheabsenceofcompetitiveefficienciesdestabilize,ratherthanstabilize,suppliesandprices.PricesinsomeofChina'sgrainmarketshavebeen
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morevolatilethaninternationalpricesandgrainimports/exportshaveexacerbateddomesticsupplyfluctuationsoverthepastdecade.
Aliberal,open,andcompetitivegrainmarketincludingstateandnonstateenterprisesoperatingunderthesameconstraints,incen-
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tives,andcommercialstandardswouldfacilitatemorerapidtraderesponsestograinsurpluses(includingsurplusstocks)andshortages,andbemorestabilizingthanthecurrentmarket.Moreopentradewouldrequireremovingtradequotasandreplacingthetwo-tiergraintariffregime(1to3percentforwithinquotaandmorethan100percentforabovequota)withasingletariffratethatwouldprovidefarmerswithdownsidepriceprotectionandprotectconsumersfromexorbitantpriceincreases.
IfChinamaintainedtariffsatthebindingratesthatithasofferedinitsWorldTradeOrganization(WTO)negotiations,grainandoilseedpricesfordomesticproducersandconsumerscouldbemaintainedatabout60percentaboveworldprices.Whilesuchbindingsarelowbyinternationalstandards,theywouldpreventChinafromadoptingtheextremeprotectionistpolicyofitsEastAsianneighbors,andpricescouldbekeptatalevelthatwouldsignificantlybenefitgrainandoilseedproducers.IfChina'sobjectivesfocusedmoreonconsumerwelfare,itwouldlowerthetariffrate,makingproductionofthesecropslessattractiveanddirectingproductiveresourcesintoalternativehigh-valuecrops.Thiswouldimprovethelong-runwelfareofbothproducersandconsumers.Totheextentthatruralpovertygroupsarenotself-sufficientinfoodstaples,ahighimport-tariffregimewouldincreasetheirfoodcosts,butliberalizedtradingruleswouldhurtthosewhospecializeingrainproduction,apartoftheruralpopulationthatisstillrelativelypoor.
ReevaluatingFoodSecurity
Somenationalobjectiveswillrequirecompromiseifotherobjectivesaretobeeffectivelyaddressed.Thisparticularlyappliesto95percentcerealself-sufficiencyandmaintaininglargebufferstocks,whichcompromisepovertyreductionandefficiencyobjectivesandexertasubstantialdrainonthenationalandprovincialtreasuries.Evaluating
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nationalfoodsecurityfromafinancialperspectiveandplacinggreaterrelianceondomesticandinternationalmarketswouldaddressbothefficiencyandfood-securityobjectives.Savingsresultingfromdecreasinggrainstoragecouldberedirectedtoassistthosegroupsmostaffectedbytradeliberalization.Growthandincomealsomightbeincreasedbydiscontinuinggrainquotasandpermittingfarmerstoselecttheirownproductioncombinationonthebasisoftheirresourceavailabilityandprices.
Fromafinancialperspective,Chinaisfoodsecurebecauseitsforeignexchangereservesandbalanceoftradearehighlyfavorable.Internationalgrainpricesareexpectedtocontinuetheirlong-termdecline,althoughshort-termvolatilityislikely.Internationalgrainreservesexceed100milliontons,andthemajorgrain-exportingcountriescouldrapidlyproduceandexportmuchlargervolumesifasteadygrowthinexportdemandwereanticipated.Chinaalsohastheinfrastructureandbureaucraticexpertisetorunaneffectivebuffer-stocksystemaspartofitsdomesticmarketingstrategy.Thissystemcouldalsobeusedinconjunctionwithimportstobufferdomesticprices.Liberalizinginternationalcerealandoilseedtradingwouldbeanefficientoptionformanagingtradeandsupportingtheobjectiveof95-percentgrainself-sufficiency.
DomesticMarketing:RoomforMoreImprovement
Marketingandpricingpolicyreformshaveledtounprecedentedmarketdevelopmentoverthepastdecade.Mostfoodcommoditiesarenowsoldatmarketprices,andstatisticalanalysesindicatedomesticgrainmarketsarewellintegratedandincreasinglycompetitiveandefficient.Theriseofaprivatetradingclasshasresultedin25to35percentofChina'sgrainprocurementgoingthroughprivatechannels.
DespitetherapidemergenceofChina'smarkets,problemareasremain,includingcontinuedinterventionbygovernmentgrainagencies,incompleteseparationofpolicyandmarketfunctions,the
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continuanceofproducerquotas,andthehighexpenseinvolvedwithalargeandcostlygrainreserve.Themarketingchannelsofthegrainbureaucontinuetoincurlosses,ex-
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tendoverdueloans,andrequirelargesubsidiesinefficienciesthatresultinpartfromtheconflictoftheiroperatingcommerciallywhileimplementingpolicydirectives.Grainstockshavecontinuedtoriseandrequireexpensivemaintenancefromthefiscalandfinancialsystem.Anappropriatelybudgetedgovernmentagencyshouldberesponsibleformaintaininggrainreservesorbufferstocks,knowingthatitwillincurlossesdirectlyrelatedtotheirsize.Therefore,Chinashouldcarefullyevaluatetheneedforreservestocksfromtheperspectiveofminimizingrequirements.IndiaandIndonesiaemploybufferstockstostabilizegrainprices,albeitatsignificantcost,butprocureonly20to25percentofthemarketedgrain.
Iftheproposedgrainreformsof1998hadbeensuccessfullyimplemented,thegovernmentwouldhavemetitscomplexsetofpolicyobjectivesofimprovedefficiency,protectionoffarmerincome,andreductioningovernment'sfiscalburden.However,policyimplementationdepartedfromthedesignandwilllikelyfallshortofmeetingthecoreobjectives.Recentmeasuresadoptedinmid-1998arereminiscentofthoseofthe1980s,whichwerecostlyandrelativelyunsuccessful.Thesemeasuresincluderemonopolizingfarmgateprocurementatgovernment-determinedprices,prohibitingthegrainbureauenterprisesfromsellinggrainatpricesbelowthegovernment-determinedprocurementprices,andclearlyseparatingcommercialandpolicyfunctionsandcentralandlocalgovernmentresponsibilitiesinpricestabilizationandbufferstockmanagement.Implementationofthenewpolicieswilllikelyleadtosubstantialgrainoverprocurementstressingfinancialandphysicalstoragecapacity.
Althoughthemarketingoffruit,vegetable,andlivestockproductswasliberalizedmorethanadecadeagoandhasgrownrapidly,severalpolicyandinstitutionalconstraintsimpedemarketingefficiency.Standardizingnationalquarantineandphytosanitaryinspectionproceduresandshippingdocumentsapplicabletoallinterprovincial
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commoditytransportwouldimprovemarketingefficiencyandfarmers'incomes.Commoditytransportersmeetingnationalstandardsshouldbeabletotransitallprovincesunhindereduponpresentationofcertifieddocumentsatprovincialbordercheckpointsandpaymentofofficiallysanctionedtransitfees(basedonweight,numberofaxles,orotherobjectivecriteria).
Producermarketingassociationsareinstitutionsdesignedtoimprovefarmers'bargainingpowerwithrespecttodownstreampurchasers.AfewfarmerorganizationshavedevelopedinruralChina,butthesefocusprimarilyonproductionratherthanmarketing.Thegovernmentcouldassisttheirdevelopmentbyestablishingapositivelegalandregulatoryframeworkfortheirexistenceandobligations.Thelackofprohibitinglegislationisinsufficienttoencouragethemtodevelop.Also,farmersneedtechnical,managerial,andtrainingassistancetodeveloptheexpertiserequiredtoestablishsuchanorganizationandtodevelopassociatedmarketintelligenceunits.Withoutmarketingorganizations,farmersareunlikelytobeabletoexploitmarketnichesandmeetsupplydeficitsthatmayexistinscatteredmarkets.
Thegovernmentcouldassistmarketdevelopmentbymakingmarketinformationcomprehensiveandbyconsolidatingtheinformationsystemundertheauspicesofasingleagency.Toensureadequateinformationwasprovidedtothecentralmarketinformationagency,Chinacouldmakelicensingofwholesalemarketsconditionalontimelysubmissionofmarketinformation.
PovertyAlleviation
Intheearlyyearsofreform,rapidgrowthwasassociatedwithrapidreductionsinpovertywhichwasachieved,inpart,bylabormigrationtothecoastalareas,wheregrowthandjobcreationwereoccurringmostrapidly.The50millionresidentsstilllivingbelowthenationalpovertylinearebelievedtoliveinareasthatareremote,lessaccessible,andveryresourcepoorlimitingpotentialforincreasing
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agriculturalproduction.Thelargewage-ratedifferentialsbetweenpoorruralareasandpros-
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perousurban(andrural)areasprovidepowerfulmigrationincentivesandmeanstoovercomepoverty.Toalleviatepoverty,theseareaswillneednonagriculturalemploymentandimprovedlinkageswiththerestoftheeconomy.Education,whichmakesindividualsmoremarketableinthelaborforce,alsocontributestopovertyalleviation.
Effectivepovertyalleviationrequiresgettingwell-designedprogramstothosewhoneedit.Properlytargetingpoorhouseholdsratherthanjustpoorcountiesiscrucialsubcountyadministrativeunitsneedtotheconsidered.Targetinginsomeprovinceshasimprovedinrecentyears,buttargetinginsomeotherprovinceshasbeenlesseffective.Designingandimplementingpovertyreductionprogramsonthebasisofdetailedconsultationswithlocalleadersandplannedparticipantsisparticularlyimportant.CommunityparticipationhasbeenanintegralelementindesigningtheWorldBank-supportedpovertyreductionprojects,whichalsoinvolveconcentratedresourcesandintensivemonitoring.Food-for-workprojectsapparentlyhavebeenquitesuccessful,inpartbecausethefundsbypassthefiscalsystemandinpartbecausetheprojectsarenarrowlydefined,easilymonitored,andfocusonhigh-returninvestments.Investmentsinagriculture,ruralenterprises,roads,andotherruralinfrastructurehaveincreasedtheproductivityandincomeofthepoor.However,resourceconstraintsinmanypoorareaslimitefficientinfrastructureinvestments.Investmentsthatdonothavereasonablyfavorableratesofreturnshouldbereconsideredunlesspovertyalleviationconsiderationsarecompelling.
Whileeconomicgrowthisclearlyassociatedwithpovertyreduction,programsforreducingpovertyhavehadmixedsuccessinincreasinggrowth.Ifpovertyprogramsaretocontributetolong-termgrowth,theymustbebasedonefficiencycriteriaandaddtoinvestmentstock.Thesubsidizedcreditprogramforpovertyalleviationgenerallyhasnotreachedthepoor,achieveslowrepaymentrates,andshouldbe
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replacedwithprogramsthatplacefundsintothehandsofruralhouseholds.Insomeareas,"grassroots"microfinanceprogramsthatareabletoreducethetransactioncostsinvolvedinevaluatingprojects,issuingloans,andmonitoringrepaymentbyusingpeermonitoringandgrouplendinghavesucceededinalleviatingpoverty.Suchprogramsmustbecarefullydesigned,staffed,andimplemented,andtheirimpactsmustbecarefullyevaluated.Also,itisimportantthatcreditpoliciesbesufficientlyflexible,particularlyregardinginterestrates,thattheprogramscanbesustained.
NaturalResourcesandtheRuralEnvironment
Naturalresourcedegradationandpollutionoftheruralenvironmentareaseriousconcern.Anecdotes,quantitativeassessmentsofsmallcircumscribedareas,glaringvisualimpactsoferosionandpollution,andthe1998YangtzeRiverfloodcreateanimpressionofveryseveredegradation.However,littlenationwidequantitativeassessmentoftheextentandseverityofnaturalresourceandenvironmentalproblemshasbeenconducted.Thenaturalresourcebasesufferedfromwidespreaddeforestationandpastureconversiontocultivatedland,leadingtoseriouserosionproblemsduringthe1950sand1960ssituationsthatwerereversedinthe1980sand1990s.Theevidenceonenvironmentaldegradationisambiguous;statisticaldataindicatethatforestcoverisincreasingandsedimenttrapsalongtheYellowRiverhavereducedsedimentconcentrationsby25percentinthelowerreaches.However,manyriversarepollutedalonglengthystretches,coastalwetlandscontinuetobedrained,anddesertificationissaidtobeincreasing.
Also,interpretationsoftheimpactofenvironmentaldegradationongrowthconflict.Variousestimatesofthecostofenvironmentaldegradationrangefromzeroto15percentofGDP,butthehighestestimatesarebasedongrossassumptionsthatarenotcredible.Oneofthemorecomprehensivestudiesontheimpactofenvironmental
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pollutionandecologicaldegradationestimatedthecostat7percentof
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GDP.However,thecostofdegradationreductionandpreventionhasnotbeenanalyzed.Betterinformationisneededtodeterminewhatpreventionandreductionmeasureswouldbeeconomicallyefficient.Also,minimalefforthasbeenmadetodeterminetheproportionofdegradationthatisoccurringnaturally.Athoroughquantitativeassessmentoftheimpactongrowthofnaturalresourcedegradationandenvironmentalpollutionandthecostsandbenefitsofpreventiveandremedialactionsisessentialtosupportaneffectivenaturalresourcepolicy.
Severalfactorscontributeorleadtoenvironmentaldegradation.Thelegalframeworktoconservenaturalresourcesandprotecttheenvironmentexists;however,thefiscalsystemoftenprovidesinsufficientfinancialresourcesforenvironmentalprotectionservicestoproperlyperformtheirjobs.Consequently,agenciesresponsibleforconservationandprotectionareoftenencouragedtousenaturalresourceassetstogeneraterevenueforwagesandotherrecurrentexpenses.Suchincome-generatingactivitiesmayexploittheresourceandcontributetofurtherdegradation.Thefiscalresourcesforenvironmentalprotection,maintainingbiodiversity,andsustainablemanagementoflong-termnaturalresourcesmustcomefromthepublictreasury.
Povertyisanimportantcontributortoenvironmentaldegradation.Thepresent,ratherthanthefuture,istheconcernoftheverypoor.Consequently,denudinghillsidestocultivatesubsistencecropsanddeforestationtomeetimmediatefuelwoodneedshaveledtoerosionandnaturalresourcedegradation.Variousprojectshavefoundthatimprovingerosioncontrolthroughincreasingvegetativecoverandimprovingcultivationtechniquesareeconomicallyefficientandshouldbereplicated.Similarly,expandingtheforestresourcestosupportcontinuedgrowthinconstructionandagroprocessinghasbeenaneconomicallyefficientinvestment.
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PARTITHERURALSECTORCHALLENGE
1.AVisionfortheRuralSectorSincethefoundingofthePeople'sRepublic,theleadersofChinahavebeenpreoccupiedwithoneoverarchinggoal;themodernizationofthenation.Ourvisionfortheearlypartofthe21stcenturyperceivestheruraleconomyasanintegralpartofthismodernizationeffort,withequitableincreasesinincome,andtheeliminationofpoverty,achievedinlargepartbytransferringrurallabortotheurban-industrialeconomyallaccomplishedinanenvironmentallysustainablemanner.Weenvisionanenormousgovernmenteffortintransformingitsroleintoaninvestorforpublicservicesandgoodsandfosteringamarketenvironmentenablingindividualfarmandnonfarmproducers,consumers,andtraderstomakemoreefficientdecisionsandimprovetheirwelfare.
Inpursuitofthisvision,twoissuesremaincentraltothegovernment'sruraldevelopmentobjectives:foodsecurityandpovertyalleviation.Chinahasmaderemarkableprogressinmeetingthesegoals;theeconomy,includingtheruralsector,hasgrownatphenomenalratesduringthereformperiod.ThegrowthoffoodsupplieshasexceededthegrowthofdomesticdemandandChinaexportshorticultural,livestock,otheragricultural,andaquaculturalproducts.Thegrowthof
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ruralindustryhasbeenanimportantelementofrecentgrowthastheruraleconomycontinuestodiversify.Increasedproductivityandincomegrowthhavereducedthemassivepre-reformpovertyproblem,improvedthestandardoflivingofmostresidents,andlaunchedthestructuraltransformationofChinafromatraditionalruraltoamodernsociety.
However,growthwillbedifficulttosustain
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andmanychallengesfacethoseresponsibleforChina'smodernization.Theeconomicbaseisconsiderablygreaterthanitwastwodecadesago,theeasysourcesofgrowthhavebeentapped,andseveralunderlyingconditionshavechanged.FurtherexpansionandintensificationofChina'scultivatedlandbasewillbedifficultandinputlevelsforagriculturearealreadyhigh.Developmentofadditionalwaterresourceswillrequiremassiveinvestments.Futuregrowthwillincreasinglyrelyontechnology,capital,increasedcroppingintensity,andproductionshiftstohigher-valuecommodities.Theearlyrapidgrowthoftownshipandvillageenterprises(TVEs)andtheexpansionofjobstheycreatedwerepossiblebecauseoflarge,unfulfilleddomesticdemandasituationthatexistsmuchlesstoday.Pastgrowthalsoreliedpartiallyonnewexportmarketsandforeigndirectinvestmentinflows.Increasedglobalcompetitionwillmakefurtherexpansionofexportmarketsmoredifficult.
ObjectivesandStructureofthisReport
Theobjectiveofthisreportistoidentifyanddevelopstrategyoptionsthatwillassistpolicymakersanddonorstoprioritizeinvestmentdecisions,policyandinstitutionalreformefforts,andcontinuetoguideChina'sprogresstowardmodernization.ThisvolumepresentsourvisionofthegrowthanddevelopmentofruralChinainthe21stcentury.Tothisend,wesystematicallyreviewtheinstitutions,stateofChina'sresourcebase,andthepoliciesthattransformedtheruraleconomyinthefollowingchapters.Weexplorethemacrolinkageswiththeruralsectorandimpactsofindustrialandexternalsectorinteractionsonruralincomes(Chapter2).WeexaminethestateofChina'sruralfiscalandfinancialservicesystems,andtrytoassesshowfurtherreformandperformancecanbeenhanced(Chapters3and4).Wesearchforoptionsinwhichgovernmentcanassistproducersmanagetheirresourcesmoreefficientlybyimprovingdomestic
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marketsandinternationaltrade(Chapters5and6);andencouragingnewproductivity-enhancinginvestmentsinland,water,andnewagriculturaltechnology(Chapters7to9).Furtherattentionisfocusedoneffortsrequiredtorevitalizetownshipandvillageenterprises(Chapter10),povertyalleviation(Chapter11)andenvironmentalandnaturalresourceprotection(Chapter12).
Webrieflyreviewrecentruraleconomicandincomegrowthandachievements,examinethesourcesofgrowth,delineateanumberofchallengesstillfacingChina'sruralsectorleaders,andrecountsomeofthebasicstrategiesthatleadershaveattheirdisposaltoaddressthem.WediscussestheState'srolesandoptionsinestablishinganenablingenvironmenttomaintainthegrowthmomentumintothenextcentury,includinggovernance,regulatoryframeworkandmarketinterventions,investmentsinruralinfrastructureandpublicservices.Someweaknessesintheruralfiscalandfinancialpoliciesandinstitutionsareexposedthat,unlessresolved,couldseriouslyunderminefuturegrowth.Publicinterventionsindomesticmarketingandinternationaltradearethendiscussed,followedbyareviewofinvestmentsinruralinfrastructureandpublicservices.Finally,thenecessitytoreducepovertywhilemaintaininggrowthisemphasized,asistheimportanceofsustainablegrowththroughnaturalresourceandenvironmentalprotectionandpollutioncontrol.
Althoughthisvisionstatementaddressesproblemsacrosstheruraleconomicspectrum,severalimportanttopicshavebeenexcluded.Theproblemsofvillagegovernance,barrierstotheemergenceofruralproducerandmarketingorganizations,thedevelopmentofagriculturalinputmarkets(suchasseeds,fertilizer,pesticides,andcustomservices),andruralinfrastructurearenotexaminedTheirexclusiondoesnotmeantheyareunimportantbutthattimeandbudgetconstraintsprecludedamorecomprehensiveassessmentofthesector.SomerecentlycompletedandimpendingWorldBankstudiesaddresssomeoftheseissues.
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Post-ReformGrowthandAchievements
Historically,agriculturehasbeentheprimarycontributortoruralgrowth,buttheexceptionalgrowthoftheoutputvalueofTVEs(averaged24percent,1985-95)hasmadethemamajorfactorsince1987.By1995theoutputvalueofTVEswasmorethanthatofagriculture.Totalagriculturaloutputgrewatanannualrateof4.2percentbetween1985and1997.GrowthinthemajoragriculturalcomponentsisillustratedinFigure1.1.Cropscontinuetocontributewelloverhalfoftheoutputvaluedespiterapidgrowthinlivestockandfisheries.Livestockcontributesabout30percentoftheoutputvalue;fisheries,lessthan10percent;andforestry,about3percent.RecentanalysesbyZhong(1998)concludedthatChina'sagriculturaldatabasestendtooverstateproduction,particularlylivestockstatistics;thusthesegrowthratesmaywellbeupwardlybiased.Notwithstandingadjustmentsthatwillfollowtheevaluationoftherecentagriculturalcensusdata,thestatisticswilllikelyconfirmexceptionallyhighagriculturalgrowth.
Rapideconomicgrowthandactivepovertyalleviationactivitiesliftedmorethan210millionfrompovertyandreducedthenumbertoaround50millionin1997about6percentoftheruralpopulation.TheexplosionofruralindustrialgrowthandofffarmemploymenthasbeenanimportantelementofChina'soverallrapideconomicgrowth,rapidincreaseinruralincomes,andpovertyreduction.TVEsexpandedrapidlyduringthereformera,contributingmorethan40percentofChina'sindustrialoutput.Ruralenterprisesalsowereanimportantsourceofjobcreation.Morethan135millionpeoplefoundoff-farmjobsbythemid-1990scontributingtothe63percentincreaseinrealpercapitaincomesbetweenthemid-1980andmid-1990s.
RuralreformshavebeengradualandmethodicalandoftenbasedonpolicyexperimentsTheseexperimentaloptionsarelimitedtospecific
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geographicallocationstoensurethatactualandtheoreticalresultsaresufficientlyconsistenttoproceedwithwiderimplementation.Iftheexperimentisjudgedunsuccessful,itisdiscontinued;however,ifitmeetsadeclaredobjective,thepolicyispromotednationwide.Thisformatisperceivedtohavebeensuccessfulandwilllikelyremainthenormforfutureruralreforms.Thusreformsinareasofmajorimportance(e.g.,land)willproceedslowlyuntilsufficientexperimentsindicatetheselectedpolicywillmeetacomplexofobjectives.Experimentalapproachestopolicyreformmaybecostlyinefficiencytermsandshouldbediscouragedinthelongerterm;but''BigBang"reformspracticedinsomeothertransitioneconomies,areunlikelytobepracticedinthenearterminChina.
SourcesofPastGrowth
Asignificantpartofoutputandproductivityhascomefromimprovedincentivesforhouse-
Figure1.1GrossValueofAgriculturalOutput(1985=100)
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holds,TVEownersandmanagers,andlocalgovernmentofficials.Replacingcommunalresponsibilitywiththehouseholdresponsibilitysystem(HRS)contributed30to60percentofthegrowthofagriculturaloutputduringtheearlyreformyears.ImprovedincentivesformanagersofruralindustryandtheriseofprivateruralfirmsmadethesectoroneofthemostdynamicelementsofChina'seconomy.However,institutionalreformsprovideone-time,incentives.
Investmentsinagriculturaltechnology,ruralinfrastructure,andsocialwelfarealsohaveincreasedproductivityintheruraleconomy.OvertheentirereformperiodincreasedproductivityfrominvestmentsinagriculturalresearchandextensionsystemexceededproductivityincreasesgeneratedbyHRS.Improvementsinirrigationandwatercontrolalsocontinuedtohelpexpandyieldfrontiers,especiallyinNorthChina.Thesearethetypesofinvestmentsthatwillincreaseresourceallocationefficiencyinthelongrun.
Increaseddomesticmarketintegrationandlinkageshavefurtherimprovedefficiencyintheruraleconomy.Theriseofmarketshasincreasedspecializationandresourceallocationefficiency.Domesticresourceusepatternsareincreasinglymoreconsistentwithregionalcomparativeadvantage.Marketsformostagriculturalcommodities,farminputs,andlaborhaveincreasedincomeearningopportunitiesformanyruralhouseholdsandhavecontributedtothedeclineinpoverty.
PersistentChallenges
Whilepastgrowthanddevelopmentachievementshavebeenimpressive,futuregrowthwillbemorechallengingasmuchofthepotentialgainsfromtransitionhavebeenachieved.Anunnecessarilylargecomponentoftheagriculturaleconomyremainsfocusedoncultivatingrelativelylow-valuedcereals,dueinlargeparttothe
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policyenvironment.Food-securitygoalsremainanimportantelementinpolicy-making.Grainfundamentalism,theprovisionofrelativelyinexpensiveandstablesuppliesofgrainfortheurbanpopulation,stillprevailsintheformofquotas,marketingregulations,directandindirectsubsidies(albeitreducedfrompreviouslevels),andbysocialpressurefromlocalofficials.Suchpoliciesobligatefarmerstoignoremarketdevelopmentsandcultivatelowerprofitabilitycropssuchasgrainandcotton.Theemphasisongrainproductionalsohasresultedintheconversionofsomefragileecosystemswetlands,forests,andpasturesintocultivatedlands,contributingtobiodiversitylossesandsoilerosion.
Thestructureofruralincomeearningshasevolvedslowly.Wagelaborasaproportionofnetincomehasincreasedtoonly25percentdespitetheextraordinarygrowthinTVEs(Figure1.2).Householdincomefromnonagriculturalactivities,suchastrading,construction,andtransport,alsoincreasedbutisoftennotanoptionformanyhouseholdsandindividuals,particularlyininlandprovinces.Althoughtheimportanceofagriculturecontinuestodecline,itstillprovided58percentofruralhouseholdincomein1997.Butincomeinequalityhasincreasedrapidlyandincomegapsbetweenrichandpoor,urbanandrural,andcoastalandinlandaregrowing.Relativelyequitableincomedistributionsprevailedinthelate1970s,but
Figure1.2
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RuralIncomebySource(constant1995)
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bythemid-1990sincomedistributioninChinawasamongtheworld'smostinequitable.Incomegrowthratesinruralareasarelessthanhalfthelevelofurbanresidents.
Decentralizationgenerallyhasbeenagrowthstimulus,butithasalsocreatedfiscalproblemsandretardedpotentialgrowthastheruraltaxbaseisexceptionallylimited.Thefiscalcrisisisanoverridingproblemfacingtheruralsector.Theruraleconomyhasneitherviablefiscalnorfinancialinstitutions.Decliningrealinvestmentforvirtuallyallagriculturalandruralinfrastructure,anddecliningrecurrentexpendituresforservicesandactivities,bodesillforfuturegrowth.Mandatedexpendituresabsorbalargeandincreasingportionofthebudget,leavinglittleforactivitiessuchastechnologydevelopmentandtransfer.Manypublic-serviceinstitutionsandstaffareencouragedtoundertakecommercialactivitiestosupplementbudgetaryresources
Increasedsupportofagriculturalresearch,watercontrolandmanagement,ruralinfrastructureandsocialservicesisneeded.Buttheagriculturalresearchandextensionsystemisweakanddeteriorating,andrestrictionsonimportinghightechnologyfrominternationalsourcesforagricultureinhibitfarmers'accesstobetteragriculturalpractices.Newproductiontechnologiesandmanyservicescouldbedevelopedandprovidedbytheprivatesectordomesticandinternationalbutweakenforcementofexistingintellectualpropertyrightsandpoorwholesaleandretailchannelsdiscourageinterestandinvestmentbysuchfirms.
Povertyandenvironmentaldegradationremainseriousproblems.Millionsofpeopleremaininpovertypocketsinresource-poorruralareasparticularlyinthesouthwestandnorthwestmountainousuplands.Poorregions,characterizedbypoorphysicalandhumancapital,receivelowerlevelsofinvestmentinbasicservicesandinfrastructure.Povertydisproportionatelyaffectsminoritygroupsand
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isanimportantcauseofnatural-resourcedegradation.
FutureVision:MeetingtheChallengesandModernizingRuralChina
China'smiraclegrowthisaptlytitledandwithgoodgovernanceChinashouldcontinueonasustainedgrowthpath.Thispositivevisionoftheruraleconomywillrequirenumerouspolicyinitiativesandinstitutionalreforms,accompaniedbyanenablingmacroeconomicenvironmentthattreatsrural-urban,agriculture-industry-service,andgovernment-privatesectorsasequallyimportantandmutuallysupportingpartners.Chinawillapproachmodernitywhenthesesectorsareintegrated,self-reinforcingpartners.Eachsectorwouldhaveequalaccesstoefficiency-pricedresources,ensuringnocross-sectorsubsidizationexceptfortargetedsubsidiestopovertygroups.
Aspartofthepolicyandinstitutionalreform,thegovernmentwouldnotonlybalanceagricultural-ruralwithothersectorsbutidentifyandseparatetherolesandactivitiesthatitwillretainaspublicgoodsandservicesandthoseitwillpermitnongovernmententitiestoundertakewithoutintervention.Governmentalsowouldembracetheprivatesectorasanintegralcomponentofthedevelopmentprocessandencourageittobecomethenewengineofgrowth.Newjobsforproductivelyabsorbingtheunderemployed,redundantlaborfromgovernmentdownsizing,state-ownedenterprise(SOE)restructuring,andnewlabor-forceentrantsmustcomefromnonagriculturalandnongovernmentsectors.
Governmentreconsiderationandreexaminationofseveralpoliciesincludingthoserelatedtodomesticproductionandmarketing,externaltrade,and95-percentgrainself-sufficiencywiththeobjectiveofconsistencyandefficiencywouldlikelyalterpoliciesenablingfarmerstoproduce,andmerchantstotrade,morelabor-intensiveandhigher-valuecommodities.Reformingthedomestic-marketandinternational-tradestructurestomakethemmoremarketresponsivewouldhavemixedimpacts,andtheimpactsofspecificreformsshould
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becarefullyassessedbeforebeingimplemented.A
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reconsiderationofnationalfiscalpolicieswouldincludeidentifyingmethodsandprocedurestogeneratemoretaxrevenuefromtheruralsectorandtoallocatemoreresourcestopovertyareasandtosubprovincialjurisdictions,andtoeitherdiscontinueoff-budgetrevenuesandexpendituresorincorporatethemintothebudget.Financialpolicieswouldbereexaminedtoensurethatfinancialflowsweredrivenbyfinancialincentivesnotbyadministrativedecisionstosupportorsubsidizestate-ownedindustryandassistinlevelingtheplayingfield.Therural-agriculturalsectorwouldhaveequalaccesstocredit,althoughconditionsoflendingmaywelldiffertocovervariousrisksandhigheradministrativecostsofsmallerruralloans.
Agriculturalincomewouldbeincreasedbyensuringfarmershadaccesstomorenonlaborresources(landandwater,credit,capital,andtechnology)topermitthemtomovetowardmoreoptimuminputandoutputcombinations,includinghigher-valuelivestock,aquatic,andhorticulturalproducts.However,landisauniqueproductioninputthatperformsanexceptionallyimportantsocial-securityroleinChina;thuslegalchangesintenureformswouldbeimplementedonlyaftercarefulassessment.Nevertheless,aland-usemarketwouldbedevelopedtoprovideamechanismforfull-timefarmerstoaccessadditionallandresourcesandoptimize(ormovetowardoptimum)inputsandimproveincome.
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PARTIIANENABLINGENVIRONMENTFORRURALDEVELOPMENT
2.RuralIncomeandMacroeconomicLinkages
Theruralandurbansectorsaredualisticandpoorlyintegrated.China'sruralsectorhascontinuouslytransferredresourcestotheurban-industrialsector,includingcapital,wagegoods(food),industrialinputs,andtoalesserextent,labor.However,constrainedlaborflowshavecontributedtothelargedifferentialinruralandurbanlaborproductivityandincome.Theruralsectorhasalsoservedtobuffertheimpactofmacroeconomicshocksontheurbaneconomy.Thespreadofmarketforcesandincreasedrelianceoncompetitivepriceshastendedtoincreasetheflowoflaborandotherresourcesandimproveintegrationinrecentyears.Unlesslabormovementconstraintsareliftedthedualisticnaturewillremain.
A.DomesticMacroeconomicDimensions
AsChinahasmovedfromaplannedtoamoremarket-orientedeconomy,balancedsectoralgrowthandintegrationhavebecomemoreimportant.Theurban-industrialsectorprovidesthedemandfortheruralsector'smarketedsurplus,andastheagriculturaleconomybecomesanincreasinglysmallercomponentofthenationaleconomy,
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changesingrowthratesoftheindustrialandservicesectorsstronglyaffecttheagriculturalandruraleconomy.
DomesticTermsofTrade
Inmostcountriesgrowthinthetotalproductivityofallproductionfactors(land,labor
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andcapital)totalfactorproductivity,orTFPhasledtodecliningruraltermsoftradedespitevariouspricesupportandsubsidyprograms.InChina,however,risingdomesticdemand,thephasingoutofadministeredpricing,andtheadoptionofmarketpricesimprovedfarmertermsoftradeover1990-97,asreflectedintheratioofpricesreceivedbyfarmerstopricespaidbyfarmers.Domesticcommoditypricesarenowsimilartointernationalborder-priceequivalents;thusChina'stradeandpricepolicydecisionswillinfluencefuturetrendsintermsoftrade.IfChinaliberalizesitstrade,domestictermsoftradeshoulddeclineovertheneartermconsistentwithinternationalexpectations.Ifnot,demandwilllikelyrisefasterthansupplyinthenearterm,meaningpriceswillriseunlessimportsareexpanded.Othernationalpoliciesandeventsnoteffectivelycapturedintermsoftradecalculations,suchasoutputplanningandquotaprocurement,enforcebothimplicitandexplicittransfersfromruraltourbansectors.Inaddition,nationalcreditpoliciesgenerallyfavorurbaninvestorsanddiscriminateagainstruralborrowers.Ruralresidents,ontheotherhand,havebenefitedfromlowerincreasesinconsumerpricesrelativetourbanresidentsoverthepastdecadeandrisingopportunitiestoremitwages.
ResourceFlows
Overthereformperioddirectbudgetaryexpenditurestoagriculturalactivitieshaveexceededagriculturaltaxreceipts,butthenetfiscalflowtoagriculturedeclinedduringtheearlyandmid-1990s.Fiscalexpendituresincludeallocationsforinvestmentsinirrigation,landimprovement,specialtycropproductionbases,etc.However,anetoutflowfromtheruraleconomyhasoccurredastaxesfromrural-basedindustrieswereconsiderablygreaterthanthenetflowtoagriculture.Thenetannualrural-to-urbanflowaveragedaboutY113billion(constant1995)overthe1994-96period(Table2.1);buttheofficialresourceflowmayhavereversedin1998asabove-marketpricesforgrainsdirectedsignificantresourcesintotheagriculturalsector.
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Table2.1:ResourceFlowsfromAgriculturalandRuralSectorstoNonagriculturalandUrbanSectors
(Ybillion,constant1995)FiscalSystem FinancialSystem Grain TotalResourceFlow
Agriculturaltonon-
agricultural
Ruralto
Urban
Agriculturaltonon-
agricultural
Ruralto
UrbanMarketing(implicit
tax)
Agriculturaltonon-
agricultural
Ruralto
Urban
1980 -38.5 -30.0 13.2 3.7 46.0 20.8 19.7
1985 -18.4 11.8 23.5 7.4 15.6 20.7 34.8
1990 -31.1 16.1 68.9 47.8 43.0 80.8 106.9
1991 -35.6 20.0 59.4 28.3 27.9 51.6 76.2
1992 -35.8 38.5 536.9 17.3 20.8 41.8 76.5
1993 -28.5 103.8 49.1 8.6 24.9 45.5 137.4
1994 -26.4 105.2 53.4 38.3 59.5 86.4 203.1
1995 -21.3 122.5 51.1 27.8 50.2 80.0 200.6
1996 -22.1 113.2 44.0 27.6 32.9 54.7 173.7
Source:DerivedfromChinaFinanceYearbooksandChinaStatisticalYearbooks,variousyears
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Regardlessofthedirectionofofficialfiscalandfinancialresourceflows,itisimprobablethatthe"farmer'sburden"hasbeenlifted.Largeamountsofoff-budgetfunds(notincludedinTable2.1)aregeneratedintheruralsectorthroughunofficialtaxes(leviedparticularlyonTVEs),variousfees,andcorvéelaborleviedonruralhouseholds.Farmersarelegallysubjecttoamaximumtotalpayment(townshipfee,villagefee,andlaborormonetaryequivalent)of5percentofthepreviousyear'snetincome.However,severalcounty-levelsurveyshaveconcludedthataplethoraofadditionalfeesandchargesareleviedbyprovincialandsubprovincialjurisdictionsthatincreaseactualtaxand"tax-like"paymentsofruralhouseholdsto20percentormoreoftheirincome(Wen1998).Totheextentthattheseresourcesarespentonsalariesoftownshiporvillageofficials(andsurveysindicatethatmanyfarmersperceivetheirvillageisoverstaffedwithofficials),insteadofruralinfrastructureandservices,suchfeesareapuretax.Furthermore,iftheresourcesarenotspentinruralareas,additionaloutflowofruralresourcesmayoccurthroughunofficialchannelsthatarenotcapturedintheconsolidatedfiscalstatements.
Investmentsinlandandwaterresourcesareobviouslynecessaryforcontinuedsectorgrowth,butinvestmentsinenergy(electricity),transport(road,rail,waterwayandport),andotherinfrastructurethatreducesmarketingcostsareequallyimportantforpromotingrural-sectorgrowth.AnalysisbyWorldBankstaffindicatesthattheinfrastructureinvestmentelasticityinEastAsiais1.0,implyingthatforevery1percentofpercapitagrowth,infrastructurestockneedstoincreaseby1percentofgrossdomesticproduct(GDP).Therefore,ifapplicabletoChina,infrastructureinvestmentwillneedtobe6to7percentofGDPifGDPgrowthgoalsaretobeachieved(WorldBank,undated).
Tostimulatedomesticdemandanddevelopinfrastructure,the
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governmenthasembarkedonathree-year$1.2trillioninfrastructureinvestmentprogram.ArecentcomponentwasaY100billionbondissuetofinanceinvestmentscommencinginthefourthquarterof1998.Muchoftheinvestmentwillfocusonruralinfrastructurethatemploysrurallaborforirrigation,road,andrailconstructionandonrehabilitationoftheruralelectricalgrid.
Theinvestmentprogramdescribedabovemaybehavinganimpactfixed-assetinvestmentrose28percentinthethirdquarter(year-on-yearbasis).However,thecompositionoftheinvestmenteffortremainsaconcernasinvestmentsduringthefirstninemonthsof1998roseby20and19percent,respectively,forSOEsandpropertydevelopment.ThusarealriskremainsthatinvestmentsmaybedivertedfromfinancingpublicgoodstoSOEs,whereovercapacityisalreadyseriousandreturnsarelow.
China'sfinancialsector,likethoseinotherAsianeconomies,hasnotevolvedinparallelwithrealsectorperformance,remainsstructurallyweakandpotentiallyputsruralgrowthanddevelopmentatrisk.Governmentintervention,intheformofpolicylending,pervadesthebankingsystem;andgovernmentremainsinvolvedwithSOEinvestmentinnonpublicgoods.Lardy(forthcoming)reportsthat,ifproperlyaccountedfor,thebankingsystem'snonperformingloanswouldbe30to40percentofGDP.Stockandcommodityfuturesmarketsremainunderdevelopedandunderregulated,andmanyhavebeenclosedorconsolidated.
Analysisofdatafromthebankingsystemindicatesanettransferoffinancialresourcesfromagriculturetoindustrythroughoutthereformperiod,althoughsuchfindingsneedtobeinterpretedwithcautionbecauseofconcernsonthecoverageoftheavailablestatistics.ConsolidateddataonruralsavingsandloansexcludetransactionsofRuralCreditFoundations(RCFs),thesmallestoftheruralcreditinstitutions,andresultsinamodestunderstatementofthefinancial
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flows.ConverselytheinclusionofAgriculturalDevelopmentBankofChina(ADBC)datacontributestooverstatingfinancialflows,asitslendingisalmostexclusivelyforagriculturalprocurementbygovernmentmarketingagencies.ManydepositsintheAgriculturalBankofChina(ABC)arebyurbanresi-
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dents.Aftermakingallowancesfortheseshortcomings,itisclearthatalthoughruralindustries(TVEs)absorbaportionofthesetransfersofagriculturetoindustry,asignificantrural-to-urbanfinancialflow(Y30billionperyearin
1995realterms)remainedduringthe1994-96period.Whetherthefinancialflowsreflecttheresponseofrationalinvestorsmovingfundsfromlow-returntohigh-returnsectorsorwhethertheyresultfromdistortionsinthefinancialandfiscalsystemisundetermined,butthemassivemovementoffundsoutofagricultureandtheruraleconomyhighlightstheimportanceofthesectorandemphasizestheimportanceofkeepingithealthy.
About40percentoftheSOEsincurlossesandsurviveonsubsidiesandbankoverdraftswhichthenbecomenonperformingloansofthebankingsystem.AgovernmentpriorityisSOErestructuring,ofwhichamajorelementisemploymentrationalization.This,combinedwithdownsizingthecivilandmilitaryservices,willmovelargenumbersofworkerstotheranksoftheunemployed.LaborreductionsshouldimproveSOEperformance,butthereducedlaborincomewillcertainlyerodedemandandemphasizestheneedforrapidgrowthtocreatenewjobsforredundantlabor.Thisoverhangofunemployedurban-industrialworkerswillhavepriorityforemploymentinnewlycreatedjobsandmakeitdifficultforruralworkerstostayandworkinurbanenterprises.Tomitigatetheimpactofincomelosses,governmenthasbudgetedY1.5billionforanewwelfareprogramtoassistlaid-off,retired,anddisabledworkers.
Tightcreditthathashamperedgrowthandexpansionofsmallandmediumenterprises(SMEs)whichaccountfor60percentofindustrialoutputhasbeenrelaxed.Lendingbystate-ownedcommercialbankstoSMEs,includingTVEs,hasbeenincreasedbyseveralbillionyuan.Thisshouldbodewellforexpansionandemployment,butitisas
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importanttoensureborrowingproposalsandloansmeetappropriatefinancialandeconomicefficiencycriteria.
Labor
Ingeneral,therurallaborforceactsasabufferstockfortheurbaneconomy,providinglaborunderboomingeconomicconditionsandabsorbinglaborbackfromthecitywhenjobgrowthslows(Zhangetal.,1999).Thebufferingcapacityprovidesastabilizinginfluencefortheoveralldevelopmentoftheeconomy,butcontinuedaccessofruralworkerstourbanjobsisacrucialelementofChina'smodernization,providingincome-earningopportunitiesforpoorruralresidentsandincreasingtheefficiencyofurbanenterprises.RecentreformsinSOEshaveresultedinlayoffsforlargenumbersofurbanworkersand,asaconsequence,manycitieshaveenactedregulationsrestrictingemploymentforruralmigrantstolow-quality,low-payingjobcategories.Suchregulationsandgeneralurbaninvestmentslowdownsaffectstheruralmigrantlaborforceanditsfamilies.Theadverseconsequencesoflayoffsandurbanrecessioncouldbemitigatedbyplacingtheunemployedinretrainingprograms,insteadofgrantingthemprivilegedaccesstojobswithoutregardfortheirskilllevel.
Rural-UrbanMigrationandEmployment
NaturalpopulationgrowthisslowerinurbanthaninruralareasbutoverthepasttwodecadesChina'surbanpopulationincreasedfrom18to30percent(in1997)oftotalpopulationduepartiallytoexpandingurbanboundariesandpartiallytorural-urbanmigration,whichhasbeencontinuousdespiterestrictionsonpopulationmovement.Achangingcomplexofincentivesanddisincentivesinfluencesboththedecisionofruralresidentstomigrateandthecharacteristicsofmigrants.Therural-urbanincomedifferentialhasbeenapowerfulstimulustomigrate(officiallyorunofficially)butthehouseholdregistrationsystemmadeitdifficultforruralresidentstoobtainaccesstourbansocialservicesandobtainwell-paidjobs;also,village"useit
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orloseit"landpoliciesmayinhibitfamilymigration.Jobsavailabletomi-
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grantswereprimarilyintraditionalmale-dominatedconstructionortransportationsectorsasindustrialSOEsarestillobligedtohireurbanresidents.Thus,urban-boundmigrantsaretypicallyyoungmaleswhosefamiliesremainedinthevillagestotillfamilyplots.
Marketdevelopment,relaxationoflabormovementandurbanemploymentrestrictions,anddiscontinuanceofthegraincouponsystemintheearly1990sremovedsomeofthemigrationdisincentives.Meanwhile,thecontinuingrural-urbanincomegaphasmaintainedthemigrationincentive.Duringthe1990surbanjobcreationandemploymentincreasedatfivetimestherateofruralemploymentandupto100millionrurallaborersandself-employedtradershavemigratedtocitiesandcoastalregions(Chan1996,HuangandCai1998).
Barrierstomigrationappeartobeprimarilyontheurbanside,implyingrural-urbanmigrationwillincreaseastheconstraintsandbarriersareremoved.Whethersuchmigrationwillresultinthecreationofmegacitiesorwhethernewmedium-sizetownswillbedevelopedasjobcentersremainsunderdebate.Regardless,however,increasingpressurewillbeplacedonurbaninfrastructureandservicesandadditionalurbaninvestmentswillberequired.Astrong,andopen,urbansectorisimportantfortheruraleconomyasmigrationreducestheagriculturallaborforceandimprovestheratioofnonlabor/laborresourcesandincomepotential.
Agriculturalemploymentreachedanabsolutepeakofabout350millionin1991andthendeclinedby19millionby1997butagriculturalemploymentasaproportionoftotalemploymentdeclinedcontinuouslyoverthereformperiodandnowaccountsforlessthan50percentoftotalemployment.However,Chinaisuniqueasalargeshareofindustrialoutputisproducedbyruralindustriesthatemployabout25percentoftherurallaborforce.Thus,duringthesameperiod
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theruralindustrialsectorcreatedabout38millionadditionaloff-farmjobs.AlthoughTVEemploymentsufferedadeclinein1997,itistooearlytodetermineiftheemploymenttrendhasreversedastemporarydeclineshavepreviouslyoccurred.
TVEgrowthandexpansionhasbeenimpressiveovertheentirereformperiodexceptduring1989-90.Despiterapidgrowthinruralindustrialemployment,output,andwages(TVEwageshavegrownat18percentannually),andthesubstantialdirectandindirectcontributiontotheruraleconomy,rural-urbanincomedisparitieshaveworsenedsince1985.Doubtlessly,rapidTVEexpansionpreventedtheincomeratiofrombeingevenmoreadverse,butitwasunabletoreversetheworseningtrend.JinandQian(1998)foundthatTVEsdidnotincreaseaveragepercapitaruralincomegiventhelevelsofnonfarmemploymentand/orlocalpublicgoodsprovision.Furthermore,thelocalnatureofruralindustryalsohascontributedtorisingintraruralinequality(Rozelle,1994).
TVEsnotonlyhavesuccessfullygeneratedoff-farmworkopportunitiesforthelocalrurallaborforce,butforworkersfromothervillagesaswell,creatingrural-to-ruralmigration.Rural-to-ruralmigrationinChinaisaparadoxinternationallyithaspreviouslynotbeenobservedonsuchalargescale,andyetinChinaitisthefastestgrowingsubsectoroftherurallaborforce.Theriseofprivatesectorownershipcan,inpart,accountfortheshiftinhiringnonvillageresidents,sincetheirownersareunconcernedwithnoneconomiccriteria,suchasemploymentpriorityforlocalworkers.Fromthemigrant'sviewpoint,commonbackgroundspermitruralin-migrantstobetterintegrateintotheworkenvironment.Thesefactors,inadditiontothefactthatmostTVEsengageinlabor-intensivelightindustry,meanthatin-migrantsaremorelikelytobewomen,older,andlesseducated;rural-to-ruralmigrationisoneofthemostimportantnewwindowsofopportunitiesforruralresidentsintothewageeconomy.
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Ananalysisoffactorsinfluencingmigrationfoundfewvillageinstitutionsthatconstrainedmigration(Lohmar,Zhao,andRozelle1999).Village"useitorloseit"landpoliciesmayinhibitfamilymigration,butlandtenureandgraindeliveryquotas,perse,donotinfluencemigration.However,theabilitytorentoutlandwhile
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maintainingnominaluserightsappeartofacilitateout-migrationasdoestheexistenceofinformalcreditmarkets.
Thereare,however,severalfactorsthatfacilitateout-migration.Theoverwhelminglyimportantmigrationdeterminantwasa"villagenetwork."Pastmigrationleadstofuturemigrationfellowvillagerswhocanberelieduponforinformation(andpossiblefinancialassistance),includingpotentialjobprospects,provideachaintoattractadditionalvillagersintothemigrantlaborforce.AsimilarlinkagehasbeenfoundforMexicanlaborersworkinginU.S.agriculturewhereitiscommonforcontractorstosolicitadditionallaborfromthesamevillageaspreviouslyrecruitedlabor.Educationgenerallyimprovesthechancesofobtainingoff-farmemploymentalthoughthatfactorismoreimportantforworkerswholiveandworkathomethanthosewhoengageinrural-to-ruralmigration.Urbanin-migrationcontinuestobeseverelyinhibitedbythehouseholdregistrationsystemandlimitedaccesstourbansocialservices.
