Market Oriented Agricultural Production: Welfare …cerdi.org/uploads/sfCmsContent/html/192/Hou.pdf · Market Oriented Agricultural ... certain well known features of a socialistic

Market Oriented Agricultural Production:Welfare Impact on Urban Workers

Jack W. HOU

Professor of EconomicsDept. of Economics

California State University1250 Bellflower Blvd.

Long Beach, CA 90840-4607, USA

TEL: 1-562-985-4710FAX: 1-562-985-5804

E-mail: [email protected]

Abstract

The success of China’s reform can be partially attributed to the initial focus onagricultural production. This is highlighted by the “household responsibility” system, aimed atincreasing economic incentives and raise food production. In doing so, China “partially”marketized the agricultural sector, and created a unique hybrid system.

Using basic tools, I analyze the effect of this reform on the welfare impact of a typicalurban worker. It is shown that both the welfare of the farmers and the urban workers areimproved, but at a cost to the State. This cost can only be eliminated with full marketization.

Key Words: China, reform, agriculture, responsibility, welfare

Market Oriented Agricultural Production:Welfare Impact on Urban Workers

Many have attributed the success of China’s Comprehensive Economic Reform (CER) to thepatience exhibited in the gradualism approach (as in contrast to that of Russia). However, just asimportant is the sequencing in China’s reform: the first six years were completely devoted torural/agricultural reforms, while the urban/industrial sector remain untouched. Which is precisely the“natural” order as a nation evolves from an agrarian society to an industrial economy.1

From a historical perspective, economic development of many contemporary less developedcountries (LDCs) can be viewed as a "transition" growth process of an "agrarian dualism" into whatKuznets (1966) referred to as the modern growth epoch (MGE) based on the ceaseless exploration ofthe frontier of science and technology, and the application of the knowledge so explored as the mostessential part of the art of production. This transition growth is concerned not only with a statisticalinvestigation of the growth performances (e.g. the rapidity and structural changes studied by Kuznets),but also the "non-quantifiable", i.e. behavior modes sustained by internalized cultural values inherent inany political/economical system. This paper is mainly concerned with the latter: the issue of historicalinstitution evolution, aiming at the construction of the market mechanism that necessarily requires therestoration of commercialized cultural values that lies behind the market; with casual reference ofstatistical measures to support the theoretical model. In the case of China, the formation of the Party State in the initial "socialistic" transformationperiod (1949-1978) was accompanied by a "cultural" revolution, only to be disestablished via aliberalization movement (interpreted as "marketization", "privatization", "internationalization", etc.)that requires the restoration of commercial culture values (i.e. money, interest, contracts, propertyrights, and "capitalistic legality") in an evolutionary process. Three main dimensions of the CER can be identified in a spatial perspective.2 The Urban Reformaims at improving the structural flexibility (i.e. to promote a healthy metabolism)3 of the large scale,technology intensive state enterprises. For the coastal regions, there is a reform for externalorientation, aiming at the linkage with foreigners through trade and investment.4 Finally, for the ruralpopulation -- i.e. employed in the agriculture sector and/or the industry/service sector run by collectives("ji-ti-hu"), individual families ("ge-ti-hu"), and in township enterprises ("shian-dzen-chi-ye") -- thereis the Rural Reform aiming at raising the agricultural productivity via an enlivening of the ruralpopulation. We shall concentrate on the rural reform to highlight the transition from the agrarian pastin an evolutionary perspective, with only brief reference to related urban reform measures. However,the progress and success of this rural reform is measured in the welfare improvement of a typical urbanworker.

1 China’s decision on this “correct” sequence is not based on understanding of economic theory, nor is it by accident. For a

more detail discussion of what led China to CER and to the sequence we see, refer to Hou and Nagahashi (2001).2 For a general discussion on the nature and reason for China's reform, refer to Fei and Hou (1994). A detailed

holistic/operational perspective of China's reform (anchoring on the rural reform, as it initiated the process and isfundamental to the overall reform) can be found in Hou, Fei, and Wang (1993).

3 By this we mean the timely birth and death of products and firms. For a more detailed discussion, refer to Fei and Hou(1994).

4 There are strong evidence that in the first decade and a half of the reform, China relied heavily on external trade and thecontrol of the foreign exchange rate as a lubricant, or more precisely, a reserve tank, to regulate the shortages (and, to alesser extend, surpluses) that are bound to happen when parts of the economy are released from central planning (Hou andMyong 1993). The nature of the external sector (and the external reform) has changed dramatically since the early/mid1990s, and will only accelerate with China’s impending membership of the WTO (Hou and Zhang 2001ab).

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In reform, certain well known features of a socialistic Party State such as pro-urban bias (apolitical paternalistic welfare coverage of the urban working class with the farmers discriminated byunfavorable terms of trade), suppression of urban consumption choice (e.g. life-long welfareguaranteeism and rationing), and investment programs based on politicized maximum austerity, mustbe abandoned. The pre-condition of these liberalization reforms is the re-emergence of cultural valuesof self reliance (rejection of political guaranteeism of "iron rice bowl"), rational egalitarianism(rejection of the distributional justice of the noble egalitarianism of socialistic undifferentiated humanbeing), and decentralization of power (i.e. rejection of political centralism), consistent with amarketized economy. The emphasis of cultural values is "interpreted" by the modeling of evolutionconsistent with the recent trend in a "hermeneutic" approach to history (Yu 1991). The abrupt end to the communism experiment in the PRC is a unique experience of the late 20th

century. The maturing of the cultural values can only proceed in a slow but sure way, giving theChinese rural reform a character of experimental pragmatism, in sharp contrast to the abruptness of theshock treatment implemented in Russia. The Chinese experiment (1978-) centered in certain reformmeasures (the revival of family farming, the two-tract system, the agricultural subsidy, the on and offmonetary inflation) suggesting a Chinese proclivity for a compromised hybrid system as anintermediary step in the evolutionary process towards a fully marketized system. The central theme ofthis paper is that, in the transition growth process, such a marketized urban-rural interaction as a systemcan only come about in an evolutionary process as the command feature melts away imperceptibly at apace dictated by agricultural modernization and the maturity of a culture of economic freedom . When it comes down to it, the objective of any reform in the ex-communist economies, is toestablish a "marketized" system to allocate resources. Economic theory has taught us that such asystem is based on "real" theory concerned with relative rather than absolute prices. With this in mind,we construct a real model based on relative prices, and will only venture into absolute prices at the endwhen discussing the monetary expansion as a means of resolving conflicts during the reform process.

