Rural Reform and the Economic Growth of China Lecturer: Zhigang Li Questions How important is the rural reform to the economic growth of China? Sources of rural productivity growth Rural labor supply Basic Facts There are 3.8 million villages and hamlets in China. In 2004 there were 632,000 of administrative villages. By 2003, 619,000 villages had a telephone. Motor vehicle access was available to 642,000. Other infrastructure (running water, cooking facilities) are less well developed. Collectives Purpose To procure a steady supply of agricultural produce at a low relative price. To provide new social services To improve production inputs Duration: Mid-1950s to the early 1980s Main Features of Collectives (before 1978) Land: Pooled and worked in common Labor: Rewarded based on a workpoints system System: The Collectives served as the basic accounting system. Collectively Owned Land Except for a small share of “private plots” (3% to 10% of cultivated area), the ownership of all other productive assets (especially land) was transferred to “the collective”, meaning the residents of a given village. The Work-Point System Reward for inputs: Individuals earned “work points” as the work assigned was done. Total net income of the collectives was divided by the residents according to their work points. The system gave the collective the ability to tax itself to finance various activities (e.g. education). Methods of assigning work points may differ for different collectives. Negative Effects of “Collective” Efficiency loss Weak incentive system Distorted monetary reward system Distorted distribution of resources Difficulty for the collective to coordinates tasks among households. Distortion: The “Grain First” Policy The pressure on peasants to meet or exceed their grain-procurement targets significantly retarded the agricultural growth. Quantitative targets rather than prices (suboptimal decision) Loss of opportunities for regional specialization and a decline in interregional shipments of grain. Total grain output grew at 2.2% annually while cotton output grew 1.5% and oilseed 0.5% before the reform. Rural household per capita consumption of poultry, eggs, and fish declined. Positive Effects of “Collective” Help mobilize resources Increased land supply (e.g. by consolidating scattered fields) Mobilize labor during the agricultural off-season (e.g. by assigning labor to repairing irrigation systems) Integrated rural credit cooperatives and supply and marketing cooperatives Provision of basic education and health care Help organize nonagricultural activities Buffer risk Rural Reforms Across-the-board increase in agricultural procurement prices Reaffirmation of the right to selfmanagement of collectives A nationally defined program of contracting land to households (household responsibility system) By the end of 1982 more than 90% of China’s agricultural households had returned to some form of household farming. Consequence of the Rural Reforms The growth of grain production accelerated dramatically. Grain output growth jumped from 2.2% to 4.1%. China even exported grain in 1985. Cotton and oilseed production grew at 15% and 16% per year. Meat production grew at about 10%. A shift toward a less labor-intensive agriculture Farmers work shorter hours and shifted cultivation toward crops with lower labor requirement. Consequence of the Rural Reforms Rural public service declined The supply of health care and education declined. The number of hospital beds per thousand rural residents reached a peak of 1.5 in 1985 but steadily declined to 0.72 in 2003. The coverage of rural population by the cooperative insurance system dropped from about 80% before the reform to less than 10% by mid-1980s. In 1998, rural residents paid for 87% of their health care expenses while urban residents paid 44%. Township and Village Enterprises (TVEs) Between 1978 and 1996, TVEs played the catalytic role in transforming the Chinese economy from a command economy to a market economy. TVEs were more efficient than SOEs. TVEs were more suitable than private firms in early reform years of China. Fig. 5: TVE Employment 160 140 120 100 Million Total Employment Individual, Household and Private Firms 80 60 40 Collectives (Township and Village Level) 20 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 TVEs are more Efficient than SOEs TVEs faced factor-price ratios that reflected China’s true factor endowment. The ratio of labor to fixed capital in TVEs was nine times that of SOEs. TVEs can freely enter empty niches: miscellaneous consumer goods (buttons, ribbons, colored elastic bands) and surging demand from the rural society (e.g. rural housing construction) due to rapid economic growth. TVEs are more Efficient than SOEs (continued) Favorable institutional framework for TVEs Formal taxes were low on rural industry Local governments and bank capital were supportive Existing credit institutions (local rural credit cooperatives) were easily adapted to support TVEs. Organizational diversity: There was no single organization model that the TVEs had to follow. TVEs vs. Private Enterprises (Jin and Qian, 1998) Why TVEs grew rapidly despite its weaker managerial incentives, greater political intervention from the government, softer budget constraints, and market ability to private enterprises? Institutional factors favoring TVEs Central government’s influence Community government’s power Underdevelopment of market Why Central and Local Governments Like TVEs More? TVEs may be a more effective instrument than private enterprises to achieve the goals of governments: Financial Objective Government’s revenue Employment Income Political Objective Favorable Factors for TVEs’ Growth I Access to credit Due to (central and local) government’s influence and underdevelopment of the capital market, TVEs have access to a larger pool of capital than private enterprises have. TVEs, with help from the community government, have a lower transaction cost in accessing SOEs, an important source of technology and materials. In contrast, private enterprises have lower transaction costs in competitive markets. Transaction costs Favorable Fators for TVEs’ Growth II “History Matters”: Twenty-years of commune system had accumulated huge amount of physical and capital and given TVEs organization advantages over private enterprises. Local governments can provide better political security to TVEs when the rule of law is absent. TVEs facilitates community governments to convert land to cash when the development of land rental markets lags behind that of product markets. How Important are the Factors? (Jin and Qian, 1998) Data Provincial data from 1986 to 1993. Proxies for economic factors State supply of credit: Loan to TVEs divided by their output Local political strength: Share of rural households not adopting Household Responsibility System by 1983. Product market development: Transaction volume in rural free markets divided by total rural output. Theories Supported “Access to credit” theory Provinces with more credits from state financial institutions see larger TVE outputs. Provinces with more developed product market have smaller share of TVE. Provinces with larger state industry see larger share of TVEs. “Transaction cost” theory “Political protection” theory “History matters” theory Key Factors Key Factors Initial collective assets Product market development The size of state industry The above factors explain over 70 percent of interprovincial differences in TVE-PE ratios (in employment of output).