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Impetus for Reform (critical juncture)

• Crisis of political legitimacy• Communist utopia? Economic stagnation

– Per capita household expenditures • increased only 2.2% 1952-75

– 1975 per capita consumption of • Grain, cooking oil, meat lower than in 1950s

– Poverty increasing

• Nationalism (wealthy/strong China)? Demonstration effect/challenge of East Asian “tigers”– South Korea, Taiwan, Hong Kong, Singapore

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Impetus for Reform

• Inefficiencies of planned economy– extensive development strategy exhausted (using more and more inputs to produce output growth)1950s

• each 2.5 元 in additional inputs generated a 1 元 increase in output

1970s• each 5.5 元 in additional inputs generated a 1 元 increase in

output

• Sought efficiencies of market economy– therefore, turned to intensive development strategy (using a given amounts of inputs more efficiently to produce

output growth)

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• No blue print for reform “groping for stepping stones while crossing the river”

摸着石头过河• Tolerance for experimentation

Experimentation as Policy Approach

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Agricultural Reform

• What specific problems had emerged in the agricultural sector as of 1978?

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Agricultural Reform

• Initial policy opening– 3rd Plenum of 11th

Central Committee (Dec ’78)

– marked the beginning of the “reform era”

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Agricultural Reform

• 3rd Plenum of 11th Central Committee• Primary source document

– “Decision on… Accelerating Ag Development”– Re-introduce price incentives:

• Increase price paid by state for compulsory grain procurements from peasants by 20%

• Increase price paid by state for above-quota grain procurements by 50%

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Agricultural Reform

• Initial policy opening – Did NOT envision de-collectivization

– Addressed local crises• Local crisis in Anhui (Wan Li, provincial party secretary)

Household responsibility system in farming (i.e., de-collectivization)

– Evaluated experiment with household responsibility Successful became official policy

– Fully implemented by 1983 • Wan Li became head of State Agriculture Commission

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Agricultural Reform

• Note nature of policy process– No “blueprint”– Local experimentation allowed

• If considered to be successful,

• Then implemented on a wider scale

– “Seek Truth from Facts”

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Agricultural Reform

• Tremendous early success– Improve quality of life

(rural and urban)

– Increase rural incomes

– Decrease poverty

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Positive implications of ag reform

legitimacy--improved living standards, rural incomes

• 1979-83– rural per cap income incr’ed 70% (almost doubled in 4

yrs)

– % of rural pop w/ food intake of <2200 cals/day decr’ed from 31% to 13% (cut in half)

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Implications for transition from ag to industry

(from last class)

Ag reform • Revealed surplus labor

– For alternative employment in industry

• Increased household savings– For alternative investments in industry

Develop rural industry 2nd major success

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Problems emerge after 1984

Budget burden• High grain prices—burden on the state budget

– state subsidized grain price to urban residents

• Policy reaction: slow down price increases

Weak incentives for farmers• Farmers shift OUT of grain production

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Other incentive problems for farmersInsecure land tenure

• Initial responsibility contracts only 1 year

• Later extended (according to official policy)– Extended to 3 years (early 1980s)

– Extended to 15 years in some places (1984)

– Extended to 30 years (1995); allow transfer of land-use rts

– Declined to extend to 70 years (2008); declined to allow rural land to be used as collateral for bank loans

• Extensions NOT implemented in places – Why?

» Cadres reallocate to reflect changes in household size (land as social safety net for farm families)

» Cadres allocate land to meet grain/tax quota burden

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Results of insecure land tenure

disincentive for farmers to invest in• infrastructure—irrigation

• long-acting fertilizer

Declining growth in yields

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Policy debates over farm policy

• Ministry of Agriculture– Seeks economies of scale– Advocates privatization of land

• To allow for specialization, division of labor

• Other ministries– Land as social security

• Fear landless peasantry, political instability

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Other problems in agriculture sector

Tax/fee burden on peasant households• To pay for local schools, roads, etc.

(rural sector largely “self financing”)

• Led to significant rural unrest

Rural/urban inequality• Per capita urban incomes now 3x rural incomes

• Among most unequal in the world

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Addressing problems in agriculture sectorHu Jintao/Wen Jiabao regime puts new

attention on rural development • Abolish rural fees (2001), ag taxes (2005)• Increase fertilizer subsidies• Increase intergovernmental fiscal transfers to rural

areas – to finance basic infrastructure (significant increase by

2004)– to finance rural teachers’ salaries – still not enough to finance rural development

» takings of farmers’ land w/out adequate compensation

» a new source of revenue for local officials» a new cause for protests by rural residents

“New socialist countryside” top priority of 11th FYP (2006-2010)

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Ag and WTO: Crisis or Opportunity?

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Ag and WTO: Crisis or Opportunity?

Ag tariffs fell to avg 17% by 2004– Liberalize imports of major ag commodities– Grant foreigners rts to import/distribute ag

products

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WTO—global markets

Where is China’s comparative advantage?

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WTO

China NOT competitive in grain• Grain: land intensive; China: land scarce

• Import grain

China IS competitive in other ag productsComparative advantage: labor intensive products

• Animal husbandry—pork, chicken

• Horticulture—flowers, fruits, vegetables

• Aquaculture—fish farming

• Processing of ag products—processed foods