Rural-UrbanIncomeDichotomy
Inequality,amongotherthings,isabarometeroftheefficiencyofaneconomyaswellasitspoliticalstability,andthefactthatduringthereformeraChinahasexperiencedanexceptionalincreaseininequalityiscauseforconcern.Giniratioshavebeenabove0.40sincetheearly1990sandhavecontinuedtorise.China'srural-urbanincomegapislargebyinternationalstandardsparticularlywhentherecent1998revisionstourbanpercapitain-
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Figure2.1Rural-UrbanPerCapitaIncomeRatios
comedataareapplied.Innominalterms,therural/urbanpercapitaincomeratiodeclinedfrom0.54in1985to0.35in1994,thenrecoveredbyfivepercentagepointsbetween1994and1997(Figure2.1).TheseratioscomparepoorlywithVietnamwherethe1997/98ruralpercapitaincomelevelwas67percentofthatofurbanincomes(Bales).Evenwhenadjustingofficialruralandurbanincomedataforhousingcostsandotherpoorlymeasuredorexcludedcomponentsofincome,rural/urbanincomeratiosdonotimprove.Further,YangandZhou's(1996)analysisofrural-urbanincomeratios,for36countriesoverthe1985-95decade,demonstratedthaturbanincomesarerarelymorethantwiceruralincomes.Theurban/ruralincomeratioofonlyonecountry(outof22forwhich1995datawereavailable)exceededthatofChina.Usingconsumptionasanincomeproxy,ChinacomparesunfavorablywithIndiaintermsofitsrural/urbaninequality.In1993-94thepercapitarural/urbanconsumptionratioswere0.28and0.61,respectively,forChinaandIndia.
Therural/urbanincomeratiousingconstant1985prices,reflectsthedifferentialincreasesinthecostoflivingbetweenruralandurbanareas,andillustratesasimilarbutslightlymoremodestdeclineinrelativeincomes.However,thesedataunderestimatebothruralandurbanin-kindincome.Pricedeflatorsadjustfordifferentialpricechangesbutnotpricelevels.Adjustingforthisdifferential(15percent),imputingrenttoruralincomesandadjustingurbanincomestoincludein-kindincomeforhousing,education,healthcare,pensionsandothersubsidizedservicesprovidesmoreaccurateincomeestimates.Theseadjustmentsloweredruralincomesto31percentofurbanincomesin1990substantiallylessthanthe45percentsuggestedbyofficialdata(WorldBank,1997c).
Thelargerural-urbanincomegappointstoalargedifferentialinlabor
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productivityandtoconstrainedfactormobility,especiallylaborandcapital;italsoreflectsthearbitrarynatureinwhichcompensationlevelsareset.Although
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onlyexaminingdatathrough1992,YangandZhou(1999)determinedthatthemarginalproductivityoflaborinagriculture,TVEs,andSOEswasY601,Y1,211,andY9,346respectively,in1992.Suchlargeproductivitygapsindicatebarrierstolabormobilitypreventanarrowingofthedifferentialdespitelargenumbersofsanctionedmigrationandlargernumbersof''floating"population.Thegovernmentattemptstocontrolthepaceofmigrationtoensureurbanservicesarenotoverwhelmed,andinparttoassureurbangrainsufficiency.Otherfactorsalsoconstrainmigration,including;lackofjobinformation,housing,medical,educationandothersocialserviceswhichareunavailabletoruralmigrants.Governmentpoliciescontinuetosupportandsubsidizeurbanstandardsofliving,includingtheabsenceofhardbudgetconstraintsforSOEs(protectingurbanjobs),andlow-costcapitalforurbanenterprisesalthoughhousingandenterprisereformsandfiscalconstraintsaremitigatingthesebenefitsasurbanworkersnowpayhigherrentsandcontributemoretotheirpensionandmedicalbenefits.
Intraruralinequalityhasalsorisenrapidlyduringthe1980sandearly1990s,atypeofinequalitythatmaybemoresociallysensitivesinceruralresidentsmaybemoreawareofthedifferencesinstandardoflivingbetweenthemselvesandotherruralcounterparts(Rozelle,1996).TheWorldBank(1997a)hasshownthatoneofthelargestgapsexistsbetweencoastalandinlandprovinces.Someofthegapmaybeduetofactorsrestrictingtheflowoflaborandotherresourcesbetweenrichandpoorruralareas.Withrisingmarketintegration,thebarriersmaybedeclining,butlargeinitialdiscrepanciesinresource,humancapital,andlocationalendowmentsmayrequiregenerationstoequalizewealthlevels.
Itwillbeverydifficulttoimprovethetrendsinrural/urbanincomeratioswithoutimprovinglaborefficiencyandproductivitythroughincreasedcapital/laborandland/laborratiosinagriculture.Whiletheformerratiocanbeincreasedbymakingcapitalmoreaccessible,significantincreasesintheland/laborratiocanbeachievedonlybytransferringlaboroutofagriculture.Duringtheearlyandmid-1990sincreasingagriculturalpricescontributedto
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increasingruralincomes,preventingfurtherdeteriorationintherural/urbanincomeratiobutadditionalrelianceonagriculturalpricepolicyislimitedsincethepricesofmanycommoditiesarenowaboveinternationalprices.Shiftingproductiontohigher-valuecommoditiesandcontinuedimprovementsinTFPwillpermitmodestincomegrowthinagriculture,butwithoutadditionallandandcapitalperagriculturallaborer,futurepercapitaincomegrowthinwillbeslowinagriculture.
Theproductionoflabor-intensive,high-valuecommoditiessuchasfruitsandvegetables(particularly
greenhousevegetables),useslandresourcesmoreefficientlythandoestheproductionofgraincropsbutmoreimportantly,provideshigherincomes.
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B.TheInternationalMarket
Internationally,exchangeratepolicies,graintradequotas,andmonopolystatetradinginfluencetheperformanceofChina'sruraleconomyandtrendsinruralincomesandconsumption.AlsotheongoingAsianfinancialcrisisandthecontinuinglackofeconomicgrowthandreduceddemandforimportsinJapanandKoreahavethepotentialtohinderruralgrowthanddevelopment.
China'sagriculturalexportvalue(foodandtobacco,butexcludingnaturalfibers)isonly7percentoftotalexportvalueconsiderablylessthanmostofitsneighbors;alsoagriculturalexportsareonly7percentofagriculturalGDP.Thuswhile$11billionofannualagriculturalexportsisobviouslyimportant,itisrelativelyunimportantinrelationtototalproductionandtotheshareoftotalexports.Theimpactonagriculturalimportslikelywillbeminimalgiventherelativelyhighquotaandtariffprotectionforagriculturalcommodities.Severalmodels(e.g.,IIEmodeldescribedinNolandetal.1998andtheG-CubedmodeldescribedinStoeckeletal.1998)
1havebeendevelopedtomeasurethedevaluationimpactofAsian-crisiscountriesontradepatterns.TheIIEmodelindicatesChina'stradebalancecoulddeclineby$12billionprimarilythroughreducedexports,with50percentofthatreductionaccruingtoJapaneseandKoreanmarkets.Thebalanceofthereducedexportswouldbederivedthroughthird-countrymarketslosttocompetitionfromthedevaluingAsiancountries.TheG-CubedmodelindicatesthatChina'simportadjustmentswouldberelativelyrapidandwouldreturntotheirbaselinetrendby2000.However,threefactorswillmitigateagainstincreasedimports:(a)quotaandtariffprotectionofagriculturalcommoditiesarerelativelyhigh;(b)withtheexceptionofpalmoil,themajoragriculturalimportsaretemperatecommoditiesthatarenotproducedinthedevaluingcountries;and(c)internationallytraded
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commoditiesareinternationallypricedandwillbelargelyunaffectedbydevaluations.
Japan,Korea,andHongKongareChina'sprincipalexportdestinationsabsorbingabout70percentofitsagriculturalexports.Totalexportstothesedestinationshavedeclinedoverthepastyear,buttheshareofagriculturalcommoditieshasremainedrelativelyconstant.Thus,therecoveryoftheJapaneseandKoreaneconomiesiscrucialtomaintainingandexpandingChina'sagriculturalexports.
Asthemanufacturingsectorislessregulatedandmoreimportantintheexternalmarketthanagriculture,itwilllikelyabsorbmostofthemarketchangesbroughtaboutbytheAsiancrisis.TVEexportdestinationsareunspecified,butTVEsexportabout40percentoftheiroutput.Thus,TVEexportdemandwilllikelybereduced,whichinturnwillreduceTVEemploymentandruralincomesbuttheimpactonagricultureshouldbemarginal.
ExchangeRatePolicies
Sinceconsolidatingthetwo-tierexchangerateinlate1993thenominalexchangeratehasappreciatedabout5percentagainsttheU.S.dollar(through1997).Therealeffectiveexchangerate(tradeweighted),however,appreciatedby30percent(InternationalMonetaryFund).Totheextentthatinternationalpricesinfluence,orestablishanupperbound,fordomesticprices,theimpactofexchangerateappreciationhasbeentolimitthedomesticpriceincreases.Thus,hadtherealeffectiveexchangeratenotappreciated,farmgatepricesforgrain,cotton,oilseeds,andothertradedcommoditiescouldhavebeen30percenthigher.Instead,theappreciationbenefitedurbanconsumers.
Althoughprospectsseemincreasinglyunlikely,theinternationalcommunityremainsconcernedaboutacurrencydevaluationbyChinaanditsimpactbothinternallyandexternally.Adevaluationwould
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erodedomesticandinternationalpublicconfidence,reduceforeigndirectinvestment(FDI)inflows,andincreasedomesticdebtbutwouldyieldrelativelysmallgains.WhileChinacouldtheoreticallybenefitbyregainingsomecomparativeadvantageinlabor-intensivemanufacturingpreviouslylosttodevaluingcountries,actualgainswouldbe
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limitedparticularlyifitprecipitatedafurtherroundofdevaluations.Actualgainswouldaccrueincompetingthirdmarkets,asbilateraltradebetweenChinaandtheAsian-crisiscountriesisrelativelysmall.Thesefactors,plusthelargepositivetradebalance,appeartosubstantiallymitigatethisrisk.
Adevaluationwouldhavedifferentimpactsondifferentcomponentsoftheruralandagriculturalsector.Producersoftradablecommodities,bothfarmersandindustrialTVEs,wouldexperienceincreasingcostsbecausefertilizers,agrochemicals,andvariousotherrawmaterialsareimported.However,outputvalueswouldincreasemoretherebyincreasingincomesforthatcomponentoftheruralsector.Producersofnontradedgoods,subsistencefarmers,povertygroups,andurbanwageearnerswouldexperienceanincomedecline,andthenumberofresidentslivinginpovertywouldincrease.Theimpactmodelssuggestthataverymodestdevaluationwouldreturntherealeffectiveexchangeratetothepre-crisislevel.
IncontrasttomanyotherAsianeconomies,Chinahasacontinentalmarketmostdomesticallyproducedgoodsaredomesticallyconsumed,withmodestrelianceonexternalmarkets.Althoughexportsandworldwidedemandareimportanttodomesticgrowth,contributingabout3percenttorecenteconomicgrowth,thehealthofthedomesticeconomyisoffargreaterconsequence.TotaltradeasapercentofGDP,ortradeintensity,demonstratestherelativeimportanceofexternalmarkets.IntheAsian-crisiscountries,tradeintensityrangesfromabout50percent(Philippines)toalmost200percent(Malaysia).China'stradeintensityis35percent,withexportscomposing20percentofGDP.However,usingpurchasingpowerparity(PPP)-adjustedestimatesofGDPreducesthetradeintensityratiotoabout10percent.
ImportRestrictions
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China'sscarcityoflandandabundanceofrurallaborimplythatmarketforceswillultimatelymakeland-intensiveproductsexpensiveifimportsarerestricted.Normalweatherfluctuationsimplythat,periodically,inflationwillemanatefromacombinationofdiminishedproductionandrestrictionsonimports.Economiclogicsuggeststhatlow-value,land-intensive,andnonperishableproducts(suchasgrain)shouldbeproducedlessandimportedmore,sothathigher-value,labor-intensivecommodities,likefreshvegetablesandanimalproducts,couldbeproducedmoreefficiently,abundantly,andcompetitively.Nevertheless,grainimportsarerestricted.Possibleexplanationsincludeconcernsfor:(a)famine,whichoccurredasrecentlyas1958-60;(b)overrelianceandhighcostofimportinglargequantitiesofgrain(i.e.,Chinaistoolargetorelyonsubstantialimportsofgrain,asitwouldincreaseworldpricesanddepriveotherimportingcountriesofsupplies);and(c)managingrural-urbantermsoftrade(i.e.,transferinvestableandconsumableresourcesfromruraltourbanareas).Nevertheless,theimpactofthisrestrictionissuppressionofthevalueofoverallruraloutputandruralhouseholdincomes.
StateTrading
Grainexportsandimportstraditionallyfunctionasbalancingmechanismstodisposeofdomesticsurplusesortoacquirestockstomakeupproductiondeficits.However,China'sexternalgraintradealsoservespoliticalinterestsasgraintradetargetsareplanned,butunpublicized,inadvanceofthecropyear.Tradeisintendedtobestabilizing,butunfortunately,China'sexecutionoftradeplanshastendedtoexacerbatefluctuationsindomesticcerealsupplies(rice,wheat,andcorn),andprices(Carteretal.1997;WorldBank1997b).
ConclusionsandRecommendations
Theruralandurbansectorsarestronglylinked,butfullintegrationisimpededbyvariouspoliciesandinstitutionsthatfostersorhinders
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resourceflows.Thepolicyframeworktransfersfiscalresourcesfromtheruralsector;thenetflowoffinancialresourcestotheurbansectormaybepolicydirectedormayrepresentefficientmarketsthattransferresourcesto
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higherreturnuses.Regardless,theruralsectorprovidesalargenetcapitalflowtotheurbansectorandillustratestheimportanceofmaintainingavibrantruraleconomy.Conversely,rural-urbanlaborflowsarepolicy-inhibited,leadingtoadverserural/urbanpercapitaincomeratios.Itisimprobablethatlong-termsustainableincreasesinagriculturalincomecanbeachievedwithoutremovinglargenumbersofagriculturallaborersfromthesectorandincreasingtheaverageland/laborratio.
Thefollowingmediumtermstepstoprogressivelytransferlaborfromtheagriculturalsectorandreversethedivergingtrendinrural/urbanincomeratiosarerecommended:
·Removemigrationconstraints.Thiswouldincludedisassemblingadministrativeandinstitutionalbarrierstorurallaborersseekingurbanemployment.However,forthispolicymeasuretobeeffectivelyimplemented,thecurrentriseinunemploymentinurbanlabormarketsmustbereversed.AstheStatecompletesitslaboradjustmentoverthemediumterm,itisexpectedthaturbanunemploymentwilldeclineandcreateamorefavorableenvironmentforremovingtheserestrictionswithoutsocialdisruption.
·Supportpoliciesandsocialservicesthatfacilitatesmigration.Thiswouldincludesupportofalandusemarketthatwouldpermitmigrantstoleasetheirlandtoothersyetprovideaminimalamountofsecurityifurbanemploymentwasterminated.Additionalsupporttoruraleducationtoimprovevocationalskillswouldincreasethemarketabilityoftherurallaborforceandencouragemigration.Removaloftheconstraintsonurbannonresidents'accesstourbansocialservices,sucheducationfortheirdependents,wouldalsopromotemigration.
·Encouragethecreationoflabor-intensiveoff-farmjobs.TomodernizeitseconomyChinamustsupporttechnology-intensive
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industries,whicharetypicallycapital-intensiveaswell.However,someindustrieshavetheoptionofoperatingineithercapital-orlabor-intensivemodes;wherethisoptionexiststhelabor-intensivemodeshouldbepursuedgiventhelargenumberofjobsthatmustbecreatedtoabsorbagriculturallabor,improveagriculturalland/laborratiosandincomes.
1.AlthoughCGEmodelshavebeendevelopedtoanalyzetheimpactsoftheAsiancrisis,onlytheresultsfromtwoofthemorecomprehensivemodelsarementionedinthisreport.Theyare(a)themodeldevelopedbyNolandLiu,Robinson,andWang(describedinNolandetal.1998),hereaftercalledtheIIEmodel,and(b)theAsiaPacificG-Cubedmodel(describedinStoeckeletal.1998).
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3.RuralPublicFinance
Chinaneedsahealthypublicfinancesystemtoenablegovernmenttoprovidebasicinfrastructureandsocialservicesandanenablingenvironmentforequitableandsustainableincomegrowth.Fortheruralsector,thisincludesprovidingorfacilitatinginvestmentsinfarmlandimprovements,agriculturalresearchanddevelopment,extensionservices,infrastructuresuchasroadsandcommunications,andsocialservices(suchaseducation,health,andsocialsecurity).Thefiscalsystemalsosetsincentivesthatguidetheallocationofresourcesandinfluencedevelopment.
Chinahasoneoftheworld'smostdecentralizedsystemsforprovidinggovernmentservices.Inmanycountriessubnationalgovernmentsprovideday-to-dayadministrativeandsocialservices,butfinancingtypicallycomesfromthenationaltreasury.LocalgovernmentsinChina,however,arelargelyself-financing,atrendthathasincreasedduringthereformperiod.China'sprovincialcountyandtownshipgovernmentsinruralareasfinanced48percentofbudgetaryexpendituresfromlocalsourcesin1990,butcollected66percentoftherevenues(Figure3.1),alevelmuchhigherthaninmostcountries.
TheConductofRuralPublicFinance
Atypicalcountybudgetisdividedintothreemainparts,withroughly40to45percentofthetotalspentonsocialservices,25to30percent
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onadministration,and10to15percentoncapitalexpenditures.Theexpendituresharesarechangingasanincreasingshareofthebudgetisspenttomeetsocialservicesmandatedbythecentralgovernmentandpaynationallysetsalarylevels.AdistinguishingfeatureofChina'sfiscalsystemisthatruralgovernmentfunctionsoverlapandareperformedjointlybythecountyandthetownshiportown,withsomehelpfromvillageresidents'committees.Attheendof1997Chinahadnationwidesome2,100countiesandcounty-levelcities,44,700townshipsandtowns,and740,000villageresidents'committees.Thislargegovernmentalapparatusisstaffedbyalargeandrapidlygrowingnumberofofficials,whosesalariesandbenefits
Figure3.1China,NationalandSubnationalSharesofRevenuesandExpenditures
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havecommandedanincreasingshareofthebudget.Incontrast,whileagriculturalinvestmentsabsorbsanimportantshareofbothcapitalandadministrativeexpenditures,itssharehasdeclinedovertime.
Theexpenditureresponsibilitiesoftownshipgovernmentshavetwoprimaryfoci:socialservices,principallyeducation,healthandwelfare;andadministrationoflawandorderandofdisasterrelief.Providinginfrastructuralsupporttotheeconomyagriculturalextension,waterconservancy,farmmechanization,andothercapitalinvestmentsintheruralsectoristheresponsibilityofthecountygovernment.
Althoughvillagesarenotaformalpartofthegovernmentanddonothaveindependentfiscalpower,theystillplayanimportantroleinChina'sfiscalsystem.Whenpeople'scommunesweredisbandedintheearly1980s,productionbrigadesandteamsrevertedtotheirtraditionalnameof"village."However,theyinheritedaframeworkofgovernancefromthecollectivesandexercisesignificantexpenditureduties,suchassalaryorsubsidypaymentstovillageofficials,socialwelfarefortheagedandinfirm,andsometimessupplementaryeducationalorhealthprovision.Duringthecollectiveera,theseobligationswerefinancedfromlocalproceeds.Totheextentthatmanyvillagescontinuetocarryonthesefunctions,theyhavehadtofindoff-budgetmechanismsforfinancingthem,usuallythroughnontaxleviesonruralincomesandproduction.
Alegacyoftheplannedeconomyisthetreatmentoftheagriculturalsectorasmarginaltothefiscalsystemitisneitherasignificantsourceofrevenuesnoramajorrecipientoffiscaltransfers.Intheplannedeconomy,therealfiscaltransferstookplacethroughthepricemechanism("thepricescissors")thatextractedsurplusesfromtheagriculturalsectorbysettinglowpricesforagriculturalrawmaterialsandhighpricesformanufacturedconsumergoods(Huangand
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Rozelle).Supporttoagricultureincludedsubsidiesthatwereexternaltothefiscalsystem;theywereprovidedthroughgovernmentcontrolledlowpricesforagriculturalinputs(fertilizers,fuel,andelectricpower)andinvestmentinindustriesthatproducedagriculturalinputs.Astheseprice-basedtaxesandsubsidieshavedisappeared,thetaxcontributionbyagricultureandallocationstotheruraleconomyhavefallen.
ThesechangestoruralpublicfinancehaveoccurredinthecontextofoverallfiscalreformthathaslaggedbehindChina'stransitiontoamarketeconomythroughoutthepasttwodecades.Therevenue-generatingcapacityoftheoldsystemhasbeenerodedwithdismantlingofplanningmechanisms,andthenationwidebudget(alljurisdictions)hasdeclinedfrommorethan30percentofGDPinthelate1970stothecurrent10to12percentofGDP(Figure3.2).Incontrast,treasuriesinotherEastAsiananddevelopedcountriescommand20to30percentofGDP(somehighlysocialistnationssuchasDenmarkandIsraelapproach50percent).
1Thisfiscaldeclinehasreducedthecapacityandwillingnessofhigher-levelgovernmenttotransferresourcestotheruralsector.
TaxReforminthe1990s
Concernwithcentralrevenuedeclineledtoacomprehensivereformofthefiscalsystemin1993,aspartoftheefforttomodernizemacroeconomicpolicy.Themainissuesweredefiningamorestableandrisingrevenuebase;makingthetaxstructuremoretransparentandlessdistortionary;andmodifyingnational-
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Figure3.2Rural-UrbanperCapitaIncomeRatios
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subnationalrevenuesharing.Keyprovisionsincludedtheadoptionofavalue-addedtax(VAT)andrevenue-sharingarrangements.Thenewtaxpolicyappearstohavemetsomeofitsgoals.IthasstemmedtherapidfalloftaxrevenuesasashareofGDP(Figure3.2),andcentralgovernmentcontrolofrevenuesandexpenditureshasreversed(Figure3.1).
Thetaxsystemremainscenteredonindustry.(TheVATisassessedprimarilyonindustrialproducts.)RuralgovernmentshavebecomeincreasinglydependentonVATrevenuesgeneratedbyTVEs,andtheincreasedremittancesofVATtothenationalgovernmenthasalmostcertainlyincreasedruralbudgetdeficitsaslittleprogresshasbeenmadeinrevenueredistribution.Thereformsdidnotaddressregressiveintergovernmentaltaxsharingandredistributionissues,andthuscreatedseriousshortfallsinmanyruralcountiesandtownships.Taxsharingisbasedoncollection,sothatrichprovincesreceivemorecentraltransfersandrebatesthanpoorprovinces(Rozelle,Zhang,andHuang1998a).Thus,overallintergovernmentaltransfersarestronglydisequalizing.Forexample,Guizhou,Shaanxi,andSichuanProvinceshadbudgetdeficitsexceeding20percentinthemid-1990s,afterincludingcentralgovernmenttransfers.
Thegrainquotatax(duringtimeswhenthemarketpriceisabovethestate-setprocurementprice)isnolongertargetedatsupportingurban
Figure3.3InvestmenttoWageSpendingRatio,
Shaanxi,1983-'92
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grainsubsidies;rightstothesequotataxes(thedifferencebetweenmarketandquotaprices)areunclear.TheMinistryofAgricultureisexperimentingwithchangingallfarmertaxburdensintoagraintax,whichhasmetwithsomesuccessandsomeproblems.
GovernmentTransfers
Subventionsfromnationalandprovincialgovernmentsstillareanimportantcomponentofthebudgetsofcountiesandtownships.However,theuntiedtransfersthatformerlyprovidedresourcestocountiesandtownshipsforgeneralexpendituresareincreasinglyreplacedbyspecific,earmarkedtransfersforagriculturalinfrastructureinvestment,educationandhealthcaresupport,welfare,anddisasterrelief.A1988nationalpolicyfixedgeneraltransfersinnominalterms,irrespectiveofrequirements;inrealterms,inflationhassinceerodedmorethantwo-thirdsoftheirvalue.Theimpactismostseriousinpoorcounties.
Targetedtransfersareerodinglessrapidly,butthereformshaveimposedmorefiscaldemandsonlocalities,astransfersareinadequatetomeetmandatedexpenditures.Unfundedpublic-servicemandatesabound;forexample,thecentralgovernmentoftenannouncestargets,suchasspecificreductionsinschooldropoutratesorimprovementsininfantmortality,butthefundstoachievethegoalsarenotprovided.Tomeetthesemandatescountyandtownshipgovernmentsmustraisethefinancialresources.
ImpactonInvestmentandProvisionofRuralSocialServices
Persistentfiscalgaps,orshortfallsbetweenrequiredexpendituresandfiscalcapacity,haveseveraladverseeffects.Oneisthatmanyruralgovernmentsareunabletoprovidethelevelandqualityofsocialservicesmandatedbynationalpolicy.
Investments
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Deferredinvestmentisanimmediatevictimoffiscalshortfall.Asofficialsstruggletomeet
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wagesandotherimmediateneedsfromdiminishingrevenues,theseneedsaredisplacingdevelopment-orientedinvestments(Figure3.3).Evenifbudgetaryofficialsaredirectedtoallocatefundstofixedinvestment,thefundsareoftendivertedorborrowed,andifnotreturned,theinvestmentisnotjustdelayedbutpermanentlydeferred.
RuralEducation
Callsfromthenationalgovernmenttobolsterruraleducationarenotmatchedbyearmarkedallocations.Nationalofficialshavesetaneducationexpendituretargetof4percentofGDPby2000,upfrom2.66percentin1994.Imploringlocalgovernmentstoincreaseeducationfundingmorerapidlythanthegrowthinfinancialrevenuehasgonelargelyunheeded,andmeetingthistargetappearsimprobable.Insufficientfiscalrevenueshaveunderminedthequalityofeducationasmeasuredbyanumberofhumancapitalindicators.Forexample,aStateStatisticalBureausurveyshowsthat30millionChinesestudentshaveneverbeentoschoolorhavedroppedout,4milliondropoutofschooleachyearbecausetheycannotaffordthecost,andonly64percentofruralstudentscompleteprimaryeducationwithoutrepeatingayear.
RuralHealth
MinistryofPublicHealthgoalscallfor8percentofruralbudgetstobespentonhealthcare.Nationalofficialshavemandatedimprovedfacilities,expandedcoverage,andminimumtrainingfordoctors.Rulesdescribewhatisexpectedofcountyandtownshipleadersforestablishingidealruralhealthsystems.However,likeeducation,theactualresourcesallocatedtoachievenationalobjectivesfallfarshortofneeds.Thenationalgovernmentallocatesonly2.4percentofitsrecurrentbudgetforhealthcareservices,andonly1.2percentofthecapitalconstructionfund.Thesituationismoresevereinpoorareas.
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Schoolfeesandhealthchargeshavesoaredinrecentyears.West(1998)reportsinmanyareastherearebothrisingdropoutsduetodifficultyinmeetingthesenewschoolingcosts,andfallingmaternalandinfanthealthcarevisitsbecauseofrisingcosts.Inareaswherefundscannotberaised,educationandhealthserviceshavedisappearedordeclinedinquality,resultinginthelarge-scaleout-migrationofteachers,doctors,andotherprofessionals.
ExtrabudgetaryRevenueSources
Asecondadverseeffectoffiscalpressureisthegrowingrelianceonoff-budgetfinance.The
Table3.1TownshipFinanceinChina,1986-93(Percent)
1986 1987 1988 1989 1990 1991 1992 1993
Totalrevenue 100.0100.0100.0100.0100.0100.0100.0100.0
Budgetaryrevenue 83.3 82.7 80.0 75.9 74.6 72.0 71.5 73.8
Extrabudgetaryrevenue 5.0 4.7 5.6 6.0 6.4 6.9 7.1 6.5
Self-raisedfunds 11.7 12.6 14.4 18.1 19.0 21.1 21.5 19.8
Totalexpenditure 100.0100.0100.0100.0100.0100.0100.0100.0
Budgetaryexpenditure 77.4 76.6 74.3 69.4 69.0 66.4 65.9 67.6
Extrabudgetaryexpenditure
6.4 6.1 7.0 7.2 7.4 7.7 7.6 7.0
Self-raisedfunds 16.2 17.3 18.7 23.4 23.6 25.9 26.5 25.4
Source:MinistryofFinance,1994.
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abilityoflocalgovernmentstoraiserevenuesvariesgreatlyanddeterminesthequantityandqualityoflocalpublicservices.Countyandtownshipofficialsareevaluatedontheirfulfillmentofmandates.Thisisanimportantreasonfortheincreasingoflocalfeeassessmentsandrisingburdens(Wen1998).
Tomeettherevenuerequirementsoftheseexpendituredemands,countyandtownshipgovernmentsattempttoincreaserevenuefromoff-budgetsources.Withoutlegaltaxingauthorityorabilitytoborrow,countiesandtownshipshavedevelopedoff-budgetsources,primarilyextrabudgetaryfunds(EBFs)andself-raisedfunds(SRFs).Fromthelate1980sthroughtheearly1990s,theproportionoftotalfundsfromthesesourcesrosecontinuously,reaching28.6percentin1992(Table3.1).Atthetownshiplevel,EBFsarefewer(comparedtocities),andconsistmostlyofruraleducationandagriculturaltaxsurcharges.Themajorityofoff-budgetrevenuescomefromSRFs,whichincludemiscellaneousfees(assessedonlocalenterprises),rentalincome(fromleasedcollectiveassets),andremittancesfromTVEs.TheMinistryofFinancehasreportedthat,onanationalbasis,off-budgetrevenuesbringtotalrevenuecollectiontoabout30percentofGDP(AgencyFrancePresse,Beijing,Sept.22,1998).
Thegrowthofoff-budgetrevenueshaseasedfiscalpressuresformanylocalities,butithasalsoproducedadverseconsequences.Ithashastenedthedeclineoftheformalfiscalsystembyprovidinganalternativetaxsourcethatis100percentretained.Ithascreatedataxsystembeyondthereachoftheformalfiscalsystemthatisadhoc,nontransparent,andregressive;thelackoflegitimacymaybemoreofasourceofruraldiscontentthanthetotalburden.Also,localofficialsrelyalmostexclusivelyonenterprisesforSRFs,thusthemostruralandpoorestjurisdictionshavetheweakestpotentialforsupplementingbudgetsfromthesesources.
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Perhapsthemostegregiousconsequenceofoff-budgetfinancingisthetendencyofcountyandtownshipgovernmentstogivepolicyandregulatoryagenciescontrolovertheassetstheyregulateoroperate(ortheresourcestheyarechargedwithprotecting).Officialsthenencourageagencyofficialstousetheseassetstogenerateincomeforstaffsalariesandotherexpenses.Thisisapervasiveissueandwillresurfaceinsubsequentdiscussionsofnatural-resourcemanagementandagriculturalextension.
EqualizationIssues
Previousstudieshavenotedunusuallylargedifferencesinpercapitabudgetaryrevenuesamongprovinces(WorldBank1992a;Wong,Heady,andWoo1995).However,revenueandexpendituredifferencesarealsolargeatsubprovinciallevels;andwithdecreasingtransfers,percapitarevenueandexpenditurehavebecomeincreasingcorrelated.WhiletheVATwasdesignedtopermitthecentralgovernmenttocontrolmorefiscalresources,negotiationshaveenabledprovincestokeepalargeproportionofthetaxestheygenerate.Thisretentionoftaxes,combinedwiththeregressiverebate,mitigatedthemoreprogressivenontaxtransfersandintendedredistributionimpact.
FiscalCrisesinPoorCounties
Inrecentyearsdeficitshavebecomepersistentinpoorcounties.In1994,halfofChina'scountieshaddifficultiesmeetingevenbasicexpenditures,suchaswagedisbursements(Parketal.1996).Countiescangenerateextrarevenuesbysellingurbanpermits,borrowingfundsearmarkedforotheruses(suchasfamilyplanningorschoolconstruction),orborrowingfromlocalSOEsorbanksafrequent,althoughlegallyprohibited,practice.Poorercountiesarerevenuestarvedevenmorethanisreflectedinacknowledgednetdeficits;hiddendeficitsarerepresentedbybudgetaryfundsdivertedfromprescribedusestopaysalariesandwages.Salaryandwagepayments
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areoftendeferred,andsomecountyandtownshipgovernmentshavedeclinedtopayforemployeebenefits,suchashealthreimbursements.(Countiescanappealtoupper-levelgovernmentsforspecialsubsi-
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diesorincreasesinfixedsubsidies,buttheseadjustmentsareonlymadeinspecialcases,suchasnaturaldisasters.)Thesehiddendeficitsindicatethatfinancialstatisticssystematicallyunderestimatetruefiscaldeficits.
EffectofBudgetPressuresonPublicExpenditurePatterns
Thepressuretoeliminatedeficitsmayresultinunderinvestmentinpublicgoods,especiallyinpoorerareas(whereneedsaregreatest)andincreaseincentivesforlocalgovernmentstomaximizerevenuesratherthansocialwelfare(Wu1994).Localgovernments'placingpriorityonmeetingtheirwagebillshasledtodeferredmaintenanceanddeterioratingcapitalstockinmanyofthepoorercountiesandconsequentlytodecliningefficiencyofresourceuse(GallagherandOgbu1989).
Theimpactoffiscalreformsontheabilityofcountyandtownshipgovernmentstomakeproductiveinvestmentsininfrastructureandsocialserviceshasimportantimplicationsforeconomicdevelopmentinpoorregions.Someofthefallininvestmentinpoorcountiesmightbeexpectedtobecompensatedbyincreasedspendingthroughotherchannels,especiallyChina'spovertyprogram.RecentresearchinSichuan,showsthatlocalinvestmentsineducation,health,andagricultureleadtogrowth,butpovertyprograminvestmentstypicallyreplace,ratherthansupplement,budgetaryinvestments(Rozelle,Zhang,andHuang1998a);andon-budgetinvestmentsandsocialserviceshavedeclinedfromthemid-1980stothe1990s.
Deficitcountieshavebeguntoreducetheirwageobligationsthroughwagesuspension,stafftermination,andreorganizationsthatreassign,butdonotterminate,localgovernmentpersonnel.Somecountyandtownshipgovernmentbureaushavebeenredesignatedascompanies,withworkerpaylinkedtoprofits.Otherbureausandagenciesare
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urgedtodesignandpursuerevenue-generatingactivities;andmanystaff(boththosereassignedandstillingovernment)pursueentrepreneurialactivities,suchasopeningrestaurantsandhotelsorengageintrade.
ConclusionsandRecommendations
Theconductofruralpublicfinanceaffectstheentirenation'sstabilityandlong-rungrowthprospects.However,theruralfiscalsystemgeneratesinadequaterevenuesandpoorlyredistributescollectedrevenues,which,unlessimproved,willconstrainlong-termdevelopment.
Fiscaldecentralizationhastransferredcontrolovermostresourcesandresidualrightsovermostincrementalrevenuestosubnationaljurisdictions.Nationaldirectivesandtax-collectionproblemshavealsoreducedresourceredistribution(Wong1997).Fiscalreformshavehardenedbudgetconstraintsforallsubnationaljurisdictions;andfiscalsharingruleshaveincreasedtaxcollectionsinbothrichandpoorregions(Parketal.1996;Wong1997).Somescholarshaveidentifiedgrowth-inducingeffectsinChina'sfiscalreform,supportedbyempiricalevidence(Lin,LiuandZhong1997).However,thereformsareincomplete,aswidespreadfiscalcrisessufferedbysomanyruralgovernmentshasreducedpotentialeconomicgrowth,welfare,andequity,andhasledtoinvestmentstarvation.Some70percentofthecountiesandtownshipshavenetdeficitbudgets,andtheirpolicyobligationscontinuetorise.
China'staxsystemischaracterizedbydeficientrevenuegenerationandpublicservicespendingatalllevels.Thetaxsystemisheavilyindustry-dependentandhasneithermadetaxassignmentsclear,norgivenruralcommunitiesarevenuebaseonwhichtobuildrationalfiscalplans.The1994taxreformincreasedthetaxcollectionpowerofthecentralgovernment,whichwouldallowmoreequitableredistribution.Whilemorerevenueshaveflowedintocentralcoffers
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(reducinglocalrevenues),littlehasbeenshiftedtopoorerareas,andthenewtaxpolicycontinuestofavorrelativelyaffluentareas,exacerbatingratherthanalleviatingtheruralfiscalcrisis.
Fiscalresourcesinpoordeficitareasareinsufficienttomeettheruralsector'sdevelopmentinvestmentrequirements.Increasedpressureatcountyandtownshiplevelstogeneraterevenuesleadstobiaseddevelopmentpolicies
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andmaybecomedistortionaryandinimicaltoeconomicdevelopment.Forexample,investmentsinrevenuedeficitregionsmaytendtobeindustrybiased,becauseoftherelativeeaseoftaxandfeeextraction,evenifinvestmentsinagriculturemightbetterservegrowthanddistributionalgoals.
Werecommendthefollowingstepstoimprovepublicfinancingoftheruralsector:
·Continuefinancialreformtorectifyapotentiallyseriousconstrainttolong-runsustainablegrowthandpovertyalleviation.Mechanismstobroadenlocaltaxbasesandgeneratemoreon-budgetrevenuefromallsectors,includingagriculture,andimproverevenueredistributiontoreallocaterevenuesmoreequitablyaresorelyneeded.Chinamustreconsidertheregressivecomponentsoftheoverallfiscalsystem,especiallythenewVATandrebatepolicies,toimprovefiscalflowstopoorerareas.Giventhemagnitudeandsensitivityoftheproblem,itmustbesolvedinternally;outsideagenciescanassistonlymarginallybyprovidingassistanceinidentifyingthestrengthsandweaknessesofthecurrentsystem,designingandassistingwithexperimentalprograms,andassistinginpublicfiscalpolicytraining.
·Continueevaluatingtheconsequencesofmanagingsuchahighlydecentralizedeconomy,includingbothbenefitsandcostsofdecentralization.Alternativefiscalstructurestobeconsideredincludereturningbasicfiscalresponsibilitytothecounty,fromthetownshipforallbutperhapsthemostindustrializedtowns.Suchamovewouldhaveanumberofconsequencesandtradeoffs.Forexample,theincentivefortownshipstomonitorpolicyandreduceadministrativecostsmightdeclineandpolicyimplementationmightsuffer.Inreturn,however,thescopeforredistributionwouldbroaden;administrativepersonnelcouldbereduced;andunauthorizedtaxes,fees,andleviesmaybereduced.
·Trackgrainquotataxesanddesignwaystocapturethemforcountyandtownshipbudgetsoreliminateallorconvertitintoamoreeasilycollectedtax,suchasaprogressivelandorheadtax.Assistancecouldbeprovidedinevaluatingtheresultsofconvertingallfarmertaxburdensintoagraintaxandin
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expandingtheseeffortstolookatabroaderarrayoffiscalinstruments.
1.WorldBank,WorldDevelopmentReport,1997,WorldBank,Washington,DC,1997.
Traditional(backyard)livestockandpoultryproductionbalancescropproductionbyutilizingcropresiduesandsurplusfarmlaborandaddstofarmincome.
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4.RuralCreditandFinance
Mobilizingandefficientlyusingavailablefinancialresourcesisimportantforachievinghighratesofeconomicgrowth,especiallyindevelopingcountrieswheresuchfundstypicallyareinshortsupply.Aseconomiesgrow,financialinstitutionsoftenplayanimportantroleindirectingresourcestotheirmostproductiveuse.Asaresult,greaterfinancialintermediation(loansasashareofGDP)usuallyaccompanieshigherincomes(GertlerandRose1996;Levine1997).However,governmentsindevelopingcountriesoftenusestatecontrolofthebankingsystemtopursuepolicygoalsthatarenotalwaysconsistentwithefficientintermediation.
TherecentAsianfinancialcrisishighlightsthepotentialdangersofweakfinancialsystems.ThecrisishasheightenedscrutinyofChina'sstatebankingsystem,whosefragilitystemsfromthecontinueduseofthefinancialsystemtosupporturban-basedstate-ownedenterprisesandotherpolicylending.Thegovernmenthasalsoimplementedstrictlendingcontrolsperiodicallytocombatinflation.Recently,stepshavebeentakentoreducetheamountofnonperformingloans,whichaccountforatleastaquarterofoutstandingloansofChina'sfourmajorstate-ownedbanks(Lardy1998).Pursuitofthesegoalshasledtostrictregulationandeffortstocontrolemergingfinancialinstitutions.Despiteanumberofimportantfinancialsectorreforms,financialmarketshavebeenliberalizedmoreslowlythanmostsectors(Tam1995).SignificantprogressinreformingChina'sruralfinancial
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institutions(RFIs)thuswilllikelydependuponthesuccessofoverallSOEandbankingsystemreform.
GiventhatthemajorityofChina'spopulationresidesinruralareas,ruralincomeshavegrownmarkedlyduringthereformperiod,andruralenterpriseshavebeenthemostdynamicsectorofindustry,theruralsectorisamajorsourceandtargetoffinancialresourcesfuelingChina'sgrowth.ConcernovertheperformanceofChina'sRFIsstemsfromseveralfactors.First,thebankingsystem'shungerforfinancialresourcesmayundulytaxRFIdepositsandpolicygoalsmayinfluencelending.Second,regulatedinterestratesimplycreditrationing,makingprivateentrepreneursandfarmers,especiallythepoor,likelytohavedifficultygainingcreditaccess.TVEsalsohavehaddifficultygainingaccesstobankcredit,especiallyduringperiodsofmacroeconomicstabilization(ZhuandBrandt1995).Evenwithoutinterestrateregulation,smallfarmersareoftenrationedoutofformalcreditmarkets(Carter1988).Fieldresearchersobservethatinsomepoorvillages,localcreditcooperativeshavestoppedlendingtofarmers.Between1988and1995,ruralfinancialintermediationhasnotdeepened;infact,farmershavereducedcreditfinancingforkeyactivities,suchasfertilizerandlivestockpurchases(Table4.1).
TypesofRuralFinancialInstitutions
Theruralsectorisservicedbyfinancialinstitutionsthatdifferinsize,branchnumbers,androleintheruraleconomy.ThelargestRFIsaretheAgriculturalBankofChina(ABC),theAgriculturalDevelopmentBankofChina(ADBC),RuralCreditCooperatives(RCCs),andRuralCooperativeFunds(RCFs).
1Eachplaysauniqueroleinprovidingdepositandlendingservicestotheruralsectorandoveralleconomy.Together,theABC,ADBC,andRCCsaccountfor24percentoftotalassets,27percentoftotaldeposits,and34percentoftotallending(Table4.2).
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Table4.1:PercentofHouseholdsEngagedinDifferentActivitiesthatFinance
ActivitywithLoansandAverageLoanAmount,byActivity
Year Fertilizer Livestock SmallBusiness Illness Construction Other
PercentofHouseholdsEngagedinActivitythatFinanceActivitywithLoans
1988 30 25 32 38 56 25
1995 22 18 34 37 56 24
AverageLoanAmountofHouseholdReceivingLoan(yuan,in1988prices)
1988 125 238 1,205 494 1,667 499
1995 90 143 3,767 849 2,161 550
Note:Thereare32observationsforZhejiang,Sichuan,Hubei,Shaanxi,andShandong;and24observationsforYunnan.
Source:VillagesurveybyRozelle,Park,Huangetal.,1996.
Table4.2:Deposits,Loans,andAssetsofChina'sFinancialInstitutions,1996
Deposits Loans Assets
NationalTotal(billionyuan) 6,853 6,433 12,856
Ofwhich(percent):
PolicyBanks 0.6 14.1 7.9
AgriculturalDevelopmentBank 0.6 9.7 5.5
StateDevelopmentBank 0.0 4.1 2.2
Export/ImportBank 0.2 0.2
StateCommercialBanks 65.7 64.5 72.6
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AgriculturalBank 13.9 14.0 11.4
IndustrialandCommercialBank 27.7 28.0 28.2
BankofCommunication 7.1 7.1 16.4
ConstructionBank 17.0 15.5 16.5
NationalCommercialBanks 6.6 4.7 6.0
RegionalCommercialBanks 1.8 1.5 1.6
CreditCooperatives 20.8 14.0 10.1
RuralCreditCooperatives 12.8 9.8 6.8
UrbanCooperativeBanks 2.1 1.2 0.2
UrbanCreditCooperatives 5.8 3.1 3.1
PostalSavings 3.1
TrustandInvestmentCompanies 1.3 1.2 1.8
Source:DatafromChinaFinancialYearbook1997,compiledbySehrt(1998).
Interestrates,bothdepositandlending,areregulatedbythecentralbank,thePeople'sBankofChina(PBC),andareadjustedatirregularintervals.EffectiveratesasofJuly1,1998wereasfollows:
Percent
Workingcapitalloans6mos. 6.57
Workingcapitalloans1yr. 6.93
Constructionloans3-5yrs. 7.65
DemandDeposits 1.44
TimeDeposits1yr. 4.77
Source:ChinaStatisticalYearBook,1998
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AgriculturalBankofChina
TheABCwasestablishedtosupportstatetradingunitsandenterprisesinruralareas,andfarmers.Ithasbranchesinnearlyeverycounty,andhastownship-levelbusinessoffices(whichapproveloans)andsmallerdeposit-takingbranchesinurbanandruralareas.Until1994loansfromthePBCwereanimportantsourceoffundswhichfinancedpolicyloans,mainlyforagriculturalcommodityprocurementbystatetradingcompanies.WhenpolicylendingresponsibilitywastransferredtotheADBCin1994,thesourcesandusesoffundschanged.Deposits,primarilybyindividuals,arenowthemajorsourceoffunds,althoughdepositsbyfirmsaregrowingmorerapidly.Householdsreceiveonly16to17percentofthelendingportfolio;themajoruseoffundsisworkingcapitalloansforindustry,commerce,andTVEs.AstheABChasbecomemorecommercial,ithasincreasinglyservedasanintermediaryintransferringfundsoutofruralareas.TheABCwasrequestedtoresumeresponsibilityforalargeandgrowinggroupofpolicyloansin1998theynowcomposeabout10percentoflendingactivity.Repaymentontheseloansremainsproblematicbecauseofaninabilitytomonitorloanseffectivelyandcrediblydemandrepayment.
AgriculturalDevelopmentBankofChina
TheADBCwasestablishedin1994toassumepolicyloanresponsibilityandallowtheABCtobecomeafullycommercialbank.TheADBC'spolicyloansincreasedrapidlyfromY356billionattheendof1994toY625billionin1996.About90percentofpolicylendingisfinancedbyPBClow-interestloans,mainlyforprocuringagriculturalcommodities(primarilygrain,butincludingcotton,pork,andoilseeds)bystatetradingcompanies.ADBClendingtograinbureaushasbecomeasignificantshareofnonperformingloansinthebankingsystemandwasanimportantreasonforreformofthegrain
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marketingsystemin1997.ToallowtheADBCtoconcentrateonaddressingthisproblem,administrativeresponsibilityforpovertyandotherdevelopmentloanswasreturnedtotheABCsin1998.
RuralCreditCooperatives
RCCsarethemostnumerousRFIsandtheonlyfinancialinstitutionswithwell-developedvillagenetworks.Althoughcooperativesinname,theyarecloselysupervisedbythestatebankingsystem.Historically,theyhavehadacloseadministrativerelationshipwithABC,anduntilplacedunderPBCsupervisionin1996,servedasaconduittochannelruralhouseholdsavingstotheABC.Morethan50,000township-levelRCCsexist,operatingasindependentaccountingunits,complementedbymorethan250,000villagecreditstations.TheRCCsarethemajordepositoryforruralhouseholdsavingsand,inprinciple,havegreaterflexibilityinmeetinglocalcreditdemands.Theyhavefewpolicyloanresponsibilities,moreleewaytoadjustinterestrates,andprovidegreaterconveniencethroughdeepervillagepenetration.However,theyaresubjecttolocalpoliticalinfluencesandportionsoftheirextensivebranchnetworkareunprofitable.RCCshavebeenmoreeffective(thantheABC)inmeetingthecreditneedsofruralhouseholdsandenterprises(Park,Brandt,andGiles)butthelendingportfolioisprimarilyTVEloans;agriculturalhouseholdsreceiveonly24percentofthelendingvolume.
RuralCooperativeFunds
RCFsemergedinthe1990sinmanypartsofChinaasnewanddynamicquasi-statefinancialinstitutions,organizedatthetownshiplevelundertheadministrativesupervisionoftheMinistryofAgriculture,withlendingfocusedonlocalhouseholdsandruralenterprises.Becausetheyareunofficial,RCFsarelessstrictlyregulatedandcannotacceptdepositsormakeloans;insteadtheycollectsharesandallowborrowingbuthavestrictercollateralandguarantorrequirementsthanotherRFIs.Sharefundswereestimatedat
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aboutY100billionattheendof1996(Cheng,Findlay,andWatson1997),44percentfromhouseholds(Park,Brandt,and
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Giles1997).RCFsaretheonlyRFIprimarilyconcernedwithagriculture.LoanstoTVEswereinitiallyprohibitedbutlaterpermittedascapitalizationincreased.In1995householdsreceived45percentofRCFloanvolume;TVEs,24percent.
