pricing and marketing policies did not allow producers to reap the profits from international prices. Instead, they forced farmers to sell much of their surplus to the state at an artificially low price. Hence, domestic policies levied a tax on farm-ers although there was little distortion at the border. Similar dynamics character-ized importable commodities such as wheat and soybeans, where, despite fairly high rates of protection erected by trade policies, producers were receiving much less protection than they would have received had there been a free domestic mar-ket for these importables.
In contrast, after the 1980s and early 1990s, the liberalization of domestic markets resulted in a reduction in the distortions arising from domestic policies.
During this late reform period, the market gradually replaced the government procurement system as the primary mechanism for allocating resources, and mar-ket-generated prices became the basis for production and marketing decisions by farmers. At the same time, especially in the case of importable commodities, trade policy also became more liberal, and the distortions caused by border measures were substantially reduced. As a result, we find that, since the end of the late reform period (that is, after 2000), China’s agriculture has become much less dis-torted in two ways. First, the differences between international and domestic mar-ket prices have narrowed considerably for many commodities because of trade policy liberalization. Second, the elimination of domestic policy distortions has meant that, when trade liberalization allows for increased imports or exports of agricultural commodities, prices in the domestic market change and farmer incentives are directly affected.
In addition, we also examine the effect of input-oriented policies and exchange rate policies. We find that input-related policies have generated few distortions since 1980. However, exchange rate policy, like changes in pricing, marketing, and trade policies, has played an important role. In the early reform period, exchange rates were highly distorted and served to add an implicit tax on agricultural trade.
By the late reform period, however, the system of exchange rates was being reformed gradually, which reinforced the gradual shift toward a more liberal agri-cultural economy.
Despite the finding that considerable liberalization has occurred because of policy reforms in the domestic and external economy, there were still distortions in agriculture in the mid-2000s (25 years after the reforms were initiated). In some cases, the remaining distortions have arisen mainly through import tariffs, which, while low by international standards, are still providing a degree of protection for a number of importables (for example, sugar and dairy products). In the case of other importable commodities (for example, maize), the use of export subsidies has created a wedge between the domestic price and the international price. These subsidies are mostly disguised as domestic marketing, transport, and storage
subsidies, which are allowed under World Trade Organization (WTO) rules for developing countries.
To show these results and provide the reader with a fuller discussion of recent changes in the structure of China’s economy, the policy environment within which the changes have been occurring, and the analytical approach and findings of our analysis of price distortions, we have organized the rest of the chapter as follows. We begin below by examining the changes in the performance of the economy and reviewing the policy environment and reform agenda during peri-ods of change. We examine the changes for two separate periperi-ods: the socialist era (1950–79) and the reform era (since 1980). The periods are split in this way not only because of the differences in the performance and the policy changes between the two periods, but also because, in the subsequent distortion analysis, we are only able to quantify the effect of China’s liberalizing domestic and external changes after 1980. We discuss our quantitative approach and the sources of our data. The results of the distortion analysis are then presented and discussed. The final section provides concluding remarks.
Growth and Structural Change in Agriculture since 1949
The history of the Chinese economy since World War II may be clearly divided into a socialist era that lasted until December 1978 and the era since then during which China has implemented a transition toward a market economy.
The socialist era, 1949–78
Socialist policies dominated in China from the 1950s to the 1970s. They had pro-found and complicated effects on agriculture. In this section, we briefly review the performance of the agricultural sector during the socialist era by laying out the sector’s successes and failures. We then describe the major policies—inside and outside agriculture—that we believe are responsible for producing the outcomes that were realized.
Performance during the socialist era
The record of the performance of agriculture in producing food and other raw materials for industry during the socialist era is mixed, although the record partly depends on the standard against which the sector’s performance is being judged.
Aggregate trends show that agriculture played an important role in increasing food availability, especially in the staple grains (Huang et al. 2007). Between 1952 and 1978, the total area sown only changed marginally, increasing 6.3 percent; the
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area sown in grain also changed little, declining 2.7 percent. In contrast, grain yields increased by 91 percent from 1952 to 1978, an annual growth rate of 2.8 cent. In aggregate, China’s grain production rose by 86 percent, a rise of 2.5 per-cent a year. Indeed, the growth rate of grain production outpaced that of the population (1.9 percent), meaning that the agricultural sector increased per capita calorie availability during the socialist era.