I. Urban-Rural Interaction: General Model

There is a long tradition for economists to model urban-rural interaction in a holistic operationalperspective. The modeling of agrarian dualism started with the Tableau Economique (i.e. FrancoisQuesnay (1758)) of the Physiocrats. In the 20th century, the post-war development theory of laborsurplus dualism modeled the process of transition towards modernization in terms of urban-ruralinteraction, involving dualistic production, exchange, terms of trade, consumer preference, capitalaccumulation, and technology change (Fei and Ranis 1964). In modeling China' rural reform, weshould be mindful of the fact that the CER is a unique historical experience that occurred towards thelatter part of the 20th century involving many socialistic countries. It is perhaps worthwhile to first repeat what eminent analytical economists has reminded us of thelimited but vital role of "models" in approaching historical (in our case, the evolutionary of) events:

"history could not be regarded simply as a branch of social science. Its aims weredifferent. It sought to study the individual case, ... social science ... might indeed beuseful, even vital, in ... illuminat[ing] the particular event.” (Arrow 1986)"[In approaching historical knowledge, t]he function of economist ... is still to makemodels and test them as best one can, but the models are more likely to be partial inscope and limited in applicability. ... If economists set themselves to the task ofmodeling particular contingent social circumstance, with some sensitivity to context,they would provide exactly the interpretive help an economic historian needs." (Solow1986)

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Accordingly, we shall construct a general abstract model of rural reform, highlighting certain featurespresumably common to all socialistic countries. Unique experiences of China, such as the two-tractsystem and the government subsidy program, will be treated in the next section. To assess thesignificance of reform, the general model in this section will naturally involve a comparison of themodes of operation of the dualistic economy before and after 1978.

1.1 An Overview of the Chinese Economy and Its Transition For simplicity, the economy is assume to be closed. For practical purposes, production can becategorized by two sectors and three types:1. Urban sector (State enterprises): Industrial output, Q, produced with the labor force L;2. Rural Sector:

a) Farmers: Agricultural output, A, produced with the labor force LA;b) Rural Industries: Industrial output, Q', produced with the labor force L';

The real outputs (Q, A, Q') are allocated, inter- or intra-sectoral wise, as:(1.1a) Q = C + CA + I + I'

Consumption of IndustrialGoods by Urban Labor

Force

Incentive Goods& Modern Inputs

Investment forUrban (I) and Rural (I')

Industries

(1.1b) A = AS + AAAgricultural Surplus Agricultural Consumption

by Rural Population

(1.1c) Q' = C' + I"Consumption by Rural

HouseholdInvestment Goods for

Rural Industries The urban-rural interaction that enlivens the rural population are described by the three inter-sectoraldeliveries CA, I', and AS. In the transition growth process of a dualistic LDC, the agricultural sector must obviously producean agricultural surplus AS to feed the urban population L (see Fei and Ranis, 1964). To fulfill thishistorical mission, the agricultural sector must receive, via exchange in the inter-sectoral commoditymarket, incentive consumer goods (e.g. textiles) and modern factory produced inputs (e.g. fertilizers),CA. Moreover, the purchase of investment goods (I' and I") for the rural industries in the "informalfinance market" by rural savings (SA), leads directly to the acquisition of titles to capital wealth, thuscontributing to a "capitalistization" (i.e. conversion to profit-seeking entrepreneur) of the traditionalfarmer. The failure of the agricultural sector being common for all ex-socialistic countries, the primaryobjective of the rural reform is to modernize agricultural via the creation of a profit-seeking and pricesensitive rural entrepreneurial class in the final analysis. A marketized urban-rural interaction is regulated primarily by the inter-sectoral terms of trade(τ ), i.e. the ratio of the price PA of the agriculture product (AS) to the price PI of the industrial product(CA and I')(1.2) τ = PA/PI inter-sectoral terms of tradeProminent scholars (e.g. Schultz 1978) have long recognized τ as a key regulator of income andinvestment incentive of entrepreneurial farmers. This "capitalistic lesson" is fully corroborated by therural reform experience of socialistic China in that the success of the rural reform was accompanied bya sustained increase of τ in favor of the agricultural sector (Ash 1991). As shown by the time path inFigure 1a, while τ moved slightly in favor to farmers before 1978, the real significant gain came onlyafter 1978, leading to the faster gain of consumption per head of peasants (Kueh 1988) relative to non-peasants (Figure 1b).

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The terms (C, CA, I, and I') on the right hand side of equation (1.1a) represent competing demandson the output capacity Q of the state enterprise. Before 1978, when the totalitarian government wasstrong, these "conflicting" demands were resolved as a "development strategy" issue -- i.e. the choice ofinvestment priority between heavy and light industries (e.g. fertilizers and consumption goods) --which, as dictated by the Party, opted for a strategy of maximum austerity with a pro-urban bias. Thepolitically insensitive rural households bore much heavier burden of austerity than the urbanpopulation. While all contemporary LDCs tend to exploit the rural population, the socialistic Chinaonly stressed its severity and thoroughness.5

With the lost of faith in socialism, an urban-rural conflict surfaced due to the erosion of theauthoritative power of the government that could dictate societal interest before 1978 to derive it of anysense of "conflict" of pluralism" that defies "revolution conformity". The improved terms of trade andthe faster gains in rural consumers welfare (Figures 1a and 1b) -- much resented by the urban workingclass as "distributional injustice" -- became a new source of societal tension that can only be arbitrated,but no longer dictated, by the government. Much of the difficulty encountered in rural reform is tracedto the fact that the cultural value of Noble Egalitarianism (sharing of affluence) or distribution justiceof the socialistic variety has lost its appeal, while that of a Rational Egalitarianism (self reliance andcompetition) a la capitalism has not yet been firmly rooted. Equations (1.1ab) show that the only way the conflicting urban interest (the consumption of C andAS) and rural interest (the consumption of CA, AA, and I') can be politically pacified is through thescaling down of the investment in the state enterprises (I). This is shown in the higher average annualgrowth rate of heavy industries (state enterprises) before 1978, and the accelerated light industry andagriculture growth rates afterwards:

1952-57 1957-66 1966-78 1978-84Heavy IndustryLight IndustryAgriculture

22.7%12.14.4

10.9%8.52.0

10.1%7.53.6

5.0%10.67.6

The socialistic government adopted a host of new monetized policy instruments to resolve thedistributional conflict, such as the use of government subsidies for money-losing state enterprises andfor the procurement of agricultural goods. The government also resorted to monetary expansion tofinance the government budget deficit and/or the "financial deficit" in fixed investment finance. TheCER entails a monetization process in which the government resorted to monetary means to resolve theissue of distributional conflict and growth rapidity with dire inflationary consequences. While theseproblems are encountered in all socialistic reform attempts, only some of these will be modeled below. The absence of privatized savings in the urban sector leads to the postulation of thefollowing equation describing the consumption behavior of the urban working class:(1.3) WL = PIC + PAAS