2Theirsuccesssuggestsalargeunmetdemandforruralcredit.RCFscompetewithRCCsfordeposits(shares),andbecauseoffewerinterest-raterestrictionsandtaxexemptions,providehighershareholderreturnsthanRCCs.In1998TheStateCouncilannounceditsintentiontoincorporateRCFsintotheRCCsystem.However,localgovernmentleadersandtheMinistryofAgriculturesupporttheRCFs,astheyarelocallycontrolledandfocusmoreonhouseholdagriculturalactivities.Implementationofthispolicyisstillunderdiscussionamongministriesandregulatoryagencies.
OtherFinancialInstitutions
Severalotherfinancialorganizationsoperateinruralareas.SomeruralhouseholdsreceiveloansdirectlyfromthelocalgovernmentbudgetorMinistryofCivilAffairsreliefprograms.Insomeprovinces,thatministryhassetupMutualAssistanceCreditGroups(MACGs)thatprovideproductionandconsumptionloanstohelppoorhouseholdstosmoothincomeshocks.MACGswereestimatedtoholdaboutY1.2billionattheendof1993(Zhu,Jiang,andBraun1996).However,mostMACGshaveencountereddifficultiesoffallingcapitalizationduetothelowinterestratesandrelieforientation,whichprovidespoorincentivesforloanrepayment.Informalorganizations,suchasrotatingcreditsocieties,havealsobeenrevivedinthereformera.
PerformanceofRFIs:SavingsandIntermediation
Householdsavingsdepositshavereachedhighlevelsandruraldepositshaveincreasedsteadilyalongwithrisingruralincomes.
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However,theyhaveincreasedmoreslowlythanurbandepositsandcompriseamodestshareoftotaldeposits(13percent).Themarginalpropensitytosaveisrelativelyhigh(0.32)butlowerthanintheearlyreformperiod.3Also,thewealthprofileofruralhouseholdssuggeststhatsizablesavingsarenotheldintheformofdepositsorotherfinancialassets.CombiningfinancialandStateStatisticalBureaudata,afour-componentwealthprofile(housing,deposits,grain,andfixedassets)ofruralhouseholdswasconstructed.Depositsaccountedfor17percentofthiswealthin1996,andgrain,whichsitsidlyandisnotintermediatedforproductiveuseelsewhereintheeconomy,accountedfor12percent.Also,holdingsofcashbalancesreportedlyarenearlyasgreatassavingsdepositsinsomeregions.Ruralresidentshaveahighpropensitytoinvestinresidentialhousing,byfarthelargestcomponentofwealth.
InformallendingplaysaslightlymoreprominentroleinChinesevillagesthaninotherAsiancountries(Park1998).Informalborrowinghasbeen10to11percentofincomeduringthe1990s,andanationalsurveyfoundthatmorethan65percentoffarmloanswerederivedfrominformalsources.Informalloansaremoreimportantthanformalloans,especiallyforconsumption.
Eighty-fivepercentofinformalloansareatzerointerest,butwheninterestischarged,itisatleasttwicethatchargedforformalloans.Inanationalsurvey,thenumberofvillagesreportingpositiveinterestratesforprivatelendingdoubledbetween1988and1995.Theaveragemonthlyrateoninformalloanswas1.9percent(25percentperyear),considerablyhigherthantheratesetbythestate(about8to10percent).Whilethisriseininformallendingisapositivetrend,andhasbeenshowntoincreaselabormobility(Rozelleetal.1998),fertilizeruse(Xiao1998),andsmallbusinessdevelopment,itsexpansionsuggestsafailureofformallendinginstitutionstomeetthecreditdemandsofruralresidents.
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Inthe1990s,rurallendingbyRFIshasnotincreasedsignificantlyasashareofruraleconomicoutput,contrarytotheexpectedpatternofgreaterintermediationwithhigherincomes.ABCintermediation,inparticular,hasdeteriorated.WhileRCCintermediationhasincreased,
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manyfarmersandothersmallpotentialborrowersarestillrationedoutofformalcredit.Inaddition,moredevelopedprovinces,especiallycoastalprovinces,havelowerruralfinancialintermediationratesthanpoorerprovinces,astrikingpatternthatimpliesthatricherprovincesarebeingtaxedbythefinancialsystem.
EconometricanalysisofintermediationratesshowthatABC/ADBClendingishighlyinfluencedbypolicyconcerns,andthatfundsdonotflowasexpectedtofastergrowing,moredevelopedregions.ThepatternofRCClending,whilenothighlyinfluencedbypolicyvariables,alsodoesnotrespondtoeconomicfundamentals.Thesefindingssuggestsignificantbarrierstointerregionalinvestmentandlending.Muchofthisisduetoregulation.Forexample,recentreformshavegreatlyrestrictedhorizontalmovementoffundsamongbanks.Localgovernmentssometimesmandatethatfundsberetainedforlendingtolocalenterprisesandindividuals.Also,fieldworkhasshownthatthelackofregulatoryprotectionandclearrightstomonitor,control,andaccessinvestmentearningsmakebanksreluctanttoloanacrossjurisdictionalboundaries.
ChallengesofFinancialReform
Financialsystemreform,includingdecentralizationandcommercialization,wasoneoffivepriorityreforminitiativesannouncedatthe1998NationalPeople'sCongress.PriorityhasbeengiventoreducingthelargevolumeofbaddebtsheldbyChina'sstatefinancialinstitutions,butconcernforruralaccesstocredithasalsoturnedofficialattentiontoruralfinancialreform.InAugust1996theStateCouncilissueda''DecisiononRuralFinancialSystemReform"andestablishedaninterministerialCoordinationGroupforRuralFinancialSystemReform,ledbyPBC(ThePeople'sBankofChina1997).
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4Thereformsarenotcompletelynew,aschangesintheruralfinancialsectorarepartofabroadreforminitiativethatbeganinthe1980s.
WithstabilityanationalpriorityandcontinuedfinancialsupporttoSOEsstillanecessity,thegovernmentmaintainscontroloverfinancialresourcestoinfluencethecompositionandlevelofbanklending.ThedecisiontosupportpoorlyperformingSOEsmayreducethefinancialresourcesavailabletotheruralsector.This,inturn,createspressurestotaxresourcesratherthanencourageefficientfinancialintermediation.
Thepriorityfocusofcurrentfinancialreformistopreservethesolvencyofthebankingsystemwhileaddressingthebank'snonperformingloansaprocessthatalmostsurelywillrequiresignificantbankrecapitalization.WhiletheannualreportsofboththeABCandADBCshowmodestprofits,thesefigureslackcredibility;ADBCofficialshaveopenlyacknowledgedaninabilitytocovercosts.5TheABCalsohasalargestockofoverdueloanswithlittleprospectofrepayment.SimilarproblemsplaguetheRCC.Inrecentyears,morethanone-thirdofRCCbrancheshavereportedlosses,6andasof1994,31percentofRCCoutstandingloansweredelinquent(Shen1998).Thesefiguresunderestimatethetrueamountsofoverdueloansbecauseloansareoftenrolledover(refinancedwithnewloans)ratherthanbeingclassifiedasoverdue.
Improvingprofitabilityoffinancialinstitutionsiscloselytiedtoimprovingloanrepayment,whichinturnistiedtoeffectivelyscreeningandmonitoringprojects.Inthisway,banks'pursuitofprofitspromotesefficientresourceallocation.Someruralfinancialinstitutionshaveinstitutedbetterincentivesystemsfortheirmanagersandstaffs.Insomeareas,localbrancheskeepindependentbooks,chartinglocalprofitsandloanportfoliocomposition,andbasecompensationpackagesoneachunit'sperformance.Branch
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restructuring,adoptionsofnewloanapprovalprocedures,anduseofcredithistoriesarebecomingmorecommon.
Regulatedinterestratesondeposits,loans,andinterbankborrowingandlendingprobablyplaythelargestroleindistortingresourceallocationdecisionsbyinvitingmisallocationandrent-seeking.Inflationhasledtonegativerealinterestratesondepositsandloansinsome
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years.Officialratesarewellbelowthoseforinformallending,andwithouttheabilitytorespondflexiblytothedemandcharacteristicsofdifferentgroups,theformalfinancialsectormustexcludesomeofthem.Between1996and1998manylocalbranchbanksreducedlendinginfavorofdepositingadditionalfundswiththePBCwhichwasmoreprofitablegiventheinterestratesoffered,expectedrepaymentrates,andthecostsoftransactions.Inearly1998thePBCadjustedthedifferencebetweenreservedepositandloaninterestratestoencouragegreaterlending.
TheABCandRCCpermitindependentbranchestoadjustofficialinterestrateswithinregulatedbands,butlocalgovernmentshavetheauthoritytonarrowthesebands.RCFshavethemostflexibilitytoadjustinterestspreadsbyadjustingdividendpayments.
Theabilitytotransferfundsacrossregionsandinstitutionsisnecessarytodiversifyriskandintermediatefundstotheirmostproductiveuse.Theinterbankmarketwasgraduallyliberalizedoverthe1980sandearly1990s(Xia1995).However,in1996,controloverfundflowswasstrengthenedandtheinterbankmarketcentralized.Withoutnationalofficeauthorizationfundtransferswereallowedvertically,butonlywithinthesamebank.RCCscanfreelytransferfundstootherbranchesinthesamecountythroughthecountyassociationofRCCs,buttransfersbetweencountiesmusthavePBCauthorization.
Otherpolicyfactorsinfluencingprofitabilityincludeill-definedincentivesforbankmanagerstomaximizeprofits;excessivereserverequirementsandloanquotas;pooraccountingandcreditratingsystems;andthecombiningofpolicyandcommerciallendinginthesameinstitutions.Institutionalconstraints,suchasinabilitytoseizecollateralandalegalsystemthatpoorlyenforcesloanrepayment,stillremain,makingitdifficultforbankstosupporthigh-returnbutrisky
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ventures.
Astatedaimofthereformsistomoreclearlyseparatepolicylendingfromcommerciallending,buteffortstoseparatethesefunctionsinseparateinstitutionshaveachievedlimitedsuccess.SomeADBCloanshavebeendivertedtocommercialusesandsomeABCloansremainedpolicyoriented.TheADBCtookovertheABC'spolicyloanportfolioin1994,butsomeofthepolicyloanswerereturnedtotheABCin1998.Delinquentpolicyloanscontinuetobeamajorproblemandwillrequirestrongermeasuresthansimplyisolatingloansinpolicybanks.
PartofChina'sfinancialreformshavebeentodiversifytherangeoffinancialinstitutionsandtoincreasecompetition.Regionalbanks,privatebanks,trustandinvestmentcompanies,othernonbankfinancialinstitutions,andevenafewforeignbankshavegraduallyenteredthefinancialsector.Thegovernment,aftersegmentingthelendingresponsibilityofstate-ownedspecializedbanksinthe1980s,hasencouragedmoreopencompetitionamongtheminthe1990s.However,therecentfailureoftheGuangdongInternationalTrustandInvestmentCompanysuggeststhatnonbankinstitutionsalsomaybesaddledwithbaddebt,raisingconcernsaboutthesystem'sabilitytoprudentlyregulatebanks.
Localgovernmentsthathaveinfluenceoverlocalbankbranchesalsomayseektoprotectthedepositbaseof"their"bankstofurthertheirownagendas.Thesefactorscreatepressurestorestrictcompetitionfromnewandinnovativefinancialinstitutionsandtoresistimplementationofreformsthatgrantfullindependencetobankmanagers.Inrecentyears,thegovernmenthassoughttoincreaseregulationoverurbancreditcooperatives,organizingmanyintoUrbanCooperativeBanks(Sehrt1998).In1998,theStateCouncilannounceditsintentiontoincorporateRCFsintotheRCCsystem:eachRCFwouldeitherbecomeanewRCCbranch(ormergewith
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one)orbedisbanded.Evenifthesetakeoversarenotcompleted,manyrulesstillrestricttheexpansionofactivitiesoflesstraditionalRFIs,suchasRCFsandprivatebanks.Atthesametime,prudentfinancialregulationofnewfinancialinstitutionsmustbemaintained.
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ReachingthePoorandtheRoleofMicrofinance
7
MostobserversbelievethatChina'sregulatedfinancialsystemhasbeenespeciallyhardonthepoor,whohavehaddifficultygainingaccesstoloans.However,poorareasmayhavebenefitedfrominterregionalbarrierstointermediation;recentsurveysinpoorcountiessurprisinglyfindthatmanyhouseholdshaveatleastpartialaccesstoformalcredit.8Asthesystembecomesmorecommercial,however,morefundswilllikelyflowfrompoortorichareas.Newmicrofinanceinstitutions(MFIs),whichbeganin1994,holdpromiseforeventuallyprovidingfinancialservicestolargenumbersofthepoor.However,theyfacedifficulties,giventhestrictregulatoryenvironment,lackoffinancialexpertise,influenceoflocalgovernments,andremotenatureofpoorvillages.
Formalfinancialinstitutionsoftendenyloanstopoorruralhouseholdsbecausethesehouseholdslackcollateral,faceriskierenvironments,andneedsmallloansthathavehightransactioncosts.Thegovernmenthastriedtoreachtheruralpoorthroughatargeted,subsidizedloanprogrambegunin1986.Aswithprogramsinotherdevelopingcountries,ithasfailedtoreachthepoorandhasachievedlowrepaymentrates(Park,Wang,andWu1997).9Subsidizedinterestratesof2.88percentperyearmaketheloansattractivetorichhouseholds,enterprises,andlocalleaders.Theloansareconsideredtohaveawelfaredimensionthatencouragesdelinquency.On-timerepaymentratesin1991,1992,and1993averaged53,55,and48percent(ChinaScienceandTechnologyCommissionResearchGroup1995).10
Internationalexperiencehasshownthatimprovedaccesstocreditcan
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promoteentrepreneurialactivityandhelpliftthepoorfrompoverty.Someoperationalmodelsforprovidingfinancialservicestohouseholdshavebeenexcludedtraditionallyfromthebankingsystem.Thesemodelsrangefromexpandingsustainablefinancialservicesbycommercialbanks(BRIinIndonesiaandBancoSolinBolivia)togroup-basedloanstargetingthepoor(GrameenBankinBangladesh).Theirsuccessesstemfromtransactioncostreductions(byreducingtraditionalbranch-bankingstructures)andtheuseofcollateralsubstitutes(e.g.,harnessingpeermonitoringthroughgroup-lendingcontractsandimprovingincentivesbyincreasingloansizesontheconditionofrepaymenthistory).PilotmicrofinanceinstitutionsandprogramsinChinahaveexperiencedpositiveresultssincetheirintroductionin1994.However,mostofthesehavebeensupportedfinanciallybydomesticandinternationalorganizations.In1997severalprovincialgovernmentsbeganreplacingtraditionalsubsidizedloanprogramswithmicrofinanceprogramssupportedbypovertyalleviationfunds.
MFIsholdpromiseforincreasingcreditaccessforChina'spoorbutrequireverycarefulmanagementandaflexibleregulatoryenvironmenttoflourish.Severalfactorscreatechallengesnotfacedelsewhere,includingtheinabilitytouselandascollateralbecauselandandland-usemarketsdonotexist.Microfinanceinmostcountriesalsoisprimarilynongovernmental.However,inChina,pilotmicrofinanceprogramstypicallydrawstafffromlocalgovernmentsandmustoperatewithinrestrictiveregulatoryenvironments,despitefinancialsystemreformefforts.Finally,China'spoorarelocatedinmountainous,sparselypopulatedregions,providingfeweropportunitiesforpettytradersandsmallbusinessesthatarethemaindemandersofmicrocreditinothercountries,andwhichprovidecashflowenablingweeklyloanrepayment.
Strictenforcementofofficialinterestraterestrictionswilldoommicrofinanceprograms.Manymicrofinanceprogramshavebeen
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allowedtochargeeffectiveratesofinterestaboveofficialrates,andthispolicyshouldbecontinued.InterestraterestrictionsshouldbeliftedinexperimentalortargetareastopermitRFIstoreachmoreofthepoorinafinanciallysustainablemanner.RFIsservingpoorareasshouldalsobeallowedtoexperimentwithcollateralsubstitutesintheirlendingoperations.Thegovernmentmayhavearationaletooffertemporary
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subsidiesorguaranteestosomeRFIstoencouragethemtoattemptchangesthatmayberiskyorrequireaperiodoflearning.Partiallysubsidizedmicrofinanceprogramsthatarefocusedonalleviatingpovertyholdthepotentialforreachinganevenlargerportionofthepoor.
TheextenttowhichfinancialsustainabilityandpovertyalleviationgoalsconflictdependsontheabilityofMFIstoeconomizeontransactioncostsandreducelendingrisk,andtheelasticityofcreditdemandofthepoortotheinterestrate.Manymicrofinanceprogramsaroundtheworld,includingallofthoseoperatinginChina,relyonexternalsubsidiestocovercosts.Somematureinstitutions,suchasBancoSolinBolivia,haveachievedfinancialsustainabilitythroughexperienceandbyrealizingeconomiesofscale,butdonottargetthepooresthouseholds.GrameenBankdoesabetterjobtargetingthepoorbutreliesonsubsidies.Wenotedearlierthattheaverageinformalloanrateofpositiveinterestwas1.9percentamonth(Park,Brandt,andGiles1997).Itisunclearhowlongitwilltake,ifever,forChina'smicrofinanceprogramstoachievesustainabilityatthoserates.
ManytimestheurgencyofpovertyalleviationmayinduceagovernmentagencytoinvestinthepoorbysupportingMFIexpansion,evenifsuchexpansionisnotself-sustaining.Arethecoststothegovernmentanddonorsworthit?Theanswerdependsonwhetherthecostsofthesubsidiesaresubstantiallybelowthenetbenefitstothepoor.Thisdependsonthedegreetowhichsubsidizedloansactuallyreachthepoor,themaintenanceofoperationalefficiency,thedegreetowhichkeepinginterestrateslowincreasesthecreditdemandofpoorhouseholdspreviouslynotborrowing,thedegreetowhichsubsidieslimitthescaleoftheMFI,theconfidenceincontinuedfundingovertime,andwhetherpublicfundswouldbebetterspentonotherprojects,suchasschoolsandhealthclinics.Recentsurveysofpilotnongovernmentalorganization(NGO)and
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governmentprogramsfindthatrepaymentrateshavebeenhigh,buttargetingofthepoorhasnotbeenverysuccessful.
However,awillingnesstosubsidizemicrofinanceprogramsshouldnotbeconfusedwithawillingnesstosupportinefficientlyrunmicrofinanceprograms.Financiallossesandinefficienciescansignificantlyandquicklyincreasethetotalcostofachievingpovertyalleviationgoals.Howonesubsidizesprogramsisimportant,withanimportantgoalbeingtoprovidestrongincentivesforprogramstomaximizeefficiency(Morduch1997a).Thisrequirescontinualdatacollectionandclearaccountability.TodatenodomesticmicrofinanceprogramofwhichweareawarerunbyNGOs,donors,orgovernmenthasdevelopedatimeframeforachievingorimprovingcosteffectiveness.Lackingarecarefulevaluationsbothoffinancialsustainabilityandoftargetingeffectivenessandimpact.AlthoughplansexisttosupportimprovedaccountingproceduresforChinesemicrofinanceprograms,measuresofhousehold-levelimpactsarealsoneededtoproperlyconsiderthedesirabilityofsubsidies.ThisisespeciallytruegiventhatChina'spilotmicrofinanceprogramsareheavilysubsidizedbyinternationalordomesticgovernmentsources.
ConclusionsandRecommendations
Long-termsolutionstoChina'sruralfinancialproblemsultimatelydependonsolvingorreducingthenation'sSOEproblem.Somegovernmentreformshaveaimedtoincreasecompetitioninthefinancialsector,butatthesametimethegovernmentisreluctanttoyielditscontroloverfinancialresources.Inindustry,competitionfromthenonstatesectorhasbeenanimportantdiscipliningforceforimprovingSOEperformance(Naughton1996).Extendingthisstrategytothefinancialsectorwouldpermitfreeentrybynew,innovativefinancialinstitutions(suchasRCFs)tomeetthedemandofmarketnichesandprovidegreaterperformanceincentivesformanagersofexistinginstitutions.Inothertransitioneconomies,new
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entryhasledtomorereformthansimplybankrestructuring(Claessens1996).
Aregulatoryframeworkisalsoneededto
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safeguardtheinterestsofdepositors,butover-regulationinterfereswithefficientintermediation.Wideninginterest-ratebandsandexperimentingwithgreaterdecentralizationandderegulationofinterest-settingauthoritycouldincreasethevolumeofruraldepositsandloans.
Werecommendthefollowingchangestothepoliciesgoverningruralfinancialinstitutions:
·Asanoverallstrategy,createaruralfinancialsectorwithadiversityofinstitutionsthatfacecompetitionandspecializeinmeetingtheneedsofgroupswithdifferentdemandcharacteristics.Theseinstitutionscouldrangefrombankstocooperativestomicrofinanceinstitutions.Regulationmustbeprudenttoensurethestabilityofthesystemandsafeguarddeposits,butmustavoidexcessiverestrictions(e.g.,oninterestratesandinterbanklending)whoseeffectistoexcludegroupsfromcreditaccess.
·Permitandencouragefinancialinstitutionstocreatenewdepositinstrumentsthatprovideattractivecombinationsofreturnandliquiditytobetterservicethesavingsneedsofruralresidents.Thiswillbenefithouseholdsdirectlyandincreasethestockofinvestablefunds.
·Deregulateinterestrates.Expandeddiscretionarybandsforonlendinginterestratesisanimportantstepinreformingruralfinance,butgreaterderegulationwillberequired.Inthecurrentreformenvironment,furtherliberalizationoftheruralfinancialsystemwilllikelybepostponedbecauseoftheprioritybeinggiventoSOErestructuringandtoreducingthefragilityofthebankingsystem.Still,governmentshouldencourageexperiments,onalocalbasis,withnewinstitutionalformsandderegulatedinterestrates,especiallyinareaswherehigherratesarenecessaryforprofitablebanking(suchaspoorareas).
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·Encouragecompetitionandinnovationwhilemaintainingprudentfinancialregulation.Thismeansregulatingratherthaneliminatingorco-optingRCFs.Theemergenceofnewinstitutionalformsshouldnotbeheldhostagetothegovernment'sdesireforcontroloffinancialresources.Rather,competitioncanincreaseperformancebyimprovingincentives,andthegovernmentshouldconcentrateoninfluencingfinancialflowsindirectly.
·Developinstitutionsthatsupporttheabilityofbankstoscreenloansandenforceloanrepayment.Itshouldexpandtheuseofloanhistoriesandcreditratings;reducethecostoflawsuits,assetvalueassessments,andrepossessions;developresalemarketsforcollateralitems;standardizeaccountingandreportingproceduresbyfirms;andallowfinancialinstitutionstorestructurebranchsystemsandadjustpersonnel.
·Improvefinancialmanagementandbankingskills.MuchoftheChineseliteraturecitesthepoorqualityofbankemployeesasakeyconstrainttodevelopmentofcommercialbanking.Improvingtechnicalexpertiseonfinancialriskmanagementandotherbankmanagementskillsshouldbeatoppriorityofthegovernmentandthedonorcommunity.Allowingentrybyforeignbankswouldgreatlyenhancesuchefforts.
·Continuetostriveforaclearseparationofpolicyandcommerciallendingindifferentinstitutions.ThefollowingcanhelptheADBCbetterrealizeitsroleasapolicybankwithoutaddingafinancialburden:(a)therecentdecisiontoreturnsomepolicyloanstotheABCshouldbereversed;(b)theADBCshouldbeempoweredtodemandaccountabilityforrepaymentofpolicyloans,whichmayrequirereformofthegrainmarketingsystem(below),andtohavetheauthoritytorefuseloanswithunacceptablerisk;and(c)PBCfinancingofADBClendingshouldbegraduallyeliminated.
·Discontinuethesubsidizedcreditprogramforpovertyalleviation.
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Thisprogram,likesimilarprogramsinothercountries,failstoreachthepoorandachieveslowratesofrepayment.Instead,itshouldfocuson:(a)supportingthemicrofinancemovementtohelpthosepoorforwhomlackofcreditisanimportantinvestmentconstraint;and(b)providenoncredit
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support(e.g.,education,infrastructure)forthosepoorwhowillnotbenefitfromcreditbecauseofothermorepressingneeds.
·Providefinancialsupportorsubsidiestomicrofinanceprograms,butonlyiflinkedtoconditionsoncosteffectivenessandfinancialsustainability.Variousorganizations,whetherinternationalordomestic,governmentalornongovernmental,canprovidethissupport;however,decisionsonwhichmicrofinanceprogramstosupportandonsubsidylevelsshoulddependonarigorousassessmentofthecostefficiencyofdifferentprogramsandtheaddedbenefitsgeneratedbysubsidies.Organizationscanalsotrainprogrammanagersinfinancialmonitoringandaccountingskillsorattractindividualswiththoseskills;trainprogramevaluatorsandsupportresearchonprogramdesign;financialsustainability,andimpactassessment;supportwaystobroadenthescopeoffinancialservicesprovidedbyexistingRCCsandRCFssothattheseservicesreachthepoor,eitherindependentlyorcollaborativelywithmicrofinanceinstitutions(especiallytoincludesavingsasacomponentofmicrofinance);supportinstitutionalformsthatguaranteetheindependenceofprojectmanagersfromlocalgovernmentsandprovidestrongincentivesforcostefficiency.
1.Ruralresidentsalsosaveinotherspecializedbanks,thepostoffice,andotherquasi-governmentinstitutions;purchasegovernmentbonds;andinvestsharesdirectlyinlocalenterprisesorthestockmarket.
2.CreditsurveyinZhejiang,SichuanandShandongreportedinPark,Brandt,andGiles,"GivingCreditWhereCreditisDue:theChangingRoleofRuralFinancialInstitutionsinChina",WilliamDavidsonInstituteWorkingPaperNo.71,UniversityofMichigan,1997.
3.Basedonfixedeffectsestimateusingprovincialdataonpercapitaincomesandexpendituresfrom1985to1996.
4.NewreformsaimtoseparateRuralCreditCooperativesfrombranchesoftheAgriculturalBankofChina,increasethecollectivenatureofRCCsandthecommercialnatureofABCs,preparefortheestablishmentofnewruralcooperativebanksinrelativelyadvancedareas,andincreaseoperationalagenciesofthe
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AgriculturalDevelopmentBank(responsibleforpolicyloans).
5.AlbertParkinterviewsinvariousprovinces,1997and1998.
6.AlbertParkinterviewwithnationalRCC,August1997.
7.ThissectiondrawsheavilyfromMorduch,Park,andWang(1997).
8.AlbertParksurveysof450householdsinsixpoorcountiesinsixprovinces.
9.SeeAdams(1984)foradescriptionofproblemsfacedbysubsidizedcreditprogramsinothercountries.
10.TheprogramsaredescribedingreaterdetailinPark,Wang,andWu(1998).
Higherrisk,higherlaborinput,higherincomes,andincreaseduseofseasonalcreditforpurchasedinputscharacterizesspecializedhouseholdproducersofimprovedlivestockandaquatic
products.Intensiveaquaticproductionalsomakesefficientuseofopenwatersandmarginalcroplandifwaterisavailable.
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5.TheDevelopmentofMarkets
TheDevelopmentofMarkets
WiththeintroductionoftheHouseholdResponsibilitySystem,Chinasolveditsbasicfoodproductionproblemsalthoughproductionproblemscouldreturnifagriculturalresearchandtechnologytransferaredeprivedofresources.Agriculture'smoreseriousproblemsnowinvolvethecontinuingdevelopmentofahealthymarketingenvironmentinagriculture,oneinwhichfarmersmaketheirresourceallocationandmarketingdecisionsbasedonundistortedpricesignalscreatedbycompetitivetraders,andinwhichofficialsshifttheirattentiontopromotingmoreefficientmarketsandinterveningonlytobufferpricesagainstextremefluctuations.Inshort,theagriculturalmarketingchallengeisa"second-generation"problemthatmustaddressbothpolicyandinfrastructure.
WhilegradualismhasbeenthehallmarkofChina'sruraltransition,thepaceofreformincommoditypricingandmarketinghavebeenvaried.Perishablecommoditieshaveexperiencedthemostrapidtransition.Themarkettransformationforgrain,vegetableoil,andcottonhasbeenmarkedbyalternatingreformandretrenchmentcyclesthatcontinuesinthelate1990s.Byearly1998,China'sgrainmarketshadbecomesurprisinglyintegrated,competitive,andincreasinglyefficient.TheGovernment'sreformplan,announcedinspringof1998,waspoisedtoinitiateanewsetofreformsthatverylikelycould
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havecreatedamarketingandpolicyenvironmentthatwouldhavepromotedevenmoreefficientallocationofresourcesandprovidedpolicymakersindirectmeanstoguidemarketsandstabilizeprices.However,grainmarketingpolicyinitiativessincemid-1998havereversedmarketliberalizationbyprohibitingprivatesectorinvolvementincrucialareas,andreassertingexpensiveandinefficientadministeredprocurement,storage,andtradebyparastatalorganizations.
Improvedmarketingefficiencyreducestransactionscostsandallocatesanincreasedshareofconsumerexpenditurestoproducerstherebyincreasingproducerincomes;butitalsobenefitsconsumersthroughreducedcost.Physicalmarketshavedevelopedrapidlyinruralandurbanareas.Thenumberoffreemarketsattheendof1997exceeded87,000,ofwhichabout25percentwerelocatedinurbanareas.Despitethesmallernumberofurbanmarkets,thevalueoftheirtransactionshasexceededthatofruralmarketssince1994.Followingdecontrolofperishableproductmarketingin1984,free-marketsalesledbyfruit,increasedrapidly;butgrainandedibleoilmarketingcontinuedtobecontrolledthroughoutthe1980s.Bytheendofthedecadefree-marketgrainsalesonlydoubledwhilethesalesvalueofothercommoditygroups
Figure5.1FreeMarketSalesIndexofAgricultural
Products(constantvalue)
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quadrupledorquintupled.However,asgrainpolicyliberalizedintheearly1990s,free-marketsalesofgrainandedibleoilacceleratedtobecomethefastestgrowingcommoditygrouponthefreemarket(figure5.1).Salesvolumeinopenmarketsdemonstrateasimilargrowthpattern.
Policyandinfrastructureconstraintsaffectthegrainandnongrainmarketdifferentially.Pricingandmarketingpolicystronglyaffectgrains,forwhichmostmarketingandmarketinfrastructureisundertheauspicesofstategrainenterprises.Alternatively,theefficientdevelopmentofperishableproductmarketsisconstrainedbyinformationshortages,interregionalprocurementrestrictions,andlimitedinfrastructure.
GrainMarkets
Thehighfiscalcostsofgovernmentinterventioninthegrainmarketcausedthecentralgovernmenttomoveincreasinglytowardcommercializationduringthe1990s.Mostgrainresponsibilitiesandpolicyactivities,exceptforanationalreserve,weretransferredtotheprovinces,includingresponsibilityforlocalsupply-demandbalancesundertheProvincialGovernor'sResponsibilitySystem(GRS).Intheory,commercialoperationsofstategrainenterpriseshavebeenseparatedfrompolicyresponsibilitiesundertakenonbehalfofgovernment(e.g.,procurementofthegrainquotaandstorageofStateGrainReservestocks)toensuresubsidiesareallocatedonlytothelatter.Commercializationpolicyfocusedontheprofitabilityofgovernmentgrainagenciesandrationalizinggrainbureaustaffing,butprivatesectorcompetitionemerged,handlinganestimated25to35percentofcommerciallymarketedgraininthemid-1990s.
Overthepastdecade,governmenthasenactedfrequentpricingandmarketingreforms,whichareoftenpartiallyretrenchedandwhichled
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tothree-tierpricesallofwhichremainedbelowtheborderprice,atshadowexchangerates,until1994.Estimatesofnominalprotectionratesindicatethatallmajorgrainsweretaxedthroughtheearly1990s,butby1995priceshadincreasedtointernationallevels(rice)orabove(wheat,maize,andsoybeans).Thedisequilibriumbetweendomesticandworldpriceisdueinlargeparttothepartiallyclosedgrainmarketsandstate-controlledtradingsystem.Historically,themostheavilytaxedgrainswereexportedinmostyears(riceandmaize),butrisingdomesticpriceshavemitigatedthispricebias.
Althoughthegovernmenthasmaintainedstrongcontrolovergrainmarkets,the"freemarkets"havecontinuedtoflourish.Cointegrationanalysesconcludethatreformshaveimprovedspatialmarketintegrationandthatsubsequentpolicyretrenchmentshavenotreversedthisintegrationtrend(Rozelle,PrayandHuang1997;WuandHuang1998;ZhouandWan,1999).Recentanalysesusingparityboundsandspatialequilibriummethods(Rozelleetal.1999)alsofindthatthroughouttheearlyandmid-1990sgrainmarketsbecameincreasinglycompetitive,lessfragmented,andmoreefficient.Transactioncosts,includingthosefortransportation,handling,andmarketing,remainedhighuptofourtimesthelevelsfoundindevelopedcountriesbutarelikelyafunctionofthecongestedtransportsystemandantiquatedgrainhandlingmethods.Unfortunately,marketcommercializationeffortshavebeendiscontinued.
RecentPolicy
Facedwithrisingfiscalburdens(duetohigherlevelsofgovernmentgrainstocks)andfallingfarmgatepricesinthelate1990s(causedprimarilybyrecordlevelsofgrainproductionin1995to1997andadeclineindemandgrowth),thegovernmentreassesseditsgrainpolicyinearly1998.Themaingoalsofthenewreformswereto:(a)correcttheinefficienciesinthegrainmarketingsystem(includingproblemsofconcurrentcommercialandpolicyoperationsbythegrainbureaus);
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(b)reducethefiscalburdenofthegrainsystem;and(c)stabilizegrainpricesandfarmerincomes.Whiletheoverallgoalsofthereformwerenotnew,anewsenseofur-
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gencywaspresent,duepartiallytotheneedforfiscalsavingsandpartiallytogovernmentconcernsforrisinggrainpricesiffarmersreducedsownareasandappliedfewerinputs.
Themajormeasuresadoptedtoimplementtheongoingreformandmeetthechallengingsetofannouncedobjectivesincludethefollowing:
·Clearseparationofcommercialandpolicyfunctionstoparalleltheseparationofcommercialandreservegrain.Commercialcompanieswillberesponsibleforfarmprocurementandinterprovincialgraintransferswithfinancingindependentofthestatebudget.
·Clearseparationofcentralandlocalgovernmentresponsibilities.Bufferstocksforpricestabilizationanddisasterreliefstockswillbetheresponsibilityofthecentralgovernment.LocalgovernmentswillberesponsibleforstabilizinglocalpricesandtheGovernors'ResponsibilitySystemwillberetained.
·Clearseparationofoldandnewgraindebts.ThegrainfinancingdebtisapproximatelyY200billion,ofwhichY130billionrepresentsdefaultedpolicyloanswiththebalancerepresentingborrowingforcommercialoperations.Thesedebtsaretoberepaidovera10-yearperiod.
·Settingthestateprocurementpriceabovethecurrentmarketpricetoprotectfarmers'incomeandensureastablesupplyofmarketedgrain.
Thisambitiousgrainpolicyagendaaddressedseveralcrucialissuesandifimplementedasplanned,acommercializedtradingsystemwithstate-ownedandprivatefirmcompetitionwouldhaveemerged.Also,agovernment-ownedpolicy-oriented,stock-holdingagencywithsufficientreservesandstoragecapacitytocreateaneffectivebufferstocksystemwouldhavebeencreatedandtheseparationofpolicyandcommercialfunctionswouldhaveledtolargefiscalsavings.
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Dependingupongovernment'sperceptionofreservestockadequacy,additionalstockscouldhavebeenpurchased(andfarmerincomessupported)ornotpurchased(supportingfiscalobjectives)althoughfarmerincomesmayhavebeenaffecteduntilproductionpatternsadjusted.
However,thisagendawasnotfollowedandmarketliberalizationeffortswereabandonedinmid-1998.Instead,governmentadoptedapolicymixthatwilllikelybeunabletosimultaneouslymeetitsgoalsofcreatingamoreefficientmarketingsystem,reducingitsfiscalburden,andmaintainingstableprices,including:
·remonopolizationoffarmgateprocurement;
·arenewedcommitmentofthegovernmenttoprocureallsalesbyfarmersatthestate-setprocurementprice;and
·prohibitionofthegrainbureaufromsellinggrainatapricelowerthanthestate-setprocurementprice.
Thenewpolicieshavemanycharacteristicsofearlygrainmarketingreformefforts.Itistooearlytoempiricallyevaluatetheimpactsofthisnewreformprogram,butitisquestionablewhetherthepolicymixwillstabilizethedomesticgrainmarket,improvegrainmarketcompetition,andreducethegovernment'sfiscalburdeninmanagingthegrainsystem.
GrainReserves
1
Mosteffortstocontrolcommoditysupplyandpricevolatilitythroughbufferstocks,stabilizationfunds,internationalcommodityagreements,andgovernmentinterventionincommoditymarketshaveendedinfailure.Bufferstockprogramsoftenaccumulatelargereservesofcommodities(U.S.andE.C.)withresultanthighcostsfor
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interestandstorage,stabilizationschemestypicallyendinbankruptcybecauseoftheirunsustainablehighcost(Australia),anddifferentcountryobjectives,alongwithhighcost,havecausedmanyinternationalcommodityagreementstolapse(WorldBank1999).Governmentinterventionisverycostlyandeventuallyhasbeenfiscallyunsustainableformostcountries.
Industrialcountrygovernmentshavebeendivestingfromgrainstoragebecausethecostofholdingreservestocksexceedstheperceivedbenefitsofgrainpricestability.Reservesaremaintainedascommercialstocksbymoreefficientandcompetitiveprivateenterprises.Foodgrainsinthesecountriescompriseasmallpor-
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tionofagriculturalincomesandconsumerexpenditures,andpriceinstabilityisrelativelyunimportant.Nevertheless,thereareeconomicargumentsforpricestabilizationindevelopingcountrieswherefoodgrainsareamajorcostelementinthefoodbasket.
2Severalcountries,notablyIndiaandIndonesia,havestabilizedpricesemployingmodifiedbufferstockprogramsbutathighfiscalcost.JhaandSrinivasan(1997)determinedthatIndia'sbufferstockprogramwasthemostcostlypolicyinstrumentforpricestabilizationcomparedwithotheroptions.
TheStateAdministrationforGrainReserve(SAGR)managesreservestocksonanoncommercialbasisandpaysProvincialGrainBureaustohandlegrainonitsbehalf.Thestategrainreservetargetof40milliontons,togetherwithreservesmaintainedbyprovincialandotherjurisdictions,and90milliontonsofcommercialandsemicommercialgrainprocuredbyStateGrainEnterprisesisanextraordinaryquantityofgrain(andproportionofmarketedgrain)handledbytheStatetomaintainpricestability3andisextraordinarilycostly.InformationonthevolumeofChina'sreservestocksandstockreleasesareunavailable;thus,costsandefficiencycannotbeevaluated.Butpricestabilitycouldsurelybeeffectedwithsmallerreserves.
Largereservesprotectagainstpossibletransitoryshortages,butlesscostlyalternativesareavailable.TyingChina'sfoodgrainsecuritytotheglobalmarketsandmakinggreateruseoftheseinstrumentsshouldbemoreefficientatstabilizingpricesandshouldcostlessthanthelargestockprogramcurrentlyfollowed.Althoughgreaterrelianceontheinternationalmarketwouldbemoreefficientthanmaintainingstockforthemostseverecontingency,additionalportandhandlingcapacitymaybenecessary.Priortothemid-1990s,whendomestic
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grainpriceswerebelowinternationalprices,maintaininglargestrategicgrainreservestockswasrelativelylesscostly;however,domesticgrainpricesarecurrentlyaboveinternationalborderpriceequivalentsmakingitverycostlytocarryoverstocks.EstimatedcarryovercostsareindicatedinTable5.1basedon1998farmgategrainprices(marginallydifferentfrom1997prices).
PerishableProductMarketing
Livestockandaquaticproducts,andfruitsandvegetables,werethefirstfoodcommoditymarketstobeliberalized.However,thesemarketscanbecharacterizedas"constrainedcompetitive"atbest.Aseriesofinformationandregulatoryconstraints,bothlegalandquasi-legal,inhibitthedevelopmentofeconomiesofscaleandafullyfreeandcompetitivemarket.Thisappliesparticularlyintheareaofcross-border(township,county,andprovincial)marketing.
Table5.1:CostofCarryoverStocks(Yuan/ton)
FarmgateGrain/a
1998UnitPrices/b Storage Interest StorageTotal
Prices(1998)
Import Export loss5%/c
Cost10%/d
fee/e Cost
Rice 2,175 4,108 2,047 108.8 228.9 126.0 463.7Wheat 1,445 1,560 72.3 152.1 126.0 350.4Corn 1,270 646 63.5 133.7 126.0 323.2/aAverageofgovernmentandmarketprices./bImportandexportunitvaluesderivedfromtradestatistics./cGrainlossesinstorageareassumedtobe5percent./dInterestcostsare10percentofthevalue(perton)ofstoredgrainafterstoragelosses./eTheStateAdministrationforGrainReservespaysY120/tonofgrainplacedinstorage;thesecostsareincreasedby5percenttoaccountforstoragelosses.
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Farmersdeliveringseedcottontobuyingstation.
CommodityProcurementandEconomiesofScale
Somejoint-venturefirmsandwholesalemarketshavedevelopedscaleeconomiesinprocurement,processing,anddistribution,butcounty-specificprocurementandprocessinglinkageshinderthedevelopmentofscaleeconomiesbylocalenterprises.Countyfood-developmentcorporationsthatprocessperishableproductsareprohibitedfromcrossingcountyboundariestocontract(withfarmers)forproduce,thusforcingprocessorstoturntoin-countywholesalemarketsthatattractproducefromadjacentcounties.Otherfoodmarketingfirmshavebeguntospecializeinhigh-valuefreshproductsinresponsetostrongdemandbyurbanconsumersandbyhotels,restaurants,andinstitutionsandcompetewithimportedproductsformarketshare.
Smallcountyprocessingplantshavebeenencouragedtocreatevalue-addedproductsandabsorbagriculturalproductswithinlocalareas.Thisstructuremayhavebeenjustifiedearlier,whentransportationnetworkswerepoor.However,withimprovedtransportationandroadinfrastructure,intercountytransportofproducthasbecomecompetitive.Restrictingfirmsfromsourcingproductsfromneighboringlocaleshasoftenleftthesefirmswithexcesscapacity,anddespitefavorablelendingpracticesbylocalfinancialintermediaries,theyoftenwereunderutilizedandnoncompetitiveleadingtoinsolvency.Theuncertainlegalframework
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forfirmconsolidationanddiscriminatorysourcingpracticescontinuestoinhibitfirmsfromexpandingacrosscountyboundaries,andborderingcountiescontinuetooperatesuboptimalprocessingplantsinthesameproductcategories(e.g.,slaughteringplants,fruitjuiceplants).
TransportationandDocumentation
Alackofrefrigerated,containerized,andintermodaltransportservicesfurtherconstrainsmarketing.Inlandaccesstothemajorurbancoastalcitiesstilllargelydependsonrailwaytransport,buttrafficflowsmustconformtothepriorityroutesestablishedduringthecommandeconomyperiod.Forexample,meatcanbeshippednorthfromChengdubutnotsouth.Railtransportisfurtherhamperedbydelayedrail-caracquisition,frequentspacecancellation,andlengthytransittime.TransittimeforexpressrailcargoservicefromChengdutoBeijing(2,000+kilometers)is15days,versus7daysbytruck.
Interprovincialbarrierstotradeinperishableandprocessedfoodsincludeinconsistentweighing,inspection,andotherprocedures,andthelackofnationalstandardizedquarantineandphytosanitaryinspectioncertificatesandclearancedocuments.Inspectionandcontrolauthoritiesateachprovincial(municipal)boundarymayquestiondocumentationvalidityparticularlyattheboundariesofprovincesproducingcompetingcommodities.Jurisdictionstreatagriculturalcommoditytransportdifferentially,requiringdriverstopresentvariouslicensestoinspectionauthorities.Bordercheckpointsaremaintainedforquarantineinspection,paymentoftransitandshippingfees,andotherdocumentclearances,butdriversoftrucksfromoutofthecountyorprovincemayfacedelayswhichdamagescommodityqualityandvalue.Driversalsomayberequiredtopayunofficialfees.Governmentsofmostothercountriesrequirethattruckstransitingjurisdictionsinwhichtheyarenotregisteredpayfeesbasedonobjectivecriteria(e.g.,grossweight,numberofaxles,etc.).
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MarketInformation
Indevelopedmarketeconomies,government-fundedinformationnetworkse.g.,U.S.DepartmentofAgriculture(USDA)provideongoingmarketinformationforeachlevelofindustryactivity,withinformationaccessavailabletoallorganizationsandindividuals.InChina,marketinformationhashistoricallybeencollectedasinputsforgovernmentpolicydecisionsratherthantohelpmarketsperformmoreefficiently.Publicinformationonmarketpricesandvolumesislimitedtoafewnationalandmajorregionalwholesalemarketsandcommodityexchanges.Althoughsuchdataarerecordedbyotherwholesalemarketmanagers,informationonproduction,stock,andflowsisrestricted,andforsomeproducts,disaggregatedpriceandproductturnoverinformationiskeptproprietary.ProducersorwholesalemarketmanagersatthecountylevelrequireclearancefromtheprovincialStateStatisticsBureautoaccessdisaggregatedcensusdataoncountyorprovincialproductionstatisticsandregionaltradeflowsbyproduct.InadditionlocalproducersandwholesalemarketshavelimitedaccesstoinformationfromtheMinistry(orBureaus)ofAgriculture.Publicinformationoninterprovincialtradeiseitherdifficulttoaccess,orisunavailable.Contractualdeliveryagreementsareprincipallynegotiatedbetweenproducersandjoint-ventureprocessingplants(aswellasstateexportagencies).Theseareproprietaryagreements,andconfidentialityofcontractcontent(e.g.,prices,volumes,deliveryarrangements)ismaintained.
ProducerMarketingAssociations
Historically,producerassociationswereformedtoimprovefarmerbargainingpowerwithrespecttodownstreampurchasersandtoimprovefarmerincome.Theseassociationsareadministeredbyproducersonbehalfoftheirmembership,andvirtuallyallorganizationalandoperationalcriteriaareestablishedandenforcedby
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members.InChina,afewfarmerorganizationshavedevelopedfromvillageassociations,focusingprimarilyonproductionpromotingmodernproductiontechnologiesandhusbandry,ratherthanmarketing.Membershipfeespayfortraining,specializedextension(oftenfromanagriculturaluniversityorresearchcenter),andotherservices,suchaspublicizingapplicableregulations.
Thesuccessofproducermarketingassociationsrequiresanumberoffacilitatingfactors.Forpositivereinforcementinestablishingmarketingassociations,alegalframeworkfortheirdevelopmentandaregulatoryframeworkdefiningthecommercialobligations(e.g.,contractenforcement,adjudication)ofassociationsandtheirmembersarenecessary;thelackofprohibitinglegislationisinsufficient.Technical,managerial,andtrainingassistanceisrequiredtoeducatefarmers(andlocalofficials)oncommercialprinciplesandalleviatesuspicionsofcollectivedecisions.Intheabsenceofmarketlinkagesandmarketingalternatives(high-valueprocessingplantsorfreshmarkets),farmersareunabletoobtainpricepremiumsforhigher-qualityproducts.Thus,marketingassociationsmusthaveanintegratedmarketintelligenceandsalesunittoassembleprice,quality,andquantityinformationindifferentiatedmarkets.Centraltothedevelopmentofproducerassociationsistheabilitytoextendtheirstructuresacrossadministrativeboundariesintoneighboringproductionareastoassuresupplyaccessandcontrol.
ConclusionsandRecommendations
Determininghowthenewpolicieswillmeettheobjectivesisdifficult.Theproposedmeasuresmightnotstabilizefarm-gateprices(orfarmerincomes),improvegrainmarketingefficiency,orreducetheaggregatefiscalburden,althoughaportionoftheburdenmaybetransferredfromthecentraltoprovincialgovernments.Consequencesofthenewpolicieswilllikelyincludethefollowing:(a)Asubstantialoverprocurementofgrainmaystresstheprocurementandstorage
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capacity,physicallyandfinancially,andinhibitcommercializationofstategrainenterprises.Theenormousprocurement
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andstoragecostswillalsobedifficulttofinance,creatingincentivestopurchasegrainatdiscountprices(belowthegovernmentdeterminedprice),withIOUs,ordeclinetoprocuregrainbeyondanticipatedsales.(b)Urbanconsumerpriceswillincrease,whichwillreducebothgraindemandanddiscretionaryurbanincomes.(c)Thegrainmarketgainsinefficiency,integration,andcompetitivenessacquiredduringtheearlyandmid-1990swillbereduced.
Thenewpolicieswilllikelyreturnthestructureofthegrainmarkettothatofthelate1980s.Evenwithtotalseparationofday-to-daycommercialoperationsandspecializedgovernmentagenciestoimplementpolicies,commercialtradingwillbedifficultwhilethegovernmentcontinuestosetprocurementpricesatabove-marketlevels.