To the country’s credit, the increases in the absolute and per capita levels of availability of food and agricultural raw materials occurred during a time when many other nations were suffering from falling food production. Nonetheless, it is difficult to argue that agriculture’s performance was sufficiently stellar to be con-sidered a transformative force in the socialist era economy. Throughout the 1950s, 1960s, and 1970s, China’s consumers remained on strictly rationed diets. Coarse grains—maize, millet, and sorghum—and sweet potatoes made up much of the average citizen’s staple food intake. Cooking oil, sugar, meat, and vegetables were not available to the typical consumer on a daily basis. Most tellingly, despite the growth, the average level of consumption in the 1970s remained low in urban areas, at only 2,330 calories per capita, while the calorie intake of the average rural resident was only slightly more than the United Nations average minimum requirement of 2,100 calories. Moreover, food production systems were so fragile that they were subject to catastrophic failure, such as occurred during the famine in 1959–61, which reportedly killed more than 30 million people (Ashton et al.
1984).
Food availability became such an issue during the late 1960s and the 1970s that China turned to international markets to supplement domestic production.
Between 1973 and 1980, China imported an average of more than 6 million tons of grain a year, mostly wheat. In peak import years, grain accounted for a large share of the value of the country’s imports. At the time, planners were trying to jump-start industrialization by importing machinery and other technologies. The inability of the agricultural sector to produce sufficient food (and foreign exchange earnings from exports) obviously represented a drag on development.
The performance of the food production subsector in the rural economy was mixed, at best. Almost everything else about the record of structural change dur-ing agricultural development in China up to about the late 1970s is negative (Huang et al. 2007). For example, the production structure of cropping showed almost no change at all. In 1952, grain accounted for 88 percent of the total area sown; in 1970, grain was still being sown on 83 percent of the total area sown.
Likewise, there was little change in the structure of the agricultural sector accord-ing to a broader definition. The value of the croppaccord-ing subsector as a share of the value of total agricultural output was 83 percent in 1952; it was still 75 percent in 1970. Perhaps of greatest importance, the income per capita of rural farmers and
other metrics of wealth also reflected the stagnation in the agricultural sector.
Despite the rise in grain output, rural earnings per capita in the 1970s were almost the same as they had been in the mid-1950s (Lardy 1983). Even by 1978, nearly 30 years after the start of the socialist era, the annual rural per capita consumption of almost every food item was low, amounting to only 1.1 kilograms of edible oil and 6.4 kilograms of meat (Huang and Bouis 1996). The poverty rate was between 30 and 40 percent.
The stagnation in incomes, given the (even modest) rising output, suggests that farm productivity growth was slow. Although the data sources do not facili-tate a rigorous analysis of total factor productivity, there appears to have been a complete absence of any gain in productivity and of any increase in allocative effi-ciency. The work of Stone and Rozelle (1995) and Wen (1993) supports such a conclusion. Using aggregate data, both studies find that total factor productivity growth between 1950 and 1978 was zero or close to zero.
Finally, there also was almost no sign of a shift in the structure of employment in the economy. Other rapidly developing countries in East Asia were diversifying the sources of the incomes of rural populations and expanding employment in the off-farm sector, but there was little of this in China’s rural sector (Lardy 1983).
In 1957, about 84 percent of the population was in the agricultural sector; by 1970, the share had risen to 85 percent; and, in 1980, it was still 83 percent. Of the more than 400 million people in China’s rural labor force in 1980, only 4 percent had full-time off-farm employment (deBrauw et al. 2002). In fact, the share of people living and working in the agricultural sector was greater in China than in any other country at a similar level of income (World Bank 1985).
Socialist policies and institutions
Blame for the poor performance of the agricultural sector may almost certainly be placed squarely on poor policy. Even while local leaders were experimenting with privatized land through ambitious land-to-the-tiller policies in the early 1950s, other factions in the socialist leadership were already developing policies that would threaten the incentives embodied in private landownership (Lardy 1983).