Urban WageIncome of L

Urban consumption ofIndustrial Goods C

Urban consumption ofAgricultural Surplus AS

where the three prices (W, PI, PA) stand for the wage rate and the two prices indicated in equation (1.2).This equation stresses the absence of privatized property income and savings, the remedy of which isstill a key issue in urban reform.6

5 Demographic statistics indicate that the brunt of the deaths due to starvation in the "Three Bad Years" was in the rural

sector (Hou 1992).6 Before 1978, for the urban population, the social function of private saving is solely for the purpose of adjusting the time

profile of consumption rather than the acquisition and accumulation of titles to capital wealth. A "statistical" saving tendsto emerge as a "planning error" when there is an agricultural shortfall, making it impossible for the urban population toacquire the guaranteed consumption goods (AS) at the planned prices (PA).

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With the revival of free consumer choice, equation (1.3) takes on an almost "revolutionarymeaning of monetization". Before CER, equation (1.3) is essentially a political monitoring device toassure that the urban workers acquire their paternalistically assigned/guaranteed consumption quotaindependent of their privatized consumer preference. After 1978, it took on a capitalistic meaning of a"budget line" that constrains free consumer choice according to their preference. When converted to abudget line for a typical urban worker, equation (1.3) , upon division by LPI, becomes(1.4a) ω = c + τα budget line for a typical urban worker, where(1.4b) Real wage in terms of industrial goods: ω = W/PI

Per urban worker consumption of industrial goods: c = C/L Per urban worker consumption of agricultural goods: α = AS/LEquation (1.4a) shows that when the real wage (ω ) is fixed, an increase in terms of trade (τ ) worksagainst the urban worker because his/her consumption of industrial (c) and/or agricultural goods (α)will have to decrease, which is a major source of social conflict. The emergence of the agriculture subsidy (let us denote that with zA) is the Chinese way toameliorate the urban-rural conflict by benefiting the farmers while lessening the adverse impact of thedeteriorating terms of trade against the urban consumer, for zA suppresses the official retail price belowthe procurement price. Let θ denote (zA/PI)/AS, i.e. real (in terms of industrial goods) subsidy per unitagricultural surplus. Then,7

(1.5a) Participation Benefit: (CA + I')/AS = θ + τ , where(1.5b) Real Subsidy: θ = (zA/PI)/AS

(1.5c) Effective Terms of Trade: τ * = θ + τThe farmer's participation benefit (i.e. the industrial goods obtained per unit of agricultural surplusdelivered) is the sum of the terms of trade (τ ) and the real subsidy (θ ), which may be defined as an"effective" terms of trade (τ *). The distributional-conflict ameliorating effect of the agriculturalsubsidy is seen from its substitutability for a higher terms of trade to benefit the farmers withouthurting the urban workers. Furthermore, the subsidy raises the procurement price to a level closer tothat of the free market tract,8 and thus reducing the "compulsory" nature of procurement, paving theway for the commercialization of the key service sector of State Trading. Equations (1.4ab) and(1.5abc) provided the perspectives to look at the urban-rural commodity exchange from the viewpointof the urban workers and the rural farmers respectively. The integration of these perspectivesconstituted the heart of the graphic model of reforms starting below. One can certainly analyze the above issues in terms of statistical data via a national incomeaccounting system. However, in this paper, we limit ourselves to integrating essential reform eventsvia graphic conceptual tools (aided by, rather than centering on, statistical analyses) to describe theevolutionary process of China's rural reform.

1.2 Features of the Command Economy Before 1978 For the highly politicized command economy before 1978, the operation of the dualistic economycenters on a tripartite of features, namely,1. Suppression of "selfish" (i.e. free) consumer choice of urban workers;2. Motivating (i.e. exploitation via the collectivism of the commune) the farmers with a "pro-

7 Equation (1.5a) follows from the equality of the monetary payments into the rural sector (zA + PAAS) and out of the rural

sector (PICA +PII').8 For example, the ratio of free market price to contract procurement price for the rice and wheat (in selected years) were:

1978 1980 1982 1984RiceWheat

2.312.10

1.571.30

1.571.21

1.001.00

Refer to Sicular (1988) for more details.

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urban bias" for the good of the commonwealth;3. Maximum austerity drive in capital accumulation for better future.The ideology that a totalitarian and paternalistic government should dictate the societal interest (i.e.reform human nature via the exercises of the political force) underlies all these features. Theconsistency of these politicized spirits can be shown with a simple graphic model.