Althoughprivatetraderswillbepermittedtoparticipateinwholesaleandretailmarketing(afterprocuringsuppliesfromthestategrainenterprises),whetherthebasisforprivateandnon-privatecompetitionwillbeequalintermsofsimilaraccesstooutputandcreditmarkets,consistentlicensing,andsimilartaxarrangementsareunclear.Also,thestateenterprisesmaycontinuetosufferfromoperationalhandicaps,suchasexaggeratedemploymentorexcesswelfareresponsibilities.
Officialsdisapproveofsignificantimportrelianceforgrainsuppliesforfearofdestabilizingtheworldmarket,ifChinaimportsverylargevolumesofgrain.Thisconcernisusedasadefenseforinterveninginproduction,marketing,andtrade.However,theinefficienciesandfiscalcostsoftheseinterventionsareenormousandseriouslyaffectfarmerincomes.Elsewhereintheworld,governmentsinbothdevelopedanddevelopingcountriesaredivestingtheirgrainprocurementandsupplysystemsandbufferstocks.
WerecommendthefollowingtofurtherdevelopChina'smarkets:
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·Commercializationmeasureshavebeensuspendedtoaccordprioritytootherreformmeasures,howeverthepolicymeasurestocommercializethetradingactivitiesofthegrainbureausanddiscontinuemonopolygrainprocurementshouldbereinstatedasearlyaspracticable.Ascurrentlyimplemented,thegrainmarketingpolicywillincurenormouscostsanddrainbudgetaryresourcesfromotherpotentialruraldevelopmentinvestments.
·Transformtheenormousstockofgrainreservesheldbycentralandprovincialgovernmentsintoatransparent,marketfriendlybufferstocksystem.Thiswouldrequire,interalia,intensiveanalysesontheoptimumsizeofreserves,stocklocations,internationalmarketlinkages,pricebandstobedefended,andtriggermechanismsforopen-markettransactions.
·Investinpublicgoodsthatpromotemarketdevelopment:transportandcommunicationsinfrastructure;marketinstitutions,suchaswholesaleandfuturesmarkets;marketinformation;thedevelopmentofuniformgrainqualitystandards;andcontractenforcementmechanisms.Inanincreasinglycommercialenvironment,thegovernment'sroleistoserveasanimpartialarbiteroffairmarketcompetition,steadfastlyprohibitingratherthanencouragingbarrierstointerprovincialtrade.Closingorisolatingmarketsdestroysincentivesforproducersandtraders,exacerbatesinequities,andmakesstabilizationthroughbufferstockoperationslesseffective.
·Encourageflexiblesourcingandprocurementstructuresforagroindustrialcommodities.Suchstructuresarenecessarytoensureappropriateandefficientscaleprocessingtechnologyandtopromotereinvestmentinfuturecost-reducingtechnologies,whichinturnarenecessarytomaintainfirmprofitability.
·Consolidatethemarketinginformationsystemundertheauspicesofasingleagency,andmakeitmorecomprehensive(i.e.,includequantityandqualityalongwithprice).Toensureadequate
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informationwasprovidedtothecentralmarketinformationagency,licensingandlicenserenewalofwholesalemarketscouldbeconditionalonthetimelysubmissionofmarketinformation.Situation
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andoutlookinformation(assessmentofproductionconditionsandprobablemarketing)ofperishablecommoditiesshouldbedisseminatedsimilartothatcurrentlyreleasedbytheMinistryofAgriculture(MOA)forgrainsandoilseeds.
·Assistinbroadeningandstrengtheningfarmerassociationmanagement,throughtrainingprograms.Few,ifany,farmerassociationshavetheskillsandknowledgebasetoadviseproducersonmarketchannelsfordifferentiatedproducts.However,broadeningandstrengtheningassociationmanagementtoengageinmarketdevelopment,promotionandothermarketingactivitiesandthusfurtherempowerproducersinthemarketplacewouldimproveagriculturalincome.Producerassociationscouldimprovetheplanninganddistributionofhorticulturalandlivestockproducts,linkingproductionwithefficientscaleprocessingindustries.Theycouldalsoextendconsumerdeliveriesbyexploitingregionalproductspecializationandseasonality,therebyimprovingincomelevelsandstability.
·Standardizenationalquarantineandphytosanitaryinspectionprocedures,certificates,andshippingdocuments,andapplythemequallytoallinterprovincialcommoditytransport.Thiswouldimprovemarketingefficiencyandincreasefarmerincome.Ifnationalquarantinecertificationconditionsweremet,lowerjurisdictionsshouldhavenoauthoritytorestrictcommoditymovement.Theestablishmentofpreclearancequalificationsandprocedureswouldfurtherincreaseefficiency.Processing-plantcertificationforquarantinepurposeshasmadefrozenshrimpexportstotheUnitedStateslessbureaucraticandmoreefficientthaninterprovinciallivestockmarketing.Inspectionandcertificationproceduresshouldbetransparentandstandardfeesshouldapply.
Requiretruckstransitingprovincesinwhichtheyarenotregisteredto
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payfeesbasedonobjectivecriteria.Thesefeesalsoshouldbetransparent,standardized,anduniversallyapplied.Transitfeesandleviesbeyondthoseofficiallysanctionedshouldbevigorouslydiscouraged.
1.ThissectionreliessubstantiallyonWorldBank1997b.
2.RicepricestabilizationbyIndonesia'sBulog(BadanUrusanLogistik)isestimatedtohavecontributedalmostonepercentagepointtoGNPgrowthinitsearlyyears,1969-74(Timmer1996).
3.Indonesia'sBulogstabilizeddomesticricepricesduringthepastthreedecadesbyrelyingheavilyonprivate-sectortradersandperformingonlyamarginalmarketrole.Bulog'smaximumannualricepurchasewas25percentofproductionanddesignedcarryoverstockswere1.0milliontons.
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6.InternationalTradeandForeignCapitalFlows
A.Trade
Introduction
Chinaisanimportantglobalplayerinthetradeofselectedagriculturalcommodities.AtvarioustimesoverthepastdecadeChinahasimportedasmuchas17percentoftheworld'stradedwheat,25percentofitsfertilizer,and28percentofitssoybeanoil,whileexportingasmuchas10percentoftheworld'stradedcorn.Agriculturaltrade,whichinthefollowingdiscussionincludesaquaculturalandmariculturalproducts,wasreasonablywellbalancedoverthe1990s,withsmallsurplusesinmostyears.
1
ThenominalvalueofChina'stotalexportsandimportsgrewatannualratesof13and12percentover1980-96;theratioofforeigntrade(exportsplusimports)toGDPincreasedmarginallyto7.1percent,valuedatpurchasing-powerparity,orPPP(WorldBank1998).Agriculturalexportsandimportsgrewconsiderablyslowerataverageannualratesof7.1and5.9percentandaccountedforjustunder3percentofglobalagriculturaltradein1996.However,growthintherealvalueofagriculturaltradeaveragedonly2percentannually,from1980to1997lessthanhalfthegrowthrateofrealagricultureGDP.
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TradeObjectives,PoliciesandInstitutions
Thehighlyvisibleproductionandtradepolicygoalofgrainself-sufficiencyisinconsistentwithothernationalefficiencyobjectives.Thisobjectivehaschangedonlymarginallyoverthereformperiod.Throughthe1980sexternalgraintradewasbasicallytobalanceindividualfoodandfeedgrains.Inthe1990s,asitbecameincreasinglyapparentthatChinadoesnotenjoyacomparativeadvantageingrainproduction,thedomesticgrainself-sufficiencytargetwasredefinedasof95percentofconsumption.
Otherobjectives,suchasimprovingtheefficiencyandresponsivenessofthetradingsysteminmeetingnationalrequirements,areconsistentwithotherefficiencyobjectives.Policyandinstitutionalreformsinitiatedduringthe1990sinclude;consolidationofexchangerates,eliminatingmostgovernmentdeterminedprices,encouragingcompetitionbydecentralizinganddemonopolizingthetradeofmanycommodities,commercializingoperationswheremonopoliesremained,transformingtradingcompaniesintohandlingagents,reducingthenumberofcommoditiesrequiringimportandexportlicenses,andreducingtariffs.Removingtheremainingdistortionstopermittradetoreflectproductioncomparativeadvantageisanimportantelementinacceleratingruralincomegrowth.
Thetwo-tierexchangeratewasconsolidatedinDecember1993.Duringthemid-1990smarketdeterminedpricesforagriculturalcommoditiesincreasinglyreplacedgovernmentdeterminedprices.Tradedecentralizationincreasedthenumberoffirmseligibletoengageinforeigntradefromabout1,200in1986toabout200,000in1996.
StateTrading
Rapidprogressinliberalizingotheraspectsoftradeaccentuatesthelackofreforminstatetrading.Whileanylicensedforeigntrade
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companymaytradecertainagriculturalcommodities-externaltradein''strategiccommodities,"suchasfoodgrains,textilefibers,andchemicalfertilizers,continuestoberestrictedtospecializedandmonopolynationaltradingcorporations.Somenationaltradingcorporationshavebeentransformedintofor-profitenterprises,includingtheCereal,Oil,&Foodstuffs
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ImportingandExportingCorporation(COFCO),forgrain,edibleoil,andsugar;ChinaNationalChemicalsImportandExportCorporation(SINOCHEM),forchemicalfertilizer;andtheCottonImportandExportCompanyofChina.COFCOhandlesgrainasamonopolyagentforimportersandexporters,butgraintradingstillremainssubjecttoimportandexportlicensesandquotas.COFCOisnotonlyalargetrader,italsoisanerraticone,generatingwideyear-to-yearswingsintradevolume.LackofinformationcharacterizesChina'stradetransactions,causinguncertainlytoboththosewhoCOFCOrepresentsandthosewhoCOFCObuysfromandsellsto.
ImpactofReforms
Unlikemanyneighboringcountries(wheregovernmentshaveprotectedagriculturalpricesandsubsidizedfarmers),Chinaconsistentlytaxedfarmersuntilthemid-1990sbymaintainingfarmgatepricesbelowborderpriceequivalentsexceptforsmallvolumesofgrainsoldtonongovernmentbuyersatmarketprices.Nominalprotectionratesestimatedatofficialexchangeratesforthemajorgrains,oilseeds,andcottonclearlyshowdecliningnegativeprotection(i.e.taxation)overthe1980sand1990s,andnowhoverwithina10percentbandaroundzero.By1997mostgrainandcottonprocurementandmarketpricesapproachedinternationalpriceequivalentsandby1998,exceededinternationalprices.
Exportablecommoditiessuchasrice,maize,soybeans,andcottonweremoreheavilytaxedthanimportablecommodities,suchaswheat.Iftheimpactoftheovervaluationofthedomesticcurrencyandthetariffprotectionsystemisconsidered(recentlyreduced),agriculturalincentivesarefurtherdistorted,depressingfoodpricesandredistributingincomefromfarmerstourbanconsumersandtheagroprocessingsector.Ontheotherhand,thegradualliberalizationofpricesandagriculturalmarketshassignificantlyreducedthe
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distortionsinrecentyears.
Whileimporttariffshavebeenreducedandmanytradingcompaniesarepermittedtoimportvariousagriculturalcommodities,monopolytradingcorporationsandimportquotasstillapplytosomeofthemajoragriculturalimportscereals,oilseedsandvegetableoils,andwool.Furthermore,thesizeofthequotasarenotpublicized.
Comparativeadvantageinagricultureoftendeclinesintheprocessofeconomicgrowth,andthisisexpectedtohappeninChina.Innationswherearablelandisscarce,thecomparativeadvantageinagriculturetendstodeclinemorerapidly(Anderson1990).Ingeneral,thecomparativeadvantageofChina'sagriculturalsectorhasbeendecliningforland-intensivecrops.China'snetgrainimportswilllikelyincreaseinthefuture;andagradualchangeintradecomposition,includingimportshiftsfromfoodtofeedgrains,seemsinevitable.
ShiftsinTradePatterns
Althoughthegrowthrateofagriculturaltradehasbeenbelowthatofindustrialexports,China'sshareoftheworld'sagriculturaltradehasincreased,suggestingthattradeliberalizationhasbeeneffectivedespitetheremainingbarriers.Tradestructurechangeshaveaccompaniedrapideconomicgrowth.Agriculture'sshareofGDPandtradewasabout30percentin1980,decliningtoabout20and10percentrespectivelyby1997.Therechangesreflectimprovedsectoralresourceallocationandthetransferringofcomparativeadvantagefromagriculturaltomanufacturedproducts.
Thevalueofagriculturalexportswas$20.2billionin1997,ofwhichgrains(Chinesedefinition),primarilyoilseeds,composedabout11percent.China'sagriculturaltradebalance(Table6.1)andtradeinmajorcommoditygroups(Figure6.1)indicatesthechangingcompositionoftradeandsuggestsanexporttrendtowardproductsin
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whichChinahasacomparativeadvantage.ImportdatadonotyetsuggestatrendincommoditiesinwhichChinaiscomparativelydisadvantaged.Grainimportsin1997and1998wereparticularlylowprobablyaconsequenceofthe95-percentgrainself-suffi-
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Table6.1:China'sAgriculturalTradeBalance,1992-97(milliondollars-nominal)
1992 1993 1994 1995 1996 1997BulkCommodities/a 1931,439 78-4,955-3,529-1,253ConsumerReadyProducts/b 1,9852,0302,520 3,458 3,836 1,463HorticulturalandOtherFoodProducts/c
9511,0731,426 1,281 1,177 1,085
ProcessedIntermediaryProducts/d 1,1291,208 400-1,259 -811-2,614TotalTradeBalance 4,2595,7504,424-1,475 673-1,319OtherAgriculturalandResourceProducts(OARP)/e 2,7462,8854,761 6,130 4,580 743TotalBalanceIncludingOARP 7,0058,6359,185 4,655 5,253 -576/aGrains,seeds,rawtobacco,cotton,andrawsugar./bProcessedmeat,dairyproducts,processedvegetablesandfruits./cTrees,flowers,freshfruitsandvegetables./dLiveanimals,floursandmeals,gums,saps,oils,hidesandskins,rawwool./eSeafood,beverages,leather,forestproducts,woolyarnandfabrics,cottonyarnandfabrics.Source:CompiledfromChina'sCustomsStatisticsYearbook,variousyears.
ciencyobjective.Thenetexportsofland-intensivebulkcommodities,suchasgrainsandoilseeds,havefallen,whileexportsofhigher-valued,morelabor-intensiveproducts,suchashorticulturalandanimal(includingaquaculture)products,haverisen(Figure6.1).Thecerealexportembargo,ineffectduringportionsorallof1994to1996,severelyconstrainedgraintrade,butgrainexportsdidnotnoticeablyrecoverfollowingtheliftingoftheembargo.Theimportanceofgrainexports,whichaccountedforabout23percentoftotalagriculturalexportsinthepre-embargoperiod,havefallenbyabouthalf.Thustheembargoappearstohavesimplyemphasizedthedecliningtrendincerealexports.In1997horticulturalproducts,
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primarilyfruitsandvegetables,andanimalandaquaticproducts,accountedformorethan80percentofagriculturalexports.Grainstypicallymakeupmorethanone-halfthevalueofimports,withwheatandvegetableoilsandfatsthemajorcomponents,butweresubstantiallylessin1997,whenanimalproductswereofmajorimportance.TheseexternaltradetrendsreinforceagriculturalproductionpatternsobservedbyPark,Rozelle,andCai(1994),andRozelleetal.(1997b),whofoundthatdomesticproductionisincreasinglymovingtowardcommoditiesinwhichacomparativeadvantageisenjoyed.
Figure6.1MajorCommodityGroupsasaProportionofAgriculturalTrade
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TradeBarriers:HowSevere?
Chinahassignificantlyreducedtariffsoverthepastdecadefornonagriculturalcommodities,andadditionalreductionsareunderdiscussionaspartoftheWorldTradeOrganization(WTO)negotiations.Chinareduceditssimpleaverageimporttarifffrom42percentin1995to17percentin1997(U.S.TradeRepresentative1998).Agriculturalimporttariffsof40to60percent,althoughhigherthantheaverageforallcommodities,areconsiderablybelowthoseofmostdevelopingcountries.Thesetariffreductionsareprogressivebutmasksignificantnontariffbarriers.Avarietyofnontariffbarriersrestrictimports,includingtariffquotas,importquotas,importlicenses,phytosanitarymeasures,andstatetradingapplyingparticularlytograins,cotton,vegetableoils,andfertilizer(U.S.TradeRepresentative1998).
AlthoughChinamaintainsahightariffforabove-quotaimports,tariffsforsomeofthemajorimportitemssuchasgrain,soybeans,andcottonarebelow5percent,ifwithin-quota.WithintheWTOcontext,Chinahasofferedtoreduceitsweighted
2average,binding(i.e.,maximum)tariffto41.3percentbytheyear2004,includingareductionongrainsfromthecurrent66.9to51.6percentaverylowlevelfordevelopingcountriesandmoresimilartothoseadoptedbylargegrain-exportingnations.IfWTOmembershipisagreedandacceptedontheseterms,itwouldprecludeChinafromfollowingaprotection-basedagriculturaltradepolicyoptionusedbyitsmore-developedEastAsianneighbors.
Thesetariffsmustallbeinterpretedcautiouslybecausetheyareoftencombinedwithquotas.Forexample,themostfavorednation(MFN)tariffonwheatwas114percentasof1996andtheWTO-boundrateis
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65percentfortheyear2004;butatariff-ratequotaappliesandimportsunderthequotaaresubjecttoonlya1.0percenttariff.Therateis114percentforimportsabovethequota.Similarlicensingoftariff-quotaimportsappliestorice,maize,soybeans,edibleoils,andwool.Thewithin-quotatariffrateisrelativelylow:1percentforallcerealgrains,3percentforsoybeans,13.8percentforedibleoils,and1to3percentforwool.Theabove-quotatariffsarequitehigh,butwhetherthesehightariffshaveeverbeenappliedisuncertain.
ImpactofWTOAccessionandTradeProtocols
TheprocessofWTOaccessionhasinvolvedseveraltradeliberalizationcommitments,andadditionalcommitmentsdoubtlesslywillfollowallofwhichwillimpactdirectlyondomesticagriculturalcommoditypricesandruralincomes.Thecommitmentsincludeterminatingthetradingmonopoliesnowenjoyedbystatetradingenterprises.Thiswillpermitnonstatetradingentitiestoimportportionsofthetariff-ratequotas,rangingfrom10percent(wheat)to67percent(cotton)to90percent(soybeanoilin2006)andrepresentsimportantstructuralreformwhichwillimprovetradingefficiency.Inaddition,domestictradinganddistributionrightswillbeliberalizedoverathree-yearperiod,permittingtransnationalfirmstoengageindomesticdistributionincludingfertilizer,whichheretoforehasbeenhighlyprotectedfromdistributioncompetition.Further,Chinahascommittedtodiscontinueexportsubsidiesandtradedistortingdomesticsubsidiesandbaseagriculturalimportprotectionsolelyontariffs,therebyeliminatingprotectionist(nonscientific)elementsofagriculturalsanitaryandphytosanitaryregulations.IfChinaistoremainanexporterofriceandcorn,domesticpriceswillnecessarilydeclinetolevelsconsistentwithinternationalpriceequivalents.AlthoughpreciseimpactsofWTOaccessioncanbedeterminedonlythroughdetailedsupplymodeling,itisclearthatpricesforandproductionofthesecropswoulddeclineandnear-termagriculturalincomeswillbereducedunlessyieldscanbeincreasedorproduction
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costsreduced.
Tariffbindingsandtariff-ratequotas(TRQ),areanintegralelementofthetariffbasedregime.Averageimporttariffsforagriculturalproductswoulddeclineto17percentby2004,leavingagriculturesomewhatmoreprotectedthanin-
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dustry,wheretheaverageimporttariffwillbereducedtoabout9.5percent.However,verylowtariffs(3percentorless)willapplytoTRQsofmostbulkcommoditiesthosecommoditiesinwhichChinadoesnotenjoyacomparativeadvantagecerealgrains,cotton,soybeansandsoybeanderivatives(mealandoil).TheexistenceofaTRQdoesnotnecessarilymeanthatimportswillimmediatelyincreasetomeetthequota.Forexample,theTRQforriceis2.7milliontonsin2000risingto5.3milliontonsin2004;buttheinternationalricemarketisvery"thin"andrarelyhasanycountryimportedmorethan2milliontonsannually.And,ifimportsofthatmagnitudewereattemptedin2000,internationalricepriceswouldincreasedramatically,similartotherapidpriceincreasesfollowingChina'simportof1.6milliontonsin1995.Nevertheless,giventhatinternationalcottonandsoybeanpricesarebelowdomesticprices,theavailabilityofcottonandsoybeanTRQswillinevitablyresultindomesticpricedeclinesandincomereductionforproducersofthesecommodities.
PriceandSupplyVolatility
Long-termtrendsinglobalgrainprices,whichhavebeendecliningforwelloveracentury,areforecasttocontinuedecliningoverthenext10to15yearsaccordingtorecentstudiesbytheWorldBank,theFoodandAgricultureOrganization(FAO),andtheInternationalFoodPolicyResearchInstitute(IFPRI).
3Sharpshort-term(2-3year)priceincreases(anddecreases)haveandwilloccurinreactiontomajorpolicydecisionsongrainproductionandstoragebymajorproducingandtradingcountries,exceptionallyfavorableorunfavorableweatherwithresultingharvestimpacts,wars,naturalcalamities,andsimilarevents.Forexample;thedramaticpricespikein1995-96followedasell-offof220milliontonsofinternationalgrainstocksduringthepreviousdecade,coupledwitha1995droughtinsomeU.S.grain-producingareas.
Futuregrainpricevolatility,aroundthedecliningtrend,islikelytobegreaterthanofrecentdecadesbecauseofpolicychangesinthemajorexportingcountries.ThesechangesincludeboththosemadeduetotheWTOAgreementsonAgricultureandunilateraldecisionsbytheU.S.andtheE.U.governmentstoreducestockholdingsforbudgetaryreasons.Thesechangeswillkeepworldgrainstockslowinthefutureandlowerstockscouldleadtogreaterprice
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volatilitybecausethesmallerbufferagainstapoorharvest.
Themonopolystructureofthestatetradingcompanycreatesinefficienciesanddistortionsinthedomesticeconomyandmayevencreateuncertaintyinworldmarkets.Pricestabiliza-
Modernbulkgrainhandlingsystemsarereplacingbaggedgrainhandlingindomesticandinternationaltrade.
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Figure6.2DomesticandInternationalGrainPrice
Volatility(dollarsperton)
tionisbecominganincreasinglyimportantgoaloftradepolicy.However,importingduringperiodsofrelativeabundanceandexportingduringperiodsofrelativescarcityhavemadepricesinChina'sdomesticmarketmorevolatilethaninternationalmarketprices.Huang(1998)demonstratedthatdomesticpricesofallthreemajorcerealshavebeenmorevolatilethaninternationalprices(Figure6.2).
4Similarlygrainsupply(produceandnetimports)fluctuationshavebeenexacerbatedbytrading.
Thecalculationofstandarderrortermsaroundpricetrendlines(199097)clearlydemonstratesthatdomesticgrainpricesaremore
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volatilethaninternationalprices.(Table6.2).Also,ananalysisbyChen(1999),usingprovincialaveragefarmgateprices(weightedaverageofquota,negotiated,andmarketprices),determinedthatpricevariation,asmeasuredbycoefficientsofvariation(CV)hadincreasedovertimeCVsforriceandcornpricesdoubledbetweenthe1975/85and1985/95decades,whiletheCVforwheatpricesincreasedby50percent.
Furthermore,nettradeinriceandcornhaveexacerbatedproductionfluctuationsasnetexportshavetendedtobelessinyearsofhighproductionandmoreinyearsoflowproduction.Theimpactoftradeisindicatedbythehigherstandarderrortermfor"production+nettrade"inTable6.2.Thisapparentanomalyprobablyderivesfromexecutingexportplanswhicharedevelopedseveralmonthspriortoharvest.Storagestatisticsareunavailable,thusitisuncertainwhethertradeexacerbatestotalsupplyvolatility.However,wheattradedampensproductionfluctuationsasadditionalsuppliescanberapidlyimportedifneeded.An
Table6.2:GrainPrice,Production,andSupplyVolatility(1990-97)Wheat Rice Corn
Sy.x CV Sy.x CV Sy.x CVDomesticMarketPrice/a 29.4 0.18 54.2 0.20 26.3 0.19InternationalPrice/a 21.2 0.15 30.6 0.12 19.7 0.18DomesticProduction/b 5.9 0.055 8.5 0.046 8.7 0.091DomesticProduction+NetTrade/b 4.6 0.040 8.7 0.046 13.2 0.132/aMonthlydata Sy.x=StandardErrorofEstimate/bAnnualdata CV=CoefficientofVariation
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argumentcouldbemadethatcornsupply,whichisharvestedlateintheyear,isafunctionofthepreviousyear'sharvestandthecurrentyear'snettrade.However,laggedproductiondoesnotdampenfluctuationsastheestimatedstandarderrorissimilartothatforproduction.
Duringtheearlyandmid-1990sanumberoffuturesmarkets,includinggrains,wereestablishedinChina.Whiledesignedtofacilitatepricehedgingbetweensuppliers,users,andtradingcompanies,tradingwas"thin"andthemarketswereconsideredspeculative,subsequently,governmentclosedorconsolidatedseveralfuturesmarkets.However,globalcommoditymarketsandmarketliberalizationpermitshorttermsupplyandpriceriskstobemanaged(hedged)throughcommodityderivativesmarkets(futuresandoptions).Futureshedgingisanefficientmanagementtoolwhenannualimportsarerequiredtomeetconsumptionrequirementsbutinappropriateasinsuranceforpossibleimports.China'sdeficitwheatpositionispartiallyhedgedininternationalfuturesmarkets.Thisisrelativelyeasygiventhatinternationalfuturesmarkets,suchastheChicagoBoardofExchange,isveryliquid,andChinaisanannualnetimporterofwheatthusaminimalamountcanalwaysbehedged.Similarly,aslongasChinaremainsanetcornexporter,aminimalamountoftheexportscouldbehedged.Itismuchmoredifficult,however,tomanagepriceriskforuncertainquantitiesofimportsandexports,becauseifahedgedpositionisnotfulfilled,significantsumscouldbelost(orgained).Itisimportanttorealize,however,thatrelianceontheinternationalmarketforannualrequirementsusuallywillbelesscostlythanattemptingtostoreorcarryoverlargestocks.Futuresoptionsarerelativelyinexpensivetheoreticalalternatives,butmarkettransactionsintheseinstrumentsaretoofewtobeaviableoptionforChinagiventhemagnitudeofyear-to-yearfluctuationsinimports.
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UndocumentedImports
Chinatendstoimportbulkagriculturalcommoditiesdirectly,butalargeshareofprocessedfoodandconsumer-readyproductsarefirstimportedintoHongKongandthenre-exportedtomainlandChina.HongKongofficiallyre-exportsabout55percentofitsagriculturalimports.InadditiontorecordedshipmentsfromHongKongtoChina,alargeunofficialtradeexists(USTR1998;Wong1998).EstimatingthedollarvalueofundocumentedagriculturalexportsfromHongKongtoChinaisdifficult,butitcouldexceed$1billionperyear.UndocumentedshipmentsoffreshfruitintomainlandChinamayaccountforupto70percentofHongKong'sfruitimports(Wong1998).
Also,thevalueofofficialre-exportsfromHongKongtoChinatendtobeunderreported.Wong(1998)reportsthatmorethan50percentofHongKong'sagriculturalproductre-exportstoChinahadunitcoststhataveraged6.2percentlessthantheirimportvalue.Alternativelytheexport-importmarginsforagriculturalproductsre-exportedfromHongKongtonon-ChinadestinationsshowthatagriculturalproductsimportedintoHongKongfromnon-Chinasourcesandre-exportedtonon-Chinadestinationshaveanaveragemarginof15.3percent.Positivemarginsforre-exportstonon-Chinamarketsandnegativemarginsforre-exportstoChina,stronglysuggestthatthevalueofagriculturalproductexportstoChinaisunderrecorded.
ConclusionsandRecommendations
Thegovernmentlargelymonopolizesinternationaltradeinbulkystrategicagriculturalproducts(cereals,vegetableoils,cotton)anddeterminesannualimportandexportgrainquotas;butwithlittletransparencyregardingeitherthequantityorvalueofthequotas.Importtariffshavelittlepracticalmeaningbecausenumerousnontariffbarriersexist.Inaddition,importquotasaresubjecttoalternativetariffschedules.
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AsChinaliberalizesthetraderegime,consistentwithjoiningWTO,acontinuingshiftinthepatternoftradewillbegenerated.However,itremainsuncertainwhetherChinawouldremainanear-term,netagriculturalexporterand
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graduallyincreasegrainandotherbulkimports(Wang1997)orifproducerswouldmeetrisingdemandbyshiftingsupplyfunctionsthroughincreasedinvestmentsinagriculturalresearch,irrigation,andotherproductivity-enhancingactivities(Huang,Rozelle,andRosegrantforthcoming).
Werecommendthefollowingchangesintradepolicytohelpimprovetheruralsector:
·Promotetradecompetition.EvenifChinamaintainsaclosedtradepolicy,competitionwillincreaseefficiency,transparencyandtheeffectivenessoftradepolicy.
·Permitthemarkettohaveagreaterroleindeterminingtradepatternstoreapcomparativeadvantagegains.Thiswouldprobablymeanincreasedoverallagriculturaltradeand,inaddition,ashifttowardimportingmoreland-intensiveagriculturalproducts(grains,oilseeds,andcotton)andexportingmorelabor-intensiveagriculturalproducts(fruits,vegetables,livestockandaquaticproducts).Toachievecomparativeadvantagegains,China'straderegimemustbemoreopenandmightinvolveremovingimplicittaxesonfarmers,reducingperversetradingincentivesforstatetradingagencies,andmakingthestatetradingagenciesmoretransparentandmoreaccountabletomarketdiscipline.
·Changethegrainself-sufficiencypolicy.The95percentgrainself-sufficiencygoalisinconsistentwithanopen-tradepolicy.Acontinuingpolicycommitmentto(near)grainself-sufficiencymeanslargeinflowsofgrainwillnotbepermittedevenifChinaopensitsbordersto(otherwise)freeagriculturaltrade.Ifthispolicyispursuedthroughfuturegrainpricesubsidies,itcouldbeachievedonlybyclosingthebordertolessexpensiveforeigncerealsbeyondthe5percentimportquota.
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·Inliberalizingtrade,assessthewelfareimpacts,andmeasuresrequiredtocushionanyadverseimpactonportionsoftheruralpopulationwhoareatriskandlessabletopartakeofnewproductionopportunities.Inanopeneconomy,grainpriceswouldalmostcertainlydecline,accordingtorecentanalysesbytheCenterforChineseAgriculturalPolicy(CCAP).Thus,grainfarmerswouldsufferincomelosses,butconsumerswouldgain,aswouldthoseproducersabletoproducehigher-valuespecialtycommoditiesforbothdomesticandexportmarkets.Theimpactonsubsistencefarmersinpoorareaswoulddependuponwhethertheywerenetproducersorconsumersofgrain.
·Phaseoutstatetrading.EvenifChinaremovesexplicitnontariffbarriers,amonopolystatetradingfirmcouldunilaterallyblocktradedespiterulesandregulations.Eveniftraderemainssubjecttoquantitativecontrols,morecompetitionwouldgeneratecompetitiveefficiencies.
·Designaneffectivesetofreleaserulesforgrainstocksandcoordinatereleasesofbufferstockwithimportsandexportsandmaintainsmallergrainreservesatareducedcost.Tensofmillionsoftonsofgrainstocksmaintainedatcostsoftensofbillionsofyuanhavebeenunabletostabilizegrainpricesbecauseofconflictingincentives,unclearcontrolrights,andpoorlydefinedreleaserulesandmanagementpractices.Chinahascreatedasystemofgranariesthatisextremelyexpensiveandisnotcontributingtostableprices.
·EnactWTOaccessionrelatedagriculturalpoliciespromptly.SomeofthebenefitsofWTOaccruethroughreformofvarioustradeinstitutions,structures,andpolicies,thereforewaitingforWTOaccessiontoimplementthereformsmerelydelaysreceiptofthebenefits.Also,ChinawillbedeprivedofseveralagriculturalpolicyinstrumentsafterjoiningWTO,thusthetransformationtoamorecomparativeadvantageandmarketorientedproductionstructure
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shouldbeinitiatedwhileallpolicyinstrumentsremainavailabletomoderateanynegativetransitionalincomeeffects.
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Figure6.3ActualCapitalFlows
B.CapitalandTechnologyFlows
AnimportantfactorinChina'srapideconomicandemploymentgrowthhasbeentheinvestmentprovidedbyexternalcapitalinflowoverrecentyears.Actualcapitalinflowhasincreasedcontinuouslyduringthe1990s(Figure6.3),although,by1997inflowcommitments(loanssignedandFDIagreed)declinedby50percentfromthehighof$123billionin1993.ThelargeinflowsofFDIsince1993hasbeentheprimarysourceofincreasedcapitalaslendingvolumeshaveincreasedonlymarginally.Inadditiontoprovidingcapital,FDIhasperformedanimportantroleintransferringnewtechnologiesandmanagementapproachestotheeconomyasawholeinmanycasescontributingelementsthatotherwisewouldhaveconstrainedgrowth.UnderstandingtheroleofFDIinChina'seconomicgrowth,thepolicyenvironmentthatencouragesanddiscouragesagriculturalinvestment,andtherecordthatChinahasbuiltinimportingtechnologiesfrominternationalsourcesareimportantindesigningmoreeffectivepoliciestofacilitateincreasedinflowsofmoreadvancedagriculturalinvestmentandtechnologyandaccelerateruraleconomicandincomegrowth.
GlobalForeignDirectInvestmentandChina
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In1992,however,FDIinChinaexceededloans.Duringthe1990sFDIquadrupled,comprisingthree-fourthsoftheactualcapitalinflowin1996($54.8billion).Contractedcapitalwas$81.6billionin1996,butdeclinedprecipitouslyto$51billionin1997.
Globally,mostforeigndirectinvestmentoccursbetweenOrganizationforEconomicCooperationandDevelopment(OECD)countries(UNCTAD1997).EightypercentofcapitaloutflowfromOECDcountriesistootherOECDcountries,primarilyforacquisitionofexistingmanufacturingandserviceenterprises.Only0.1percentofFDIoutflowfromOECDcountriesisdirectlyforagriculturealthoughaportionofthemanufacturingFDIinvolvesagriculturalinputsandprocessing.
TheUnitedStatesreceivesthelargestvolumeofFDI.However,85to90percentoftheinflowalsoisforacquisitionsandmergers,makingtheprincipaleffectanownershipchange,whichoftencreatesscaleefficiencyatthecostofminoremploymentreductions.Incontrast,ChinaistherecipientofthelargestFDIinflowsfornewinvestmentsandexpandingexistingenterprises.ThesourceofFDIinflowalsoisunique,asmuchofitoriginateswiththerelativelywealthyChinesediaspora,scatteredworldwidebutconcentratedinSoutheastAsia.Totalcontractedinflowsandactualutilizationsince1992havetotaled$417billionand$151billion,respectively.HowevertheFDIinflowissomewhatoverstated.Aportionoftheinflows(estimatedat25percent,HarroldandLall1993)representsrecycledfundsfundsthatoriginateinChina,whicharesentoffshore(primarilyHong
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Figure6.4FDIInflowasPercentofGrossFixed
CapitalFormation,'91-95
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Kong)andreturntoChinaasFDIinflow.Suchrecycledfundsenjoypreferentialpoliciesunavailabletodomesticinvestors.Inaddition,about70percentoftheinflowsare"in-kind"equipmentandtechnology,whichisoftenovervalued.
5
WhiletotalFDIinflowintoChinaismassive,themagnitudeissimilartoseveralothercountrieswhenmeasuredrelatively.During1991-95(whencomparabledataareavailableforothercountries),inflowsaveraged16percentofcapitalformation,somewhatlessthanMalaysiaandArgentina.(Figure6.4).(SingaporeandHongKongwereomittedbecauseoftheiruniquecharacteristicsasfinancialcenterswithlargecapitalinflowsandoutflows.)However,preliminarydatafor1997indicatethatFDIinflowsrepresented25percentofChina'sgrossfixedcapitalformation.Byothermeasures,Chinaranksevenlower:inflowstockrepresented18percentofGDPin1995andinflowstockpercapita,at$106,isthesmallestinEastAsia,exceptfor$100percapitainthePhilippines.ChinahasmodestFDIoutflowsfortheacquisitionofmodernandproprietarytechnologyinnonagriculturalindustries.
FDIRegulatoryReformandtheTaxEnvironment
China'sFDIpolicy,hasevolvedgraduallyandmethodically.Followingadoptionofthe"OpenDoorPolicy"inlate1978andtheissueoftheEquityJointVentureLawin1979,ChinaopenedfourSpecialEconomicZones(SEZs)forFDI.ThiswasfollowedbyexpandingtheSEZconceptto14coastalcitiesandHainanIslandin1984,tothreedevelopmenttrianglesin1985,theentirecoastalareain1988,andallprovincialcapitals(excepttwo)andmajorYangtzecitiesin1992.Foreigninvestmentregulationsclassifyinvestmentsintocategoriesof"encouraged,""permitted,"and"restricted"inadditionto
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a"prohibited''categorythatdescribescharacteristicsofactivitiesinwhichforeigninvestmentsaredisallowed(ratherthanidentifyingspecificindustrialsubsectors).ThebusinessincometaxandVATthatapplytodomesticenterprisesis33and17percent,respectively.However,varioustaxandtariffincentivesapplytoFDI.Beyondthestandardsetofincentives,incometaxesforfirmsengagedinagriculturearereducedby10to30percentforanadditional10years.
Copyright,patent,andotherintellectualpropertyright(IPR)protectionshavedevelopedslowly.Thepatentlawbecameeffectiveonlyin1985butdidnotapplytochemicalsandpharmaceuticalsuntil1993.Plant-varietyprotectionbecameavailablewithpassageoftheplantbreeder'srightslawin1997.
ConstraintstoInflows
Despiteimprovementstotheinvestmentenvironment,manybarriersexisttothefurtherinflowsofagriculturaltechnologythroughtransferorinvestment.ExtensiveinterviewswithcorporateofficialsoftransnationalcorporationsinvolvedwithagriculturalinputmanufacturingorcommodityprocessinginvestmentsinChina,identifiedfourcommonfrustrationswhichrestrainsthemfrominvestingmorefundsandtransferringadditionalnewtechnologies:
·Foreigninvestmentpolicyisnottransparent,whichismanifestinfrequentpolicychanges.
·Theextensiveregulatoryenvironmentrequiresmultiplenegotiationsasnationalregulationsapplyonlyiftheforeigninvestmentexceeds$30million.Otherwisenegotiationsmustbeheldwithofficialsineachprovincewhereproductsaretobesold.Conversely,itmaybeeasiertosatisfyprovincialthannationalregulations,resultinginseveralsmallinvestmentsthatmightbelessefficientthanonelargeinvestment.
·TheweakenforcementofIPRsisamajorconcernforcorporations
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withcopyabletechnologies.Transnationalcorporationsthatcanpreventtechnologylossbytechnicalmeansdoso;butagrochemicalsarewidelyreportedtobereverse-engineered,exceptwhentheactiveingredientsareverycomplexmolecules.
·Evenwhentechnologycanbeprotectedandwhenmarketdemandishigh,fragmented
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retailingandwholesalingnetworksreducemarketpenetration.Someoftheseconstraintsareafunctionofpoorphysicalinfrastructure.Otherconstraintsareregulatorywhichprotectthedomesticservicesectorfrominternationalcompetition.
FDIinChina'sAgriculturalSector
ThenaturalincentivesforFDIinChina,are(a)alargedomesticmarketand(b)alaborsurpluseconomy.Thegovernmenttypicallystructuresforeigninvestmentstobelabor-intensiveandabout60percentofChina'sFDIinflowshavebeeninlabor-intensivemanufacturingactivities.Thishelpscreatenonagriculturalemploymentandcontributestoincomegrowthgenerally,butdoesnotaddressmodernizationoftheagriculturalsector.
GiventhesmallholdernatureofChina'sagriculturaleconomy,agriculturalFDIwouldbeexpectedtobemodest.Indeed,"projectsthatuseuplargetractsoffarmland,thatarenotbeneficialtotheprotectionanddevelopmentoflandresources,..."areprohibited(MOFTEC1998).AgriculturalFDIinflowsaccountedforonly1.3percentoftheactualFDIinflowsduringthe1990s,andwereconcentratedinlabor-intensive(horticulturalcrops,poultryandaquatic)production(Table6.3).Thelargestinvestmentswereforcropproductionbutwerebelowthecropshareofgrossvalueofagriculturaloutput(GVAO);forestryreceived15percentoftheinvestmentconsiderablygreaterthanitsshareofGVAO
Thepastpolicyenvironment,unfortunately,hasnotprovidedequalopportunityorencouragementforalltoinvestinagriculture.TheearlyrestrictionsonFDIlocation,andsubsequentliberalization,madepolicytheprimarydeterminantofinvestmentlocation.AneconometricanalysisofagricultureFDIconfirmedtheimportanceofpolicyandsupportedtheconclusionofotherstudiesthatthelevelofaccumulatedFDIstockgreatlyinfluencescurrentinflows(Petri1995;
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Dobson1993).Thus,officialpolicyconcentratedinvestmentsalongthecoastinthe1980sandtheinvestmentaccumulationcontinuedtoattractFDIinthe1990s.Aslateas1996,some85percentofagriculturalFDIinflowswereintothecoastalprovincesplusBeijingandHebei.Otherimportantlocationdeterminantsweretransportintensity,urbanpopulation(marketsize),andtherealwagerate.
FDIinAgriculturallyRelatedManufacturing
Regulatory,IPR,andmarketingconstraintshavebeenimportantfactorsinkeepingtheinflowofFDIforagriculturalmanufacturingrelativelysmallevenmorethandirectinvestmentincropandlivestockproductionhas.AccumulatedFDIinflowsforagriculturallyrelatedmanufacturing,overthe1987-96decadewere$6.0billionrepresentingonlyafractionofaggregateFDI.
Investmentsinagriculturalinputsinclud-
Table6.3:AgriculturalSubsectorDistributionofContractedFDIInflows(1994-96)
FDIInflow GVAOSubsector $million PercentShare PercentShareCropFarming 1,211.9 33 58Forestry 534.2 15 4Livestock 845.8 23 30Fisheries 906.5 25 8AgriculturalServices 160.2 4 -Total 3,658.6 100 100Source:MinistryofForeignTradeandEconomicCooperation(unpublishedmaterials).
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AmoderncottonspinningmillnearShanghai
ingfertilizer,pesticides(andotheragrochemicals),seeds,andagriculturalmachineryhavesubstantialmodernizingpotentialfortheagriculturesector.AlthoughChinalistsalloftheseinputsinthe"encouraged"category(exceptforseedsofgrain,vegetableoils,andcottonwhicharerestricted),investmentsremainexceedinglysmall-$195million(in1995)andaccountedforonly3.0percentofChina'sagriculturalinputsales.MarketingproblemsplaguecompaniesthattrytodistributetheirproductsinChina'svastgeographicmarket,inpartbecauseofwholesalingrestrictions,vaguerules,andpoorlyenforcedIPRmeasures.
ThedistributionofagriculturalmanufacturingFDIisshowninTable6.4.
Astable6.5indicates,technology-intensiveinvestmentsrepresentonly2.5percentofagriculturalmanufacturingFDI.
FDIandAgriculturalModernization
FDIassistedinmodernizingthepoultryindustrybyimportinggrandparentgeneticstockandbreedingparentgeneticmaterialsdomestically.Theintroductionofsuperiornutritionfeedmillingandmixingparalleledthedevelopmentofthepoultrygenetics.Also,almostalloftheplantbreedingandscreeningresearchby
Table6.4:FinancialIndicatorsofAgriculturallyRelated
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Foreign-FinancedEnterprises,1995(Billionyuan)
Subsector TotalFDI TotalAssets TotalSalesAgriculturalInputs 1.58 5.55 4.64Fertilizer 0.58 1.57 1.28Pesticides 0.38 1.55 1.33VeterinaryMedicines 0.16 0.71 0.61AgriculturalMachinery 0.46 1.72 1.42AgriculturalProcessing 38.71 150.89 128.24FoodProcessing 12.00 54.85 60.58FoodManufacturing 12.18 39.51 28.33Beverage 11.58 44.04 28.50Tobacco 0.20 1.20 0.56FiberProcessing 0.80 2.65 1.61LeatherProcessing 1.47 7.91 7.76TimberProcessing 0.63 1.42 0.90Total 40.29 156.44 132.88Note:ThesedatamaynotcaptureallagriculturalmanufacturingFDIassomeagrochemicalandagriculturalequipmentmaybemanufacturedbyenterprisesthatareprimarilyinvolvedinproducingothermechanicalequipmentandnonagriculturalchemicals.Source:OfficeoftheThirdNationalIndustrialCensus,DataoftheThirdNationalIndustrialCensusofthePeople'sRepublicofChina:State-Owned,Foreign-FundedandTownshipandVillageEnterprises,ZhongguoTongjiChubanshe,Beijing,1997.
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Table6.5:DistributionofForeign-FinancedEnterprisesinAgriculturallyRelatedManufacturing,byFactorIntensity,1995(Percent)
FDI TotalAssets SalesValueLabor-Intensive/a 66.9 67.7 74.6Capital-Intensive/b 30.5 29.8 22.8Technology-Intensive/c 2.5 2.5 2.5Total 100.0 100.0 100.0/aIncludesfoodprocessing,foodmanufacturing,naturalfiberprocessing,leatherandfeatherprocessing,andtimberprocessing./bIncludesbeveragemanufacturing,tobaccoprocessingandfertilizermanufacturing./cIncludespesticide,veterinarypharmaceuticals,andagriculturalmachinery.Source:OfficeoftheThirdNationalIndustrialCensus,"DataoftheThirdNationalIndustrialCensusofthePeople'sRepublicofChina;State-Owned,Foreign-FundedandTownshipandVillageEnterprises,"ZhongguoTongjiChubanshe,Beijing1997.
foreign-financedenterpriseshasbeenonhybrids(corn,sunflower,sorghum,andrice)becausehybridvarietiesaredifficulttocopy.Aslongastheconfidentialityofthehybridparentsismaintained,theIPRsaretechnicallyprotected.
Intheagrochemicalsectorthepesticidesthatallegedlyhavenotbeenreverseengineeredarethosewhoseactiveingredientsarecomplexmoleculeswhicharedifficulttocopy.Others,despiteofficialagreements,areallegedlycopiedandsoldwithoutanycompensationtotheinventors.AlthoughthelegalenvironmentprovidesadequateprotectionforIPR,enforcementremainsweak.ThecurrenteffortbyMonsantotomarketitsBtvarietyofcottonseedwillbecloselywatchediftheseedsbecomewidelyavailablefromnon-Monsantosources,otherhigh-technologyandbiotechnologyfirmswillbereluctanttoinvestinChina.
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Loans
Nationally,loanswerethemostimportantelementofforeigncapitalflowsuntilreplacedbyFDIin1992.Theseloansarelargelysourcedfrombilateral(50percent)andmultilateral(30percent)agencies,withonly20percentcomingfromcommercialsourcesprimarilytofinanceexports.However,fortheagriculturalsector,overseasdevelopmentassistance(ODA),loansandgrants,remainamoreimportantsourceofforeigncapitalthanFDI.AgriculturalODAisoverwhelminglysourcedfrommultilateralagencies(80percent),withabout20percentprovidedbybilateralsandaverysmallamountfromNGOs.ArecentevaluationofODAdeterminedthat$8.28billionwasgrantedorloanedtotherural-agriculturalsectorduringtheperiod199497(UNDP1998);morethandoublethe$3.66billionFDIinflow(1994-96).Loans,primarilyfromtheWorldBankandsecondarilyfromtheAsianDevelopmentBank,compriseabout90percentoftheassistancewiththebalanceprovidedintheformofgrantsprimarilyfromUNDPandWFP.
NearlyallODAistiedtoprojects,someofwhicharenationalinscopeandcannotbeallocatedtoanyparticularregion.However,theEastern,Central,andWesternregionsequallyshareODAgrantsfornonnationalprojects;ODAloanshavebeenprimarilytotheCentralregion(50percent),followedbytheWesternregion(30percent)andtheEasternregion(20percent).ThesedistributionpatternscontrastsharplywithFDIinflowswhichhavebeeninvestedoverwhelminglyintheEasternRegion(85percent).TheimmediateimpactofODAisincreasedbudgetarysupportforruralinfrastructureandserviceinvestments(includingon-farminvestments),whichwillleadtoincreasedruralincomes.Totheextentthatmanyprojectshave
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Table6.6:ODAAllocationsbySubsector(Milliondollars)Subsector Amount PercentIntegratedAgriculturalDevelopment 2,773 33.5WaterResources 1,608 19.5SupportServices 1,196 14.5AgriculturalInputs 1,053 12.7Forestry 802 9.7Livestock 265 3.2Crops 127 1.5Fisheries 86 1.0Other 366 4.4Total 8,276 100.0Source:UNDP.ChinaAgricultureandFoodSecurityResourceBook:ACompendiumofDonorActivities(1994-1997),Beijing,1998.
researchandtechnologytransfercomponents(eitherdomesticextensionorinternationaltransfer),longertermproductivityandincomeimpactswillbegenerated.Integratedagriculturaldevelopmentprojectswerethelargestrecipientofdonorassistance,followedbywaterresourcemanagementanddevelopmentandsupportservices(Table6.6).