The levels of investment believed to be required to promote industrialization were partly obtained through transfers from the agricultural sector. During the plan-ning era, prices for agricultural products were depressed so food could be sold to consumers at rationed prices. The scissors effect was reportedly large (that is, the extent to which the agricultural sector is taxed if the prices of agricultural goods are set below market value and the prices of industrial goods are set above market price). Realized primarily through the direct taxation imposed on the prices of agricultural goods, the estimated taxation rate was 26 percent in 1957 and 27 per-cent in 1978 (Yao 1994).
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After the early 1950s, farmers were organized into collectives and then com-munes, eliminating the household farm in China. The main negative effect of the communization movement was the absence of incentives. The basic problem was that individual families were not the residual claimants of production, and deci-sion making was left to a collective leadership (Putterman 1993). Farm workers were assigned points based on tasks that were difficult to monitor. There is a debate over the extent to which the collectives were able to motivate farmers to exert effort and attempt to increase the efficiency of production on their farms (Dong and Dow 1993; Chang and Wen 1997; Lin and Yang 2000). Most scholars believe, however, that free riding and the inability to monitor agricultural labor undermined the incentives in agriculture.
Socialist era pricing and marketing policies also did little to encourage the effi-cient production and allocation of goods and services. Prices were fixed by the government (Sicular 1988a). Between 1962 and 1978, the price of grain was adjusted only three times and rose by a total of less than 20 percent. Input prices played mainly an accounting function because shortages kept most producers from receiving the quantities they demanded. Marketing institutions—monopolized by government parastatals—did not encourage the development of agriculture.
There was little competition, and marketing officials did not have an incentive to search out low-cost or high-quality producers. Through plans directed via the marketing system, production was carried out based on (mostly) planned acreage, target volumes, and the quality and variety of production. Even the ratio between home consumption and marketed surplus was stipulated.
The system also served to support—at least in the short run—the govern-ment’s effort at forced industrialization by keeping down the price of staples, thereby allowing wages to be kept low. Except for the amount used by farm house-holds for food, feed, and seeds at home, all production of grains, edible oils, and fiber crops was procured exclusively by the state at quota prices for a specified (compulsory) amount (Sicular 1988a). After the early 1960s, the government also procured—at a somewhat higher, above-quota price (to provide an incentive to increase production)—any surplus output beyond the quota and beyond con-sumption by farm families. The incentives, however, were targeted at collective leaders and not at the farmers on whose effort labor depended. To suppress the demand for agricultural products that were in short supply (because they were priced low), marketing policy also exercised tight control over food marketing in urban areas. Almost all major commodities were sold by government agencies to urban consumers and rural households in grain-deficit regions at low prices upon presentation of the appropriate ration coupons.
Fertilizers, pesticides, and other material inputs, where available, were also sold during this same period through marketing channels monopolized by the state
(Stone 1988). The Agricultural Inputs Corporation, the government retailer for fertilizer, sold fertilizer to villages on the basis of a carefully formulated plan. Col-lective leaders needed fertilizer coupons to buy fertilizer and other inputs that were in short supply.
In an agricultural system dominated by either tens of millions of individual farmers or hundreds of thousands of brigades and teams, there is a need for the government to play a major role in organizing wide-ranging investments because individuals have little incentive to make these investments. In several areas, the gov-ernment made such investments between 1950 and 1978. National leaders arguably put their greatest effort into water conservation (Nickum 1998). In the early 1950s, China’s irrigation and flood control systems were a shambles. The irrigated area was less than 20 percent of the total cultivated area (Stone 1988). By 1978, after more than 20 years of investment by local and national governments and the aid of uncountable man-years of corvée labor, more than 40 percent of the country’s cropland was being irrigated. By the mid-1970s, every major river system was also protected by intricate networks of dikes, dams, and flood diversion projects.