Let the budget line (1.4a) of a typical urban worker be represented by the straight line ω 0B0 inFigure 2, where per person consumption of industrial goods c (agricultural goods α ) is measured onthe vertical (horizontal) axis. Notice that the slope of the budget line is the inter-sectoral terms of tradeτ 0, while the vertical intercept at ω 0 (= W/PI) is the real wage in terms of industrial goods. With freeconsumer choice, the equilibrium (i.e. the preferred) consumption point would have been E0 where theindifference curve U0 tangents the budget line. In socialism, this "selfish" free choice was universallysuppressed as the paternalistically (i.e. bureaucratically) determined per capita consumption standard isestablished at point E1, which lies to the left (and above) of E0, implying certain well known features ofsocialistic economy due to the suppression of free consumption choice, as indicated by the boxes (1)-(6) that we shall now described in the given order. First, the free consumer choice was suppressed in a particular direction that implies a shortage ofagricultural goods in that, at the given terms of trade (τ 0), the worker would have preferred toconsume more agricultural goods (α 0) than the guaranteed amount (α 1) -- see box (1). Equivalently,to clear the market at E1, the price of agricultural goods should be much higher, implying that the termsof trade would have been more favorable to farmers (i.e. τ 1 > τ 0) -- see box (2). Thus, the officialterms of trade (τ 0) amounted to an intrinsic "pro-urban bias" and the exploitation of the politicallyinsensitive farmers that were implemented by the commune (see Section I). The agricultural shortage r(= α 0-α 1) implies a rationing system and long bread lines, while the higher terms of trade (τ 1)suggests "black markets" for agricultural products. These well known socialistic features also includethe compulsory sales of surplus industrial goods (represented by the vertical gap between E1 and E0) --see box (3). The economy was not a fully monetized one, as the constraining effect of the budget linemust be reinforced by political and other institutional coercive measures. The above analysis of urban consumer choice can be viewed in the context of urban-ruralinteraction when a (= AS/L), measured on the horizontal axis, is interpreted as an AAS (averageagricultural surplus). Figure 2 shows that AAS measures the availability of the "total" agriculturalsurplus (AS) on a per urban worker basis (see Fei and Ranis (1964), p. 205). The AAS is a key conceptin the development literature of the dualistic economy, as the agriculture sector can fulfill its historicalmission to fuel the expansion of the industrial sector only after an adequate AAS is forthcomingcontinuously. What the farmers obtain in exchange for this AAS are the modern factory producedinputs and incentive goods (CA) and titles to industrial wealth (I') that are absolutely essential foragricultural modernization (see Section I). The distance υ (= ω 0 - c1) as indicated on the vertical axisis the "participation benefit of farmers" (as defined in equations (1.5) when θ = 0), as it is the amountof industrial goods (CA + I') on the per urban worker basis, that the farmers can obtained in exchangefor providing the a1 units of AAS at the stipulated terms of trade τ 0. It is then clear that the suppression of the terms of trade measured by the gap (τ 1 - τ 0) representsan exploitation of the farmers. For at a free market price (τ 1), the participation benefit of the farmercould have been raised by η , bringing it to the level of υ + η (box (4)). Notice that, the urbanworkers' expenditure on food amounts to a transfer of the title to industrial goods to the farmers. Thus,a policy with an unfavorable terms of trade to the farmers (τ 0 < τ 1), logically implies a lowerindustrial wage (ω 0 < ω 1) as a manifestation of a pro-urban development strategy. To link the above analysis with the drive of maximum austerity investment, let the average laborproductivity of Q/L = ω * be indicated on the vertical axis. After the consumption standard for the

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typical urban worker has been determined (E1), the paternalistic government will have to make anadditional decision on the amount of industrial goods made available to the farmers. If the real wage isat ω 0 (with the consistent terms of trade τ 0), the amount of investment on a per worker basis is ω *-ω 0 (or µ + η ), which presumably represent a maximum austerity drive (box (6)). This investmentper head is clearly higher than µ (box (5)) -- which would have prevailed had the farmers not beenexploited. Thus we see that the totalitarian government has a strong motive to adopt a pro-urban biasto maximize the drive for investment. The pre-1978 experience of the PRC suggests that an LDC cannot exploit the farmers indefinitelywith immunity. Contemporary development theory of labor surplus dualism has demonstratedconclusively, that as long as labor can be mobilize efficiently, the shortage of AAS is unlikely to be abottleneck in the early stages of development (Fei and Ranis, 1964). However, if the agriculture sectoris ignored, an "agricultural shortage point" will sure to emerge eventually (Fei and Ranis, 1964). Chinaindeed enjoyed a period of "golden age" until such a shortage point emerged shortly after 1960. Inresponse, the PRC government resorted to a combination of food import and making the terms of trademore favorable to farmers Figure 1a. This policy experience was accentuated after 1978, as the farmerswere render more terms-of-trade sensitive (see Section II below) with the rehabilitation of the familyfarm.

1.3 The Impact of Rural Reform After 1978 In the rural reform after 1978, the revival of family farming and the inter-sectoral commoditymarket paved the way for the floating of the prices of agricultural products (PA) and inter-sectoral termsof trade (τ ), and the rehabilitation of free consumer choice in the urban market. The tripartite featuresthat characterized socialistic PRC before 1978 (i.e. the choice suppression, the "pro-urban bias", andthe maximum austerity drive) are all modified consistently, as described in the boxes in Figure 3. With the floating of prices, the price of agricultural products increased until the market clearingprice prevailed.9 This improvement in the terms of trade swivels the budget line from B0 to B1 wheretangents the indifference curve at E1, signifying the restoration of free choice (box (1)). The fact thatthe terms of trade had increased dramatically for the farmers (box (2)) is fully corroborated by theempirically observed facts in China (see Figure 1a), and presumably for all socialistic countries. Thetermination of rationing and other institutional constraints on trade is a natural consequence. Thisobviously implies an increase in participation benefits by the amount of υ∆ (box (4)) that willencourage the increased supply of AS (see Section II below). This, in turn, leads to increases in boththe money and real wage in terms of industrial goods for urban workers to compensate for the higherprices, and hence transfers more industrial goods to farmers (box (5)). The investment in stateenterprises must be scaled down accordingly, which represent the termination of the maximumausterity drive (box (6)) -- as has been observed empirically in Section I. The insert in Figure 3 provides a side note on relative versus absolute price levels. When theterms of trade improved, the τ line (in the insert) swivels counterclockwise from τ 0 to τ 1. Toachieve the new τ line (a relative price), it could be either done by solely increasing PA (PI) whileholding PI (PA) constant, this will lead to a point like B (B') which implies changes in absolute pricelevels. Of course, there is no reason why a point like C is not possible. Though the terms of tradeimprovement is consistent with all kinds of absolute price movement (e.g. points B', B, C), we havepostulated that it is characterized more closely by the movement from point A to point B (which iscertainly supported by Figure 1a, especially in the early stages of the rural reform). The discussion willbe deferred to Section IV.

9 Theoretically, the improvement in the terms of trade can just as well be accomplished via a decrease in the price of

industrial goods. Section VI provides a simple postulation as to why this is not observed.

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The above reform represents deviation from socialistic traditions towards liberalization.Impartial market mechanism replaced political arbitrariness; pragmatism and experimentalism replacedideological dogmatism; secularism replaced futuristic spiritualism; rational egalitarianism replacenoble egalitarianism; conforming to the cultural value of Kunzets' modern epoch.

II. Modeling of Two-Tract System

While the basic model is applicable to all socialistic countries, the emergence of the "two-tractsystem" is a historical experience unique to PRC (possibly due to the Chinese cultural trait) that will bemodeled in this section to show its evolutionary appearance and hybrid nature in transition. We shallfirst discuss the case of homogeneous agricultural goods, as the model can be readily modified toinclude product differentiation into staple and subsidiary food (vegetable, fruits, meat, etc.).