TheWorldBankprovidedabout70percentofODAresourcesoverthe1994-97period,butwiththephasingoutofsoftloansbetween1997and1999WorldBankassistancetoChinadiminishedbyabout45percent.Thus,itisuncertainwhetherODAwillcontinuetoproviderobustsupport;however,ODAcomprisesarelativelysmallportionofruralinvestmentsupportanditsdeclineisunlikelytoseriouslyimpactonruralgrowth.
ConclusionsandRecommendations
Giventhefiscalconstraintsfacingagriculturalresearchandtechnologytransfer,FDIinagriculturalinputscouldbecomemuch
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moreimportantformodernizingChina'sagriculture.AlthoughFDItaxpolicyisfavorabletoagriculture,ithasbeenaninsufficientincentivetoattractsignificantinvestmentinagriculturalinputs.
IfChina'sfarmersaretohavereadyaccesstothelatestandmostmodernproductiontechnology,either(a)FDImustbeattractedintotheinputindustry,(b)agriculturaltechnologyimportsmustbeunrestricted,or(c)domesticresearchonmodernagriculturaltechnologymustbeintensified.
Thefollowingpolicyinitiativeswouldimprovetheinvestmentenvironmentandprovideincentivesforrenewedinvestmentinagriculturalinputmanufacturingandcontributetoagriculturalmodernization:
·Designincentivestostimulateinvestmentinthoseactivitiesofpriorityinterest.IncludeagriculturalmodernizationasanFDIobjectiveandactivelysolicitmultinationalinvestmentinmoderncropandlivestockgeneticsandbiotechnology,pesticidesandotheragrochemicals,andsophisticatedfarmmachinery.
·Attractinvestmentintothecountry'schemicalfertilizerindustry.Thetechnologyofmodernhigh-analysisfertilizermanufactureiswellknown,butcapitalrequirementsarehigh.TheexistingFDIstockinfertilizermanufactureofabout$70millionistrivialrelativetothe$350to$600millionrequiredforasinglemodernscale-efficientureaordiammoniumphosphateplant(500,000tonsofelementalnutrients).IncreasedFDIinnitrogenandphosphateplantswouldintroduceknowntechnologyandneededmanagementskills
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andreducefertilizerimportrequirements.Ifinternationalfirmswereinvolvedinrawmaterial(phosphaterock)mining,fertilizermanufactureandblending,andwerepermittedtomarketdirectlytofarmers,theyalsowouldbepreparedtoinvestintechnologytransferservicecenters
6(e.g.,soiltestinglaboratories).
·HavestrictandpublicizedenforcementofIPRprotectionforagrochemicals,veterinarypharmaceuticals,plantandanimalgeneticsandbiotechnology,andotheragriculturaltechnologiestoreassureinvestorsthattheftofproprietarytechnologywouldnotbetolerated.Thelegalframeworkisinplacebutitsenforcementremainsuncertain.
·Eliminatethe'jointventureswithmajorityChineseownership"restrictiononFDIforgrain,oilseedandcottonseeddevelopment.Thisrestrictionhashinderedinvestmentandtechnologytransferintotheseactivities,anddisallowedChinesefarmersfromenjoyingthemostmodern,internationallydevelopedseedvarieties.
·Liberalizedomesticmarketingconstraints.ThecurrentrequirementthatChinesepartnersmusthaveamajorityshareindomesticmarketingenterprisesmakestransnationalfirmsreluctanttomanufacturehigh-technologyproducts,astheyareunabletocontroltheirdistribution.Firmsthatmanufactureagriculturalinputsneedtheopportunitytomarkettheirproductsdirectlytofarmers.Also,marketcompetitionwouldimprovedistributionefficiency.
·ImprovethetransparencyoftheFDIregime.Taxation,theapplicationofimporttariffs,andforeignexchangerulesareadequatelydefined.However,applicationandapprovalproceduresarecomplexrequiringseparatenegotiationswithofficialsineach
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provinceinwhichinvestmentandoperationisproposed.ThereisalsoaproblemofChina'schangingtherulesafterinvestmentshavebeenmadewhilethismaybenecessaryforequityorotherreasons,aprovisionfor"grandfathering"theforeignenterprisesoveranadjustmentperiodisneeded.
1.ThesetradebalancedataarebasedonChina'sCustomsStatistics,andareonacalendaryearbasis.TheydonotaccountforundocumentedtradebetweenHongKongandChina.Thedatamustbeinterpretedcarefullybecauseofalternativedefinitionsofagriculturaltrade,whichmayormaynotincludecertainseafoodandlumberproducts.ThispaperfollowstheUSDAclassificationsystembutincludesaquaticproductsasagricultural.TheFoodandAgriculturalOrganizationoftheUnitedNations(FAO)includesmorecommoditiesintheirdefinitionofagriculturaltradeandthustheFAO'svalueofagriculturalexportsandimportsexceedsthatreportedbytheUSDA.
2.Incomputingtheaveragebindingratesfor2004,the1994-96importvalueswereusedasweights.
3.Islam,Nurul(ed.),PopulationandFoodintheEarlyTwenty-FirstCentury:MeetingFutureFoodDemandofanIncreasingPopulation.InternationalFoodPolicyResearchInstitute,Washington,DC,1995.
4.Asdifferentexchangeratesappliedtocertaintradedcommoditiesduringtheearly1990s,computinganaccurate"average"exchangerateisdifficultandcouldintroduceadistortioninthesedataforinternationalcomparisons.
5.In1994,aninvestigationbytheStateAdministrationforImportandExportInspectionrevealedthattheactualvalueofequipmentin5,500FDIProjectswas19percentbelowcontractualcommitments.UNCTAD,DivisionofTransnationalCorporationsandInvestment;WorldInvestmentReport1995.TransnationalCorporationsand
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Competitiveness,UnitedNations,Geneva,1995.
6.Fromdiscussionswithplanningandinternationalsalesstaffoftransnationalfertilizercorporations.
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PARTIIIMANAGINGRURALDEVELOPMENT
7CultivatedLand
Introduction
Landownershiporthepossessionofkeyland-userightsprovidesruralhouseholdsseveralbenefits.Long-termtenuresecurity,andfreedomfromthearbitrarylossoftheserightswithoutcompensation,iscriticaltoprovidingincentivesforlong-terminvestmentandlandmaintenance.Transferorrentalrightsplayasimilarroleandcanbeinstrumentalinpromotingefficientlandallocationacrosshouseholds.Byprovidingsmallfarmerswithaformofcollateral,secureandwell-definedlandrightsalsocanhelpthedevelopmentofruralcreditmarkets.Landalsoservesasanimportantsourceoffoodsecurityandsocialinsuranceandcanhelpabsorbfamilymembersunabletoworkoff-farm,orwhoseoff-farmjobshavebeenterminated.
RuralreformsandtheintroductionoftheHouseholdResponsibilitySystem(HRS)intheearly1980sradicallyalteredtheorganizationofagriculturalproductionandtheincentivesfacingruralhouseholds.Withtheextensionofland-userightsandresidualincomerightstohouseholds,agricultureproductionshiftedfromacollectivetoafamily-basedfarmingsystem,butlandwasnotprivatized.Ownership
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remains"collective,"andlocalgovernmentseithercontrolorinfluencehouseholdlanduseandlanddecisions.
Theinitialruralreformstriggeredanunprecedentedaccelerationofagriculturalgrowth
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inChina.Empiricalstudies(McMillanetal.1989;Lin1992;HuangandRozelle1996)attributeapproximatelyhalfofthisincreasetotheincentiveeffectsassociatedwithbetterresidualincomerights.Followingreducedgrowthafter1984,attentionhasincreasinglyfocusedonthelandmanagementsystem,thedimensionofthefarmeconomythathasbeenprobablyleastalteredsincetheinitialreforms.Poorincentivesrelatedtotenureinsecurity,forexample,arethoughttohavediscouragedinvestmentinagriculture,slowingproductivityandeconomicgrowth.However,otherfactorsalsonegativelyaffectagriculturalproductivity.
Theconsequencesofchanginginstitutionalarrangementsgoverningcultivatedlandusearepotentiallyenormous.Thedebateonlandpolicysuffersfromanumberofweaknesses,principallythelackofanenumerationofbasicfactsaboutdomesticlandtenureastheyhaveevolvedoverrecentyears.Empiricalworkonthedeterminantsoflandrightsandtheireffectonhouseholdbehaviorandthefarmsectorisminimal,thusfewdataexisttosupportthedevelopmentoflandpolicies.
IssuesofOwnership
Theruralreformsvestedownershiprightswiththe"collective,"whichisusuallytakentomeanthevillage,althoughambiguityoverownershipissurfacinginanincreasingnumberofareas.Insomevillagesthevillagegroup(theoldproductionteam)isrecognizeddefactoastheowneroftheland.Inothervillages,however,ownershipiswiththevillage(theoldproductionbrigade)andinasmallminorityofcases,ownershipreportedlyresideswiththetownship.Ownershipdisputeshavedevelopedbetweenvillagegroupsandvillages,particularlywherelandistobeconvertedtononagriculturaluseswithahighcommercialvalue.Nevertheless,thecollective"owns"thelandrightsandtheinternaldebatefocusesonhowtoconstructanewsetof
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rightsoncollectiveland.Legalprivatization(asopposedtodefactoprivatizationthroughextendedtenure,rental,andinheritancerights)isnotapolicyissue.Themajorityoffarmersreportedlydonotsupportit,anditisnotonthegovernment'spolicyagendaofanygroup.Moreover,Chinalackstheancillaryinstitutions(creditmarkets,landregistration,andlegalsystem)thatcouldmakelandprivatizationsuccessful.
Management,FormsofLandTenure,andPropertyRights
Fivemajorformsoflandtenurearesanctionedbythenationalgovernment.Thesetenureformsandtheirshareofhouseholdtenuredareasare:(a)responsibilityland79.4percent,(b)rationland8.3percent,(c)contractland5.5percent,(d)privateplots5.7percent,and(e)reclaimedland1.1percent.Responsibilityland,comprisingmorethanthree-quartersofthecultivatedland,typicallyhasacommoditydeliveryquotaassignedandfacesthepossibilityofreallocationtoothervillagehouseholds.Thesetenureforms,inturn,arepackagedintoseveraltypesoflandtenuresystems,includingthetwo-fieldsystem(combinedresponsibilityandrationland),andthree-fieldsystem(addscontractland).
Althoughthesetenuretypesdifferintermsofhouseholdrightsandobligations,theyprovidealessthansatisfactorywayofdifferentiatinglandtenuresystems.Theresidualincomeandnonresidualrightsthatfarmershaveonresponsibilitylandmaydifferinvillageswithinthesameregion.Therefore,thefollowingdiscussiondisaggregatesthetenureformsintotheircomponentrights,includingsecurityoftenure,rentalortransferrights,freedomofcropselection,andconversiontoalternativeagriculturaluses.
Inmostvillages,land-userightsarelost(orgained)throughvillage-widereallocations(landtransfersamongfarmhouseholdsinitiatedbythevillageleadership).Tenuresecurity,thus,isinverselyrelatedtothefrequencyofreallocations.Surveydatafor215randomlyselected
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villagesineightprovincesshowthattheaveragenumberofreallocationspervillagesincetheimplementationofHRSintheearly1980sis1.7(Brandt1998).In60ofthesamplevillages,however,landhadnotbeenreallocated
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Stockingratesonlowrainfallgrasslandsmustbemanagedcarefullytoavoiddegradation.
sinceHRS.Themagnitudeofreallocationsalsodiffersfromcommunitytocommunitybutonaverageentailsabout50percentofavillage'scultivatedlandandaffectsabout65percentofhouseholds.Fortheentiresample,slightlymorethanhalfofallcultivatedlandhasbeenreallocatedatleastonceduringthereformperiod.
Nearly70percentofsurveyedvillagesreportthathouseholdsarefreetotransfertheiruserightstootherhouseholds.Intheremaining30percent,constraintsontransfersmostoftentaketheformofrestrictionsonrentingtononvillagersandtheneedtoobtainpriorauthorizationfromvillageleaders.Thetransferofland-userightsamonghouseholdsistypicallyshortterm,andentailsthepaymentofafeeandtheassumptionoftaxandquotaliabilityinreturnforuseoftheland.Despitethehighpercentageofvillagesreportingunconstrainedtransferrights,thepercentageoflandrentedinChinaislow.In1995,morethanthree-quartersofthesurveyedvillagesreportedsomerental,buttherentalmarketisthin,representingabout3percentofthelandarea;mosttransactionsarebetweenrelatives.Thus,mostinterhouseholdtransfersoccuradministrativelyratherthanthroughlandrentalmarkets.
Inthree-fourthsofvillages,householdsarereportedlyfreetodecidecropmix.Thisstatisticshouldbeinterpretedcarefully,however,asconstraintsoncropchoiceneednotbeexplicit.Quotasandlimited
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freedomtoconvertquotasintocashalsomayaffectcropchoice.InLiaoning,forexample,grainquotasaverageabout25percentofgrossoutput,andtypicallycannotbefulfilledincash.CottonquotasinpartsofHebeiandShandongappeartohavesimilareffects.Householdautonomytoconvertcultivatedlandtoalternativeagricultureuses(e.g.,constructingagreenhouseorfishpond,convertingdrylandtopaddy)alsoisrestricted.Morethanhalfofallvillagesreportsuchrestrictions.
Althoughbroadlandpolicyisdeterminedbythecentralgovernment,thedifferencesinpropertyrightsacrosscounties,townships,andvillagesindicatethatthereallocusofland-usedecisionmakingisthevillage(Li1998).Infact,China'sOrganizationLawoftheVillageCommitteevestsvillageleadersandgovernmentwithlegalauthorityoverlandrights.
1Thetransferofdecision-makingpowerfromthecentraltolocalandvillageauthoritiesissoextensivethatChinaisarguablynowoneofAsia'smostdecentralizedcountries(Liu,Yao,andCarter1998).
LandReallocation
Empiricalliteraturehasidentifiedanumberoffactorsthatappeartoaffectvillagereallocationpolicy.WiththeintroductionoftheHRS,landwastypicallyallocatedtohouseholdsinafairlyegalitarianwayonthebasisoffamilysize,demographiccomposition,andlaborsupply(Putterman1993).Landreallocationshelpmaintainequalaccesstolandashousehold-leveldemographicschange.Asnewhouseholdsareformed,anddependinguponnonagriculturalemploymentopportunities,householdincomedisparitiesarecreatedthatarecontrarytothevillage'soriginalegalitariandistributionofland.Thesedisparitiescreatepressuretoredistributeuserightstomaintainminimumconsumptionlevels.Also,landreallocationshelpeliminateinefficiencycausedbydemographicandlaborsupply
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changesandpoorlyfunctioninglaborandlandrentalmarkets(Turner,Brandt,andRozelle1998).
Leadersinsomeaffluentsuburbanvillagesmaybeusingtheirpositionstoextractrentsthroughperiodiclandreadjustmentsandlandsalestononagricultural,nonvillageinterests(Johnson1995).Inotherlocations,directrent
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seekingfromlandislesscommon,asnonvillagedemandisminimalandonlyasmallproportionoffarmersactuallypaycashforuserights.Morecommonly,villageleadersusetheircontroloverlandtoensurestateinterestsareprotectedandstatepolicies(i.e.,taxesandquotafulfillment)areimplemented.Thiscanbeachievedbythreateninglandexpropriationfromhouseholdsthatdonotmeetpolicyobligationsandbyrewardingfarmerswhodowithadditionalland.(Rozelle1994;LiandRozelle1997).Alternatively,landmaybereallocatedfromfarmerhouseholdswithhighoff-farmearningswhofindagriculturerelativelyunprofitable(Turner,Brandt,andRozelle1998).Theseactionsalsoareself-promotingifpolicyobligationsaremet,thevillageleadersmaybepromoted,gainstatuswithinthecadrecommunity,orreceiveotherbenefits.
Tenuresecurity,andotherpropertyrights,aretheoutcomeofacomplicatedinteractionamongtheinterestsofthestate,villagers,andvillageleadersinteractionsthatneedtobebetterunderstoodbeforeconclusionscanbederived.Theinfrequencyoflandreallocation(averagingeverysixyearsinvillageswhichhavereallocatedland)anddifferencesintheamountoflandinvolvedsuggeststhattransactioncostsareimportantinexplainingreallocationbehavior.Thesecostsincludethedirectcostofconductingthereallocation,andtheindirectcostsofagriculturaldisruptionandthepotentialimpactoninvestmentbehavior(i.e.,tenureinsecuritycosts).
ImpactofChina'sLandManagementSystem
Empiricalworkonproperty-rightformationanditseffectsisquitelimitedandisinadequateforpolicyformulation.Thatundertakenhasfocusedonthreekeydimensionsoftheimpactofvillagelandpolicy:(a)landallocationdecisionrules,(b)impactsonstaticefficiency,and(c)impactsondynamicefficiency.Unfortunately,noavailableworkrigorouslyexamineshowlandrightsaffectincomedistribution,
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povertyalleviation,orprovisionofsocialinsurancethreeoftheimportantaspectsusedtojustifythecurrentsystem.
LandAllocationandEquity
Analysesofhousehold-leveldatasupporttheviewthatlandinmanyvillagesoriginallywasallocatedonthebasisoffamilysize,possiblyadjustedfordemographiccomposition(Burgess1998).Universalandegalitarianaccesstolandincreasedcalorieconsumptioninaneconomycharacterizedbyuncertainfoodmarketswithhightransactioncosts.However,morerecentreallocationsappeartobefinetuningratiosoflandtolabortoreflecthouseholdparticipationinoff-farmlabormarkets.Inmanyvillages,householdswithfamilymembersworkingoff-farmreceivelesslandpercapita.Inafewvillageswithextremelaborshortages,leadersareconsolidatinglandintolargerfarmsthat,inturn,areoftenmajorbeneficiariesofsubsidiesforexpendituresoncurrentandcapitalinputs.Iftheselandallocationpatternsaretypicalofvillagesthroughoutthecountry,andifsuchtrendscontinue,theoriginal,purelyequity-based,criteriamaybegivingwaytoanefforttomakeallocationsmoreefficient.
Withconstrainedrentalmarkets,theonlywaysignificanthouseholdlandreallocationcanoccurisbyadministrativedecree,whichcanbeviewedasamarketsubstitute.However,highinformationandimplementationcostsmake"fine-tuning"reallocationslessefficientthanwell-functioningrentalorsalesmarkets.An
Tocontrolerosionandconservelimitedrainfall
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ontheLoessPlateau,thelandisterracedbeforeplantingeitherannualortreecrops.
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analysisofhouseholddatafor1994forvillagesinHebeiandLiaoningfoundthatdespiteeffortstoshiftlandamonghouseholds,landdistributionacrosshouseholdsisstillinefficient(BenjaminandBrandt1998).Betteraccesstooff-farmopportunitiesandreallocationsthatredistributelandfromthelandrichtothelandpoorattenuatebutdoesnoteliminatetheselosses.
Theimpactoftenureinsecurityoninvestmentbehaviorisbehindrecentcallstoextendtenureto30years,butestimatesofthesedynamicincentiveeffectsarelimited.ArecentanalysisusinghouseholddatafromHebeifoundthathouseholdsapplymorefertilizerandlabortotheirprivateplotsthataremoresecureandtoplotstheyhavefarmedforlongerperiods,receivinghigheryields(Guo,Rozelle,andBrandt1997).However,theimpactofseveralotherimportantfactors(e.g.,sizeofplot,landqualitydistancefromplottohomestead)werenoteconometricallydifferentiatedandyieldimpactswereonlyminimal.AnotheranalysisofZhejianghouseholdsexaminesotherlong-terminvestments,(e.g.,wellsanddrainage),findsasimilareffect,andsuggeststhatareductioninthefrequencyofreallocationbyhalfwouldresultinanoutputincreaseofonly5percent(CarterandYao1998).
Theseresultsmustbeinterpretedcarefully.Thestudiesonlyshowthereturnstoalternativetenurebutdonotcapturethepotentialreturnsofshiftingtoanalternativeproperty-rightsregimeinwhichhouseholdsenjoymoresecuretenureandarelessconstrainedinotherdimensions.Theyare,also,geographicallynarrow,makinggeneralizationofthefindingsdifficult.Becauseofregionaldifferencesinagronomic,climatic,andsocioeconomictraits,opportunitiesforlong-terminvestmentwouldbeexpectedtodiffersignificantlybetweenlocalities.Theanalysesignorevillage-levelinvestmentanditspotentialinteractionwithhouseholdinvestment.
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Landreallocationthathelpsequalizeland-laborratiosbetweenhouseholdsmaygiverisetoaninverserelationshipbetweendynamicandstaticefficiencies.Reallocatinglandmayequateresourceintensitiesandimproveshort-termallocativeefficiency,butitmayunderminesecurityoftenure,therebyreducinginvestmentincentivesandlong-termefficiency.Thisillustratesthedichotomybetweenmarketandadministrativeallocations:rentaltransactionsinawell-functioningmarketwouldnotunderminetenuresecurityorleadtodecreasedinvestment.Thisdichotomyhighlightstheimportanceofunderstandingwhyrental-markettransactionsaresofew.Ifrentalmarketscouldbemadetooperateeffectively,theymightbeabletoreplaceleader-implementedlandreallocationswithouttheadverseincentiveeffects.Potentialreasonswhyrentalmaynotexist,however,include(a)ideologicalormoralrestrictionsonlandrental,(b)problemsofcontractenforcement,(c)''useitorloseit"rulesthatdiscouragerental,and(d)villageleaders'discouragingrentalbecauseitmakesquotafulfillmentmorecostly.
ConclusionsandRecommendations
Empiricalstudiessuggestthatimprovedtenuresecuritywouldimprovehouseholdinvestmentsandoutput.However,incrementalproductivityismarginalandthesestudiesdonotincorporatenontenureoptions(e.g.,villageinvestments)andfactors(e.g.,differencesinclimate,geography,andgeneralagroenvironment,andincreasedfreedomincropchoice)thataffectproductivity,output,income,andwelfare.Nevertheless,therecentdecisiontoextendtenureonresponsibilitylandto30yearsisgenerallyperceivedtoimprovefarmerincentivestoinvestinlandimprovements.Althoughthisimprovestenuresecurity,thesystemlikelyhassignificantshort-andlong-termefficiencycosts.Theinabilitytouselandascollateralmaybeslowingthedevelopmentofcreditmarkets,asfarmershavefewothercollateralizableassets.Ifrental-marketbarriersarecreatedbynonsecurityfactors,extendingsecuritymayincreaseinefficiencyin
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landallocationasruralresidentsincreasinglybecomeemployedoff-farmorasotherdemographicchangesoccur.Also,theinabilityofnonagriculturalhouseholdstoleaseouttheirlandcouldloweron-farmin-
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vestmentsandinhibitagriculturalhouseholdaccesstoadditionalland.
China'srecordforrapidruralgrowth,stability,andpovertyalleviationmayormaynotbelinkedtoitsflexiblelandsystem.Thelackofknowledgeonalternativetenurestructuresmakesundertakingrigorousresearchonproductivityandequityimpactsimperativeifinformedpolicyjudgmentsaretobemade.Giventheuncertaintiessurroundinglandtenurechanges,andbeforefurthertenurialreformsareintroduced,testingrentalmarketsandalternativelandtenurearrangementsisimperativeforcarefulmeasurementofimpactsonincome,equityandsocialsecurity,investments,short-andlong-termefficiency.
Withinthisframework,wemakethefollowingrecommendations:
·Asaninterimstrategy,continuetoallowvillagedeterminationofpropertyrightsregimes.Difficultiesanddifferencesthatexistinpropertyrightsacrossvillagessuggestthatthiswouldbethebeststrategyfornow.However,thegovernmentshouldconsiderhowtoimprovevillagegovernancetoeliminateegregiousabusesoflocalpower(suchasillegallandsales)andtoensurethattheallocationofpropertyrightsinlandreflectthewishesofthelocalcommunity.
ThiskindoflocalflexibilitymaybeadvantageousshouldtheadverseeffectsoftheAsianfinancialcrisisandtheongoingrestructuringintheSOEandcollectivesectorsintensifyinthenearterm.Inearliermacroeconomicretrenchments,off-farmemploymentopportunitiesdriedupformanyruralresidentsandmigrants,forcingareturntoagriculture.Asharpdeclineinurbangrowth,combinedwithareductioninlocaloff-farmopportunities,wouldrequirereabsorbingperhapstensofmillionsofunemployedintheruralsector.
·Continuetoexperimentwithrentalmarketsandalternativetenure
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arrangementstodevelopsomeformofmarketableland-useright.Thisshouldalsoincludecontinuingtoassessincome,socialinsurance,andpovertyalleviation,equity,investment,andshort-andlong-termefficiency.Farmers'apparentpreferenceforvillageownershipandperiodiclandadjustmentsemphasizestheneedtoproceedcautiouslywithtenureadjustments.Acharacteristicofruralreformhasbeenexperimentation(oftenconductedintheRuralReformExperimentalZonesundertheauspicesoftheMOA'sResearchCenterforRuralEconomy)successfulexperimentsareadoptedwidelyandthosedeemedunsuccessfularediscarded.Asruralhouseholdsbecomemoredistinctlynonagriculturaloragricultural,thelattermusthaveaccesstoincrementallandtomaintainincomegrowthparity.
·Aslanduserightsbecomesmarketable,conductadditionalmodestexperimentationtodevelopland-userightsthatallowfordevelopmentofcollateralandtohelpdevelopcreditmarkets.
·Ensuresomeformofsocialinsurance.ThesocialsecurityroleofarablelandissoimportantthatChinacanonlyignoreitbyreplacingitwithsomeotherformofsocialinsurance.
1Article4,OrganizationLawoftheVillageCommitteeofthePeople'sRepublicofChina,China'sAgriculturalYearbook(ZhongguoNongyeNianjian)1988,pp.459-460.
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8.WaterResources
Asthesinglemostimportantnaturalresourceconstraint,watermanagementiscrucialtoChina'scontinueddevelopmentinallsectors.Althoughadditionalwaterisneededforagriculture,futurewaterrequirementswillincreasemostinthenonagriculturalsectors,particularlymunicipalandindustrialuses.Withouteithermore-efficientwateruseorthedevelopmentofadditionalsupplies,economicgrowthcouldbeseriouslyimpaired.
WaterScarcityandScarcityAllocation
China'srenewablewaterresourcesconsistof2,711billioncubicmeters(bcm)meanannualriverrunoff(includinginflowsoriginatinginothercountries,butexcludinganaverageoutflowof732bcmtolowerripariancountries)andgroundwaterresourcesestimatedat760bcmthat,generally,arenotadditionaltotherenewablewaterresourcesbecausetheirrechargeisdependentuponsurfacewaterresources.Aswaterbalancestatisticsfor1993(lastyearinwhichwaterbalancestatisticsareavailable)indicateonly518.6bcmofwaterwasused,Chinawouldseemtohavemorethanenoughwatertomeetforeseeablerequirementsifitweredeveloped(Table8.1).However,muchoftherunoffcannotbeeconomicallyexploitedbecauserainfallandrunoffareconcentratedin3or4summermonths.Also,China'swaterresourcesaremaldistributedspatially,similartootherlargecountrieswithmultipleagroclimaticzones.Thelocational
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imbalanceresultsinsouthernChina(thebasinssouthof,andincluding,theYangtzeriverbasin)receivingabout80percentofthenationalrunoff,butcontainonly36percentofthecultivatedland.
Althoughirrigationcomposedtwo-thirdsofthewaterconsumed(1993),agricultureisaresidualwateruser,followingallocationsformunicipal,industrial,andruralhouseholduses.However,manymunicipalallocationsaresupplyconstrainedandfallseriouslyshortofurbanrequirementsanddemand.The343.4bcmusedforirrigationrepresentsabout80percent
Table8.1:WaterBalanceandEstimatedWaterRequirements,1993,2000,and2010(Billioncubicmeters)
IndustryUrban RuralHouseholds
Irrigation OtherAgriculture
Total
1993Requirements 83.8 24.1 24.4 424.3 36.5 593.1Supply/Use 88.9 24.1 23.1 343.4 39.2 518.6Balance +5.1 0.0 -1.3 -81.0 +2.7 -74.5Requirements2000 126.8 50.4 32.4 433.5 32.4 688.42010 206.5 79.7 43.1 448.3 56.1 833.7Note:1993precipitationandrunoffwasassumedtobeat75percentprobabilitylevel.Source:NanjingInstituteofHydrologyandWaterResources,ReportontheMid-andLong-TermPlansforWaterDemandandSupply,November1996,asreportedinUN-ESCAP,"China:WaterResourcesandTheirUse,"1997.
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ofthewaterrequirementforoptimumcropyields.Ruralhouseholdwateruseincludesconsumptionbybothruralresidentsanddomesticlivestock."Other"agricultureuseisprimarilyforaquaculture,butalsoincludesforestryandpastures.Portionsofurbanandindustrialwastewaterarereused,thussectoralusesarenottotallyadditive.
Toinhibittheexistingnegativewaterbalancefromworsening,watermustbeappropriatelypricedtoencouragegreaterefficiencyinwateruse(forallapplications,includingindustryandirrigation),waterdeliverysystemsmustbeefficientlyoperatedandmaintained,andconveyanceandapplicationefficiencyimproved.However,improvingefficienciesoflocalschemeswillresultinonlymodestwatersavingsfortheentirewaterbasin.Thisisbecausemostofthelossesfrominefficientirrigationschemesreturntothehydrologic(surfaceorgroundwater)systemandareavailabletodownstreamusers.Theactualwatersavings(availableforincrementaluse)withinawaterbasin,isonlythereducedamountofnonbeneficialevapotranspirationandnonbeneficialoutflowtotheocean.Actualwatersavingscanbegeneratedonlythroughagronomicandirrigationmanagementmeasuresthatimprovewateruseefficiencyandreducesnonbeneficialevapotranspiration;forexample,improvedcropgenetics,plasticandorganicmulching,andirrigationscheduling.Giventhelimitedabilitytoimprovethewaterbalancethroughimprovementsinoverallirrigationsystemefficiency,developingadditionalwatersuppliesisimportant;butundevelopedsuppliesalsoarelimited.TheMinistryofWaterResources(MWR)hasproposedseveralhundredwaterdevelopmentprojects,includingwater-savingirrigationtechnologies,improvedirrigationefficiencyprojects,andnewsupplydevelopmenttoincreasewatersupplies.Toassistinmaintainingagriculturalandruralincomegrowth,andtoaddressfoodsecurityneeds,theMWRproposestoexpandtheeffectiveirrigatedareato53.3millionhectaresby2000and58.0millionhectaresby2010.
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Theterm"irrigatedarea"mostquotedinstatisticalreferencesappliestoeffectiveirrigatedarea,whichencompassesthecroplandthatisleveledandisbundedandconnectedtoasourceofirrigation.However,thisareamaynotnecessarilyreceiveirrigationwater.Effectiveirrigatedareawasestimatedat50.4millionhectaresin1996.Actualirrigatedareaistheareacultivatedatleastonceduringtheyearandreceivesirrigationwateralthoughnotnecessarilyoptimumsupplies;andstableirrigatedareaistheareasuppliedwithsufficientwatertomeetaverage-yearcroprequirements.
ChinahasnineWaterRegions,whichconformtothemajorwaterbasins.
1Also,thecountryisdividedintothreeirrigationzones,broadlybasedonprecipitationpatternsandthe"irrigationindex"(thepercentageofcropwaterrequirementsthatmustbemetfromirrigation)andthatcutacrossthewaterregions.Theirrigationzonesaredefinedasfollows:
·Perennialirrigationzone.Meanannualprecipitationis400mm(15.7inches)orlessandtheseasonaldistributionisgenerallyinsufficienttomeetcropneeds.
·Unstableirrigationzone.Meanannualprecipitationis400to1,000mm(15.7to39.3inches)andincludesthemajorportionofChina'sagriculturalland.Rainfedagricultureispossibleandwidespread,butoptimalyieldscanbeobtainedonlywithensuredirrigationanddrainage.
·Riceirrigationzone.ThiszonecomprisessouthernandsoutheasternChina,whererainfallismorethan1,000mmandtheclimateishighlyfavorableforagriculture.Twoorthreecropsperyeararecommon.
TheirrigationzonesandwaterregionsareshowninFigure8.1.
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FinanceandManagement
Previousworkhasdemonstratedthatirrigationinvestmentsmakeimportantcontributionstoagricultural(crop)growth(WorldBank1997;HuangandRozelle1997).Waterconveyanceisoneofthefewrural-sectorareaswhererealinvestmentshaveincreasedoverthepastdecade;growingatanannualrateof17per-
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Figure8.1WaterRegionsandIrrigationZones
centbetween1987and1996andexceeding¥18trillionin1997.Budgetaryresourcesareallocatedprimarilyfornewirrigationprojectsastheproportionofinvestmentsforrehabilitationandexpansionofexistingschemeshasdeclined(Figure8.2).Waterchargestoandcollectionsbyfarmers,whileminimallyadequateforroutineoperationandmaintenance,areinsufficienttocoverperiodicrepairsandrehabilitationofsystemstructures.(Yetfarmerobligations,includingcorvéelaborandwaterfees,aresubstantial.)
TheMWRisresponsibleformanagingChina'swaterresources,butalargepartofMWR'sresponsibilityisdelegatedtosevenmajorriver-valleycommissionscoveringtheYangtze,Yellow,Huaihe,Haihe,Pearl,Songhua,andLiaoheriversandTaihuLake.Regional-levelresponsibilityrestswiththeProvincialWaterResourceBureau,withofficesineachprefectureandcounty,andchargedwithmanagementofthemaincanals,systemimprovementprograms,andsupervisionoftheTownshipWaterManagementStations(WMSs)thelatterareresponsibleformaintenanceandmanagementoflowersystemcanalsandgatesand,throughvillagestaff,forschedulingwaterandcollectingwatercharges.Atthevillagelevel,WaterManagementCommittees(WMCs)incollaborationwiththeTownshipWMSandAgriculturalServicesStationareresponsibleforlocaldistribution.The
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WMCisalsoresponsiblefororganizingfarmerlaborformaintenanceandsystemexpansionandforcollectingwatercharges.Groundwaterforirrigationuseislargelymanagedbylocalgovernments.
Thegovernment'sstrategyistotransformirrigationmanagementagenciesintoself-financing,independentlegalentitiesasystemincreasinglybeingadoptedinothercountries.Oneofseveralexperimentalinstitutions,theSelf-FinancingIrrigationandDrainageDistrict,hasbeensuccessfullypilotedforseveralyearsandit,orsimilarinstitutions,willincreasinglyberesponsibleforholisticwatermanagement.ThestructurecomprisesaWaterSupplyCorporationandWaterUserAssociations(WUAs).TheWaterSupplyCorporationisformanagement,organization,andmaintenanceofthemainirrigationsystemandsupplyofbulkwater.The
Figure8.2ProportionofInvestmentsinWater
Conservancy,byType
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WUAsareestablishedbyfarmergroupsforconstruction,management,andoperationandmaintenanceoflateralcanalsandon-farmsystemsandwouldpurchasethemeasuredvolumeofwaterdelivered(i.e.,attheheadofeachlateral).InthepilotstageWUAshavebeenhighlysatisfactoryinimprovingwatermanagementefficiency(reducingwaterusewhileincreasingproduction),rationalizingfieldchannels,andreshapingplotstofacilitatemechanicalcultivation.Giventhefinancialconstraintsandtheaccumulateddeferredmaintenance,thetransferofsystemresponsibilityandmanagementtoself-financingenterprisesshouldproceedasrapidlyasexpertisecanbedeveloped.
ConstraintsandtheirAlleviation
Fewoptionsareavailabletoalleviatebasin-widewatershortages;developmentofnewwatersupplies,whereundevelopedsuppliesexist,isanobviousoption.Numerousprojectsareproposedtoincreasewatersuppliesfromsurfacesources.ThemultipurposeXiaolangdiandWanjaizhaiprojectsintheYellowriverbasinwillcollectivelycontributeonlyabout4bcmtotheannualwatersupplywhencompleted.Asthecostofthesetwoprojects(excludingresettlement)isabout$3.6billion(whichincludeshydropowerandotherbenefits),themagnitudeofthewatersupplycapacityproblembecomesclear.Certainly,theThreeGorgesprojectwillincreaseavailablesuppliesandstabilizewaterresourcesforalargearea.Also,eitherrouteoftheSouth-Northtransferschemewouldbringabout14bcmperyearofabundantYangtzewatertothedriernorth(Liu1996).However,thevolumeinvolvedwouldbelessthanthecurrentlevelofgroundwateroverexploitationinthenorthandsuppliesfromsuchtransferswouldbeavailableonlyaboutadecadeafterinitiatingtheproject.
Beyonddevelopingnewsupplies,onlyinvestmentswhichreduce
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nonbeneficialevapotranspirationandnonbeneficialoutflowstotheocean,orthatimprovecropuseefficiencyactuallycontributetomakingadditionalwateravailablesystem-wide.Investmentswhichreducewaterpercolationsaveswaterforindividualschemes,butimprovesbasinefficiencyonlymarginallyaspercolationandrunoffrechargesthegroundwateranddownstreamsurfaceflows.However,someagronomicandmanagementeffortswouldgeneratewatersavingeffects.Theseincludecropgeneticresearchwhichhasthepotentialtosavewaterbycreatingnewdrought-tolerantvarietiesthatproducemoreoutputusinglesswaterinput.ThiswillnecessarilybecomeanincreasingimportantresearchagendaaswaterbecomesincreasinglyscarceinthenorthChinaplainandothermajoragriculturalareas.
LandLeveling
Surfaceirrigationaccountsfor99percentoftheirrigatedareabuttheplotsarestillleveledbytraditionalmethods.Tomakeefficientuseofwater,fieldsmustbelevel;precisionlevelingwillsavewaterasreducedwaterapplicationwillreduceevapotranspirationandyieldperunitofwaterappliedwillincrease.Laserlandlevelingisadecades-oldtechnologybutisrelativelynewtoChina.Internationallythecostoflaserlevelingisabout$300perhectareorY165permu(assumingmaximummovementof300cubicmetersperhectare)andgenerallyproducesyieldgainsof30to50percentandreduceswaterapplicationneedsby10to25percent.Thistechniquemaynotbeapplicabletoallareasbutshouldbeconsideredwhenfieldsizesarelargeenoughtoefficientlyaccommodatelaserequipment.
PlasticFilmMulching
Thistechniqueconsistsofcoveringthesoilwithafilmtoreduceevaporation.Ithasdevelopedrapidlyandisnowappliedtomorethan1.3millionhectares.Remarkablewater-savingandyield-increasingeffectshavebeenachieved,withwaterefficiencyreaching90percent.CottonexperimentsonplasticfilmmulchinginXinjianghasachieved
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watersavingsofmorethan70percent.
Full-CostandVolumetricWaterCharges
TheStateCouncildocument,IndustrialPoliciesonWaterConservancy(1997),addressedtheneedforappropriatewatercharges.Waterchargesforneweconomicprojectsaretobesetsufficientlyhightocoveroperationandmaintenancecosts,paytaxes,repayloans,andyield
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rationalprofits.Waterpricesonexistingschemesaretobeadjustedupwardoverathree-yearperiodtoconformtothesameprinciples.
Irrigation-watermeasurementissteadilyincreasing,butinmostsystemsthemeasurementisundertakenonlyatmajorofftakesandbranches,sofarmerseffectivelypayflatrates.WatermeasurementisonlynecessaryatthelateralcanaloperatedbytheWUA,whichbuysthewaterandensuresabalancedallocationtothemembers.Also,watermeasurementisessentialforcorrectirrigationschedulingtomeetcroprequirementssystem-wideandflattenpeakdemandperiods.
DemandManagement
Croppingpatternsremaindeterminedbyacombinationofclimaticconditions,marketforces,andgovernmentdirection.Thegrainquotasystemcontinuestooperateand,thus,waterchargeswillnotinfluencethegrainareaplanted.
SystemRehabilitationandImprovement
ManyofChina'sirrigationschemeswereconstructedinthe1950s.Severalwereinadequatelydesignedandconstructedandwereofteninadequatelymaintained.Consequently,manyschemesrequirerehabilitationandmodernizationnotonlybecauseoftheseproblems,butbecauseofnaturalaging.A1990surveybyMWRfoundmorethanone-halfofthestructuresandcanalssurveyedhaddeterioratedinvaryingdegreesandabouttwo-thirdsofthedeterioratedinfrastructurewasduetonaturalaging(ChenandJi1995).Investmentsintheseactivitieswouldimproveirrigationschemeefficiencyandperhapsfarmerequity,butmaynotimprovebasin-wideefficiencysignificantly.
CanalLiningandPipelines
Thisisthemostwidelyadoptedwater-savingpractice.Canallining
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alsoimprovesoperations.Antiseepagetechniquesforcanalsincludeliningsofstone,concrete,plasticfilm,asphalt,andasphalt-felt.Theeffectofthesetechniqueshasproducedwatersavingsexceeding50percentwithinanindividualWUA.Muchoftheseepageisreturnflowwithinabasin,thusthesumofindividualschemesavingswouldbeconsiderablygreaterthanactualbasinsavings.Insomenorthernprovinces,canalnetworkshavebeenreplacedwithpipelines,thuspreventingseepageandevaporationfromthedistributionnetworkandpermittingthecultivationoflandpreviouslyusedforcanals.Lowpressurepipelineconveyancesystemshavedevelopedrapidlyinthetubewellirrigationareas.
AdvancedIrrigationTechniques
Thesetechniquesincludesprinkler,trickle,andlowpressuresystems;gatedpipes;andseepageirrigation.Theyhavebeenintroducedandsomeequipmentismanufactureddomestically.Usehasyettobecomewidespread(sprinklerirrigationisestimatedtocoveronly700,000hectares),exceptforsomemedicinalandotherhighvaluecrops.Surge-flowirrigationsystemsprovideswaterinacyclicalmannerandhastheeffectofreducingsurfaceinfiltration.Thissystemismorecomplexthanconventionalgravitysystems,butwouldconservesomeirrigationwater,assmallerwaterapplicationswouldreducenonbeneficialevapotranspiration.
WastewaterReuse
Reusingmunicipalandindustrialwastewaterwillimproveoverallwaterefficiency.Anestimated37.3bcmofmu-
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Liningirrigationcanalsreduceswaterpercolationlosses.
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nicipalwastewaterwasproducedin1995,ofwhich23.3bcmwastreated.Wastewatercontainsconsiderablequantitiesoffertilizernutrientsandthus,iftreated,isparticularlyusefulforirrigation;however,carefulmanagementisrequiredtoavoidsoilandgroundwatercontamination.TreatmentcostsaretypicallyY1.00/cubicmeter,butitsvalueinirrigatinghighvaluecropsontheperimeterofcitiesismuchgreater.
TheImportanceofIrrigationtoAgriculturalProductionandIncomes
In1996about95.5millionhectareswerecultivatedinChina,ofwhichabout50million(52percent)wereirrigated.However,irrigatedareasaccountforfarmorethan52percentofcropproduction.Firstly,croppingintensitiesonirrigatedlandareabout203percent,whereasonrain-fedlandtheyareabout114percent.Thusabout66percentofsownareaisirrigated.Secondly,theproductivityofirrigatedlandismuchhigherthanthatofrain-fedlandinmostofChina.Aboutthree-fourthsofthecroplandlieseitherintheperennialirrigationzoneorintheunstableirrigationzone.Croppingintheseareasisriskywithoutensuredirrigationsupplies.
Availablestatisticsdonotpermitdirectlycomparingrain-fedwithirrigatedcropyields.ControlledexperimentsundertakeninShanxiProvinceandestimatesderivedfromFAO'sCROPWAT
2model(anirrigationschedulingmodel),underconditionsoffullirrigationandnoirrigationindicatedthatinwetterlocations(RegionsV,VI,VII,andVIII),nonricerain-fedyieldsarenearlyidenticaltoirrigatedyieldsexceptforvegetablesandmelons.Indrierregions,yieldsofirrigatedgrainsarealwayshigher.IntheInlandRegion(IX)mostyields,includinggrains,aremorethandoublerain-fedyields.Otherwise,irrigatedyieldsrangefrommarginallytosubstantiallyhigher,particularlyintheYellowRiverBasin(IV),whereirrigated
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winterwheatyieldsareaboutdoublerain-fedyields.
Toestimatetheroleofirrigationinthegenerationofruralincomes,wemappedthe1996ruralpopulationandprovinciallevelpercapitaincomedataintothewaterresourceregionstoderivetotalruralincome.Wethenconvertedtheresultsto"IncomefromAgriculture"and"IncomefromCrops,"firstlybyremovingtheproportionofruralincomesderivedfromnonagriculturalsources,andsecondlybyremovingtheproportionofagriculturalincomederivedfromnoncropactivities15.8and20percent,respectively.(Substantialregionalvariationwouldexistintheproportionofincomederivedoutsideofagricultureandofagriculturalincomederivedfromlivestock.)Theresultindicatedthatabouttwo-thirdsoftotalruralincomesderivefromcroppingactivities.Usinggrossrevenuefromcroppingasanincomeproxy,wedeterminedthat58percentofcroprevenuecamefromirrigatedareasinthenorthernregions(IthroughIV,andIX);and77percentinthesouthernregions(VthroughVIII).
CropYieldandIncomeResponsetoWater
InnorthernChina,rice,vegetables,andmelonsaregivenpriorityinirrigationapplicationdecisions.Othergraincrops,particularlywheatandcorn,areonthemargin;theyreceivesupplementalirrigationwhenavailable.TheShanxiexperimentaldataandestimatesusingFAO-CROPWATmethodologyproducedsimilarresults.WediscusstheCROPWATresultsbelow.
Themodelassumeda20percentreductioninirrigationsuppliestoeachcrop(fromthefullwaterrequirement).Theresultsindicatethatvegetablesandmelonsarethehighestmarginalrevenueproducers;themarginallosswasatleastY4.00percubicmeterinallregions,andnearlyY9.00percubicmeterinRegionII.Vegetablesandmelonswouldbethelastcropsonwhichafarmerwouldreduceirrigationwater.Nextwouldbecotton(northernregions)andthen
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cornororchards.Thefirstcropstocutwouldprobablybewheat,soybeans,tubers,orothergrains.
Ricetypicallycannotbestressed,thuswaterreductionsforricemeansreductionsinricearea.Kutcher(1998)modeledtheimpactsof
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convertingallthericeareainWaterRegionsIthroughIVtowheatorcorn.Thericeareasarerelativelysmall,(exceptRegionI),butgiventheirdisproportionatewaterrequirements,couldmakeasubstantialvolumeofwateravailableforothercropsiftheseareaswerenotproduced.(However,ricemaybegrowninspecificareasbecausewaterloggingorotherfactorsmayprecludeothercropproduction.).Fortheamountofwaterricerequires,uptotwiceasmuchwinterwheatareacouldbesown,about2.5timesasmuchspringwheatarea,andmorethanthreetimesasmuchcornarea.Furthermore,wheatandcornhaveanabsoluteadvantageoverriceingeneratinggrainoutputandrevenuepercubicmeterofirrigationwaterunderP75rainfallconditions.Thetablebelowcomparesthesealternativesonthebasisof1995estimatedyieldsand1997cropprices.Wheatgeneratesupto50percentmoregrainperunitofwaterthandoesrice,andcorn,betweentwoandthreetimesasmuch.Theresultsaresimilarwhencomparingrevenuepercubicmeterofirrigationwater.
Averagerevenue,ofcourse,isnotaverageincome.SeparatesurveydatafromHenanProvince(whichincludespartsofRegionsII,III,andIV)for1996indicatedtheincomeperhectareforwheatY3,658,cornY5,349,andriceY10,040(HenanAgriculturalStatisticsYearbook1996).(Ricepriceswereparticularlyhighin1996.However,exceptforricewedonotknowwhethertheseaveragecropincomesarebasedonadequateorinsufficientwatersupplies.)And,ifneithertheavailabilityofwaternoritscostwereaconcern,farmerswouldclearlyprefertogrowriceratherthanwheatorcorn.However,ifwaterbecomesthe(physicallyorfinancially)constrainingfactorintheseregions,asseemslikely,farmerswillneedtoconsiderreturnstowateraswellaslanduse.Farmerswhoproducericewouldsuffermodestincomelossbyshiftingriceareatowheatandcornunless(a)nonricecropsareseverelystarvedofwatercurrently,or(b)additionalcultivatedlandisavailableforcroppingwiththereleasedwater
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supplies.However,riceaccountsforonlyabout4,5,and6percentofcropincomeinRegionsII,III,andIV,respectively;thus,excludingricefromthecroppingpatternwouldhaveminimalincomeimpactsregionally.Incomeestimatesperhectare(ormu)arequitesensitivetowaterapplication,thusoptimizingcroppingpatternsonavailablelandandwaterneedcarefulstudyineachlocation.
TheImportanceofImprovingIrrigationSystemEfficiencies
Grossconsumptionofirrigationwaterdeclinedmarginallybetween1980and1993,butnationalplanscallforasharpincreaseby2000andafurthermarginalincreaseby2010.Given
Table8.2:AverageGrainOutputandRevenueperCubicMeterofIrrigationWater
Crop/Region I II III IVAverageGrainOutputperCubicMeterofIrrigationWater(kg):WinterWheat n.a. 1.58 1.82 0.98SpringWheat 2.04 1.54 n.a. 1.21Corn 6.07 4.09 4.36 2.22NorthernRice 1.57 1.36 1.33 0.94AverageRevenueperCubicMeterofIrrigationWater(yuan):WinterWheat n.a. 2.33 2.69 1.45SpringWheat 3.02 2.28 n.a. 1.79Corn 6.95 4.68 4.99 2.55NorthernRice 2.04 1.77 1.73 1.22n.a.=notapplicable.