In addition, led by a publicly funded research and development system, China’s agricultural scientists led the developing world in many areas and were responsible for generating many scientific breakthroughs. Breeders developed high-yielding semidwarf varieties of rice several years before the Green Revolution began in other parts of Asia (Stone 1988). Farmers were able to use hybrid maize and disease-resistant varieties of wheat in the 1960s and 1970s, long before such technologies were available elsewhere in the developing world. In 1976, Yuan Longping created and commercialized the world’s first hybrid rice variety (Lin 1991; Huang and Rozelle 1996). An extension system with nearly 500,000 agents was in charge of introducing the technology to brigade technicians (Hu and Huang 2001). By the mid-1970s, most of the country’s cereals were improved varieties.
The government’s approach to planning, including the placement of the rural economy in the unplanned sector, also had dramatic effects on the nature of employment and on the structural stagnation in the country (Lyons 1987).
Because the agricultural sector was large and underdeveloped, leaders decided to make a sharp distinction between people who lived in rural areas and people who lived in urban areas. Agriculture became part of the collective sector. In return for shipments of fertilizer and small amounts of capital and other inputs, the agricul-tural sector was expected to supply food and nonfood commodities to the urban-industrial portion of the economy. The rest of the needs of the collective agricultural sector were supposed to be satisfied by the leadership of the collectives through their own resources. Farmers were not allowed to move freely from their collec-tives. The scope and magnitude of the gap in housing, education, health care, welfare, and other services between rural and urban areas widened throughout
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the socialist era. Without doubt, these hukoupolicies—policies tied to the house-hold registration system (hukou)—and other restrictions prevented rural people from moving into manufacturing and service provision. They also artificially lim-ited structural changes during the socialist era and depressed rural incomes and rural productivity.
Two key external policies had a negative effect on agriculture in the socialist era. First, in the prereform period, agricultural trade was subject to the planning system (Huang and Chen 1999a, 1999b; Lardy 2001). It was used to supplement the planning for the domestic economy. Given the nation’s commitment to self-sufficiency in all areas of the economy, imports were to be used only for procuring those items—most of which were machinery and other productive investments—
that could not be produced domestically and that facilitated realization of the goals of the plan. Almost all trade occurred through eight state-owned trading firms. In the 1970s, the state agricultural trading firms monopolized nearly all food imports and exports. Hence, it was not in the nature of the institutional structure of the trade apparatus to allow specialization in labor-intensive export crops that could be offset by imports of land-intensive staple crops. Agricultural trade was looked upon primarily as a means to generate foreign exchange.
Summary: socialist agriculture was a policy-driven disaster
After nearly 30 years of development, agriculture was not effective in fulfilling any of its roles. Although output was increasing, this was because of enormous central and local government investments, as well as mostly corvée labor financed pre-dominantly through the sweat of farmers. Productivity and incomes were stag-nant. There had been no structural shift toward more productivity and higher efficiency. A large share of the population was locked into agriculture.
The clearest finding arising from our analysis of the socialist era is that the dis-mal performance of agriculture was mainly the result of more than two decades of socialist policies inside and outside the agricultural sector. Production structures, the pricing system, and marketing institutions did not provide adequate incen-tives. Some investments were effective, but there were far too few of these to offset the negative impact of poor incentives. Perhaps most negative was the effects of a system that treated the rural population as second-class citizens and excluded them from a fair share of investments, services, and opportunities. In short, the agricultural and nonagricultural policy environment failed to allow agriculture to contribute to the establishment of a healthy modern economy.
Performance during the transition era, post-1978
We first describe the performance of the agricultural sector and the role it has played since the onset of reform in the late 1970s. We then analyze in greater depth
the policy initiatives—inside and outside agriculture—that have helped launch and guide China’s agricultural transition. We examine the reform strategy by looking at its various components, including implementation, objectives, and rationale.
The ups and downs that characterized the performance of agriculture during the prereform period ceased after 1978. All the best indicators achieved in agricul-tural production from the 1950s to the 1970s were surpassed after the launch of the reforms, and agriculture finally began to play a positive role in the develop-ment process. In the early and mid-1970s, agricultural gross domestic product (GDP) rose by 2.7 percent a year. The annual growth rate almost doubled, to 7.1 percent, during the initial reform period, from 1978 to 1984, before declining to 4.0 percent in 1985–95 and 3.4 percent in 1996–2004 (table 3.1). By world stan-dards, these are high rates of agricultural growth over such a sustained period.