2.1 Background of the Evolutionary Appearance of the Two-Tract System The basic model (Figure 3) shows an abrupt increase in terms of trade (from τ 0 to τ 1) that can infact be quite drastic due to the sharp rise of the prices of agricultural goods (e.g. 300% to 500% in theYeltsin reform in Russia after the New Year of 1992). This is due primarily to the fact that thepolitically guaranteed per capita consumption of food (α 1) is not very much above the caloricminimum level (α m), and hence the indifference curve at E1 is quite steep. Presumably, the verypurpose of this drastic improvement in τ is to encourage an increase in the supply of agriculturalgoods by the farmers. These ideas are modeled in Figure 4a (a reproduction of Figure 3) where theexplanatory boxes will guide our discussion in the indicated order. Let us assume that for a typical worker (with wage income ω 0), the government guaranteesthe food consumption of α 1 units at the low official price τ 0. The system is now hybrid because, ontop of the politicized parameters (ω 0, α 1, τ 0) the workers can buy extra food at free market prices(i.e. terms of trade) which is always higher. Using E1 as the "politically guaranteed" consumptionpoint, a dotted price-consumption curve (E1E2E0) can be derived, which implies the food demand curveDD' for the typical urban worker in Figure 4b, where the terms of trade is measured on the vertical axis.For the lower terms of trade τ 0 at E0, the amount of food demanded in the free market is α 2-α 1 units,as shown by the vertically aligned Figures 4a and 4b. In juxtaposition with DD', let the supply curve tothe free market trade of AAS be postulated as the S0S' curve, producing an equilibrium point E2. Thepostulation that the farmers are terms-of-trade-sensitive (Box (1)), is basically a post-reformphenomenon as the communes are abandoned and the markets are revived in a productionorganizational reform. The Russian reform, in contrast, which floated the terms of trade (via the"shock treatment" approach) without a commitment to these production related reforms, is possibly acultural phenomenon on account of their absence of a long family farming tradition with vitality.Whether or not the Russian state farms are price sensitive, remains to be seen.

2.2 Hybrid Nature of the Two-Tract System The two tract system consists of the channelization of AAS (Box (2)) via an official tract (α 1) anda free market tract (α 2-α 1), where the free market price (τ 2) is higher (Box (3)). The purpose of thisarrangement is to retain a government guarantee of minimum consumption requirement for the urbanworking class (Box (4)), while at the same time, their choices are partially liberalized (Box (5)).Notice that the real wage remains at the pre-reform level ω 0, leading to the two components of thefarmers' participation benefit (i.e. υ o and υ f obtained from the official tract and free market tractrespectively, Box (6)). The hybrid nature of the two-tract system is in its partial retention of political command. The"official" tract maintained guaranteeism and rationing mechanism for the urban workers (Box (4)), onthe one hand, and compulsory acquisition under the contract system for the farmers, on the other. As

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compared to the free market solution, these "residual" coercive practices carry a lower real wage (ω 0 <ω 2) implying a lower participation benefit for the farmers (Box (7)) and a higher austerity drive (Box(8)) by the amount of υ r (= ω 2 - ω 0). The Chinese opted for a course of evolutionary compromiseand gradualism.

2.3 Differentiation of Staple vs. Subsidiary Food In China, the two-tract system was carried out in such a way that differentiated between "staple"(essential for subsistence) and "subsidiary" food. For illustrative purposes, we will assume that theformer correspond to the "official" tract, while the latter the "free market" tract. Before 1978, percapita consumption of both types were politically guaranteed (as shown at the top of Figure 4a) leadingto the point Eg on the budget line B0. The free market solution for the subsidiary food lead to theequilibrium position E2 on the indifference curve U2. The relative position of e and Eg portray the factthat, after the floating of prices, the typical urban worker is worse off after reform than before (i.e. Eg ispreferred over e). This shows that the drastic increases in the prices of subsidiary food (e.g. meat,vegetables, fruits, etc.), incidental to price reform, can be a major source of urban social unrest. TheChinese solution to this protest of distributional injustice, on "noble" egalitarian grounds, was topartially compensate the urban workers with an increase of real wage (as was in Russia). Whether or not this conflict will arise, and the rapidity of its resolution, lies in the elasticity of thesupply and demand curves in Figure 4b. For example, in the case where the farmers are highly "terms-of-trade sensitive", the supply would be represented by a more elastic dotted S0S", producing a higherAAS at E2' (with a lower τ ) and thereby the relative position of e and Eg can be reversed. If theworkers are still jealous of the more rapid increase of the consumption welfare of the rural population(see Figure 1b), the pragmatic Chinese government has at least seen to it that the welfare of the urbanworkers are not declining in absolute terms. Our analysis made it clear that, with the concern ofdistribution injustice by the urban workers as it is, the successful completion of the price reformdepends very much on the price sensitivity of the farmers as suppliers of agricultural surplus to the freemarket.

III. Evolution From Two-Tract Through Subsidy Towards Liberalization

In an evolutionary perspective, interest in the study of the subsidy really centers on two issues.First, to show that the appearance of agriculture subsidy is almost an unavoidable "logical"consequence of the evolution of the two-tract system in the direction of liberalization. Second, to showthat its disappearance signifies the termination of the "hybrid" nature of urban-rural interaction as thecontrol feature melts away imperceptibly with agricultural modernization. Attention then shifts tourban reform to complete the CER.

3.1 Evolutionary Appearance of Subsidy from Two-Tract System Let Figure 4a be reproduced as Figure 5, to show that at E2 under the two-tract system, thegovernment still exercises political guaranteeism for the urban working class and compulsoryacquisition of food (α 1) from the farmers in the "official tract" at a terms of trade τ 0 which is lowerthan the prevailing price in the "free market tract" (i.e. τ 2 > τ 0). In view of the fact that it has alwaysbeen less feasible for the government to control the spatially dispersed rural population, the next logicalstep of the liberalization movement is to abandon the compulsory acquisition feature affecting the ruralfarmers, while the guaranteeism towards the urban working class is momentarily retained in itsentirety. Such a solution that transfers resources from the investment in state enterprise to the ruralsector (with a neutrality on the consumption welfare of the urban working class) lies at the heart of thesubsidy program, as will be discussed in the order of the boxes in Figure 5.