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competingwaterdemandsandthehighinvestmentcosttoincreasewatersupplycapacity,coupledwithashortageoffinancialresources,theproposedincreasesareunlikelytobeachieved.However,improvingthewaterdeliverysystemisimportantandshouldbeundertakenwheneconomicallyefficient,particularlywhenitalsoimprovesintra-schemedistribution.
Thenationalaverageoverallirrigationsystemefficiencywasreportedtobe54percentinthe1980s(ESCAP1997).RecentdiscussionsindicatethatstatisticstillappliesinmuchofNorthernChina.
3However,theESCAPstudy(1997)impliedthatthenationalaverageefficiencyhadimprovedto66percentby1993.Thus,grossirrigationconsumptionof343.4bcmin1993couldhaveresultedinnetconsumptionaslowas187bcm(usingthe1980efficiencies)orashighas230bcm(usingtheimplied1993efficiencies).Thenetconsumptiondifference,43bcm,islargeandrepresentsoneofthemajorsourcesofuncertaintyinwaterresourceinformationandplanning.Dependingonhowmuchirrigationefficienciesareimprovedbefore2000,meetingthegrossirrigationrequirementof433.5bcmcouldresultinnetirrigationsuppliesofbetween236and337.5bcm(ignoringnaturalintrabasinreturnflows).ThemarginalvalueofirrigationisatleastY1/cubicmeter,implyingthattherangeofuncertaintyduetotheseefficienciesismorethanY100billionperyearofagriculturaloutput,andasimilarvalueintermsofruralincomes.
ConclusionsandRecommendations
Althoughwaterresourceplanningcallsformoderatelyincreasingallocatedsuppliesofwatertoirrigationoverthenextdecade,thiswillbeverydifficulttoachieve.Moreprobableisacontinuationofrecent
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trends,withmodestreductionsinirrigationwaterallocationsbecausemostnonfloodseasonsurfacewaterisalreadyconsumed,andgroundwaterisheavilyoverabstracted.Furthermore,siltingofreservoirsandneglectofmaintenanceoftheirrigationsystemimpliesthatlocalsurfacewatersuppliesmayevendecline.
Thehighcostofnewinvestmentsinwater-resourcedevelopment,coupledwithincreasingeconomy-widedemandsforlimitedfiscalresources,willlikelyconstrainrapiddevelopmentofnewwaterresources.Althoughwatercancontinuetobeadministrativelyallocated,itismoreefficientandwillleadtohighergrowth,ifwaterisappropriatelypricedandmarketforcesallocatethewatertouseswithhighereconomicvalue.Astheeconomybecomesmoremarket-oriented,thelong-runsustainabilityofirrigationanddrainagewilldependincreasinglyonself-financingentitiesthatarebasedonhydraulicboundaries(notadministrative),withmaximummanagementresponsibilityandcontrolaccordedtofarmerusers.
Fromamacroeconomicview,thevastlyhighereconomicvaluesofwatergeneratedbytheurbanandindustrialsectorsshouldnotbesacrificedforincreasedagriculturalproduction.TheabilityofChina'sindustrialsectortogeneratetradesurpluseseasilyoffsetsforeseeablereductionsinagriculturaloutputthatmayarisefromirrigationwatershortages.However,three-fourthsofChina'spopulationisrural,anddependonagriculturefortwo-thirdsoftheirincomes.Protectingandincreasingtheseincomesandmaintaininggrowthinagriculturalproductionisanationalconcernonethatdependsinpartonmoreandbetterirrigation.
Rehabilitatingandcompletingsurfaceirrigationanddrainagesystemsincludingtheinstallationofcontrolstructuresandwatermeasuringdevicestoimproveefficiencycanyieldlocalbenefits.Rehabilitationshouldbeundertakenwhereeconomicbenefitsjustifytheinvestment,particularlyifitprovidesamorereliableandequitable
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supplyofirrigationwatertofarmersandincreasesdeliveriestowater-deficientareaswithinthescheme,typicallylocatedinthelowerreachesoftertiaryandquaternarycanals.Investmentsinimprovingandextendingexistingsystemswouldlikelyprovidebetterreturnsthannewconstruction.(Between1989and1995,themarginalcostofirrigationexpansionwasaboutY10,000per
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hectare,(1990terms),representingveryefficientinvestments.However,futureinvestmentswillprovemoreexpensive.)
Ifirrigationwatersuppliesdonotincreaseasplanned,ordecrease,thenegativeimpactonagriculturalproductionandincomescouldbeminimizedbythefollowingactivities:
·Conductacomprehensivestudyofsystem-wideefficiency.Suchastudyissorelyneeded.
·Rehabilitatetheirrigationanddrainagesystemswhereeconomicallyjustified,toincreasetheoveralldeliveryefficiencyandimproveon-farmfacilities.Suchinvestmentswillhaveanincomeimpactbyensuring''tail-end"farmersreceiveaequitableshareofwater,butsystem-widewatersavingswillbemodest.
·UndertakeoneormoreroutesoftheSouth-Northtransferscheme,whichwouldbringplentifulYangtzeriverwatertothewater-starvedregionsII(HaiBasin),III(HuaiBasin)andIV(partoftheYellowBasin)asearlyaspossible.Delayswillincreasethecostintermsoflostindustrialandagriculturaloutput,socialcostsofchronicwatershortages,andenvironmentaldamagefromoveruseofgroundandsurfacewater.
·Introduceimprovedland-levelingtechnology(e.g.,useoflaserguidedequipment).Thistechnologyappearsfinanciallyattractiveandshouldbeexploredasameansofsavingwaterandincreasingyields,particularlyonnewlyreclaimedlands.GivenChina'ssmallcultivatedplots,landlevelingmaynotbepracticalinallareasbutwouldbefeasibleinnewlandreclamation.Full-cost,volumetricallybasedwaterchargeswouldprovideanincentivetosavewaterandmakeprecisionlevelingfinanciallyattractive.
·Expandcollection,treatment,andreuseofmunicipalwastewater,particularlyaroundlargerurbanareas,withsuitablemonitoringand
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controltopreventcontaminationbyhazardouswastes.
·Encouragefarmerstorefinecroppingpatternsinwater-shortareastomorewater-efficientcrops.Insomeareasconsiderablymorewheatandcorncouldbegrownwiththewaterricecurrentlyconsumes,withlittleornoreductioninfarmincomes."Encouragement"wouldbestcomeintheformofappropriatewaterpricingsupportedbyfarmereducation.
·Introduceandenforcearationalsystemofwaterpricingandvolumetricmeasuring.Overthelongterm,volumetricmeasurementwouldconsiderablyimprovewateruseefficiency.Farmerscannotbeexpectedtoconservewateroraltertheircroppingpatternswheneffectivewatercostsareloworunrelatedtotheamountused.Waterchargesthatfullyrecovercostwouldencouragebetterwatermanagementonallcropsandwouldinfluencenongraincroppingpatternsbyincreasingtheproductioncostforcropswithhigherwaterdemand.
·Expandself-financingwaterenterprisestomanagewatersuppliesandoperateandmaintainirrigationsystemsasrapidlyasmanagementexpertisecanbedeveloped.
·Ensureagriculturalresearchandextensionprogramsaccordappropriateprioritytocropwateruseefficiency(droughttolerance).
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Page741.WaterRegions:RegionName ComponentProvinces MajorRiver
Basins
I Northeast Heilongjiang,Jilin,Liaoning,NeiMongol
Heilong,Liaohe,Songhua
II Haihe Hebei,Beijing,Tianjin,Shanxi,Henan,Shandong
Haihe,Luanhe
III Huai/ShandongShandong,Henan.Jiangsu,Anhui HuaiheIV Yellow Qinghai,Gansu,Ningxia,Nei
Mongol,Shaanxi,Shanxi,Henan
Yellow,Weihe,Fenhe
V Yangtze Hubei.Hunan,Anhui,Jiangxi,Jiangsu,Zhejiang,Henan,Guangxi,Sichuan,Shanghai,Guizhou Yangtze
VI South Guangdong,Guangxi,Yunnan PearlVII Southeast Fujian,Zhejiang,Guangdong Qiangtang,
MinjiangVIII Southwest Yunnan,Tibet Yarlung-Zangbo,
Nujiang,Lancang,Yuanjiang
IX Northwest NeiMongol,Qinghai,Xinjiang,Tibet
Tarim,Yilo,Ertix
2.CROPWATisanirrigationschedulingmodeldevelopedbytheFAO,UN.ItisdescribedinFAOIrrigationandDrainagePaperNo.46(Rome:FAO,1992).
3.DiscussionswithriverbasincommissionofficialsattheHai.Huai,andYellowRiverheadquarters,April/May1998.
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9.TechnicalChangeandTechnologyTransfer
Duringthereformperiod,higherpricesandimprovedincentiveshaveincreasedagriculturalinputusageandsubstantiallyraisedagriculturalproductivity.TFP,whichisthebasisofimprovedefficiency,increasedrapidlyduringtheearlyreformyears,buthassincetaperedoff.TFPimprovementis,generally,theresultofadaptingnewandimprovedproductiontechnologies,whichinturnrestsprimarilyonagricultural(andallied)researchandisthefundamentalelementforlong-termincreasesinfarmers'percapitaincomes.
Thecomprehensiveextensionsystemduringtheearlypost-revolutionperiodplayedacrucialroleinmeetingexpandingfoodneeds,disseminatingtechnology,andmodernizinglargepartsofChina'sbackwardandlow-productivityagriculturalsector.Intheearlyreformyears,theextensionsystemcontinuedtoassisttechnologytransfertofarmerhouseholdsmuchasithadearlier.Villagescontinuedtohirestafftoliaisewithtownshipextensionagentsonplantprotection,seedandfertilizeruse,andothertechnologies.However,financialresourceshavedeclinedinrecentyears,resultinginadeclineinagriculturaltechnologyresearchandpromotionefforts.
Agriculturalresearchandtheextensionofnewcropvarietieshavebeenshowntobeamajorengineofagriculturalgrowthduringthereform(HuangandRozelle1996,andLin1992).Whilefarmerswereresponsiveinpursuingnewtechnologies(e.g.,hybridrice),following
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introductionoftheHRSreformstheadoptionrateofnewtechnologiesdeclined,whichmightbebecauseofweakeningofthetechnologydistributionsystem.
A.AgriculturalResearch
FundingforagriculturalresearchinChinaisallocatedorgeneratedinthreeways.Corefunding,whichfinancessalariesandsocialbenefits(e.g.,retirement,housing,medicalbenefits),constitutesabout50percentofgovernmentfundingforresearchinstitutesandcenters.Tomakeagriculturalresearchmoreeffectivebyrewardingthosewithgoodideas,successfulpastrecords,andwhoareworkingonkeyprojects,theremainderofpublicsupportconsistsofcompetitivegrantsallocatedforprojectsproposedbyscientists.Researchbudgetsalsoareallowedtobesupplementedbyadditionalfundsgeneratedthroughcommercialsalesbytheinstitutesandcenters.
PublicSectorFinancing
Historically,agriculturalresearchhasbeeninthepublicsectordomaininmostcountries.Marketfailurecharacterizesagriculturalresearch,asitisapublicgoodinvolvinguncapturableexternalities,isrisky,andislongterm.Withoutpublicsectorinvolvement,suboptimalamountsofagriculturalresearchwouldlikelybeconductedandthatresearchwouldlikelyfocusoneasilymarketabletechnologywithcapturableprivatebenefitsandignorebasicandlong-termresearchthatmaximizesociety'sbenefits.IntheOECDcountries,theprivatesectornowaccountsforabout50percentofagriculturalresearch,asIPRprotectionenablesmoreofthebenefitstobecaptured.
China'scropagriculturehasbeenwellservedbythepublicresearchsystem,particularlyriceChinapioneeredthebreedingofsemidwarf,high-yieldingvarietiesandtodayisstilltheonly
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countryintheworldwithlargeareasofhybridrice.Successinthenongrainsubsectorshasbeenlessdramatic.Theimportanceofagriculturalresearch,intermsofhighratesofreturnandcontributiontogrowth,iswelldocumentedinChinaandelsewhere.FanandPardey(1997)foundthatgovernmentinvestmentinresearchanddevelopmentresultedina20-percentgrowthinagriculturalproductivityinChinaover196594.Fan(1996)estimatedthattheinternalrateofreturntoagriculturalresearchoverthesameperiodwas94percentimplyingaseriousunderinvestmentinagriculturalresearch.Asurveyofmorethan150studiesofratesofreturntoagriculturalresearch(worldwide)concludedthatratesofreturnaretypically40+percentandoftenexceed100percent(Echeverria1990).GrowthaccountinganddecompositionanalysesdemonstratedthatgrowthinChina'srice,wheat,andmaizeproductionover198495wasoverwhelminglyattributabletoresearchinvestments(Huang,RosegrantandRozelle1995andWorldBank1997b)
DecliningResearchInvestments
Oneofthegovernment'sobjectivesistoincreaseagriculturalresearchinvestments,butthatobjectivehasbeenelusive.Asinmanyotherfacetsoftheruraleconomy,agriculturalresearchsuffersfromfiscalconstraints,aspublicresourceallocationshavebeenwoefullyinadequate.TheNinthFive-YearPlanrecommendedincreasingagriculturalresearchexpendituresto29percentoftotalgovernmentresearchexpenditures,butthroughoutthe1990sagriculture'ssharehasremainedat13to14percent.Agriculturalresearchintensity(ARI),definedasinvestmentsinagriculturalresearchasaproportionofagriculturalGDP,declinedfrom0.49inthelate1970sto0.38inthemid-1990sandalthoughnationalagriculturalresearchbudgetsincreasedduringthereformperiod,thenumberofresearchscientistsemployedincreasedevenmorerapidly(Fan1995).Recentcomprehensivedataongovernmentexpenditures,includingprovinces
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andlowerjurisdictions,foragriculturalresearchactivitiespresentsanequallyalarmingpicture.Realagriculturalresearchexpenditures,asmeasuredbydeflatingcurrentexpendituresbytheCPI,grewmarginallyduringthelate1980s,butallocationsincreasedduringtheearly1990s.However,Huang,HuandFan's(1998)analysisofdisaggregatedagriculturalresearchbudgetsclearlydeterminedthatafterdeductingexpendituresforcapitalconstruction,salaries(whichincreasedmuchmorerapidlythanthegeneralpricelevel),overheads,etc.therealexpendituresforresearchprojectsdeclinedatanannualrateofabout4percentduringthe1990s.Thesefacts,coupledwiththerapidincreaseinthenumberofagriculturalresearchscientistsreducedtherealresearchfundsperscientistby25-30percentduringthe1990s.TheARIdeclinedthroughouttheperiodreachinganall-timelowof0.38in1996and1997(Table9.1).ThedecliningARIislikelytoreducefutureagriculturalgrowth.Aninternational,"ruleofthumb"istospendabout1percentofagriculturalGDPforagriculturalresearch(FAO1990).Asseenabove,thedownward-trendingARIisbelowboththislevelandthedevelopingcountryaverage(Alston,Pardey,andRosebloom1997).Also,researchcostsareincreasingasadditionalobjectivesareincorporatedintotheresearchprogram(e.g.,pestresistance,droughttolerance)andresearchisincreasinglyturningtomorecostlyapproaches(suchasinbiotechnology),leavingfewerresourcesfortraditionalresearch.TheWorldBank'sFoodSecurityReport(1997b)summarizestherecentresearchonthedeterminantsofagriculturalsupply,whichdemonstratedthatincreasesinChina'scerealproduction,post-1985,wasoverwhelminglycontributedbyagriculturalresearchandtechnology.
MakingChina'sResearchInvestmentsMoreProductive
In1982theChineseAcademyofScienceinitiatedacompetitivegrantsprogramthatallocatedfundsdirectlytoresearchscientistsaspartofashiftinnationalscienceandtechnologypolicythatencouragesresearch-fundingagenciestomakegrantsbasedonthe
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Table9.1:AgriculturalResearchBudgetsandResearchIntensity,1986-'96
AgriculturalResearchBudgets
ResearchProjectFunds
AgriculturalGDP
AgriculturalImtensity(ARI)
Year
Current(millionyuan)
Constant(1995)(millionyuan)
Constant(1995)(million
yuan)(billionyuan) (percent)
1986 1,346 3,529 766.9 276 0.491987 1,403 3,429 560.7 320 0.441988 1,782 3,674 811.2 382 0.471989 2,095 3,668 747.5 423 0.501990 2,050 3,515 522.7 502 0.411991 2,381 3,967 729.1 529 0.451992 2,761 4,366 622.8 580 0.481993 3,273 4,572 673.6 688 0.481994 4,409 5,061 627.1 944 0.471995 4,856 4,856 570.7 1,199 0.401996 5,238 4,854 548.4 1,388 0.381997 5,377 4,795 1,397 0.38Note:Theagriculturalresearchexpendituredatareportedinthistableinclude(a)agriculturalresearchexpenditureinresearchinstitutesystemunderallministries,theAcademyofSciences,andtheAcademyofAgriculturalScienceatnational,provincial,prefectural,andcountylevels;and(b)agriculturalresearchexpenditureintheuniversitysystem.Agriculturalsectorincludescrop,forestry,livestock,fishery,water,andagriculturalservices(e.g.,machinery,information).ConstantpricesderivedbyusingCPIdeflator.Source:TheStateSciencesandTechnologyCommission(providedbytheCenterforChineseAgriculturalPolicy).
posals.Nationalresearchadministratorsalsocreatedanumberofspecialresearchfundingprograms,particularlyinhightechnology.Fundsfromthesenewprogramshavemostlycomefromcorebudgets,
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meaningresearchinstitutionsthathavenotbeensuccessfulinthegrantscompetition,haveexperiencedfallingsupport,whichearliercametothemonthebasisofstaffinglevels.
Sincethemid-1990sChinahasattemptedtocommercializeaportionofagriculturalresearchbyrequiringresearchcenterstodevelopcommercialproductsintheirinstitutesandselltheirresearchfindings.Oneoftheoverallgoalsfromtheprogramistousecommercialprofitstofinancefurtherresearch.Ifintellectualpropertyrightswerebetterprotected,researchcenterscouldlicensenewtechnologytocommercialentitiesandenjoytheroyaltyrights.Instead,theinstituteshaveestablishedtheirowncommercialenterprisesandjointventuresasawayofprotectingtheirbreakthroughs.However,thesecommercialventureshavehadanumberofadverseconsequences.Commercializationalsohasdivertedskilledscientistsawayfromresearch.StudiesbyRozelle,Pray,andHuang(1997)showthatinsomecasesmorethan20percentofthescientistsinresearchinstitutesareengagedinactivitiesthatarenotrelatedtoresearchanddevelopment(R&D).Institutestaffarenottrainedtoengageinnon-R&Dactivities,andthushavehighfailurerateswhentheydo.Othercentershavehiredstafftoruntheirnewbusinessventures,whileatthesametimelayoffsareoccurringbecauseofalackoffunding.
Mostsignificantly,despitealloftheeffort,commercializationappearstoprovidefew,ifany,supplementalfundsforresearch.Researchfundingregulationsstipulatethat30percentofcom-
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mercialnetrevenueshouldflowbackintoresearchprograms.Inreality,nomorethan15percentofnetrevenuesofprofitableventures(inthosecentersfocusingonriceresearch)havebeenreturnedtoresearchbudgets.Mostearningssupportsalariesandbenefitsofcommercial-enterprisestaff(Rozelle,PrayandHuang1997).
Jin(1997)determinedthattheactionsofgovernmentofficials,whoobservethecommercialactivityintheresearchsector,furtherunderminestheoriginalgoaloftheprogram.Foreach1yuanofcommerciallygeneratedincome,governmentfundinghasbeenreducedby0.80yuan.Thus,despiteabsorbinglargeamountsoftime,energy,attention,andcapital,commercializationhasledtoanetfundingincreaseofonly4percent(Jin1997).Asgovernmenthasreducedfunding,researchcentersareforcedtoseekalternativesources,which,exceptforanoccasionalinternationalgrant,arelargelylimitedtocommercialincome.However,thelackofpriorityforresearchsupportcreatesadownwardspiral.Generatingadditionalcommercialincomeresultsinfurtherreductionsinresearchfundingfromthebudget.
PotentialNewSourcesofResearchFunds
ProducerandUserCesses
Nonsubsistenceandprocessedagriculturalcommoditieswithcommercialmarketscouldappropriatelybesubjectedtocessesonsalesearmarkedforspecifiedpurposes,includingcommodityresearch.Processedcommodities,suchastea,tobacco,andsomenonfruittreecrops(e.g,rubber),arewellsuitedtothecollectionofsuchcesses.Whetherthefeeisleviedontheproduceroruserdependsontherelativeeaseofcollection.Fortobacco,imposingafeeonusersthroughastamp(orsimilar)taxcollectedfromthemanufacturerisrelativelyeasy.Forothercrops,suchascotton,levyingthefeeonproducersthroughdeductionsattheprocessingpoint(ginnery)may
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beeasieradministratively.Wheresuchasystemisemployed,producersshouldhaveavoiceindeterminingthefocusofresearchfinancedinthismanner.Subsistencefoodcommoditiesareunsuitedforcessfundingbecauseonlyasmallportionofproductionismarketedtypicallyinsmall,uncontrolledmarketplaces.Norarecessesapracticalmethodofobtainingfundsfornoncommodityresearch,suchasfarmingsystems,soilconservationandotherenvironmentaltopics.
InternationallyFinancedNonprivateResearch
ChinahasaccesstotechnologygeneratedbytheConsultativeGrouponInternationalAgriculturalResearch
1(CGIAR)institutionsandbenefitsthroughadaptiveresearchbytheFAO,whichoftenincludestraining,andbysomeactiveNGOs.FundsforCGIARcenterscomeprimarilyfromdevelopedcountries(Europe,UnitedStates,andJapan)andtheWorldBank;fundingfromdevelopingcountriescomprisedonly2percentofthetotalbudgetin1995.Developingcountries,includingChina,havebenefitedenormouslyfromtheresearchofthesecentersatlittlecost.ChinahasactivecooperativeprogramswiththeInternationalRiceResearchInstitute,orIRRI(rice);theInternationalCenterforMaizeandWheatImprovement,orCIMMYT(maizeandwheat);theInternationalPotatoCenter,orCIP(potatoes);theInternationalPlantGeneticResourcesInstitute,orIPGRI(plantgenetics);theInternationalFoodPolicyResearchInstitute,or
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AnIRRIbiotechnologylaboratorywhereforeigngenesareintroducedintorice
cellsusingbiolisticprocess.CourtesyofCGIARPhotoLibrary
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Box9.1:IndiaGrowthAccountingAnalysis
IFPRI examined factorproductivity and governmentspending linkages withagricultural growth and povertyreduction in India. The resultshave implications for China.India's TFP increased at anaverageannualrateof1.1percentbetween 1957 and 1987with aslightlyhigheraverageduringthe1967-77 "Green Revolution." Agrowth accounting analysisindicated thatpublic researchandextension contributed most (59percent)toTFPgrowth.However,surprisingly,domesticandforeignprivate researchanddevelopmentalso made importantcontributions13 and 23 percent,respectively.The contributions ofvarious factors to TFP areindicatedinthetablebelow:
TotalFactorProductivitybySourceofGrowth,India,1957-87
Contribution
Factor Percentage Percent
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Agri.Research
Publicdomestic
0.258 22.8
PublicHYV 0.070 6.2
Privatedomestic
0.145 12.8
Privateforeign
0.261 23.1
PublicExtension
0.331 29.3
Markets 0.035 3.1
Irrigation 0.084 7.4
Other -0.054 -4.7
Total 1.130 100.0
Source:IRPRI,EPTD,TotalFactorProductivityandSourcesofLong-TermGrowthinIndianAgriculture,April1995.
IFPRI(foodpolicy);andtheInternationalIrrigationManagementInstituteorIIMI(irrigationmanagement).
ResearchandTechnologyTransferbyPrivateEnterprises
Anotheralternativetogovernment-financedresearchandextensionisthroughprivatesectorsupport.Asnotedabove,theOECDcountriesrelyheavilyontheprivatesectortogeneratenewagriculturaltechnologies,asdosomedevelopingcountries.Forexample,domestic
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andforeignprivateenterpriseshaveprovidedthetechnologythathascontributedabout36percentofIndia'sproductivitygrowthsince1957(Box9.1).Mostmajorinternationalseedcompaniesconductresearchandsellfield-cropseedsinIndiaacountrywithagroclimaticconditionsmuchdifferentfromNorthAmericaandEuropeandwithafarsmallerseedmarketthanChina.Incontrast,onlytwointernationalcompaniesaresellingsmallamountsofseed(otherthanvegetableseed)inChina.
AfewmultinationalorganizationsandtransnationalcorporationshaveresearchunderwayinChina.Oftentheresearchisdemonstrationinnatureandservesmoreasanextensionorsalesmechanism.TheseincludethePotashandPhosphateInstituteofCanada(PPI);theAmericanSoybeanAssociation;andtransnationalseed,chemical,andfoodandfeedcorporations.Thesegroupshavehadvaryingdegreesofsuccessandhavemadevaryingcontributions.Forexample,incooperationwiththeSoilandFertilizerInstituteoftheChineseAcademyofAgriculturalSciences,thePPIhasdemonstratedthebeneficialeffectsofapplyingmorepotassiumfertilizers,whichhasledtoincreasedpotashimports(andincreasedproductivity).ChiaTai(theChinasubsidiaryofCharoanPokphand)producesalargeportionofChina'smanufacturedfeedastheresultofpoultryfeeddemonstrations.Inadditiontothesesuccesses,trialsundertakenwithgovernmentagencieshaveproducedampleevidencethatadaptingadditionalforeigntechnologycouldsignificantlyincreaseproductivityincrops,livestock,andagriculturalmachineryandequipment.Forexample,Chinacouldtakeadvantageofforeigntechnologyformaize,rapeseed(canola),andsoybeans.ResearchinNorthandSouthAmericaandEuropehasproducedvarietiesthatyieldmuchhigherthanChinesevarietiesundersimilarclimaticenvironments.
Chinabenefitsonlymarginallyfromagriculturaltechnologydevelopedbytheprivate
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sector.However,giventhesizeofChina'sagriculturaleconomyandsimilarityofagroclimaticconditionstothoseinNorthAmerica,Japan,andEuropewhereprivateresearchisquiteimportantChineseagriculturehasenormousopportunitytogrowmorerapidlybyusingtechnologydevelopedbycommercialenterprisesandforeignfirms.Farmersneedtobegivenaccesstothattechnology.
IntellectualPropertyRights
Copyright,patent,andotherIPRprotectionhavedevelopedslowly.Thepatentlawbecameeffectiveonlyin1985butdidnotapplytochemicalsandpharmaceuticalsuntil1993.Plantvarietyprotectionbecameavailablewithpassageoftheplantbreeder'srightslawin1997althoughtheapplicationofficehasyettoopen.Thelegalframeworkseemsadequate,butenforcementisperceivedtobeweak.IntheabsenceofstrongIPRprotection,fewlargemultinationalcompaniesdoresearchin,ortransfercutting-edgeagriculturaltechnologytoChina.OnlycompaniesthatcancontroltechnologythroughmeansotherthanIPRsandareconfidentoftheirjoint-venturepartnerscantaketherisk.
FDIassistedinmodernizingthepoultryindustrybyimportinggrandparentgeneticstockandbreedingparentgeneticmaterialsdomestically(thiscouldbedonewithsomeconfidencebecausethetechnologydidnotrelyonIPRprotectionbutsophisticatedhybridgenetics).Theintroductionofsuperiornutritionfeedmillingandmixingparalleledthedevelopmentofthepoultrygenetics.Almostalloftheplantbreedingandscreeningresearchbyforeign-financedenterpriseshasbeenonhybrids(corn,sunflower,sorghum,andrice)becausehybridvarietiesaredifficulttocopyaslongasthehybridparentsarekeptsecretthustheIPRwastechnicallyprotected.
Intheagrochemicalsectorthepesticidesthathavenotbeenreverseengineeredarethosewhoseactiveingredientisacomplex,and
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difficulttocopy,molecule.Manyothers,despiteof-
Apromisingsuper-hybridricevarietyunderdevelopmentattheNationalHybridRiceResearch
andDevelopmentCenter,Changsha,Hunan,China.
PhotocourtesyofCNHRRDC
ficialagreements,havebeencopiedandsoldwithoutanycompensationtotheinventors.AlthoughthelegalenvironmentprovidesadequateprotectionforIPR,enforcementremainsweak.ThecurrenteffortbyMonsantotomarketitsBtvarietyofcottonseedwillbecloselywatchediftheseedsbecomewidelyavailablefromnon-Monsantosources,otherhigh-technologyandbiotechnologyfirmswillbereluctanttoinvestinChina.
Othernontariffbarrierstotechnologytransferincludeweakcontractlaw,restrictionsontheroleofmultinationalsintheagriculturalinputindustry,andgovernmentmonopoliesonthesalesofsomeagriculturalinputs.Forexample,theamountofimportedcottonseedallowedfortestingislimitedto500kgpervariety,seriouslyslowingdowneffortstotesttheapplicabilityofforeignvarietiesinChina.Otherregulationsdictatethatcompaniescanonlyimportfemalepigs,andthehealthprotocolsforimportingbreedingpigsrequirebloodtestsconductedinChinaatacostof$300perheadfordiseasesthat
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alreadyexistinChina.
Relyingsignificantlyontheprivatesectorforagriculturaltechnologydevelopmentcarriespotentialhazards,particularlyintermsofresearchfocusandpriority.Theobjectivesofprivatefirmsareunlikelytocoincidewithsociety's,
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asoptimizinglong-termfinancialgainsisnotnecessarilyconsistentwithoptimizingsociety'seconomicbenefits,whichincludeenvironmentalandpovertyalleviationobjectives.SomeofficialsinChinaworrythatforeignfirmswithadvancedR&Dmethodsandtechnologywilldisplacedomesticexpertiseandunderminethenation'sabilitytogenerateitsownresearch.
ResearchPrioritiesandEfficiency
Decentralizationandfinancialreorganizationhasresultedinthestateprovidingadecliningproportionofagriculturalresearchfundingandgreaterrelianceonprovincialandlowerjurisdictionfinancing.Usingprovincialdata,Jinetal.(1997)identifiedseveralfactorsthatinfluencegrowthingovernmentfundingofagriculturalresearch.Inthestudy,governmentrevenues,agriculturalGDP,provincialgrainexports,andnumberofscientists(allonapercapitabasis)werepositivelyrelatedtoagriculturalresearchfinancing.Thesefindings,althoughunsurprising,haveseriouswelfare,poverty,andequityimplicationsforregionswherethepositivefactorsarelowerthanthemoreeconomicallyadvancedcoastalprovinces.
Giventheoverwhelmingcontributionofresearchtoagriculturalgrowthandpovertyreduction,realinvestmentsinresearchmustbebettermanagedtoensurethatefficiencyandlong-termobjectivesaremet.Aconsolidationandreorganizationoftheresearchsystemeliminatingunnecessaryduplicationandrestructuringitalongagroecologicalzonesalsowouldimproveefficiency.Thiswouldincluderesearchapplicabletopoverty-strickenandresource-poorareasbothhighelevationtemperateandtropicalzones.Peopleinpovertyareasoftenrelyonsubsistencecropvarietiesandlivestockspeciesthathavenotreceivedasignificantresearchfocus,particularlyunderadverseenvironments.Theseincludepotatoes,sorghum,
Box9.2:AgriculturalResearchConsiderations
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The agricultural research budget allocated to various commodities isunknown, but food grains has been a major focusand production ofcerealshasincreasedimpressively.However, inrecentyearsChinahasturnedfromanetexporterofvegetableoils,oilmeals,andoilseedstoanet importer, reflecting increasingdemand for protein supplements forlivestockfeeds.However,China'srapeseedishighinglucosinolatesandmuch of the meal is exported because of its toxicity to nonruminantlivestock(China'sneedsforproteinsupplementsisprimarilyforpoultryandpigs).Canadaembarkedonaresearchprogramtoimproverapeseedyieldandqualityinthe1960sand1970sthatyieldedratesofreturnof100percent in theearlyperiod,declining to50percent inmorerecentyears.China'srapeseedyieldshavegrownatonly1.6percentannuallyoverthelate1980sandearly1990sandremainbelowthoseofCanada,Argentina,andFrance.AlthoughsoybeansoriginatedinChina,Chinesesoybean yields remain far below that of other major producers(Argentina,Brazil,Canada,andtheUnitedStates).ThegrowthratesofChina'scerealsandoilseedsyieldsareshownbelow.
GrowthRatesofCerealsandOilseedsYields,1985-96
CommodityGrowthRate(percent)
CommodityCommodity
GrowthRate(percent)
Cereals OilseedsRice 1.0 Rapeseed 1.6Wheat 1.2 Soybeans 2.3Corn 3.3 Peanuts 3.7Millet 3.0 Sunflowers 3.2Sorghum 4.6 Sesame 4.3
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millet,barley,buckwheat,beans,goats,poultryandpigs.RecentworkonIndia'sresearchinvestments(FanandHazell1996)concludedthatorientingadditionalresearchinvestmentstononirrigatedagriculturewouldyieldgreaterproductivityandpovertyalleviationbenefitsthanmaintainingaheavyfocusonirrigatedagriculture.
Asresearchbudgetsbecomeincreasinglyconstrained,Chinamustusefundsefficientlyandappropriatelyidentifyresearchpriorities.Whilesomeprioritiesandbroadfinancingallocationscanbeestablishedonobjectivecriteria,suchaspercentofagriculturalGDPorimpactonthebalanceoftrade,otherprioritiesmustbeassessedmoresubjectively.Obviousexamplesoftheformeraredrought-tolerantplantvarieties(inanticipationofreducedirrigationsupplies),feedgrains(tosupportthelivestocksector);livestockandfisheries(whichareanincreasingshareofagriculturalGDP),andoilseedsandtheirderivatives(whichareanincreasingproportionofimports).Examplesofthelatterarefarmingsystemsandvarietalimprovementinresource-poorareas(forequityandpovertyalleviationreasons),marketingandagroprocessingissues,andnatural-resourcemanagement(wherelong-termbenefitsarenotcapturedineconomicassessments).
Chinaisconcernedaboutunduerelianceonexternalmarketstosupplysubstantialportionsofdomesticneeds.ThisisbecauseChina'slargesizecouldpotentiallydisruptinternationalmarketsandbecausethegovernmenthasalatentfearthataforeigncountrymightapplypoliticalpressurethroughtradeembargoes.Theseconcernspartiallyunderliethegrainself-sufficiencypolicy.
ConclusionsandRecommendations
Improvementsandtransfersintechnologyarecrucialinimprovingthehealthoftheruralsector.Agriculturalresearch,alongwithextensionservices,isamajorengineofgrowth.Toensurenewandcontinually
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improvingtechnology,researchneedssupport.Stepsthegovernmentcantaketoprovidethisincludethefollowing:
·Financeasmuchofthe"publicgoods"agriculturalresearchaspossible.Thereturnstoagriculturalresearchhavebeenfoundtobeveryhighandoneofthelargestpastandpotentialcontributorstoincreasingfoodsupply.Bygivingfinancialsupporttoresearch,thegovernmentwillaccelerategrowthandthusisagoodinvestment.Creatingan"enablingenvironment"tostimulateagriculturalresearchbytheprivatesectorisalsoimportant.
·Makecompetitiveresearchgrantsaccessibletotheentireresearchsystem.Conceptually,thisshouldenhancethequalityofproposalsandproduceimprovedresultsasproposalsareratedonthebasisofproposedmethodology,originality,andexpectedcontributiontofarmers,amongotherthings.However,competitivegrantsforprojectscannottotallysubstituteforlong-termfundingforresearchprograms,whichenablesmoresustainedeffortonbasicR&Dissuesandmoreroutineresearchactivities.Thisprocessmayfavorexperienced,centrallysituatedscientistsattheexpenseofyounger,andperhapsbettertrained,scientists.Indeed,olderscientistsatnational-levelinstituteshavebeentheprincipalbeneficiariesofthecompetitivegrantsinitiative.Widelypublicizingthecompetitivegrantsprogramanditsevaluationcriteria,includingabroadrangeofscientistsandinstitutionalrepresentationontheevaluationpanel,andensuringprogramadministrationwasfullytransparentwouldhelpmeetprogramobjectives.Also,ablindfirststageevaluationmightbeundertakeninwhichthesubmissionexcludestheproposedresearchersandtheaffiliatedinstitution.
·Developagrantprogramthatmatchedaresearchcenter'scommercialearningsallocatedtoresearchratherthanautomaticfundingreductions.Suchaprogramcouldstrengthentheresearchprogramandgivetheresearchstaffofthecentersmoreincentiveto
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supportcommercialactivities(Pray1997).
·Rigorouslysuperviseanycesscollectionsto
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ensuretheyareusedfortheirintendedpurposesandnotdivertedtoalternativeuses.Wherecessesareemployedproducersshouldhaveavoiceindeterminingthefocusofresearchfinancedinthismanner.
·Increaseparticipationofinternationalfirmsinagriculturalresearch.Thiswouldhelpaccelerateagriculturalmodernization.Withoutgreaterparticipationoftheprivate(domesticandinternational)sector,China'sagriculturalproductivitywillbelower,asfarmerswillnotbeassuredaccesstostate-of-the-arttechnology.Ifimportedtechnologyistosupplantgovernment-supportedresearch,animprovedIPRpolicyenvironmentisnecessary.
·Increaserelianceontheprivatesectorforresearchinwhichthebenefitsarecapturable.Thiswouldenablethegovernmenttofocusmoreofitseffortsonresearchissuesrelatedtonaturalresourcesustainability,poverty,andequitythatcommercialcompaniesareunlikelytoaddress.Theseissueswouldinclude,forexample,researchonsoilconservation,andonrain-fedandsubsistencecropsforresource-poorareas.
B.Extension
FinancingAgriculturalExtension
Technologydevelopmentandtransferplayedacriticalroleinthepastgrowthoffoodproduction,buttotalrealexpenditureshavestagnatedsincetheearly1990sandrealexpendituresperextensionstaffmemberhavedeclinedfrommorethanY7,000inthelate1980stoaboutY5,000in1994/95(Table9.2)Littleinformationisavailableabouttheeffectivenessoftheextensionservice,butrecentdeclinesintechnologyadoptionratesandincreasingfiscalproblemshaveweakenedtheextensionsystem,andgovernmentinterestinassessingandimprovingtheextensionperformancehasincreased(Huang,etal.
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1998).
China'ssmall-scalefarmingrequiresintensiveextensioninput,creatinghighextensioncostperunitofoutput.However,China'sshare
Table9.2:AgriculturalExtensionExpendituresinChina,1986-95TotalExpenditures Extension Expendtr/Staff Agric.
ExtensionCurrent(millionyuan)
Constant1995(millionyuan)
Staff(thousandyuan)
Constant1995(yuan)
Intensity(percent)
1986 1,136 2,978 385.3 7,729 0.411987 1,270 3,103 404.7 7,667 0.401988 1,406 2,899 411.1 7,052 0.371989 1,513 2,649 429.3 6,169 0.361990 1,740 2,983 454.5 6,564 0.351991 2,051 3,417 495.7 6,895 0.391992 2,275 3,598 615.7 5,844 0.391993 2,554 3,568 604.2 5,905 0.371994 3,120 3,582 733.0 4,886 0.331995 3,721 3,721 674.9 5,512 0.311996 5,706 5,269 0.411997 6,848 6,151 0.49Note:AgriculturalExtensionIntensityisdefinedastheratioofagriculturalextensionexpenditurestoagriculturalgrossdomesticproduct.Source:Huang,Jikun,RuifaHu,JunSong,andScottRozelle,''PolicyBrief:AgriculturalTechnologyExtensioninChina,"WorkingPaper,CenterforChineseAgriculturalPolicy,ChineseAcademyofAgriculturalSciences,Beijing,China,1988.
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ofagriculturalextensioninvestmentinagriculturalGDP(agriculturalextensioninvestment-AEI)becameoneofthelowestintheworldinthemid-1990s.TheAEIdeclinedby25percentoverthe1986-1995decadeandstoodat0.31in1995,butlargeexpendituresin1996and1997appearstohavereversedthedecliningtrend.Internationalextensionexpendituresurveysarelessfrequentandcomprehensivethanresearchsurveys;however,anFAOsurveyof57countriespresentedregionalaverageAEI,whichindicatestheAsia-Pacificregionalaveragewas0.56in1988(downfrom0.68in1985),considerablyaboveChina's.The1993AEIoftheUnitedStateswasestimatedat0.81(AlstonandPardey1997),ahighlevel,especiallyconsideringthelargeeffortspentbyprivatecompaniesinprovidingextension-likeservices.
Extensionstaffwagesandbenefitshaverisenrapidlyduringthe1990sbutremunerationlevels,relativetootheragriculturalsectorpersonnel,declinedfrom87to79percentbetween1985and1995.Compensationlevelsarestipulatedbystateandprovincialgovernments,butmostwagemandatesareunfunded;thuslocalauthoritiesareleftwiththeresponsibilityofmeetingthesecostsfromlocalbudgets.Tomeetcosts,localauthoritiesmustassessfarmersordivertresourcesfromotherexpenditurecategories.Salarypaymentsasaproportionoftotalagriculturalextensionexpendituresrosefrom43percentin1986tomorethan70percentinthe1990s.Insomeagriculturalextensionstations,actualpublicexpenditureshavefallenbelowstaffsalaryandretirementobligations.Somelocalgovernmentshavedeclinedtopayextensionstaffsalaries(oronlypartoftheirbasicwage)andinsteadhaveencouragedstafftocommercializetheiractivitiesorengageinmarketingagriculturalinputs(fertilizer,pesticide,andseed).Anecdotalevidenceindicatesthatthelackoffundsgreatlyreducestheabilityofextensionstafftocontactfarmersandconductfieldtrialsandthat,inpoorinlandcounties,salarieswere
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asmuchas12monthsinarrears(Huang1998).
FiscalImpactonAgriculturalExtensionPerformance
Chinahasacomprehensive,six-level(national,provincial,prefectural,county,township,andvillage)extensionnetwork,withabout675,000full-timeextensionworkersemployedatthenationalandsubnationallevelsincludinganumberinlargerandmoreprosperoustownships.Thesystemalsoreliesonmorethan500,000full-andpart-timeextensionworkers(farmertechnicians)attownshipandvillagelevelsinthemid-1990s.
Despitetheseimpressivenumbers,workbytheCenterforChineseAgriculturalPolicy(CCAP)infourprovinces(Zhejiang,Henan,Sichuan,andHeilongjiang)foundthattheextentoftheextensionnetworkhaddeclinedandcontinuestodeteriorateinsomelocales.Morethan70percentofvillageextensionpersonnelreportthatthefrequency,scope,andcoverageoftheirserviceshasfalleninthe1990s.About50percentoftownshipextensionstationsreportsimilartrends.Largenumbersofstaffhavelefttheextensionserviceandnumerousvillageextensionofficeshaveclosedoverthepastdecade.
Effectivenessofextensionwork
Declinesinagriculturalextensionexpenditureperworkerandinrelativeincomearedisincentivesforextensionworkers.CCAP'sstudydiscoveredthatactiveextensionworkersspent76percentoftheirtimeonextensionworkin1996,about10percentagepointslessthanin1985.(Nonextensiontownshipofficialsreportthatfewextensionworkersspentevenone-halfoftheirtimeonextensionactivities.)Regressionanalysesshowthatthemostsignificantfactorsaffectingextensionworkers'effort(i.e.,timeallocatedtoextensionworkandfrequencyofvisitingfarmers)arewagesandextensionexpenditures.
Manyofthosewhohaveremainedintheextensionsystemareemployedinpart-timejobselsewhereorengageinwork-related
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businessessellingchemicals,seeds,andfertilizerasnewpoliciesallowandencouragethis.
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Unfortunately,staffalsoengageinactivitiesunrelatedtoextension,suchasoperatingguesthouses,restaurants,orotherbusinessestablishments.Divertingattentiontootheractivities,whilehelpingtosupplementincomesandkeeptheextensionsysteminmanyareasintact,alsohasitsdirectandindirectcosts.Inrecentfarmerinterviews,onlyasmallminorityacknowledgedbeingvisitedorvisitinganextensionagent,althoughfarmersstillbenefitfromextensionleaflets,radioprograms,andotherservices.Localleadersindicatethatthefrequencyofvillagevisitsbyextensionstaffhasfalleninrecentyears.Encouragingextensionstafftoundertaketradeinagriculturalinputscreatespotential,ifnotactual,conflictsofinterest,assalesincentivesmayoutweighthevalueoftheproducttofarmers.Suchindirect,policy-induceddistortionsareincreasinglycommoninmanyareasofpublicgoodsprovisionandarelinkedtotighteningbudgets.Theyarealsolinkedtoapropensityforlocalleaderstoaddressthefiscalconstraintbyallowingpolicyagentstocombinethepublicservicestheyarechargedwithprovidingandcommercialactivities(inthiscase,farmmanagementadviceandinputsales).
Inindustrializedcountriestheresearchandextensionagendaislargelydeterminedbyproducersthroughfarmerorganizations.However,indevelopingcountries,researchandextensioninstitutionstypicallylackaccountabilitytofarmersandoften"push"technologiesratherthanelicitingfarmerneeds.ThiswasdemonstratedinarecentsurveybyCCAPthatfoundagapbetweentheopinionsofextensionagents(andofficialsandbreeders)andfarmersregardingthetypesoftechnologiesneeded.Forexample,higher-yieldingvarietieswereperceivedby81percentofextensionagents(butonly69percentoffarmers),tobeahighpriority,and19percentoftheextensionstaff(but31percentoffarmers)feltthatfarmersdemandedhigh-qualityvarieties.
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ImpactofSeedCommercialization
Astheseedindustryhasbecomemorecommercialized,seed-enterprisemanagershavebeguntopursueprofitsandsomeofthelongstandingtiesbetweentheextensionsystemandseedsystemhavebeguntochange(HuangandRozelle1997).Insomecases,seedcompaniesselltheirseeddirectlytofarmerstoretainthemarginthatextensionagentsmightotherwiseearn.Furthermore,asseedcompaniesattempttoprotecttheirbusinessinterests,theysometimesdonotshareinformationonnewvarietieswithextensionstaff.Consequently,extensionagentsoftenlackinformationontheavailabilityofnewseedvarieties.Asseedcompaniescontinuetocommercialize,theseproblemsmayintensify,especiallyifextensionagentscontinuetodependoncommercialincomesupplements.
ConclusionsandRecommendations
China'sextensionsystemhasperformedanimportantroleinboostingagriculturalproductivityinthepast.Withnearly200millionsmallfarmsandrisingwages,Chinaneedsacost-effectiveextensionsystemtohelpitmeetfutureproductiongoalsandobjectives.Currently,however,theextensionsystemisindisarray,andthequalityandquantityofextensionservicesaredeclining.Thegovernmenthasshownakeeninterestinstemmingthisdeterioration.
Someoptionsarecurrentlybeingpursuedthatmaypointtothefuturedirection.Althoughrelativelyrare,farmersarebeginningtoformproducergroupsandassociationsinrelativelycircumscribedareasthatcontractwithprofessionalagriculturalists,aquaculturalists,foresters,andlivestockspecialiststopurchasethelatestinformationonvarietiesandspecies,pestcontrol,andotherculturalpractices.Thesegroupsarenoticeablyinorchardproductionandfresh-wateraquaculture.Whilethisapproachseemsworthwhilefornonstaplecommercialcommodities,chargingforadviceonstaplecropsinpoorareaswouldnotbefeasible;forthis,governmentextensionwill
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remainnecessaryandwillbeoneofthefewsourcesofnontraditionalinformationforfarmersinremoteregions.
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Werecommendthefollowingstepstomaintainandimproveagriculturalextensionservices:
·Improveeffectivenessofagriculturalextension.Thismayincludeimprovinglinkswiththeresearchsystemandestablishingformalrelationshipswiththeacademysystemanduniversities.Improvedinformationsystemsareneededbothintermsofnewideas,technologies,andtechniquesandtospeedtheirdeliverytofarmers.Also,newissues,suchasmarketing,willbecomeincreasinglyimportantandneedtobeincorporatedintotheextensionprogramastheeconomydevelopsandfarmersincreaseproductionofnontraditionalcrops.Trainingprogramstoupgradetheskillsoflocalagentsandprovidethemwiththetoolstounderstandmarketsandfollowmarkettrends,shouldprovideahighrateofreturn.
·Permittheprivatesectortoparticipateinagriculturalinputmarkets.Thiswouldlikelyprovidesometypesofextensionservices,suchassoiltestingandfertilizerrecommendation.Astheseresponsibilitiesareassumedbytheprivatesectortheresponsibilitiesofgovernmentextensionwillbereduced.