At least during the early reform period, output growth—driven by increases in yields—was experienced in all subsectors of agriculture. Between 1978 and 1984, grain production increased, in aggregate, by 4.7 percent a year (table 3.1). Produc-tion rose for each of the major grains, namely, rice, wheat, and maize. The success of agriculture in playing its role of supplying inexpensive food is illustrated by grain prices. During the reforms, with the exception of price spikes in 1988 and 1995, the real prices of rice, wheat, and maize fell by between 33 percent (maize) and 45 percent (wheat) from the late 1970s to the early 2000s.
Another change was far more fundamental than the higher yields in grains. As it achieved success in grain production, the agricultural economy was steadily remaking itself from a grain-first economy to an economy producing valued cash crops, horticultural goods, and livestock and aquaculture products.
Like the grain subsector, the output of cash crops in general, especially cotton, edible oils, fruits, and vegetables, also grew more rapidly in the early reform period than in the 1970s (table 3.1). Unlike grains, the growth in the nongrain sub-sector continued throughout the reform era (with the exception of land-intensive staples such as cotton). The rise in some subsectors was dramatic. For example, between 1990 and 2004, the increase in vegetable production was so rapid that the country was adding the equivalent of the production capacity of California (the world’s most productive vegetable region) every two years. In the total cultivated area in China, the share that is planted in fruit orchards (over 5 percent) is more than double the share in the next closest major agricultural nation. Today, agricul-ture in China is following the dictum “make apples and onions the key link” rather than the dictum “grains first” that was applied to agriculture in the socialist era.
Livestock production rose 9.1 percent in the early reform period and has con-tinued to grow at 4.5 to 8.8 percent annually since 1985. The fishery subsector is the most rapidly growing component of food production, growing at more than 10 percent a year between 1985 and 2000. Today, over 70 percent of the world’s
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freshwater aquaculture is produced in China. The sustained and rapid rise in live-stock and fishery output has steadily eroded the predominance of cropping. After remaining fairly static during the socialist era, the share of agriculture contributed by cropping fell from 76 to 51 percent between 1985 and 2005. Meanwhile, the Table 3.1. Real Average Annual Rates of Economic Growth,
China, 1970–2004 (percent)
Prereform Reform
Indicator 1970–78 1979–84 1985–95 1996–2000 2001–04
GDP 4.9 8.8 9.7 8.2 8.7
Agriculture 2.7 7.1 4.0 3.4 3.4
Industry 6.8 8.2 12.8 9.6 10.6
Services — 11.6 9.7 8.3 8.3
Population 1.80 1.40 1.37 0.91 0.63
Per capita GDP 3.1 7.4 8.3 7.2 8.1
Grain production 2.8 4.7 1.7 0.03 0.2
Rice
Production 2.5 4.5 0.6 0.3 0.9
Area 0.7 0.6 0.6 0.5 1.2
Yield 1.8 5.1 1.2 0.8 0.2
Wheat
Production 7.0 8.3 1.9 0.4 1.9
Area 1.7 0.0 0.1 1.4 5.1
Yield 5.2 8.3 1.8 1.0 3.3
Maize
Production 7.4 3.7 4.7 0.1 5.5
Area 3.1 1.6 1.7 0.8 2.5
Yield 4.2 5.4 2.9 0.9 2.8
Other production
Cotton 0.4 19.3 0.3 1.9 6.5
Soybeans 2.3 5.2 2.8 2.6 2.4
Other oil crops 2.1 14.9 4.4 5.6 0.6
Fruit 6.6 7.2 12.7 8.6 29.5
Meat 4.4 9.1 8.8 6.5 4.6
Fishery 5.0 7.9 13.7 10.2 3.5
Planted area
Vegetables 2.4 5.4 6.8 6.8 3.8
Fruits 8.1 4.5 10.4 1.5 2.2
Sources:Data of the National Bureau of Statistics and the Ministry of Agriculture.
Note:Growth rates are computed using the regression method. The growth rates of individual commodities and groups of commodities are based on production data. GDP in real terms in 1970–78 is the growth rate of national income in real terms. — no data are available.