11

The subsidy reform appears when the constancy of the price τ 0 in the urban retail stores andgradually increases in the procurement price for food grains (α 1) in the official tract leads to theinevitable incurrence of the loss (zA) by the State Trading agencies that will have to be subsidized bythe Ministry of Finance. For simplicity, we may assumed that the subsidy has increased to the extendsuch that the procurement price is raised to the same level as that of the prevailing price in the freemarket tract, so that the effective terms of trade τ * (see equation (1.5c)) is brought to the same level asthe free market terms of trade τ 2. The subsidy per unit of AAS is thus θ = τ 2 - τ 0, as indicated inBox (1). The subsidy program represent further liberalization towards the rural sector as the price gapbetween the free market and official tract is narrowed and eliminated, signifying the atrophy of politicalcommand in the termination of the compulsory nature of the contract system (Box (2)). While in the"short-haul", the farmers themselves can dispose of the agricultural surplus in the rural commoditymarket , the "long-haul" of urban-rural exchange will have to be mediated by the State Tradingagencies which play the role of the "grain merchant" class (a tradition in the long agrarian history sincethe Sung Dynasty (before 1279 AD)).10 This will, in turn, contribute to the commercialization of theState Trading agencies, which is the weakest link in all socialistic countries11 that need to be reformedto become a vital service sector so essential to the promotion of competitiveness for the entireeconomic system spreading over the vast land space.12

Conceptually, the imposition of the subsidy program on top of the two-tract system has noappreciable impact on the urban worker since the urban real wage (ω 0), as well as the guaranteeism offood consumption, all remain intact (Box (3)). Thus, the subsidy program is solely a furtherliberalization of the rural sector with an "urban neutrality". The substitutability between the realsubsidy θ and terms of trade τ (i.e. to benefit the farmer without hurting the worker), as described inequations (1.5abc) in Section I, are geometrically interpreted in Box (4) to show the composition of theparticipation benefit. To the extent that farmers are benefited by subsidy, the investment for stateenterprises must scaled down (i.e. by the amount s = θα 1) representing further relaxation of theausterity drive as resources are diverted to the agricultural sector (Box (5)).

3.2 Termination of the "Hybrid" Urban-Rural Interaction The disappearance of subsidy and the two-tract system is a major milestone in the transitiongrowth process, as the urban-rural interaction is fully marketized and finally freed from politicalcommand that melts away. As the appearance of subsidy liberalized the rural population, itsdisappearance liberalized the urban population from political command as the government (proxied bythe Ministry of Finance) is untangled from urban-rural interaction. The termination of the two-tractsystem will be analyzed in a number of steps as indicated in the boxes of Figure 6ab, where theframework of Figure 4ab is reproduced. The first step is obviously to raise the retail price in the official tract, which will necessitate anincrease in the real wage of the urban worker to compensate. In the state enterprises that employedthem, this higher wage cost leads to a decline of the profit turnover (π ') to the Ministry of Finance, thatterminates its subsidy (zA) to the State Trading agencies that no longer incurred the loss since the gapbetween retail and procurement prices closed. Thus, from the view point the Ministry of Finance, thetermination of agricultural subsidy is deficit neutral (will not increase or decrease the budget deficit).

10 Yoshinobu (1975).11 For example, it has be documented that more than 40% of the cabbage produced in the collective farms in the former

Soviet Union were left to rot due to the collapse of the state run trading agencies after the disintegration of the USSR.12 It is well understood in the capitalistic West that the service sector is a vital lubricant in its role as an intermediary across

time and space. It is because of this dynamic and essential role that the service sector is viewed as the very fabric ofcompetition which is the fundamental source of efficiency and flexibility under capitalism.

12

However, what is more important is that because both the government's expenditure and revenue isreduced, fiscal policy becomes "conservative" in the sense that the government is less involved withurban-rural interaction. All these are described in Box (1) that stresses the deficit neutrality and fiscalconservatism in Figure 6a7a where the real wage moves upward from ω 0 towards ω 2, implying thatthe terms of trade in the official tract is equalized with that prevailing in the free market (τ 2). The above development implies the consumer choice for the urban worker is fully liberalized(Box (2)) because the paternalistic guaranteeism by the official tract is effectively abandoned since theworker is now indifferent between purchasing at the official stores or at the free market. The price-consumption curve that initiated from E1 is now replaced by the dotted price-consumption curve thatinitiated from ω 2. Note that the two P-C curves intersect at E2, indicating that the command systemswitched imperceptibly into a marketized system. The long entrenched practice of socialistic rationtickets is gone forever as the State Trading agencies become fully autonomous and must now beresponsible for its own profit/loss, and hence commercialized. The termination of the agricultural subsidy is a process facilitated by increasing agricultureproductivity. As shown in Figure 6b7b, when the farmers' supply behavior becomes more terms-of-trade sensitive, the agricultural surplus increases over time ( 22 αα → ' 0α→ ) as the PA and τ declines

( 032 τττ →→ ). Hence, the procurement price declines accordingly as the State Trading agencies are

commercialized and behave competitively (Box (3)). The full liberalization of the urban-rural interaction (Box (4)) is accomplished by a simultaneousincrease in the retail price from ω 0 towards a declining ceiling (i.e. the free market) until the twocoincide at ω e, signifying the termination of the hybrid system. Thus the rural reform is really anevolutionary process where the political interference melts away imperceptibly, at a pace controlled bythe rapidity of agricultural modernization as the urban-rural interaction is fully marketized andprivatized. The success of agricultural modernization also will contribute to an increase in theinvestment in the state enterprise as the prosperous agricultural sector begin to fulfil its well knownhistorical mission.

IV. Resolution of "Conflict" by Monetary Expansion

Up to now we have centered on an "absolute-price-neutral" real model. The distinction between a"real" model versus a "monetary" one is conspicuously lacking in the literature. One of the objectivesof this study is to emphasize that the rural reform, in and of itself, is independent of monetarycharacterization. However, the monetary phenomenon of price inflation is almost an inevitableevolutionary result of the "real" rural reform modeled above. In the final analysis, inflation is causedby the government's attempt to resolve distributional conflicts in the process of the rural reform. Thedegree of the price change is within the realm of monetary theory, which depends on how thegovernment resolves the distributional conflicts and the monetary factor of the circulation velocity. Although price inflation is an all pervasive phenomenon, we shall only briefly comment on thisissue as related to rural reform. All socialistic countries encountered, to them, the new experience ofinflation, which may be either "price-adjustment" inflation or monetary inflation in nature.13 What wecall the "price-adjustment inflation" occurs when the artificial/rigid RELATIVE prices of a commandeconomy is being floated to seek its natural market clearing level under the condition of downwardprice rigidity during price reform.14 In this regard, the increasing of the terms of trade (i.e. the relative

13 These are not to be confused to "supressed/repressed" inflation encountered in the literature of socialistic countries (e.g.

Chen and Hou 1986, Feltenstein and Ha 1991) based on the conviction that the equation of exchange "should be" valid.14 This is also what Chang and Hou (1997) termed as “structural” inflation.