·Baserestructuringofextensionprogramsontheirimpactonagriculturalproduction.Althoughagriculturalextensionmustberestructured,intensiveanalysisofextension'simpactonagriculturalproductionisneededbeforegovernmentofficialscanredefinestructuresanddeterminepolicyoptions.Determiningtheappropriatepolicyoptionswillbedifficult,aslittleresearchandinformationexistsaboutextensioninChina;withtheexceptionofrecentpreliminaryworkbyCCAP,quantitativeanalysesofhigh-qualityextensiondeterminantsandtheimpactofextensiononagriculturalproductionislacking.Newresearchshouldexaminetheseissues,assessingattheinstitutionallevelthetraitsandvalueofsuccessfulprograms,theimpactsofpolicies,andalternativewaysofdelivering
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betterinformationtofarmersinamoretimelyfashion.
1.CGIARisaloose-knitgroupofdonorsthatsupport16institutesaroundtheworldwithspecificresearchfoci,includingspecificcrops,livestock,aquaculture,waterresourcemanagement,foodpolicy,andagriculturalresearchsystems.
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10.RuralIndustry
RuralindustryhasmadeanextraordinarycontributiontoChina'srapideconomicgrowthoverthepast20years.Itscontributiontonationalgrossindustrialoutputrosefrom10percentin1979tonearly40percentin1996(DongandPutterman1997).Outputintheruralindustrialsectorgrewatanaverageannualrateofnearly20percentduringthe1980s,andthesectorcreatedmorethan5millionnewjobsannuallyover1978-96.In1997TVEemploymentdeclinedby5millionfromthe1996highof135millionemployees,butstillaccountedforabout40percentoftotalnonfarmemployment(JinandQian1998;Rozelle,etal.1997).Ruralindustryalsosupplied25percentofthenation'stotalexportsinthemid-1990s(DongandPutterman1997).
PerformanceofTVEs
Despitethissterlingrecord,ruralindustry'srecentperformanceparticularlyincertainsubsectorshasraisedconcernsoverthesector'seconomichealthandlong-termsustainability.Thecapacitytocreateemploymentdeclinedinthe1990s(Table10.1),andthemarginalpropensityofruralindustriestocreatejobsfellevenasoutputcontinuedtoincrease.Employmentintownship-runenterprises,thebackboneoftheinitialruralindustrialmovement,hasfallensince1994andemploymentinvillage-runfirmshasstagnated.TVEexpansionmayhavereachedaturningpointin1997whenthe
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totalnumberoffirmsandoverallTVEemploymentdeclined.Someofthesharpestemploymentdeclines(ordecelerationsinthegrowthrates)haveoccurredinsomeofthecoastalareas,thetraditionalstrongholdofruralindustries.Nevertheless,totalvalueadded(whichhasreplacedgrossoutputvalueasthemeasureofoutput)continuedtoincreasein1997.
Ruralindustrycontinues,however,tohavesomebrightspots.Privatefirmshaveincreasedtheirshareofemploymentandoutput(Figure10.1).Incontrasttotheshrinkingcollectivesector,privateandcooperativefirmsincreasedtheirvalueaddedby9.5percentin1997,increasingtheirshareofruralindustry'stotalvalueaddedtomorethan50percent(Du1998).Onoccasionemployersinruralareashavehiredmigrantsatahigherwageratethanemployersinurbanareas(LohmarandRozelle,1999).
Table10.1:TVEEmployment,byOwnership(millions)Year Total Township Village Other/a1980 30.0 13.9 16.1 n.a.1985 69.8 21.1 22.2 26.51990 92.6 23.3 22.6 46.71995 128.6 30.3 30.3 68.01996 135.1 29.6 29.9 75.61997 130.5/aIncludescooperativeandprivate,butprimarilyprivate.n.a.=notavailable.Source:ZhongguoXiangzhenQiyeNianjian(variousyears).
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Figure10.1PercentofTVEOutputValue,byOwnershipType.Sources:ZhongguoTongiNianjian,ZhongguoQiye
Nianjian,andZhongguoNongyeNianjian,variousyears
KeyIssuesandCriticalQuestionsFacingTVEs
Thefuturedirectionofruralindustrializationiswidelydiscussedanddebated.InsideChina,scholars'opinionsaresharplydividedastowhetherthecurrentshakedownsignalsmanagerialtransformationandconsolidation,whichwouldleadtoanevenmorevibrantsector;orwhethertheirsmallscale,limitedcapital,oftenremotelocations,andpoormanagementandmarketingskillsmakeruralfirmsinherentlyinefficientwithpoorgrowthpotential.Somearguethattheinabilitytoletweakfirmsfail,inpart,aconsequenceofthequasi-publicnatureofalargepartofthesector,couldcreateanotherfinancialcrisis.Thismorepessimisticargumentassertsthattheshiftinmanagerialauthority(gaizhi)currentlyunderwaydisguisesthesector'spoorperformanceandmorecompetitiveandefficientindustrialfirmswillnotreemerge.Theargumentfurtherstatesthatfiscal,financial,andmanagerialresourcesshouldnotbewastedonasectorthatisnotevolvingonthebasisofcompetitivemarketprinciples.Stillothersarguethatthecurrentstructuraltransformationsignalsafundamentalshifttowardsamoremarket-orientedsector,withimprovedmanagementincentivesandautonomy.
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Theincidenceofprivateownershiphasrisen
Figure10.2ManagerialContractEvolutioninTVEs,
SampleData,1984-'93(Percent)Source:Chen,Hongyi,andScottRozelle,"Leaders,
ManagersandtheOrganizationofManagerialContractsinChina,"WorkingPaper,DepartmentofAgricultureandResourceEconomics,UniversityofCalifornia-Davis,1998.
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Page89Box10.1TypesofTVEOwnershipandControlinRuralIndustry
Type 1: Conventional Public. Managers are salaried employees;governmentissoleresidualclaimantthroughtaxesandprofits;officialsare deeply involved inmajor business decisions; and profits, loss, andriskareborneentirelybygovernment.
Type2:LiberalizedPublic.Managershaveincentivecontractsbasedonfirm profitability, government receives income flows both in taxes andprofits,managers risk only reduced income for poor performance, andgovernmentbearsallfinancialrisks.
Type 3: Contract Partnership. Government shares residual withmanagers while firm also pays taxes to government, government andmanagersarejointresidualclaimants,riskissharedbybothparties,andgovernment commitment isnot firmlycommitted tobailingout a loss-makingcompany.
Type4:Leasehold.Managerspayfixedrentstogovernmentinadditiontotaxes,managersareresidualclaimants,riskisbornebymanagers,andgovernmentisnotcommittedtobailingoutthecompany.
Type5:Private.Managersmayseekallianceswithgovernmentofficialsfor favors or protection, especially for licensing as Type 2 or 3, butownership and control lies completely with the manager or owner, asdoes all the risk; and government is not financially committed to loss-makingcompanies,althoughprofitablecompaniespaytaxes.
dramatically,andprivatizationofcollectivefirmsiswidespread,eveninregionswithastrongcollectiveheritage.Also,managementauthoritywithincollectivefirmsisbeingdecentralized,aswitnessedbythemarkedshiftfromfixed-wagecontracttoprofit-sharingandfixed-leasecontracts(Figure10.2).Policyplaysanimportantroleinencouragingthisownershipandmanagerialevolution,butthesepoliciesresultfromeconomicpressurestoinnovate.Otherforces
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(e.g.,fledglingfinancialreformsincertainareas)havealsocreatedindependentandspontaneousrestructuring/reorganizingofruralfirmssuggestingthesectorisrespondingtoachangingeconomicenvironment(JinandQian(1998);Kung1999).Effortstoresolvethisdebatehavebeenhamperedbylackofinformationonrecentchangesandthefactorsaffectingrecentperformanceofruralindustry.
TheEvolutionofFirmManagement
Fivedifferentinstitutionalformshaveemergedtodominatetheenterpriselandscapeatdifferenttimesandlocations(Walder1998).AsshowninBox10.1,thesefirmtypescanbearrangedalongacontinuumthatrangesfromconventionalleader-runfirms(Type1)totraditionalprivatefirms(Type5),andthreeintermediatemanagementstructuresthathavebeenimportantthroughoutmostofthereformera.Thesefirmstypesaredifferentiatedbythenatureoftheincentivesfacedby,andthescopeof,propertyrightsassignedtofirmmanagers.Theextentoflocalgovernment'sconcernwithlossesandwillingnesstobailoutfirmsintheeventoffinanciallossesalsovariesalongthiscontinuum.
Chinaneededparticipationbylocalleaderstoexploiteconomicopportunitiesandcreateprofitableenterprisesinthe1980s,asthecountrylackedwell-functioningfactorandproductmarketsandhadminimalexpertiseinbusinessmanagement,andthepoliticalenvironment(exceptinthesouthernprovinces)eschewedprivateenterpriseefforts.Thestrongincentivetogeneratetaxrevenuesandcreateasourceoflocalincomepushedlocalleaderstoinitiateruralindustrialization.Atthesametime,highdemandandtheperceptionofrichearningsattractedthemintoenterprisemanagement.InGuangdongandFujianProvinces,however,moredevelopedmarkets,amoreliberalpoliticalen-
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vironment,andfinancialinflowsfromoverseasChinesereducedtheneedforleaderstobeinvolved.Becausehighdemandandlowinterregionalcompetitionguaranteedhighprofitsformostearlyentrants,varioustypesoffirmscoexisted,evenifsomewererelativelyinefficientandpoorlymanaged.
Overtime,however,theopportunitytogeneratequickandlargeprofitsgraduallydisappearedundereconomicpressures,causinglocalitiesandenterprisestorethinktheirtraditionalmanagerialstrategies.Growthcreatedmonitoringproblemsforleadersbyincreasingthenumberoffirms(ChenandRozelle1998).Risingcompetitionfromthemassiveentryoffirmsreducedprofitmargins(Naughton1994),anddecliningprofitscreatednewfiscalconcernsandreducedtheabilityoflocalofficialstosavefalteringfirms(Walder1995).Atthesametime,improvingmarketsforsomeinputsreducedtheneedforleadershipinterventioninbusinessactivities(PanandPark1998;ChenandRozelle1998).Thesetrendsinducedlocalleaderstoseekenterprisedivestitureandencouragedprivatization,andbetter-motivated,more-independentmanagershaveemergedinmanyoftheremainingcollectiveenterprises.Economicandtransitionpressuresalsohavetriggeredtherapidexpansionofprivatefirms.
Otherproblemsaffecttheperformanceofruralindustries.Economistsplacemuchoftheblameforthesector'scurrentillsonfallingdemandandfalteringinvestment.Demandhasfallen,partlybecausetheAsianfinancialcrisishasaffectedexportsandweakeneddomesticconsumerconfidence,andpartlybecauseofdomesticmarketconditions.Lowerremittancesduetomigrantlayoffshaveconstrainedruralpurchasingpower,whileSOEandgovernmentreorganizationhaveadverselyaffectedurbanincomes.Concurrenttightcreditpoliciesin1996and1997,newregulatorylimitsontheactivitiesofinformalfinancialinstitutions,andpolicyfailuresrelatedtointerestrateceilings,managementofnonperformingloans,andfinancialsectorreforms
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haverestrictedinvestmentcapital.
CreditShortageandCreditworthiness
2
Ruralfinancialreformshavecurtailedcredittoallbutthebest-performingfirmsinthe199798period,anactionwhichhasseverelyrestrainedTVEdevelopment.Bothinvestmentandoperating-fundshortagescontinuetoconstrainTVEgrowthandconsolidation,includingprivate-sectorenterprises,asaccesstoformalcreditislimited.Capitalaccessdependsonthesupplyofdomesticsavingsandcapitalinflow,itscompetitiveallocation,thecreditworthinessoftheapplyingenterprise,andpressuresbyleaderstoinfluenceloandecisions.Throughoutthereformperiod,capitalfromtheformalbankingsectorABCandRCCshasbeeninsufficient
Box10.2:TVECreditConstraintsWeak credit relations between TVEs and bank centers on operatingcriteria,financialpositions,andfirmprofitability.TVEsfrequentlyhavemultiple financial and accounting records,which are used for differentpurposes (e.g., taxauthorities,banksandcreditauthorities,governmentowners).TVEs lackqualified accountants, auditors, andother financialstafffamiliarwithmodernaccountingmethods.Intheabsenceofalargetraining program, this problem will remain, leading to continuedmisinformed lending decisions. Profits, taxes, and defined fees areroutinely submitted to appropriate government authorities; but localgovernment departments also impose unauthorized fees and levies thatmakeplanningcashflowsdifficult.TVEassetsareoftenoverstatedanddebtfinancingisexcessive,andalthoughdebtratiosaregenerallylowerthan those of SOEs, and present excessive credit risks to financialinstitutions.
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tomeetTVEneeds.Consequently,enterpriseexpansionhasbeencloselytiedtothecapacityofTVEstogenerateinternalfundsorobtaininformalcredit.
TVEsaredisadvantagedbycreditpolicy,astheyareamongthefirsttosufferwhencreditistightenednationally(ZhuandBrandt1997).TVEgrossoutputvaluehasdeclinedonlyonce,in1989alsotheonlyyearthatABCandRCClendingdeclined.However,otherlow-growthperiodsin1988,1990,and1994similarlycoincidewithlowcreditexpansion.Thus,totheextenttightcreditwasintendedtocooloffanoverheatingeconomy,ithassucceededwithTVEs.OtherofficialswouldarguethattighteningcredittoTVEsisarationalpolicythatshouldcontinueregardlessoftheoverallmacroeconomicenvironment,sincethesectorhasaninherentlypoorfuture.
ThefallingaccessbyTVEstoloansfromtheformalsectoralsohasamorechronicelement.TVEborrowingdeclinedappreciablybetween1986and1995fallingfrom7to8percentofthenationalloanportfoliointheearly1990sto3to4percentin1996/97and,asaproportionoftotalliabilities,declinedfrommorethan40percenttolessthan30percent.Loans
3asaproportionofTVEoutputvaluedeclinedfromabout15.5to6.5percentduringthedecade(Figure10.3).Loansasapercentofnetfixedassetsshowasimilarpattern(atahigherpercentagelevel)withlargeratiodeclinesin1988-90and1994.ThesefindingsaresupportedbyasourceoffundsitemizationforcollectiveTVEsbyCheng(1998)whichshowsa30percentreductionintheproportionoffundsprovidedbyABCandRCCsbetween1991and1994(somewhatlessthanthedeclineshowninFigure10.3,whichincludesallTVEs).
TheplightofTVEsintheirquestforfinancialresourcesalsomay
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result,inpart,fromtheirownmanagementandcharacteristicsofthefirmsinthesector,generally.Banks,especiallythosewhorecentlyhavebeengrantedbetterincentivestoearnprofits,mayhavegoodreasontoquestionthecreditworthinessofsomeTVEs.ProblemsassociatedwiththecollectiveownershipandmanagementofTVEs,include(a)financialpositionandoperationmisinformation,(b)feeirregularitiesimposedbylocalgovernments,(c)excessiveprofitremittances,(d)idiosyncraticmanagementchangesandstrategicbankruptcies,and(e)excessivedebt.NotallTVEssufferfromthesedeficiencies.NeitherareallthesedeficiencieslikelytoapplytoanyparticularsetofTVEs.However,thesedeficienciesarefoundincreasinglyinmanyTVEs.
Whilepartoftheseproblemsstemfromunderdevelopedinstitutions,anotherpartarisesbyconsciouschoiceandisaninevitableconsequenceofChina'slegacy.Governmentatvariouslevelshasmultipleobjectivesbeyondprofitmaximization,includingexpandingemployment,sales,taxrevenues,andgrossoutputvalue.Inpursuitofrevenues,thelocalgovernmentsoftenrequirespecificamountsoffundsberemitted,regardlessofwhethertheenterpriseisprofitable.WhenlocalgovernmentschangemanagementofheavilyindebtedTVEs,thenewmanagementoftenwillnotrecognizedebtaccumulatedbypreviousmanagement.Althoughtheowners(localgovernment),notthemanagers,arelegallyliableforthedebt,andcreditinstitutionsareunlikelytoseekjudicialintermediation.
Figure10.3
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BankBorrowingasaPercentofTVEOutputValue
Source:Bankstaffestimates
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Thecontinuinginterestofleadersinnoneconomiccriteriaisanobstacletocreatingmoreefficientruralfirms.Leadersinmanyareasremainconcernedwith,andfrequentlyarerewardedonthebasisof;enterpriseandemploymentcreation,jointventurecapitalattracted,exportvolume,potentialtaxextractionorreceipts,andindicatorsotherthaninvestmentprofitabilityandviability.Totheextentthatnonprofitcriteriareceiveconsideration,leadershavemotiveandopportunitytointerveneinmanagementandoperationaldecisions.Insomeinstances,interventionshavebeenhighlydistorting,andmayhaveplayedasignificantroleintheevolutionarypathofruralfirms.RecentfieldworkbyWalderhasshownthatinterventionbylocalleadershavekeptfailingfirmsafloatforemploymentandothernonpecuniaryreasons,thusreducingloanaccessandvolumeforprivateindustry.Incontrast,extensivefieldworkbyateamfromStanford,Toronto,Michigan,andCaliforniafoundthatinmanyprivatizedandquasi-privatizedfirms,profits,efficiency,andfinancialmanagementhavebecometheprimaryobjectivesoffirmownersandmanagers,andthatlinkswithlocalgovernmentshaveweakenedconsiderably(Shen,1998).ThedebateonthefutureofTVEscentersonwhetherornotstructuralchangewillleadtoreductioninimportanceofnonfinancialgoals.
CapitalMarkets,PropertyRights,andConstraintstoCross-JurisdictionalInvestments
UnderdevelopedcapitalmarketsareaseriousstructuralproblemforTVEsandpotentiallycancauselargedistortionsininvestmentsandothermanagementdecisions.Also,weakpropertyrightsoverfirmassetsandambiguousbankruptcyrulesandprocedureshaveminimizedtheeffectivenessofusingcollateraltosecureloans(Shen1998).Instead,banksrelyonexpensivemonitoringandtheguaranteesoflocalgovernmentstoreduceriskexposure.
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Fuzzyaccountingprocedures,weaklegalenforcement,andcontinuedinterventionsbylocalpoliticalleadersalsomakeinvestingacrossjurisdictionalboundariesdifficult.Investinginanothertownship,county,orprovincefrequentlyremovesdefactocontroloverassetsfromtheinvestor.Inaddition,becausemonitoringisalsodifficult,investmentfundusersfrequentlyhaveanopportunitytounder-compensatetheinvestorwithlittlefearofdetection,orofredress,ifdetected.Receivingafairhearingoutsideone'sownjurisdictionisperceivedtobequitedifficult.
ThesejudicialimperfectionsandundevelopedcapitalmarketsmeanthatsuccessfulTVEsusuallymustreinvesttheirearningsintheirhomelocaleregardlessofrateofreturn.Inaddition,mostopportunitiestoexploitscaleeconomiesbycombininginvestmentfundswiththoseinanotherjurisdiction,forinvestmentinthatjurisdiction,areforegone.Scarcemanagementskillsandfallingshadowratesofreturnoncapitalinareasofexpandingruralindustrymaypartlyexplainreducedemploymentgrowth.Thelowerrelativevalueofcapitalmakesinvestmentsinlabor-intensiveindustrieslessattractive,butfieldvisitshavenotedthatleadersinless-developedareasareincreasinglyinterestedinattractingoutsideinvestment.Somelocalitieshavetriedtoincreasetheinflowofinvestmentcapital,technology,andmanagementskillsbyofferingconcessionpackagesdesignedtoovercomethereluctanceofinvestorstoinvestoutsidetheirjurisdictions.Concessionstoattractinvestmentincludereducedtaxes,guaranteesagainstfee
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Ruralindustry,suchasthissilkreelingfactory,typicallyeitheruseslocalrawmaterialsor
producescommoditiesforlocalmarkets.Ruralindustryemploysone-thirdofthenation's
nonagriculturallaborforce.
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assessments,assurancesofindependentmanagerialauthority,andprovisionofinfrastructure.Althoughsomecross-jurisdictionalinvestmenthasoccurred(Du1998),theperceptionsofriskarestillsubstantialandconstrainsincreasesintheflowvolume.
ConclusionsandRecommendations
RuralindustryhasbeenahugecontributortoChina'srapideconomicgrowth.However,theinitialconditionsthatfavoredtherapiddevelopmentofruralindustryinthecoastalprovincesandsuburbandistrictsaroundlargecitiesnolongerexist.Productcompetitionisfarmoreintense,andthelargeprofitsoftheearlyyearsarenolongerfeasible.Increasedcompetitionanddecliningprofitshaveforcedconsolidationofruralindustrialenterprises.Thisisoccurringespeciallyrapidlyinthemoreprosperousruralregions,andhasbeenunderwaysincethebeginningofthe1990s.Thisconsolidationwillbeacceleratedforfirmsthatrelyheavilyonexports,astheAsianfinancialcrisishasreduceddemandinAsia,anddevaluedcurrenciesmakecompetingcountryproductscheaper.
Tosupportruralindustry,Chinashoulddothefollowing:
·Theadvantagesofthetraditionalleader-runmodelhavedeclinedrapidlywithgrowthandincreasedcompetition,andareinappropriatefordevelopinginteriorregions.Thetraditionallypro-collectiveregionsaremovingrapidlytowardleasingandprivatizationsolutionstotheirfiscalproblemscausedbyunprofitabletownshipandvillagefirms.Theinteriorregionsshouldbuildonthesemanagementandownershiptrendsinimplementingindustrializationprograms.Inlessdevelopedregions,emphasizeagricultureandrelatedsidelineproductionmorethanindustry,andsmall-scalefamilyenterprisesoverlargervillage-andtownship-ownedfirms.Marketsmustbeallowedtoguideinvestmentdecisions,notgovernment-developed
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strategicplansbasedonfiscalneeds.Thepatternofruralindustrialgrowth,andtheevolvinginstitutionalforms,suggeststhatattemptsbytheless-developedregionstotrytoemulatethepoliciesandinstitutionsofanerathatnolongerexistswouldbecounterproductive.
·Usedifferentrural-industrialstrategiesonthebasisofgeographicalandeconomicarea.Evenwithoutrapidindustrialization,incomesincoastalprovinceswouldhaverisenmarkedlythroughincreasedyields;highercropprices;anddevelopmentoflivestock,aquatic,andsidelineactivities.Forpoorer,inlandareas,focusingonimprovementsinagricultureandsidelineactivitiesandestablishinglinkstotheoff-farmlabormarketsaremorepromisingstrategiesthanestablishingruralenterprises.Formiddle-incomeareas,oneoptionistoestablishefficientruralenterprisestomeetlocalmarketdemandsandexploitcomparativeadvantageslowwages,cheapland,andbetteraccesstoresourcessuchaselectricity,water,andrawmaterials.
·Establishinstitutionalstructuresthatwilllimittheliabilityofinvestors(andbanks),rewardandpenalizemanagersfortheirperformance,andcompensateshareholdersfortheirinterests.Jurisdictionswithlarge-scaleTVEsmayfaceincreasingproblemsiftheyareunabletofindwaysto''privatize"orprovidebetterincentivesfortheircapital-intensiveenterprises.AmajorchallengetothetransformationofTVEpropertyrightsistofindwaystomanagetheriskoflargefirms.Privateownership(orgoodmanagementincentives)isneeded,butcompletingthetransitionwillbedifficultunlessChinacanfindtheappropriateinstitutionalarrangements.
·IncreaseTVEaccesstocreditbutONLYwhensuchloansarebasedonfinancialcriteria.IfTVEscannotoperateprofitably,theyshouldbeallowedtogooutofbusiness.TVEfinancialneedsarenotwellmetbythefinancialmarkets.Despitebeingthemostdynamiccomponentoftheindustrialsector,duringperiodsoftightmoney,
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TVEsarethefirsttobecutoff.Giventheirimportanceinthenationaleconomy,AwaymustbefoundtoincreaseTVEaccesstocredit.Oneoptionfor
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improvingcreditaccessistoprovideexplicitfundingforonlendingorloanguaranteesforsmallandmediumenterprises,andcross-jurisdictionalinvestmentchanneledthroughtheexistingfinancialinstitutions(ABCandRCCs).However,property-rightreformsandtheincentivestoenforcethemmustaccompanyacreditprogramtopermitsecuredlendingandimproveloanrepayment.Tobefullyviable,Chinawouldneedatrainingprogramformangersofthecreditinstitutions,andTVEs;aprogramtoimprovemanagementskillsmightinclude,projectdesign,evaluation,monitoring,accountingandauditing,andfinancialmanagement.Thecostofacquiringtheseskillscouldbeacomponentofaloan.
1.Ruralindustryincludesconstruction,manufacturing,transportation,andserviceenterpriseslocatedandfallingunderthepurviewoftownship(andlower-level)authorities.Theyarethoseenterprisesthat,becauseoftheirruralnature,aresupervisedbytheMOAand,forstatisticalpurposes,areclassifiedasTVEs.
2.Thissectionreliesheavilyon,Cheng,Enjiang,"ReportbySeniorExpertonFinancialSystems"in"AsianDevelopmentBank,TownshipandVillageEnterprisesDevelopmentProject(PartB),"ChineseEconomicResearchCenter,UniversityofAdelaide,SouthAustralia(undated).
3.Outstandingloansatyear-endfromABCandRCCs.Workingcapitalloansdoubtlesslyrolloverduringtheyearbutassumingnochangeinrolloverfrequencychangesintheratiowouldindicatechangesintheimportanceofcredittooutputvalue.
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11.PovertyReduction
Introduction
Sincethelaunchingofeconomicreformsinthelate1970s,Chinahasmaderemarkableprogressinitswaronpoverty.
1Duringthisperiod,morethan210millionruralresidentsescapedabsolutepoverty.Povertyreductionwasexceptionallyrapidintheearlyreformyears,between1978and1984thenumberofruralabsolutepoordeclinedby171million(WorldBank1992).[Applyingthepovertylineof$1.00percapitaperdaysuggeststhat300millionresidentsescapedpovertybetween1981and1995,andthatabout176millionremainedinpovertyattheendof1995(WorldBank,1997b).]Improvingincomessufficientlytolift171millionpeoplefromthegripofpovertyinsixyearsaremarkablefeatwasprincipallyachievedthroughintroducingthehouseholdresponsibilitysystemandtherapideconomicgrowththatfollowed.Realpercapitaincomeandgrossvalueofagriculturaloutputgrewatannualratesof19.1and7.5percent,respectively,duringthisperiod.
Thepovertystrickengenerallyliveinremoteandresourcepoorareas,butthoseresidinginsomewhatmoreaccessibleandlesshillylocations,withevenmildlyresponsivesoils,wereabletocapitalizeontheneweconomicenvironmentusheredinwiththe1978reforms.
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Improvedmarketsandoutputpricesmademodestuseofmoderninputsattractiveandledtoincreasedfarmoutput.Manyofficialsandobserversbelievedthatpovertyreductionachievedthroughrapidagriculturalgrowthwaslargelyexhaustedby1984.Theresidualpoorremainedentrenchedinpovertyinareasthatareveryresourcepoor,withminimalpotentialforfurtheragriculturalproductivitygains.Alleviatingtheirplightwillrequiremoreintensiveefforts.
Theabsolutepoortypicallycompriseentirevillagecommunitiesisolatedinuplandareas.Landqualityintheseareasisgenerallysopoorthatmanyhouseholdsareunabletoachievefoodself-sufficiency,consumesubsistencefoodsbeyondtheirownproductionlevels,andarenegativelyaffectedbyfoodpriceincreases.Asthepoorareriskaverseandafraidoflackingfoodstaples,theyareunwillingorunabletorelyonmarketsforthebulkoftheirconsumptionneedsanddevotemuchoftheirlandtograineveniftheyhavenocomparativeadvantageinitsproduction.Withinthesecommunities,thepooresthouseholdsaremostoftenthosefurtherdisadvantagedbyhighdependencyratios,illhealth,andotherdifficulties.Minoritypeoplesareknowntorepresentadisproportionatelylargeshareoftheruralpoor.Noevidenceexiststhatwomenareoverrepresentedamongthepoor.Confrontedwithsuchachallenges,authoritiesdecidedthatalleviatingtheremainingpovertyrequiredamoreintensiveeffort.
GovernmentPovertyReductionProgram
Withtheslowingofpovertyreduction,thegovernmentintroducedseveralantipovertyprogramsbetween1984and1986.ItalsoestablishedtheLeadingGroupforPovertyReduction(LGPR)undertheStateCounciltocoordinatethoseprogramsandexpediteeconomicdevelopmentinpoorareas.Economicgrowthdidrevive,andsince1991another40millionresidentsescapedpovertyabout49million,orabout6percentoftheruralpopulation,remainedinabsolutepovertyattheendof1997(Figure11.1).
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Thegovernmenthasastrongcommitmenttopovertyreduction,andmostgovernmentagenciesandministrieshavespecialpoverty
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Figure11.1RuralAbsolutePoor
reductionresponsibilities,including,educationandhealthprogramsadministeredbytheirrespectiveministries.However,likemanyotherelementsofruralsociety,theantipovertyeffortsuffersfromfiscalproblems.TheLGPRcoordinatesspecialdevelopmentgrantfunds,administeredthroughthefiscalsystem,andthePovertyReductionFund,whichprovidessubsidized
Figure11.2RealInvestmentinPoorAreasPovertyReductionProgram
loansfordevelopingpoorareas.TheregionalofficeoftheStateDevelopmentPlanningCommissionadministersaFoodforWork(FFW)programthatsupportstheconstructionofroads,potablewatersystems,irrigation,terracing,andothercapitalconstructionworks.FundscoordinatedbytheLGPRhavefluctuatedinrealterms,overthelifeoftheprogram,withlittleapparenttrend(Figure11.2).Between1986and1995thefundsadministeredthroughthefiscal
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budgetdeclinedbytwo-thirdsinrealterms.However,thegovernmentreviveditscommitmenttopovertyalleviationwithasharpincreasein1997funding,reversingthedecadeofdecline.
SubsidizedcreditthroughthePovertyReductionFundhasbecomethemostimportantelementofthepovertyprogram.Duringthelate1980sthesefundswereallocatedprimarilytohouseholdstosupportagriculturalproductionandotherincome-generatingactivities(WorldBank1992).However,bytheearly1990sborrowedfundsweregenerallyperceivedasfinancingconsumptionratherthanproduction,repaymentrateswereverylow,andeconomicgrowthinpoorareashadstagnatedasevidencedbythelackofreductioninthenumberofabsolutepoor.Thecreditfocusshiftedawayfromhouseholdstoward"economicentities"orenterprisesthatcouldbettercoordinateactivitiesrequiringnewtechnology,greaterinputuse,andmarketingsupport(StateCouncil1991).Fiscaldecentralizationhadcreatedabudgetarycrisisinnearlyallpoorcounties(Parketal.1996),which,inturn,createdstrongincentivesforlocalofficialsinpoorareastoinvestinrevenue-producingenterprisesratherthaningrowth-orientedactivities,ortodivertearmarkedinvestmentfundstomeetfixedexpenditureobligations,suchaswagepayments.
Bythemid-1990s,itbecameclearthatsubsidizedcreditdirectedtoenterpriseswasnotmeetingruraldevelopmentandgrowthobjectives.Thecreditdidnotappeartostimulatelocaldevelopmentandloanrepaymentratesdidnotmarkedlyimprove.Theinvestmentapproachwasoften"top-down"aslocalofficialsidentifiedcollectiveprojectswithoutdueconsultationwithfarmersthenallegedlyrequiredtheirparticipationinpursuitofscaleeconomies.Rozelle,Park,HuangandJin(forthcoming)haveempiricalevidenceofthefailureofChina'ssubsidizedcreditprograminShaanxiduringtheearly1990s.
Whenleadersreassessedthepovertyreductioneffortinthemid-1990s,thefocusofsubsidizedloansreturnedtopoorhouseholds.
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Sincethen,adebatehasragedabouthowtocreateaneffectivestructure.Officialsaresearchingforaprogramthatwillleadtogrowth,reducepoverty,reducelendingcosts,andimprovere-
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Box11.1MicrofinanceinYilongCounty
The government and donorsexperiment with substitutes forcollateral, screen projects, andprovide support and disciplinein microfinance programsusingpeer monitoring to manageinvestmentsandrepayloans.
Whilemicrofinance has proveneffectiveinothercountries,suchprojects in China rarely havebeen evaluated. One evaluationof an UNDP-fundedmicrofinance program inSichuan Province's Yilongcounty found that householdassets, especially householdproductive assets, of programparticipants increasedsignificantly. Participants' otherwelfare improvements includedmore diversified croppingpatterns, more grain storage,andmoremonetarysavings.
paymentrates.Thishasledtowidespreadexperiments,oneofthemosthigh-profilebeingtargetedmicrofinanceprogramswhich,todate,havehadmixedsuccess.Box11.1containsanexampleofan
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effectivelymanagedandtargetedmicrocreditprogramthatiscontributingtohighergrowth.
Targeting:IdentifyingPoorAreas
Antipovertyeffortsmightwellbenefitfromanarrowingofthegovernment'stargetingcriteriafromcountiestotownshipsorsmallerunits.Thegovernmenthasapproachedpovertytargetingbyidentifyingcountieswithlowpercapitaincome.Acountywasidentifiedaspoorifits1985averageruralpercapitaincomefellbelowY300,Y200,orY150,dependingonlocationalandpoliticalfactorsincludingthepresenceoflargeminoritypopulations.Followingnumeroustargetingcomplaints,anewtargetingoperationwasundertakenin1994byrevisingthepovertylineandadjustingthedesignationofpoorcounties.Somecounties"graduated,"andotherwereadded.Countiesincludedinthepovertyprogramnownumber592.
Evenaftertheseadjustments,2ofthe10poorestcountiesremainedoutsidetheprogram.Theuncertainreliabilityoftheincomedatacallsintoquestionwhetherthecountiesincludedwerethepoorest.PercapitaincomestatisticsfromtheMOAdatabasegenerateadifferentlistofpoorcountiesthanthatintheStateStatisticsBureaudatabase.Riskin(1993)suggeststhatin1988morethan60percentofthepoorhouseholdslivedoutsideofficiallydesignatedpoorcounties,thoughhissurveywasnotdesignedfortestingthesequestions.Riskin'sworkarguesthatthepovertyprogramshouldfocusontownshipsorpoliticalunitssmallerthancounties.
ImpactoftheProgram
Intheabsenceofacomprehensiveevaluationofthepovertyprogram,animpactassessmentmustrelyonprovincialanalysisandanecdotes.DatafromSichuan(Rozelle,Zhang,andHuang1998b)clearlyindicatethatin1985bothgrossandnetpercapitaincomeswerelower
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inprogramcountiesthaninpoor,nonprogramcounties.Overthefollowingdecade,incomesincreasedinbothgroups,butby1995incomesintheprogramcountieswereconsiderablyhigher.Incomeincreasesinprogramcounties,however,didnotkeeppacewithincreasesinthenonpoorcounties.
Ourstatisticalanalysisofthedifferencesingrowthratesbetweencountygroupingssupportedtheconclusionthatprogramparticipationincreasedgrowthinpoorcounties.AneconometricassessmentofincomegrowthinSichuan(1990-95)indicatedthatgrowthinpoverty-programcountieswasabout3.0percentlessthaninnonpoorcounties(whichgrewabout4percentannually).Growth,however,wasevenslower,inthepoor,nonprogramcounties.
DeterminantsofGrowthInvestmentPriorities
Giventhatthepovertyprogramshavehadpositiveincomeandgrowthimpacts,whichelementshavebeenmoreefficientinreducing
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povertyinparticipatingcounties?Intheabsenceofacomprehensiveevaluation,werelyonassessmentsofindividualprovincesandanecdotes.Rozelle,Zhang,andHuang(1998b)estimatedaseriesofregressionstoexaminethegrowthandlevelofincomeinSichuanthatcouldbeexplainedbythepovertyprogram.Theresultsshowthatincreasesineconomicactivitiesthatcreatelinkageswiththerestoftheeconomy,suchastheriseinnonfarmemploymentoranincreaseinsownareasforcashcropping,addtogrowth.Investmentinagriculture,healthandeducation,andelectrificationalsopositivelyaffectsgrowth.Infrastructureinvestmentsalsoshouldpositivelyaffectgrowth,butsuchinvestmentsmustbeintruepublicgoods(e.g.,roads),shouldbewelldesigned,andrequireclosemonitoring.Also,theyshouldnotimposehighlaborinvestmentsonfarmers.
DespitetheinvestmentofY96.1billion(nominal)inpoorprogramcounties,povertyprogramshavenotincreasedtotalgovernmentexpendituresintopoorareas.Thismaybeaconsequenceofthefiscalstressthatpervadespoorareasandthefungibilityofresources,allowingofficialstosubstituteantipovertyfundsforbudgetaryresourcesinprogramcountiesanddivertbudgetaryfundstoothercounties.Acommonproblemofpoorareainvestmentmanagementisthediversionofloansandgrantfundstootherusesbeforetheycanreachlocalinvestmentagencies.Onlythroughcreativefundmanagement,whichprimarilydependsonkeepinginvestmentfundsoutofthefiscalsystem,canlargeinvestmentsbeeffectedinremoteruralareas.
Rozelleetal.(1998a)foundthatinShaanxithetargetingofsubsidizedcredittofarmersincreasedgrowth.Placingfundsinthehandsoffarmersforagriculturalinvestmentshadpositivegrowthimpacts.However,subsidizedinvestmentsintoruralcollectiveenterprisesandlocalSOEsdidnotincreasegrowth.Surprisingly,investmentsinagriculturalinfrastructurealsohadnopositiveimpact
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onagriculturaloutputgrowth,suggestingeitherthattheprojectstheyselectedwerepoorlychosenorrun,orthatinvestmentsinothertypesofinfrastructureshouldbeaccordedhigherpriority.Projectsthatcreateaneconomicenvironmentfosteringentrepreneurshipandlabormovement,suchasincreasinghumancapital,alsosupportgrowth.
FFWprogramshavebeenbetterthansubsidizedcreditinincreasinggrowthinpoorareas,althoughitisnotalwaysthepoorestthathavebenefitedthemost.ZhuandJiang(1995)showthatincomerisesinFFWprojectareas,withroadinvestmentsgeneratingthegreatestbenefits.Theyarguethatnarrowlydefinedprojects(roadbuilding,drinkingwater,andirrigation)facilitateeffectivemonitoring,andthatdiversionpressuresonFFWresourcesarelessthanthoseappliedtodevelopmentgrantstransmittedthroughthefiscalsystem.Unfortunately,projectsoftenarenotplacedinthepoorestareas,thustheverypoorgainonlyindirectly.
InvestmentOptions
EducationandHealth
Investmentsineducationandhealthinmostdevelopingcountrieshavehighreturnsandarethemostdirectwaytoincreaselaborproductivity.Also,educationenhanceslabormarketabilityandimprovesthelikelihoodofsuccessfulmigration.EducationandhealthstrategiesforpovertyalleviationarenotcomponentsoftheLGPR'santipovertyprogrambutareimplementedbythesectorministries.Unfortunately,thefairlyregressivefiscalsystemrequireslocalresidentstobearthecostsofeducation,whichcanreach25percentofpercapitaincomes(Fan1994).Lowrevenuebasesleadtopoorquality-schoolsandunderpaidteachers;andthehighcostofattendingschoolcangreatlyreducethedemandforeducationbythepoor,whoaremoreresponsivetothecostofeducation.Thepoormustalsohaveaccesstoproductiveemploymentopportunitiesthatmakeeducationinvestmentworthwhile,highlightingtheneedforeconomic
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integrationandwell-functioningmarkets.
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Box11.2India:GovernmentSpending,Growth,andPoverty
IFPRIconductedoneof themost comprehensiveevaluationsofdirectand indirect impacts of infrastructure investments on TFP and onpoverty reduction. Investments in roads had little direct impact onpoverty reduction by the indirect impact through improved TFP wassignificant and greater than any other infrastructure investment. Theresultsarereproducedbelow:
GovernmentExpenditureElasticitiesonTotalFactorProductivityandPovertyReduction
RuralRoads Education
Soil/WaterConservation
Research&DevelopmentIrrigationElectricity
TFP 0.0670 0.0427 0.0280 0.0160 0.0116 0.0031
Poverty-0.2250 -0.1760 -0.0057 -0.0033 -0.0024 -0.0014
Note:Thecoefficientsareelasticities;therefore,ifgovernmentincreasesruralroadexpendituresby1percentTFPwillincreaseby0.067percentandpovertywilldeclineby0.225percent.
Source:IFPRI,EPTDDiscussionPaperNo.33,GovernmentSpending,GrowthandPoverty:AnAnalysisofInterlinkagesinRuralIndia,1998.
Infrastructure
Theimpactofinfrastructureinvestmentonlaborproductivityandpovertyreductionalsoispotentiallyverysignificant.Investmentsinroadsandcommunicationsincreasesaccesstooutsidemarkets,raisesreturnstolabor,makesproductioninputscheaperandmoreaccessible,andfacilitateslabormobility.Marketdevelopmentwillreducepricevariabilityandallowgreaterexploitationofcomparativeadvantage.Reliableinfrastructureisrequiredtointegratepovertyareasintotherestofaneconomicsystem.Internationalexperienceshowsthatratesof
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ofaneconomicsystem.Internationalexperienceshowsthatratesofreturnandtheimpactofpovertyalleviationvarywidelybythetypeofroadbuilt;e.g.,interprovincialexpresswaysversusdirtroadsthatpenetrateintoremotemountainouslocations,andall-weathertrunklinesintoruralfarmingregions(Jacoby1998).InvestmentsinroadswerefoundtohaveapowerfuldevelopmentimpactinIndia(Box11.2).
Improvedtransportnetworksfacilitateoff-farmandseasonalemploymentoutsidehomevillagesandreducesthetransportcoststherebyreducingfarmers'costsoffertilizerandotherinputs,improvesreliableaccesstooutputmarketsandgenerallyreducesmarketingmargins(GannonandLiu).AWorldBankimpactevaluationreportonaruralroadprojectinMoroccoconcludedthatimprovedroadsledtoincreasedagriculturaldiversificationandincreaseduseofagriculturalinputsandextensionservicesandledtoincreasedvalueaddedperhectare.Theimprovedroadsalsoledtoincreasedoff-farmearnings,improvedqualityofeducationandimprovedaccessanduseofhealthservices(WorldBank1996).
LandQuality
Wherelandqualitycanbeimproved,doingsoincreasesreturnstolabor.Givenrelativelyequitabledistributionofland,improvementinlandqualitycanalsomeetdistributionalgoals.Theimpactoflocalinvestmentinland-enhancingprojectsbylocalofficialsoftenhasbeenshowntohaveasignificantimpactonagriculturalproductionandonincomes.WorldBankexperiencewithinvestmentsinlandimprovementandruralinfrastructureprojectshaveshownmixedresultsindicatingtheneedformorecomprehensiveexante(whatisplannedcomparedwithwhatactuallyoccurs)appraisalofprojects.Whilesomeprojectshaveprovidedhighfinancialreturnstofarmers,indirectsub-
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sidieshavemadetheprojectsofdubiouseconomicvalue(seeJingtaiPhaseIIprojectdiscussedinWorldBank1992).Stateinvestmentinbasicagriculturalconstructionhasunfortunatelydeclinedinrecentyears.Theproportionofthecentralbudgetdevotedtoagriculturalinvestmentshasdeclinedtoonly3percent,andeventheseareincreasinglydivertedtomeetotherpressingexpenditurepriorities.Localinvestmentsinprojectsthatenhancelandproductivityhaveshownasignificantimpactonagriculturalproductionandincomes(Dong1998).DatafromtheMinistryofAgriculture,however,showthatlocalinvestmentsoccuronlyinwealthierregions,whichrepresentsonlyafractionoftheruralsector;elsewheretheproportionoflocalbudgetsdevotedtoagriculturalprojectshasalmostdisappeared.
Accordingly,mostlandinvestmentsrelyonlaborcontribution.Thishasmanypositiveaspects,butisnota"free"investment.Withincreasedreturnstotemporarymigrationandotheroff-farmactivities,corvéelaborcanhaveahighopportunitycost,evenintheslackseason.Theimportanceofwell-designedinvestmentsisillustratedbycomparingyieldsfollowingimplementationoftwoterracingprojectsonmoderatelyslopedlandinShanxi(Li1994).Oneuseddesignspreparedbythelocalagriculturaltechnicalcollegeandemployedheavyequipmentalongwithlocallabortocreatedeep,straight-cutterraceswithreconditionedsoilineachterracebed.Theotherwasa"traditional"terracedesignedbylocalofficialsandconstructedwithlocallaborandhandtools.Subsequentcropyieldsonthewell-designedterracesweresignificantlygreaterthanonunimprovedmoderatelyslopingland,butyieldsdidnotimproveonthe"traditional"terraces.Farmerperceptionsofspendingtimeandeffortonconstructingtraditionalterracesarebestsummarizedbythe1997commentofaHenanfarmer:"Wework,wedonotgetpaid,wecannotmakeothermoney,andwedonotseeourlandgetanybetter."However,theexperienceofTheWorldBankinShaanxiprovincesupportsthecontentionthatwell-designedagriculturalinfrastructureprojectshavehighratesofreturn.
ResearchandExtension
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ResearchandextensionhavebeenthemostimportantsourceofyieldandTFPgrowthinthepost-reformperiod.(WorldBank1997).Thenationalandprovincialresearchsystem,however,hasgivenlowprioritytoagriculturalR&Dinrecentyears;veryfewtechnologieshavebeendevelopedforresourcepoorareas(Rozelle,Huang,andPray1998).Thebiasagainstpoorareasisevengreaterforextensionandagriculturalmanagementservices.Lowsalariesandfundshortageshaveleftextensionstationsinmanypoorareasseverelyunderstaffed(Hu,Huang,andRozelle1998).
IndustrialDevelopment
Manylocalleadersfeelthatonlythroughcapturingthehighvalueaddedofsuccessfulindustrialdevelopmentwilltheplightofpoorareaschangenoticeably.Industrialgrowthisalsoperceivedasthekeytoresolvingthefiscal
Povertyisoftenconcentratedinresourceandinfrastructuredeficientareaswherearableland,forsubsistencecropproduction,isofpoorqualityandavailableonlyinsmallplots.
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crisis(Wong1997).Eveninpoorcounties,taxesonindustryandcommerceaccountforthebulkofgovernmentrevenues.However,TVEsinpoorareashaveahighfailurerateandhavebeenaseriousdrainonscarcefinancialcapital.TargetinginvestmentandcredittounviableTVEprojectsmaybelesseffectiveinsuccessfullypromotingTVEsthanhavinglong-terminvestingineducation,vocationalskills,andinfrastructure(Rozelle,Park,Huang,andJinforthcoming).By1990,only4percentoftherurallaborforceinChina's120poorestcountieswereemployedinruralenterprises,incontrasttothe22percentinthenationasawhole.
Migration
Thelargedifferencesinwageratesbetweenruralareas,particularlypoorruralareas,andprosperousurban(andrural)areasarepowerfulmigrationincentives.Thegovernmentdoesnotmaintaincomprehensivetime-seriesstatisticsonmigrantlabor,butvariousestimateshaveplacedthenumberashighas100million(Rozelleetal.1998,HuangandCai1998).Migrationdestinationshavechangedfrombeingprimarilyintraprovincialinthelate1980stoalmostequallybalancedbetweenintra-andinterprovincialmovementinthemid-1990s.TheurbanmarketsintheYangtzeandPearlriverdeltasaremajorinterprovincialdestinations.Thecharacteristicsofmigrantsalsoarechanging;womenarenowenteringthemigrantlaborforceatrateshigherthanmen.
Migrationhasmadeanimportantcontributiontoemploymentopportunitiesformanyruralcommunitiesthroughoutthenation.Migrantremittancestatisticsareanecdotalbutindicatetheimportantcontributiontopoorareas.TheMinistryofLaborestimatedthatin1994some37millionruralmigrantsin23largecitiesremittedY75billion;theSichuanLaborBureaureportedthattheprovince's6millionmigrantworkersremitmorethanY16billionannually(World
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Bank1997d)andtotalremittanceswereY200billionin1997(ChinaDailyAug.7,1998).Perworkerremittancesofthismagnitudefarexceedsthepercapitaincomeofpovertyhouseholds.However,evenwithoutmigrantremittances,poorhouseholdsbenefitfromthedecreaseddemandforfoodsupplies.Migrationmayalsoprovidelesstangiblebenefits,suchasaccesstobetterinformationandavailabilityofcapital.
Mostmigrationoccursoutsideofficialjobplacementprograms.Forexample,anestimated15percentofShaanxi'sinterprovincialmigrantsusedofficiallabormarketchannels,butfewofthesewouldhavecomefromthemoreremoteandpoorestcounties.Whilethepotentialrewardsofsuccessfulmigrationaresubstantial,soaretherisks,particularlywithspontaneousmigration,wherethereisnotonlytheuncertaintyofobtainingemploymentbutalsothepossibilityofexploitationasmigrantslackproperdocumentationandcredentials.Theoverwhelminglyimportantmigrationdeterminantisa"villagenetwork."Pastmigrationwillleadtofuturemigrationfellowvillagerswhocanberelieduponforinformation(andpossiblefinancialassistance),includingpotentialjobprospects,provideachaintoattractnewvillagersintothemigrantlaborforce.
ConclusionsandRecommendations
AlthoughChinahasmaderemarkableprogressinitswaronpoverty,thegovernmentcandomore,includingthefollowing:
·Improvetargetingofpovertyprogramstoaimatsmallerpoliticalunits,suchastownships.Thepovertyprogramhassuccessfullytargetedpoorcountiesandhashadpositiveimpactsoneconomicgrowth.However,improvedtargetingisneededtoensureallthepoorarereached.