13

price of τ = PA/PI shown in Figure 1a) to correct the pro-urban bias (see Section IIIV) provide aconspicuous example, as PA must go up because of the downward rigidity of PI (due to theinconvenience of the bureaucratic re-calculation of industrial prices on account of the multiplicity ofproducts).15 It is this price-adjustment type inflation that has aroused an urban-rural conflict, which inturn contributed to monetary inflation. Monetary price inflation, which is traced to the "printing" of purchasing power by the sovereigngovernment, is also a new experience for socialistic countries because of the emergence of a monetizedculture where "chasing after purchasing power" became the dominant economic mores (Hou 2001).Fortunately, this is apparently what is happening in the rural sector at the present time, for in the wordsof Keynes (1951):

" ... there is social and psychological justification for significant in-equalities of incomeand wealth, ... There are valuable human activities which require the motive of money-making and the environment of private wealth ownership for their full fruition.Moreover, dangerous human proclivities can be canalised into comparatively harmlesschannels by the existence of opportunities for money-making and private wealth, which,in they cannot be satisfied in this way, may find their outlet in cruelty, the recklesspursuit of personal power and authority, and other forms of self-aggrandisement. It isbetter that a man should tyrannnise over his bank balance than over his fellow-citizens;and whilst the former is sometimes denounced as being but a means to the latter,sometimes it is at least an alternative. ... The task of transmuting human nature must notbe confused with the task of managing it. Though in the ideal commonwealth men mayhave been taught or inspired or bred to take no interest in the stakes, it may still be wiseand prudent statesmanship to allow the game to be played, ... so long as the averageman, or even a significant section of the community, is in fact strongly addicted to themoney-making passion."

In a historical perspective, the inflation experience has its own life under socialism. Before 1978 whenmoney and prices were monitoring device, inflation was almost unknown and insignificant (the averageannual inflation rate between 1966-1976 was 0.28%).16 With the monetization of the economy after1978, price inflation average around 2.78% during the rural reform period (1978-1984). When theeconomy went earnestly into urban reform after 1984/1985, two characteristics became apparent. Onthe one hand, the average annual rate became much higher (9.38%), on the other hand, increasedvolatility, as shown in Figure 7. While the employment of the "quantity theory" to explain thetechnical relatedness of ∆ M and the rapidity of price inflation (real or suppressed) has been attemptedfor socialistic China (e.g. Chow 1987, Hou 2001), the very causation for "money printing" ( ∆ M) isreally a vital issue that can only be explained via the evolutionary background of rural reform. The monetary expansion can be partially caused by a huge agricultural subsidy program to pacify

15 This is certainly attested by the statistical data in China, especially in the early stages of the reform. PA increased

22.13% in 1979, while PI increase a mere 0.09%. Between 1978 and 1983, the average annual increase in PA and PI were8.35% and 0.9% respectively. The annual increase in PI grew to 3.59% (relative to a 7.75% average annual growth ratein PA) between 1984 and 1987. It was after 1988 that the industrial price increase accelerated (to 15.21% in 1988 and18.71% in 1989), perhaps reflecting the spiral inflation generated by the monetary expansion. Another conspicuousexample is the Yeltsin reform (since New Year of 1992), the price of agricultural goods shot up by 300 to 500% in amatter of months because the set of all industrial prices cannot be reduce drastically (to a third or a fifth of its previouslevel).

16 Between 1950-1978, the annual inflation rate averaged to 1.18%. However, the sub-period of 1966-78 is more relevantas it. For a more detailed discussion of the different phases of China’s economy and the consequence of not taking thesestructural issues into consideration when empirical research is conducted, refer to Hou (2001).

14

the farmers.17 The two-tract system (as summarized in Figure 5) produced what may be regarded as atypical case for socialistic monetary expansion to pacify the labor unrest due to agricultural shortfall(see Box (9)) by granting a money wage increase while the government insisted on an austerity drive(Box (8)). In all these cases, socialistic government cannot resist the temptation to resort to theconvenience of money printing to resolve urban-rural conflict and/or government-societal conflict (seeR8 and R9) which should have been dealt with by other more legitimate methods. The "final" advicegiven by Samuelson (1992) to the socialistic reformers is that "all price reform measures will fail ifmoney printing is used to finance budget deficits".18 The erratic nature of the inflation rate after 1985,suggests the hybrid nature of the economy in that the government can retreat into a non-inflationarystate of growth by exercising political command whenever it chooses to do so. Apparently, they haveyet to learn the Samuelson advice, as there is no more "free lunch" under socialism than there is undercapitalism.

Summary and Conclusion

By now, there can be no doubt regarding the wholesale bankruptcy of Communism as we know it.Though Perkins stated in 1988,

"It is unlikely that China;s leaders had worked out a blueprint ... This reform processwas still under way in 1987 and appears likely to continue for some time. Where it willall end is not known to anyone either inside or outside of China." (Perkins (1988), p.601)

True as this may be at the time when Perkins wrote his milestone paper,19 the epoch ending events ofthe past couples years (Tienanmen, Fall of the Berlin Wall, liberalization of Eastern Europe, and thedisintegration of the Soviet Union) should leave no doubt in anyone's mind as to where the reform willend.20

There is, however, fundamental differences in the route taken by the different former-socialisticeconomies. The Russians, for example, under the leadership of Yeltsin embarked on a "shocktreatment" or "revolutionary" approach, while China (under the guidance of Deng) to an evolutionaryroute. The economic performance between the two economies certainly favors the strategy that Chinahas taken. The novelty of this paper, compared to the existing literature which is predominantly a historicalannalist's approach, is the utilization of traditional economic tools and models to illustrate theevolution of institutions and the cultural values that regulate them. This, in contrast to the historicalannalist's approach, approaches China's reform process from a hermeneutic perspective. In China, an irrevocable trend toward liberalization started with the rural reform in 1978. For therural population, that accounts for the vast majority, the privatization of the cultivatorship (not

17 For example, the cereals subsidy in 1981 reached 12.9 billion Yuan or 10% of total government expenditure (Lardy

1983). In a broader context, the State price subsidy for grain, oil crops, and cotton grew from 12 million Yuan in 1980,to 16.3 million in 1981, and to 17 million in 1982. In terms of the proportion of the State budget, this translates to anincrease from 10% of total government expenditure in 1980 to 15% in 1982. See Sicular (1988) for more details.

18 This is demonstrated in the worst way by Russia. In little more than six months (between January 1992, when the pricecontrols were lifted, and July of 1992), the general price level rose 750%. The undeniable link is in the excess creation ofthe Ruble: in July (1992) alone, the Central Bank of Russia printed more money than the former Soviet Union did in theprevious 30 years (Carrington 1992)!