·DevelopandexpandTVEsinpoorareascautiously.ProjectsforcarryingoutanyTVEinvestmentsshouldfocusonsimple,labor-
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intensiveproductiontechnologiesusinglocalinputssuchasprocessingofagriculturalproductsthatmightofferacomparativeadvantage.
·Promotelabormarketdevelopmentandexpandlabormobilityprogramstargetingpoorhouseholds.Thequickestmeansofovercoming
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povertyissuccessfulmigration,thereforeincreasingandexpandingtheseprogramswouldhaveanimportantandimmediatepovertyreductionimpact.SuchprogramscouldexpandthepilotpovertyreductionactivitiesinitiatedwithWorldBankassistance.
·ExplorewaystoexpandFFW-Typeprograms.FFWactivitieshavebeenparticularlysuccessful,inpartbecausethefundsbypassthefiscalsystemandbecauseprojectsarenarrowlydefined,easilymonitored,andfocusedonhigh-returninvestments.Experiencesfromothercountriesthatpaylow,self-targetingwagesforworkersonFFWprojectsshowthatsuchprogramscanleadtobothincreasedgrowthandtargetpoorhouseholds.
·Designpoverty-reductionprogramsonthebasisofdetailedconsultationwithlocalleadersandplannedparticipants.Considerableprogressinstrengtheningcommunityparticipationhasbeenmadeintwopoverty-reductionprojectssupportedbytheWorldBank.
·Expandeffectivemicrofinanceprograms.Whenproperlydesignedandimplemented,microfinanceprogramsareaprovenmeansofachievingsustainedreductionsinpoverty.Asexperimentationwithmicrofinanceschemesexpands,theirdesignandimplementationwillbecomemorecriticalanditiscrucialthatinterestratecontrolsbediscontinued.Correctingthemistakeslatermayprovedifficult.
·Investinruralinfrastructure.Investmentsinagriculture,ruralenterprise,roads,andotherruralinfrastructurecanincreasetheproductivityandincomeofthepoor.However,resourceconstraintsinmostpoorareaslimitefficientinfrastructureinvestments.Thegovernmentshouldavoidmakinginvestmentsthatdonothavereasonablyfavorableratesofreturn.
·Increasetheamountandqualityofresearchandtechnologysupport,
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todevelopnewandbettertechnologiesforresource-poorareas.Littleresearchandtechnologysupportexistsforcropsandlivestockinsuchareas.Provincialagriculturebureausextendexisting"off-the-shelf'technologypackages(oftendesignedforirrigatedlowlands)touplandrainfedareas.Developmentofappliedtechnologiesforresourcepoorareasisurgentlyneeded.LGPRshouldworkcloselywithagricultureofficialstodevelopsuchtechnologies.
·Maintainandreinvigoratetheextensionsystem.Thisshouldcontinuetobeahighpriorityinallpoorareas.Subsistenceagriculturewillbecharacteristicofpoorareasformanyyearstocome,andonewaytoincreaseproductivityandpreventthenearpoorfromfallingintopovertyisinvestmentinnewcroppingandlivestocktechnologies.
1.TheincidenceofpovertyinChinaiscalculatedbyapplyingpovertylines(twolevels)toaconstantpricedistributionofpercapitaincome.TheabsolutepovertylineestablishedatY318percapitaperyearin1990pricesreflectstheincomerequiredtomeetminimumnutritional(2,100caloriesperday)andnonfoodrequirementsandcorrespondstoabout$0.70perdayin1985PPPdollars.ThehigherpovertylineissetatY454(in1990prices)equivalentto$1.00perdayin1985PPPdollars.BothofthesemeasuresarebelowtheWorldBankstandardof$1.00perday(in1995PPPdollars)ofconsumptionexpenditure.TheChinesedefinitionofabsolutepovertyisthebasisofthediscussionunlessotherwiseindicated.
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12.NaturalResourceManagementandtheRuralEnvironment
PhotoCourtesyofNationalZoologicalPark
Rapideconomicgrowthhascontributedtoincreasingpressureonthenaturalresourcebase.Mostscholarsagreethatenvironmentalstressandnaturalresourcedegradationareprimarilyfunctionsofinappropriategovernmentpolicy,lackofappropriatepropertyrights,populationgrowth,andpoverty.Increasedincomeandmorerationalpropertyrightshave,accordingtosomescholars,ledtoimprovementsinChina'sruralenvironmentquality.Furtherimprovements,coupledwitheffectiveregulation,canimproveresourcesustainability,soilerosion,andland,forest,andgroundwaterdegradation.
TheevidenceonthedevelopmentofChina'snaturalresourcesinthiscenturyisambiguousandsubjecttoconflictinginterpretations.Time-seriesdataonChina'slandqualityshowfertilityhasrisenandfallenduringthe20thcenturyandgenerallyhasnotworsened(Lindertforthcoming).Othermeasuressuggestthatthelandresourceisimprovingcontrolshavecontinuouslyreducedtheareasufferingfromsalinityanderosion,forestedareashaverecoveredfromlossesinthe1980s,andpreventionmeasureshavereducedtheareassubjecttofloods(Table12.1).Duststormsand''mudrains"inBeijingandother
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northerncitieshavediminishedinfrequencyfollowingtheintroductionofforestryshelterbelts(U.S.Embassy1998)TheYellowriverstilltransportsmoresedimentthananyotherriver,butsilttrappinghasreducedthesedimentloadsfrom1.6billiontonsannuallybefore1960to1.2billiontonssubsequently(WorldBank1993).Nationalstatisticsclearlydocumenttheincreaseinforestcoverfrom12to14percent(18millionhectares)between1980and1995.Theareaofnaturereserveshastripledinthepastdecade,althoughprotectionofthesereservesisnotensured.
However,othermeasuressuggestChinafacesadeterioratingenvironment.PasturesinnorthwestChinaandontheTibet-Qinghaiplateaucontinuetobeovergrazedandconvertedtocultivatedlands,althoughsomeoftheconversionssubsequentlyreverttograssland.Coastalwetlandsaredrainedforagriculture(primarilyrice)orconvertedforaquaculture.Statisticsaredifficulttofind,butdesertificationissaidtobeincreasing.Muchofthereforestedareaismonocultured,andthedropinnaturalandold-
Table12.1:IndicatorsofRuralEnvironmentandNaturalResourceConservation
WaterErodibleArea
SalinityArea
FloodArea
Forest
Total Controlled Total Improved Total Improved Cover(millionhectares) (percent)
1975119.6 40.7 7.1 3.9 22.1 16.1 13-141980118.3 41.1 7.1 4.2 23.4 17.8 121985132.0 49.5 7.6 4.8 24.3 18.5 131990136.0 53.0 7.5 5.0 24.4 19.3 141995163.0 66.8 7.6 5.4 24.4 20.11996182.7 69.3 7.6 5.5 24.6 20.3 n.a.n.a.=notavailable.Source:China'sMinistriesofWaterResources,Agriculture,andForestry.
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growthforestmaysignaladeclineinbiodiversity,wildlifehabitats,andotherenvironmentalservicesprovidedbynaturalforests.
Technology'srelationshiptoenvironmentalandnatural-resourcedegradationalsoisambiguous.Usingmodernmechanizedterracingequipmentontheloessplateauwillleadtodecliningerosion,increasedproduction,andrisingincomesandwillinitiateapositivecycleofrisingincomesandenvironmentalimprovement.Thedevelopmentofnewcold-tolerantvarietiesofcerealshasencouragedtheirintroductionintomarginalareas.Inmanyinstances,however,technologyimprovesresourceusenewcropvarietiesthatincorporatepestresistancewillreducepesticideuse.Whileheavyapplicationsofchemicalfertilizersandpesticideshavepollutedruralwater,thisprobablyhasbeenmoreafunctionofinadequatefarmereducationthanthetechnologyitself.
Interpretationsoftheimpactofenvironmentaldegradationongrowthconflict.Estimatesrangefrom0to15percentofGDP,butthehigherestimatesarebasedongrossassumptionsandanecdotesratherthanonsystematicnationaldataanalyses.TheResearchCenterofEnvironmentandDevelopment,CASSestimatedtheimpactofenvironmentalpollutionandecologicaldegradationontheeconomy(1992)atY200billion,about7percentofGDP,andconcludedthatagriculturesufferedabouthalfthoselosses.AnanalysisbyXu(1998)determinedthatGDPlossesfromecologicaldestructiondeclined7.5percentinnominalterms50percentinconstanttermsover1985-93.Asimilar1992studyconcludedpollutionanddegradationcostswere4.0percentofGDP(Xia1997).AstudyandanalysisbyYu,basedondatacollectedbytheMinistryofAgriculturefound,thatecologicallossesdeclinedinprovinceswhereeconomicgrowthwasmorerapidandroseinslower-growthprovincesinnorthwestandsouthwestChina.Thesefindingslendcredibilitytothetheorythatgrowthreducespollutionanddegradation.However,somescholarsfindnolong-term
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impactongrowth(LiZhou1998).
LegalandRegulatoryFramework
Chinahasahierarchyoflawstoaddressabroadrangeofurbanandruralenvironmentalissues,withtheEnvironmentalProtectionLawattheapex.SupportingitaretheWaterPollutionPreventionandControlLaw,theAirPollutionPreventionandControlLaw,MarineEnvironmentalProtectionLaw,ForestryLaw,FisheriesLaw,WaterLaw,WildlifeConservationLaw,GrasslandsLaw,andLandManagementLaw,whichgovernspecificenvironmentalandecologicalissues.Whilethelawsestablishthegeneralenvironmentalprotectionframework,implementationauthorityisvestedintheStateEnvironmentalProtectionCommission,aStateCouncilorganization.TheStateEnvironmentalProtectionAgency(SEPAformerlytheNationalEnvironmentalProtectionAgency,orNEPA)istheexecutivearmresponsibleforsupervisingandmanagingenvironmentalprotection.BelowSEPA,inallprovincial-leveladministrativeregions,areEnvironmentalProtectionBureaus(EPBs).Actualmonitoring,implementation,andenforcementislefttosubnationalagencies.Directcontrols,implementedthroughpermitsorlicenses,aretheprimaryregulatoryinstruments.Effectiveenvironmentalconservationandprotectionproblemslienotwiththeobjectivesidentifiedinthelawsandregulations,butwiththeirenforcement.
Becauseoffiscalresourcelimitations,SEPAhasdelegatedmostsupervisionauthorityovernaturalresourceandruralissuestolineministriesandtheirenvironmentalprotectionunits(asistrueinmostcountries)but,unfortunatelyproduction-orientedagencieshaveobviousconflictsofinteresttheirofficialsareevaluatedon,andrewardedfor,meetingproductiontargets,notenvironmentalprotectionefforts.
FiscalEnvironment
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Inadequatefiscalresourcesarethemostseriousconstrainttoenvironmentalandnaturalresourceprotection.Thegovernmentallocatesminimalfinancialresourcestoenvironmentalprotectionandnaturalresource
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Table12.2:NationalInvestmentinEnvironmentalProtection,1991-95Investments Proportionof
Year CurrentYuan
1990YuanYuan
GNP BudgetaryExpenditures
TotalExpenditures/a
(billion) (percent)1991 17 19 0.81 5.01992 21 16 0.75 5.61993 27 17 0.68 5.8 4.41994 31 17 0.63 5.4 4.01995 35 19 0.57 5.1 3.8/aIncludesextrabudgetaryexpenditures.Source:ChinaEnvironmentalYearbook,1997;andChinaStatisticalYearbook,1996.
conservation,andonlyasmallportionofthatisdirectedtotheruralenvironment,primarilyforforestprotection.Whilerealexpendituresforenvironmentalprotectionincreasedmodestlyduringthe1990s,relativeexpendituresdeclined(Table12.2).
Fiscalconstraintshaveledtoinactionandconflictsofinterest.Staffingresourcesaremodest,andlocalbureausoftenhaveonlypart-timeandinadequatelytrainedstafftoimplementandenforceantidegradationpolicies.Withintheconstrainedfiscalatmosphere,localleadersfrequentlygiveresourcecontrolrightstotheagenciesresponsibleforprotectingresourceswhoarethenencouragedtousethoserightstogenerateincomeforstaffsalariesandotherexpenses.Thiscaneasilyinduceagencyofficialstoexploittheveryresourcetheyarechargedwithprotecting.
Thesefiscallimitationsandresponsescanleadtosevereconsequencesfortheruralenvironment.Forexample,officialschargedwithprotectingthenaturereservesareprovidedinsufficientbudgetstoimplementtheirresponsibilitiesandoftenencouragedtousethereserve'sassetstogeneratetherequiredincome.However,
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suchincome-generatingactivitiesoftenexploittheveryresourcetheyarechargedwithprotecting.Harkness(forthcoming)reportsthatanationwideauditbytheMinistryofForestryandtheWorldWildlifeFundfoundthatthesetypesofactionshadleftseveralnaturereservesdevoidofbiodiversity.Thesystemlacksanindependentmonitoringoroverseeragencytoresolvegrowthandenvironmentalconflicts.
TheStateofChina'sRuralEnvironmentandResourceBase
LittleauthoritativeinformationexistsonthestateofChina'sruralenvironmentandnaturalresourcebase.Severalstudieshavebeendoneonvariousaspectsofdegradationandtheresponseofvariousgovernmentaljurisdictions.However,theevidenceisfragmented,anecdotal,andbasedondataofvaryingdegreesofreliability.Theseproblemsfrequentlyleavewell-intentionedobserversconfusedandfacedwithconflictingevidenceandunclearpolicyoptions.Inothercountries,theWorldBankhasbegunanEnvironmentalIndicatorsProgram,aneffortthattriestomakeasystematicassessmentoftheavailablestudies,establishinacountrywhatisandisnotknownabouttheenvironment,andmaketheresultsknowntointerestedpartiesbothinsideandoutsidethecountry.
Chinafacesanumberofchallengesbuthashadsomesuccessinsolvingproblemsinsomeofthemostcriticalareasofruralenvironmentandnaturalresourceprotection.Themajorruralenvironmentalproblemsarediscussedinthefollowingparagraphs.
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RuralWaterPollution
Soilerosion,inappropriatefertilizernutrientmixtures(particularlyexcessivenitrogenapplication),andexcessivepesticideuse,coupledwiththelackofintegratedpestmanagement(IPM),atthefarmlevelcontributetoruralwaterpollutionandcreateotherenvironmentalproblems.Industrialandmunicipalwastewaterdischargesarethemajorpollutersofruralwatersupplies.
TVEsareprimarilyproducersoflabor-intensiveproductsbutalsoproduceproductsthatgenerateairpollution,includingcement,brick,andtile.WhileTVEsaccountforonly10percentofthenation'sindustrialwastewaterdischarge,theytreatonlyasmallportionoftheireffluentandcontributemorethan10percentofindustrialwaterpollution.Paper-makingisthemosthighlypollutingTVEactivityandaccountsfor44percentofTVEwastewaterdischargethuswastewatertreatmentofpapermillsmustbeaccordedpriority.
Applicationofchemicalfertilizersurgedfollowingtheintroductionofreformsgrowingatanannualrateof7.2percent,evenwhenpricesubsidieswereliftedandwasimportantinthespectaculargrowthofagriculturalproduction.Elementalapplicationwas38.3milliontonsin1996.Fertilizerbalancesheetsfor1995(Sheldrick1997)indicatethatnutrientapplicationisunbalanced,withexcessnitrogenandphosphateapplicationsrelativetopotash.Whilesomeoftheexcessnutrientsmayhaveremainedinthesoil,theexcessnitrogenismorelikelytobeeithervolatizedorleachedintothegroundwater,streams,andrivers.SoilandFertilizerInstitutesurveys(1991-93)determinedthatnitrateconcentration,primarilyfromnitrogenrunoff,ingroundwatersurpassedpotablewaterstandardsbyasmuchas50percentinafewlocations.Runoffofexcessfertilizernutrientshasbeenblamedforfrequent"redtides"alongthesoutheastcoastthataretoxictohumansthatconsumeinfectedshellfish.Fertilizerapplication
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methods,placement,andtypeoffertilizerappliedalsocontributetoenvironmentalpollution.Muchofthefertilizerisbroadcastontofieldsandvolatizesorleachesnutrients(particularlynitrogen)beforeitreachescroprootzones.Ammoniumbicarbonate,whichisaparticularlyvolatileformofnitrogenanduniquetoChina,remainsasubstantialportionofthenitrogenfertilizerapplied.Inpartthismayresultfromtheconflictingrolesofextensionstaffwhoretailagrochemicalstoearnrevenuebutalsoareresponsibleforeducatingfarmersonplantprotectionandrestrainingagrochemicaluse.
Excessivepesticideapplicationhasledtoenvironmental,ecological,andeconomicproblems.Heavyandfrequentapplicationshaveeradicatedthenaturalenemiesofsomepestsandledtochemicalpestresistanceleadingtoevenheavierpesticideapplications(InternationalOrganizationforPestResistanceManagement1993).Thisisparticularlytrueinthecontrolofcottonbollworm,wherethecostofbiweeklyapplicationhasseriouslyreducedcropprofitabilityinthetraditionalcottonarea.Also,unenforcedchemicalpesticideregulationshaspermittedindividualsandfirmstoconcoctandsellpestcontrolcocktailsofuncertainstrengthandcompositionwhichhascontributedtothepestresistanceproblemandmaybehazardous.Thegovernmentbannedtheuseoforganochlorinepesticides(suchasDDT)in1983,butresiduesarestillfoundinthesoilalongtheYangtzeriver.Regulationsstipulateminimumtimeperiodsbetweenfinalpesticideapplicationandharvestingoffruitsandvegetablesandsetlimitsforpesticideresiduesonfoodproducts.However,thelackofmonitoringandenforcementresultsinfrequentpesticidepoisoningandpreventstheexportofsomefoodproductstoOECDcountrieswherethetoleranceforpesticideresiduesinfoodimportsisverysmall.Some10to15millionhectaresoffarmlandarereportedtobepollutedbypesticides(U.S.Embassy1997).
Large-scale,continuousmonocroppinghascontributedtotherapidincreaseingrainproductionbutmayalsohavecontributedtoa
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declineincottonyieldsinthetraditionalcottonareas.IPMresearchisaprovenalternativeto
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chemicalpestanddiseasecontrol.WhileChinaisaleaderinIPM,chemicalpestcontrolremainsthenorm.IfIPMistobecomeimportantitmustbepromotedatthefarmlevelandinfarmertrainingprograms.
Salinization
China'smassiveinvestmentinirrigationfacilitiesduringthe1960sand1970swasfinancedlargelybythecentralandprovincialgovernments.Lower-levelinfrastructure,includingminorandtertiarydrains,wasthefinancialresponsibilityoflowerjurisdictions.Becauseofinsufficientfinances,thesedrainswereneverconstructedinsomeareas.Muchofthesalinizationthataffects7millionhectaresofirrigatedfarmlandcanbeattributedtoinadequatedrainageand,toalesserextent,toinadequatewaterforflushingsaltsthroughthesoilandintothedrainagesystem.About2.7millionhectaresofthesalinizedareaisintheNorthChinaPlain,affecting12to15percentofthecultivatedareaintheHai,Huai,andYellowriverbasins.Themildlevelsofsaltfoundwillmoderatelyreducetheyieldsofrice,corn,soybeans,wheat,andevencotton,amoderatelysalt-tolerantcrop.WorkbyHuangandRozelle(1995)concludedthatsalinizationreducedgrainyieldsbyanaverageof7.8percentinthemid-tolate1980s.About75percentofthesalinity-affectedareashavereceivedsomeremedialtreatment.
SoilErosionandDesertification
Anoft-quotedstatisticsuggeststhatChinalosessome5milliontonsofsoil(includingnonagriculturalland)towatererosionannually(U.S.Embassy1997),butwewereunabletodeterminehowthisstatisticwasderived,orbywhom.Whenslopingorfragilelandsarenotprotectedwithgroundcover,orarecultivatedinappropriately,acceleratedsurfacerunoffandsoilerosionareinevitable.Some1.53
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millionsquarekilometersareclassifiedasmorethanslightlyeroded(NEPAandSPC,undated).Themostseriouslyaffectedareasaretheloessplateau,theredsoilsareasouthoftheYangtzeriver,theblacksoilsofthenortheastplains,andthegrasslandsofthenorthwest.Whiletheprimarydirecteffectoferosionisadeclineinsoilproductivityandcropyields,cropareaalsodeclinesaserosionworsens,althoughthishasnotbeencapturedinavailablestatistics.Also,anareaof1.53millionsquarekilometersisclassifiedasdesert(Ning1997).Increasingratesofdesertification(landturningintodesert)havebeenreported,suggestingthattheannualrateofdesertificationreached2,460squarekilometersinthe1990s.Whilethespreadofdesertlandsmayberapid,thereportedlevelofdesertificationisuntenable.Ifinfactthedesertwereexpandingattheratessuggested,allthegrasslandswouldhavebeenlostyearsago.
AreportbytheResearchCenterforEnvironmentandDevelopmentfoundthaterosionanddesertificationhadthegreatestimpactonGDP.Subsequentwork(HuangandRozelle1995)ontheimpactoferosiononcropyieldsdeterminedthatitwassmall,butstatisticallysignificant.Haditnotbeenforerosion,China'sgrainyieldswouldhavegrownabout5percentperyearmore(1983-89).Someerosionisnatural,andsomeiscausedbyinappropriateagricultural/cultivationpractices.TheLoessPlateauhasbeenerodingforcenturies,exacerbatedbyinappropriatecultivationpractices,butmosterosionislikelytobethedirectresultofeitherpastureovergrazing,inappropriateconversiontocultivatedcropland,andremovalofvegetativecoverthroughdeforestationandclearingofmarginallands.Erosionwasmostseriousduringthe1950sand1960swhenlarge-scaleforestandpastureconversionwasundertakentomeetgrainproductiontargets.Inrecentyears,pasturelandconversionhasdiminishedandforestryconversionhasreversed,butlargeareashavebeenseverelyerodedordegradedbycultivation.Erosioncontrolmeasureshadbeenimplementedonalmost700,000squarekilometers
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through1996.
Grasslands
Convertinggrasslandintocultivatedland,andoverstockingandovergrazing,aremajor
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contributorstodesertification.Agriculturalpolicy,particularlythegoalofincreasedgrainproductionandself-sufficiency,historicallyhasbeenadrivingforcebehindgrasslandconversionanddestruction.Althoughprecisedataseriesareunavailabletoevaluatetheseverityofgrasslanddegradationanddesertification,Li(1998)reportsthat30millionhectaresofgrasslandshavebeenconvertedtocultivatedland,contributingtosoildeteriorationanddesertification.China'sEnvironmentalActionPlan(NEPAandSPCundated)indicatesthatinadditiontothe1.5millionsquarekilometersofdesertifiedland,that1.3millionsquarekilometersoffarmlandinnortheast,northandnorthwestChinawerevulnerabletowinderosion.
TheconversionofgrasslandtocroplandforannualcropsinlowrainfallareassuchasNeiMongoloftenishighlydestabilizingunlessirrigable.Plantingperennialfoddercropswouldprovideyear-roundvegetativecovertolimiterosionandprovidelivestockfoddertoreducethepressureontheremainingnaturalgrazingland.However,grasslandisstillbeingbroughtundercultivationonalargescale.CultivatedlandinNeiMongolhasexpandedby1.0millionhectaressince1990,buttheeffectivelyirrigatedareahasincreasedbyonly0.3millionhectares.However,lowerqualitycultivatedlandalsoisrevertingtograssland;inthelate1980sandearly1990sabout100,000hectaresoftheannualdeclineincultivatedlandrepresentedgrasslandreconversions.
AnalysesbytheLanzhouInstituteofDesertificationconcludedthat85percentofdesertificationwascausedbyexcessivelandconversion,overstocking,anddenudation;12percent,byinappropriatewateruseandindustrialconstruction;andonly3percent,bynaturaldunemovement(Jin1995).
Forestry
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Perhapsbecausetheconsequencesoftheirdestructionaresoevident,forestshavefaredsomewhatbetterthanotherecosystemsinthe1980sand1990s.Thecatastrophicfloods,ero-
Oneofmanynurseriesproducingconiferseedlingsforcommercialtimberplantations
andreforestationofwatersheds.
sion,andsiltationthatresultedfrommassiveillegalcuttingofforestsforfuelandlumberfromthe1950sthroughthe1970spromptedthegovernmenttolaunchaseriesoflarge-scalenationalafforestationandwatershedprotectionprograms.Someanalystshaveconcludedthatforestdenudationisthemostseriousnaturalresourceproblem(Smil1996);thismayhavebeenvalidinearlieryearsbutthereislittlehardevidencetosupportthisviewinthemid-1990s.China'safforestationsuccessinthe1980sand1990shasbeenamongtheworld'sbest,andChinaisoneofthefewdevelopingcountriesinwhichforestcoverisslowlyincreasing18millionhectaresbetween1980and1993.However,thenetincreasemaskschangesintheforeststructureandquality(Table12.3).
WhileTable12.3illustratestheimportanceandcontributionofshelterbeltsandcommercialplantations,italsoindicatesdecliningforestdiversitythroughcuttingofoldgrowthstandsandreplantingwithmonocultureplantations,whichcontributestodeterioratingplantandwildlifehabitats,decliningcarbonsequestration,andlossofnontimberproducts(suchasmedicinalplantsandfungi)thatare
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importantincomesourcesforpoorhouseholds.
HuangandRozelle(1998)identifiedtheprincipalfactorsinincreasingforestcoverasinvestmentsthatimprovedlandqualityprimarilyirrigation,whichincreasedmultiplecropping;growingoff-farmemployment;andland-tenurearrangementsforforestedlandforestsunder
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collectivemanagementhaveexpandedmorerapidlythanforestsunderstatemanagement.Negativeinfluenceswereincreasingpopulationdensityandforestpolicy.Inareaswhereindividualpropertyrightshaveimproved,forestareahasincreasedsubstantially.Nevertheless,biasedforestpolicieshaveinducedfarmerstocutoldgrowthnaturalforestsandreplantwithmonoculturetreesandorchards.
Chinaisintheforefrontofagroforestrytechnology,includingthesuccessfuldevelopmentofmethodsforinterplantingtreeswithcrops.Thegovernment,andlocalauthorities,encourageandfinancetreeplantingtolimitsoilerosionbywindandwater.Thepracticeofplantingtreesaroundvillages,canals,androadshasbeenwidelyadopted,anditspositiveimpactonlocalwindandwatererosionhasbeendemonstrated.Themostcommonuseofcorvéelabor(afterroadandcanalmaintenance)isfortreeplanting(RozelleandHuang1998).Chinahasembarkedonanumberoflargeafforestationprograms,includinglargeshelter-beltdevelopmentprojectsin13northernprovinces,autonomousregions,andmunicipalitiestoprovidewindbreaks,stabilizesanddunes,conservesoilsandwater,andprovidetimberresources.However,manyshelter-beltdevelopmentsaresinglespeciestands,whichreducesinvestmentcosts,butincreasessurvivalrisks.Othermajorprogramsincludesoil-andwater-conservationforestsintheup-
Table12.3:ReforestationinChina(1980-93)
TypeofReforestation Area(millionhectares)
Totalarea +18Timber +5Afforested(primarilysinglespecies)
+21
Clear-cut,nonreforested
-16
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Shelterbelts +6Commercialplantations(includingorchards)
+5
Other(fuelwood,nationalreserves)
+2
Source:HuangandRozelle1998.
perandmiddlereachesoftheYangtzeriver,acoastalshelterbelt,afforestationinthenortherngrasslands,andrapid-growingcommercialforests.Chinaplanstointensifytheseprogramsoverthenextdecade.
Biodiversity
China,richinbiologicaldiversity,containsabout10percentoftheworld'splants,mammals,birds,reptiles,andamphibians.However,overthepastfewdecades,increasingpopulationpressuresanddevelopmentactivitieshaveerodedChina'sbiodiversityresources.Thecombinationofalargepopulationandlimitedlandhasledtoextensivelossofhabitatstoagriculturalandaquaculturalproduction,logging,fuelwoodcollection,andlivestockgrazing.TheChineseAcademyofSciencesreportsthatabout200plantspeciesarebelievedtohavebecomeextinctandanestimated5,000speciesendangeredinrecentyearsbecauseofhumanactivity.
Recognizingtheseproblems,thegovernmenthassignificantlystrengthenedthepolicyframeworkforenvironmentalprotectioningeneral,andforbiodiversityinparticular.Newenvironmentalprotectionandwildlifeconservationlawswereputintoeffectin1989,whichfacilitateddevelopmentofacomprehensivesystemofnaturereserves,andrationalizedcategoriesofprotectionforendangeredwildlife.Chinahasalsobecomeincreasinglyvisibleininternationalefforts;In1992ChinabecamepartytotheConventiononWetlandsofInternationalImportanceespeciallyasWaterfowlHabitat(the
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RAMSARConvention)andtheConventiononBiologicalDiversityin1993.Thesepolicychangeshavebeenaccompaniedbyincreasedemphasisonsectorplanningandmanagement.In1987Chinaproducedanationalstrategyfornatureconservation.ANationalEnvironmentProtectionActionPlanapprovedin1994includesbiodiversityobjectivesandpriorities.TheStateCommissiononEnvironmentalProtectionapprovedaBiodiversityConservationActionPlan(BAP)in1994.TheBAPreviewsthepresentstatusofbiologicaldiversityandconservationef-
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fortsinChinaandsetsoutacomprehensiveprogramofrequirementsforinvestment,policyreform,andtechnicalassistancetostrengthennationalbiodiversitymanagementandconservation.
Asinmanyothercountries,biodiversityprotectioninChinahasfocusedonestablishingnaturereserves.Theamountofprotectedareashasdramaticallyexpandedoverthepast10years.China'smorethan700naturereservestotalsome56millionhectares5.5percentofthecountry.TheStateForestryAdministrationhasjurisdictionovertwo-thirdsofthereserves,andtheStateEnvironmentalProtectionAgency,MinistryofAgriculture,StateOceanographyAdministration,ChineseAcademyofScience,andotheragenciesadministertheremainder.Despitethegovernment'sstrongcommitmenttobiodiversityconservation,stafflevels,managementbudgets,andtrainingandperformancestandardshavenotkeptpacewithreserveexpansion.Fewareasareprotectedormanagedeffectively,andifcurrenttrendscontinue,biologicaldiversityinmanycriticalreserveswilldiminishdramatically.Themainconstraintisfiscalresources,whichleavesnaturereserveswithinsufficientfundsandstafftoeffectivelyperformtheirprotectionandmanagementresponsibilities.Giventheprevailingfiscalconstraint,reducingthenumberandareaofnaturereservesandimprovingthemanagementoftheremainingreservesmayimprovebiodiversityprotection.ThiswouldnecessitateareviewoftheentireNatureReservesystemtorationalizepublicholdings.
Chinaisrichinfloraandfaunabiodiversity,but
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habitatlosshasendangeredsomeuniquespecies.
ConclusionsandRecommendations
Chinahashadenvironmentalprotectionachievementsandfailures.Beneaththenationaltrends,severalcharacteristicsappearthatmaybeunrelatedtoaregion'snaturalecosystem.Wecannotdeterminewhetherthesepatternsarerelatedtotheenvironmentalawarenessandcommitmentoflocalleaders,progressinpovertyalleviation,reductionsinpopulationpressure,orimprovementsinpropertyrights.Particularlyimpressiveprogresshasbeenmadeinincreasingforestresources.Theseincreasesaredue,inpart,toinvestmentsinirrigationandtoimprovedincomesandeconomicgrowth.Thus,furtheragriculturalinvestments,andpoliciesthatshiftfarmersintooff-farmemploymentwillpromotefurtherimprovementinforestryresourcesalthoughincreasedincomeinequalitycouldmitigatesomeofthepositiveincomeeffects.
Afewscholarshaveattemptedtoquantifythecostsofenvironmentalandnaturalresourcedegradation,butlittleanalysishasbeendoneonthecostofdegradationpreventionorreduction.Itisthecomparisonofthecostsandbenefitsofenvironmentandnaturalresourceprotectionthatisrelevanttopolicymakers.Stronganalyticalevaluationsofthecostsandbenefitsofdegradationpreventionandreductionareneededasabasisforderivingmorerationalpoliciesforenvironmentalandnatural-resourceprotection.ChinamightconsiderinitiatingcollaborationwiththeWorldBank'sEnvironmentalIndicatorsProgramtocollectandanalyzetheenvironmentalresearchavailableonChina.Thequalityofenvironmentalresearchvaries,andthusthefindingsmustbeinterpretedcautiously.Moreresearchisneededtodefineaccuratelytheproblemsandremedies.
Financialconstraintshavepushedprotectionresponsibilitiestolocalproductionagencies,whichhaveinadequateenvironmentaltraining,fewresourcesavailableformonitoringandenforcement,andmost
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cruciallyfewincentivestoimplementnationalandregionalregulations.However,evenifotherconstraintswereremoved,thefiscalshortagesaresose-
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verethatofficialsmayhavetoexploittheveryresourcestheyarechargedtoprotecttoearnincomeforstaffsalariesandexpenses.Withappropriateincentives,ruraldevelopmentcanattractprivateinvestmentintoseveralactivities,butenvironmentalprotectionisnotamongthisselectgroup.Therefore,resourcestoprovideenvironmentalprotection,maintainingbiodiversity,andsustaininglong-termuseofnaturalresourcesmustcomefromgovernmentbudgets.
Theissuesofenvironmentalprotection,pollutioncontrol,andsustainablemanagementofnaturalresourcesaresocomplexandhaveimpactsoversuchlongtimehorizonsthatwithoutwelldesignedregulations,marketfailure(exacerbatedpollutionandunsustainableexploitationofnaturalresources)isquitepossible.Experienceindicatesthatrapideconomicgrowth,fertilitydeceleration,andpovertyreductioncontributetoalleviatingenvironmentaldegradation,butfullyadequateprotectioncanbeprovidedonlyifaregulatoryprogramisenforced.Tomakesucheffortsmoresuccessful,severalchangesareneeded,includingthefollowing:
·Makeregulationsspecifyingstandards,penaltyschedules,monitoringcriteria,andenforcementprovisionsmoreprecise.
·MaintainNaturalResourcepolicywiththelineagenciesbutallocatetheresponsibilitytobureausabovethecountyleveltoavoidlocalfiscalandstaffingconstraints.
·CommitmorefinancialandstaffresourcestostrengthenthecapacityofSEPAandProvincialEPBstomonitornaturalresourceprotection,developdatabases,andprovideindependentadvicetogovernmentonthestateofnaturalresources.Thisshouldincludeanationallandusemappingexerciseusingsatelliteimageryandotheravailabledata,toprovideacomprehensivebaselineagainstwhichfurthertrendscanbemeasured
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·Thenumberandsizeofnaturereservesshouldberationalizedconsistentwiththeresourcesprovidedfortheirmaintenanceandprotection.Asmanynaturereserveshavelocalcommunitieswithintheirboundaries,thedevelopmentofsustainableparticipatorymechanismsforcommunity-basedresourcemanagementisahighpriority.
·Reformagriculturalregulatoryinstitutions/agenciesrelatingtoplantprotectionandpublichealth(livestockandfood)processing,etc.
·Providebettereducationforfarmersonbalancednutrientapplicationandtiming,fertilizerplacement,soilincorporation,andpollutionimplicationsofoveruse.
Tosupporttheforestrysector,Chinashouldtakethefollowingsteps:
·Eliminateremainingdistortionsinthepolicyframework,particularlythehighlevelofdomesticprotectionthatimpedesefficientinternationaltrade,andtheveryhighleveloftaxationontimberproducts.
·Morerigorouslyimplementsustainablelanduserequirementsinthelegalframework,particularlygreaterenforcementofrulesrelatedtoannualallowablecutsinnaturalforests.
·Expandforestryresourcestosupportcontinuedgrowthinconstructionandagroprocessingwithanemphasisonproductivitygainsthroughimprovementsinsilviculturaltechnologies,particularlyplantingstockdevelopmentandsilviculturalmanagement.
·Shiftgeographicalfocusofafforestationactivitiesfromthemoredevelopedsouthernandcoastalprovincestothepoorerinlandprovinces,withappropriateadjustmentstosilviculturaltechnologiesthatreflectthesocioeconomicrequirementsofpoorhouseholds.
·Developmoreparticipatoryapproachesfordesigningandcarrying
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outlarge-scaleafforestationcampaignstostrengthenincentivesforsustainableresourcemanagementbylocalcommunities.
·Developcomprehensiveintegratedmanagementplansforforestresources,particularlynaturalforests,tomaximizeeconomicandenvironmentalbenefitsforlocalcommunities.
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ANNEX:POLICYANDACTIONMATRIXIssue Action MacroeconomicPoliciesandFramework
·Policyframeworkisurban-industrialbiased·Ruralincomesarelow.·Rurallaborforcebuffersurban-industrialneedsbyprovidinglaborduringboomperiodsandabsorbinglaborduringslackperiods.·Massiverural-to-urbanfinancialtransfersoccurthroughthebankingandcreditinstitutions
·Removeanyremainingbarrierstoruralmigration.(M-L)·Developprogramstoretrainandredeploylaid-off(redundant)urbanlaborersandnotdisplaceruralmigrantlaborers,forcingthemtoreturntoruralareas.(M-L)·Discontinueadministeredinterestratesandothertransferpoliciestoensurefinancialflowsrepresentonlyrationaltransfersoffundsfromlow-tohigh-returnsectors.(M)
RuralFiscalPolicyandManagement·Ineffectivecontroloftaxeshasresultedinpoorredistributionandreallocationofcollectedrevenues.·Low,inadequateandseculardeclineintaxrevenues(aspercentofGDP)andthereforelackofresourcestoundertake:·Ruralinfrastructureinvestment;
·Recentralizetaxationauthorityandcontrolandestablishreallocationmechanismsandprovideincentivesthatensuresignificantresourcesaretransferredfromaffluenttopoorareas.(M)·Broadentaxbase,including;expandedusertaxes/fees,legitimizetransparentoff-budgetlevies,makegrainquotataxesexplicit,considertransferringlowestfiscalaccountabilityfromtownshiptocountytoreducesalaryandwagecostsandimplementiffeasible.(M)·Providefundsformandatedexpenditures.
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·Manageandprotectresources;and·Providepublicgoodsandservices.·Largeoff-budgetrevenuecollection.·Unfundedexpendituremandatesencouragesmisuseofbudgetaryresourcesandunderminesincentivestoimplementpolicies.
(S)
ExternalTradePolicyandInstitutionsTraderemainsgovernmentcontrolled.
Permitmarkettodeterminetradepatterns.
·Statetradingmonopoliescontrolthetradeingrains,cottonandmajorproductioninputs·Graintraddequotasbutaremaintainedasconfidentialinformation,unavailabletothepublicandexacerbatesdomesticsupplyandpricevolatility.
·Promote,andphase-intradecompetition,overamanageableperiod.EvenifChinamaintainsaclosedtradepolicy,marketcompetitionwouldincreaseefficiency.(S-M)·Phaseoutstatetrading;evenifChinaremoveson-tarifftradebarriersamonopolystatetradingfirmcouldunilaterallyblocktrade.(M)·Discontinuetradequotasandthegrainself-sufficiencypolicy;addressfoodsecuritythroughtradelinkageswithmultiplesuppliersandlong-termcontracts.(S-M)
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Page114Issue ActionForeignDirectInvestmentinAgricultureandAgriculturallyRelatedManufacturing·Lackoftechnology-intensiveforeigndirectinvestmentsinagriculturalindustries.
·Designincentivestostimulateinvestmentsinprioritysubsectors.(M)·Eliminateunnecessaryinvestmentrestrictions,suchasjointventurerequirements.(S-M)·Publicizeandstrictlyenforceintellectualpropertyrightsforagriculturaltechnology.(S)·Liberalizedomesticmarketingconstraintspermittingtransnationalfirmstoestablishandcontroldistributionnetworks.(S-M)
AgriculturalPricingandMarketingPolicyandInstitutions·Governmentinterventioningrainsubsectorremainsstrongandcostly.Rolesofvariousgovernmentaljurisdictionsinimplementinggrainpolicyhavebeenunclear.·Farm-deliveryquotasstillleviedonfarmers.·Farmgatepricesforgrainaregovernmentdetermined.·Farmgateprocurementofgrainsismonopolizedbyparastatalgrainbureaus.·Governmentmaintainslargevolumesofgrainstocksalthoughexactamountisconfidential.·Pricevariabilityhighandincreasing.·Thecommercialandpolicy
·Relymoreontheprivatesectorandmarketforcestoimproveagriculturalresourceallocationandfarmerincomes.·Discontinuegovernmentdeterminedgrainquotasandprices.(S-M)·Liberalizegrainprocurementandpermitprivatetraderstocompeteonanequalbasiswiththegrainbureaus.(S)·Reevaluateself-sufficiencyandgrainreservepolicieswiththeobjectiveofreducinggovernmentgrainstocksandcost.(S-M)·Clearlyseparatethecommercialandpolicyfunctionsofthegrainbureau.(S)·Assesscosts,benefits,andfeasibilityofestablishingpricestabilizationprogram.(S-M)·Design,establish,andenforcenationalquarantineandphytosanitarystandards
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functionsandfinancialaccountsofthegrainbureaucompaniesoverlap.·Thelackofstandardizedphytosanitaryprocedures,shippingdocuments,andtransitfeesimpedesinterprovincialmarketingofnongraincommodities.·Theabsenceofcomprehensiveandconsolidatedinformationonmarkets(prices,quantities,andqualities)handicapsthemarketingoffarmersandtraders.·Intheabsenceoffarmermarketingassociations,farmershavefewmarketingoptionsandreceiverelativelylowprices.·Toincreasetaxbasesandaddvaluelocallysomecountiesprohibitcrossborderprocurementofagriculturalcommoditiesforprocessingresultinginmanyscale-inefficientagroprocessingplants.·Insufficientpublicinfrastructureimpedesefficientmarketingandtransportofagriculturalcommodities
applicabletoallinterjurisdictionalcommoditymovement.Andifstandardsaremet,prohibitinterjurisdictionalembargoesonagriculturalcommodities.(S)·Consolidatemarketinformationsystemsundertheauspicesofasinglecentralagency.(S)·Encourageandpromotefarmermarketingassociationsthroughlegislationandintroducetrainingprogramsforassociationmanagementstaff.(S)·Investmoreinruralinfrastructurewhereeconomicallymerited.(S-M-L)
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Page115Issue ActionRuralFinance·Ruralcreditinstitutionsmoreconcernedwithpolicylendingthancommerciallending·Ruralcreditinstitutionshaveweakcapacitytoevaluateloans.·Bothruralindustriesandfarmhouseholdsarecreditstarved.·Lackofalternativedepositinstruments·Unsustainablecreditsubsidiesforanti-povertylending
·Assignpolicylendingtoaninstitutionwithoutcommercialresponsibilitiestoensurepolicyandcommerciallendingarefullyseparated.(S)·Permitandencouragecompetitionandinnovation,suchasnewdepositinstrumentswithattractivecombinationsofreturnandliquidity.(S-M)·Deregulateinterestrates.(S-M)·Discontinuesubsidizedandunsustainablecreditprogramsforpovertyalleviationandrefocusonmicro-financeprogramsorotherhousehold-basedpovertyalleviationprograms.(S-M)·Developinstitutionsandintroducetrainingprogramsforstaffofruralfnanceinstitutionsincludingmicro-financeprogramsstaff.(M-L)
ResourceManagementLand·Lackoflandrentalmarketinhibitsefficientuseoflandandlabor·Tenuresecuritymaybeundermininginvestmentincentivesandtheemergenceofcreditsincelandcannotbeusedascollateral.Manyfarmersfavorcurrentlandtenuresystembecausecollectivelyheldlandprovides
·Continuetoanalyzecostsandbenefitsofalternativelandrightsregimesandexperimentwithrentalmarketsandtenurearrangementstoimprovelandmanagement.(S-M)
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security.Water·InsufficientwaterresourcesavailableinnorthernChinatomeetaggregaterequirements.·Inefficientuseofexistingwatersupplies.·Largebudgetaryrequirementsformaintainingsystems.
·ExpediteconstructionofoneormoreroutesoftheSouth-Northtransferscheme.(M)·Conductastudyofconveyanceanddeliveryefficiency;rehabilitatesystems,linecanalsandintroduceimprovedtechnologieswhereeconomicallyefficient.(M)·Expandcollection,treatment,andreuseofmunicipalwastewater.(M)·Introducearationalsystemofvolumetricmeasurementandwaterpricing.(S-M)·Expandself-financingwaterenterprisestomanagewatersuppliesandoperateandmaintainirrigationsystems.(S-M-L)·Establishtrainingprogramformanagementstaffofwaterenterprises.(S-M)·Discontinuegrainquotasandotherproductionconstraintstopermitfarmerstoproducecommoditiesconsistentwiththeircomparativeadvantage.(S-M)
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Page116Issue ActionNaturalResourcesandForestry·Naturalresourceandenvironmentaldegradation.
·Consolidatenaturepreservesandcommitmorefinancialandstaffresourcestonaturalresourcemanagementandprotectionservices.(M)·Improvetrainingofnaturereserveandforestrystaff.(M)·Fornaturereserveswithlocalcommunitieswithintheirboundaries,developparticipatorymechanismsforcommunity-basedresourcemanagement.(S-M)·Developintegratedmanagementplansandrigorouslyenforceregulatoryframework,includingpricestructureforexploitationandpenaltiesfornoncompliance.(S-M)·Investinrehabilitationofwatershedsandgrasslandswhereeconomicallyefficient.(M)·Removeforestpolicydistortionsincludingpricingandtariffprotectionthatimpedesefficientinternationaltrade.(S-M)·Improvefarmertrainingonapplicationandplacementofpesticidesandfertilizers.(S-M)
AgriculturalTechnologyResearch·Declineingrowthoftotalfactorproductivityinagriculture.·Agriculturalresearchfundinghasdeclinedinrealterms.·Inefficient
·Establishresearchprioritiesincludingsubsistencecommoditiesforpovertygroupsinresourcepoorareas.(S)·Centralizeandincreasebudgetaryallocationstoagriculturalresearch.(S)·Evaluatealternativefinancingsources,suchascommoditycesses;andifimplemented,rigorouslymonitorcollectionstoensurefundsarenotdiverted.(S)
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allocationofresearchresources.·Lackofsubstantiveresearchbydomesticandjointventurefirms.
·IncreasecooperationwithinternationalagriculturalresearchcenterstoobtainandadaptnewtechnologytotheChineseenvironment.(S)·EncourageinternationalfirmstoparticipateinChina'sagriculturalinputindustry.(S)
Extension·Formalextensionserviceisineffectiveandnearcollapse.·Extensionfundinghasdeclinedinrealterms.
·Restructureandrevitalizeextensionservice.(S-M)·Improveextensionstafftraining,incorporatingnewissuessuchassolutionstomarketingproblemsandunderstandingproductiontechnologiesfornontraditionalcommodities.(S-M)·Permittheprivatesectortoparticipateinagriculturalinputmarketingandtechnicaladvice.(S)·Promotetheformationofcommodityproducergroupsandencouragethemtoretainspecialiststoprovideup-to-dateinformationonvarieties,pestcontrol,andotherculturalpractices.(S-M)
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Page117Issue ActionRuralIndustry·Ruralnonagriculturalemploymenthasbeguntodecline.·TVEprofitabilityisdeclining.
·IncreaseTVEaccesstocreditandimprovecreditagencycapacitytoevaluateinvestments,monitorandrecoverloans.(S-M)·CautiouslyexpandTVEinvestmentsininlandprovincesandonlyaftercarefulevaluationofanycomparativeadvantage.(M)·Promoteprivatesectorownershipanddevelopinstitutionalstructureswhichwilllimittheliabilityofinvestors,rewardandpenalizemanagersfortheirperformance,andappropriatecompensateshareholders.(S-M)
PovertyAlleviationAbout50millionruralresidentscontinuetoliveinabsolutepoverty.
·Excessiveleakageofpovertyreductionfundingtononpoor,alsoinadequatesupervisioncontributestopoorqualityofprogramworksandservices·Theremainingpoorwillrequiremorethaneconomicgrowthtoescapepovertybecausetheyliveinveryresourcepoorareas.·Limitedfundingfordevelopmentofappliedtechnologiesforuplandagricultureimproveduplandagricultureproductivityis
·Improveidentificationofthepoortopermitbettertargetingofantipovertyprograms.(S-M)·Augmentsupervisionofpovertyreductionprogramsatthelocalleveltoimprovequalityofworksandservices.(S-M)·Investinservicesandinfrastructurethatwillassistthepoormigrateorotherwisetransferoutofagriculture,includingeducation,transportandcommunicationservices.(M)·Continueexperimentingwithmicrofinanceandotherpovertyalleviationprogramsthataredesigned
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crucialtoliftingthepoorabovethepovertyline.
topromotehouseholdinvestment.(S-M)·Designandimplementantipovertyprogramsonthebasisofdetailedconsultationwithlocalleadersandplannedparticipants.(S-M)·Promotesmallbettertargetedprojects,suchasFood-for-Workwhichhaveprovensuccessful.(S)·Useaportionofcentralgovernmentpovertyreductionfundingfordevelopingapplieduplandagriculturaltechnology.(S-M-L)
Note:ThecharactersS,M,andLfollowingtheindividualrecommendedactionsrefertoshort-,medium-,andlong-timeperiodslikelyrequiredtoimplementtheactions.
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