19 Documentary evidence show that the Chinese reformers clearly had a "capitalistic" blueprint in mind, at the latest, in1984. This is evident in the Central Committee (1984).

20 Indeed, some may be as so bold to predict the inevitability of the march towards a capitalistic market system, even if it iswith Chinese characteristics and a socialism bent (Hou and Hou 2002).

15

ownership) of land and the private ownership of capital in the rural industries are accomplished facts.For example, by the end of the 1970s, private lots account for a mere 7% of sown area. The earlyreform measures were aimed at the fundamental restructuring of the agricultural production system.This de-collectivization of rural production can be seen from two sets of statistics: number of peoplescommunes and agricultural output linked to the "responsibility" system.21

In 1982, there were more that 54 thousand rural People's Communes (nearly 6 million productionteams). By 1984, the number had dropped to a mere 249 (7 thousand production teams), closing thecurtains on the people's communes forever. As for the effects of the "responsibility" system, at thebeginning of 1980, 29.1% of the agricultural production was linked to the responsibility system, while99% was tied to it by the end of 1983 (Kueh 1985). At the end of 1984, 97.9% of the agriculturalhouseholds were producing under the responsibility system, of which 96.56% was under thethoroughly decollectivzed form of "baogan daohu". A careful digestion of the above shows that the rural reform has created a curious hybrid system --a mixture of "market" and "centralized command" -- that the world has never seen. For the farmers tofulfill their historical mission, an adequate AAS must obviously be forthcoming. This paper presents anintegrated treatment that links "α " and "τ " to the behavior of farmers and the urban consumers. Thefree market choices for these agents, that were irrelevant to the centrally planned economy before 1978,have been revived, if only partially, in this hybrid system. At the present time, that the PRC has a hybrid economy is due primarily to the fact that, instead oftruly floating, the wage-price system (δ , PI, PA) is still at least semi-politically commanded. Unlikethe command economy prior to 1978, when the economic agents were not supposed to be responsive toprice signals at all, the system of wage and prices are now being used as politically commanded"levers" to regulate the economy in order to implement growth promotional strategies. This can beclearly seen from the following statement in the major blueprint for reform:

".... The more the economy is enlivened, the more attention we should pay to macro-economic regulations and the more we should try to have timely grasp of economictrends so as to use pricing and other economic levers better. This will help regulatemarket supply and demand, regulate accumulation and consumption, regulateinvestment finance, regulate the flow of material and human recourse, regulate theexternal exchange... We have fallen into the habit of using administrative commands tokeep the economy function and have long neglected the use of economic levers ofregulation." (Decision (1984), page IX)

The "lever price system", characterized by the absence of an automatic adjustment mechanism, is aninterim arrangement in the evolutionary process prior to the arrival of a truly "floating price system".Thus, the use of the "lever price system" to regulate urban-rural interaction to promote growth is,indeed, a novel feature of the hybrid economy that was modeled in this paper. In the transition process of the dualistic economy of the LDCs, the development strategy alwayscenters in the promotion of a balanced growth between an expanding industrial sector and a relativelydeclining agriculture sector. In the command economy of PRC before 1978, this issue of balancedgrowth -- i.e. on the priority of investment in heavy industry, light industry (textiles and fertilizer) andagriculture -- was resolved by a paternalistic central planning and command for which the "interests" of

21 There are two stages in the evolution of the "responsibility" system: "baochan daohu" (contracting output to the

household) and "baogan daohu" (contracting everything to the household). Both involve the privatization and de-collectivation of production, while the difference is in the distribution of inputs and final income. Under the former, thedistribution tasks are still controlled by the collectivized production teams, while under the latter, even this distributionrole is de-collectivized. Prior to mid 1981, "baochan daohu" was the more important form of the responsibility system,after which "baogan daohu" dominated. Refer to Ash (1988) for more details.

16

the "society" need not be consulted. Bureaucrats had a free hand on the drawing board because thefarmers and workers were supposedly "united in interest" to support the revolutionary Party. The PRC reformers failed to realize that when the "lever price system" is introduced, an implicitpolitical concession to the society was made. As the invisible hand begins to curb the free hand, thebureaucrats must be mindful of the societal interests in carrying out a decentralized growth promotionstrategy. In particular, in the hybrid economy, the government has to face and resolve both agovernment-societal conflict in respect to austerity as well as an urban-rural conflict in respect todistribution justice. In the hybrid economy where a monetary culture has been revived, the austerity decision of thebureaucrats for investment finance by monetary expansion can be challenged, and effectivelyfrustrated, by the "society" that exercises the sovereignty of purchasing power in the market place. Forthe first time, the PRC bureaucrats encountered the velocity of circulation (V = l/k, or velocity ofcirculation equals the inverse of the Marshallian k) in their bouts with monetary inflation that, as weknow, really amount to a battle with a rebellious society. The society itself, now also shows a conflict of interests -- i.e. between urban workers (for lowfood cost) and rural farmers (for high agriculture or food price) -- that is "arbitrated" by agriculturesubsidies and the manipulation of the terms of trade. That this is a "new deal" can be sensed from thefollowing quotation:

"... in solving the problem of the state purchasing farm and sideline products at priceshigher than their selling prices and in readjusting the prices of consumer goods, we mustadopt effective measures to ensure that the real income of the urban and rural habitantsdoes not go down as a result of price adjustment" (Decision (1984), page IX)

that reflects an implicit fear for social disharmony and consumer rebellion. The "levered price system"brought about a subtle liberalization of the relation between the government and a society that must beappeased or pacified as it could no longer be dictated to or patronized. With three decades of artificial price stability (1949-1978), inflation was unheard of before 1978(Hou 2001). Monetary and "suppressed price inflation", with peculiar characteristics, surfaced tobecome a familiar landmark of socialism under reform. The magnitudes (e.g. over 100%) and theover-night explosion of the price of "bread" (i.e. of a "suppressed price inflation") can only imply thatthe revival of consumer choice has been accompanied by a "levered" price has been manipulated by thegovernment to reach a government-societal compromise -- that has proved to be unsatisfactory to allparties (the workers, the farmers or the government.). The hybrid economy is seen to be a highlyunstable interim arrangement from the political standpoint. The societal interests are already pluralized. The revival of monetary practices signifies theawakening of the free choice (for urban consumers) and self reliance (for the rural entrepreneurs and/orthe migrant workers). It is most unlikely that these "capitalistic revisions" will be retrenched. For theagriculture sector to fulfill its historical mission, the interim arrangement will have to give way to a fullliberalization as the "depoliticized" automatic adjustment mechanism of the market system will berestored.

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