GRAIN. SECTOR. ECONOMIC' REFORM .IN CHINA

by

Christopher Findlny

Chmcsc Ecmlomie~ Research Cciltre ...

University of Adelaide

.4hstrart; The Magnation (,f grain output per heud in r~ i.l J99(h in China nuses que\l10ll\ almut gram ~cclt)r perfnrmau.:e. This papc! discusses the scope for further r·efnrrn' to contribute h.l mttput growth. Opi;~wt.unities for further reform in hoth u1put mtl output market~ are identifted. Th{~ tA*mtiul contribUtion of research .md de\c:ihlptnc."nt i'-1 also noted. 1'he discussion is .;>resented in the context of the fot't!C~ f<lr structtlt'al cbnngc in the economy assr,1::mted with it!, rapid growth and mdthtriahst\tinn. ;

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Thr' paper wa~ prepa(ed fot· pr-esentation at :me Australian Agricultural ~,ud Resource: E~onomic~ Society c,mrerettce~ Gold Co;,.A. January 1997. Some of the work repor·ted here was funded by t · e Austmlian Centrc;1or Intemational AgriculmraJ Research with supplettnmtury supp{ « from the Australt·Jn Research Council and the Grains Re.~e~nch and ~velopment Corpo ;ation. The work ·~;~:as part of a joir.t research pm,let~t with the ~1mistry of Agricuh re <MoA) in Bcrmg anrt relied on dat:t front a three-year survey of over ;t thousand gra· 1 producing hmt,4!holds Jocated in twenty countie' ,prcad ovc1' five provinces of China . referred to as t.he CERU/MoA survey dnta .. see Wu, 1997).

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1. '''troduction

Grain output per head in China (With the exception of corn) has changed little over the last dccude. The early gains from reform therefore appear to have been exhausted.' But bus China really reached u frontier which is Hmhing the growth of output, either in t.erms of tt~chnnlogy m In tenth of the org~mismion of production'! The aim of this paper is to l't!'vicw rl'cent rc~curch on this question. Th<~ is~ue is of great interest to Chinese policy mukct·s. who continue to he concerned about the relat,vc importance of domestic ~mnpared to import sources or gram. It is of grem interest to the rest of the world~ which gtYcn the size of the economy. might expect that events in Chi.nn might have substantial cffcct'i China·~ trade and thetcfore on world markets for grain.

The next sect:ion reYicws the tr\!nd!-1 in grain outpunii1d notes some of the key shifts in dirct:Uon. It highlights the development~ of the 1 <J90s. The following section examines in more dct:ul the t~onrex.t in which farmers arc rnuking their output 1.!hoices and reports work on mcdwmsms by whtch event!-! in the rest of the economy affect farm level decision makmg. The follnwing section" review u number of fnctor~t !,Oute subject to change by guvermnent pohC))• v:hh:h miFht have effects on trends in \nuput. Conclusions are \Uillmariscd in the fmul ~ccuon.

2. Treml.~ ;, gtuilt fltllpllt

l:igurc t 'how~ the t.rcnd in gram omput per head in Chum since 1949. A rising trend in output pt'r hc1:d was c~tablishcd in the mid 1960s, hut output per heud uppeured to \tagnatc around the mid J 970s. 'rhe introduction of the reform procest: in· the lnte :1970s mnrkcd a turntng. point. Gn1in output per head ruse on a new trajectory and reached n peak ill f~JR5. Thereafter ou":~ aguln nutput per heud appears to have !\tagnated.

Ttw trends in output relative population in Chi ott vary between types of grain. Figure 2 ~how~ the trend in output: per head of wheat over the same period. The growth in output per head accelerated jn the refotm period but since 1985 the trend is Out. Rice output per head <Figure 3) shows a similar trend to wheat up to the mid Hl80s but. since then rice uutput per head appears to have falle.n, cspechdly over the 1990s.

The exception to these patterns i~ provided by maize output per head (figure 4) which in absolute terms has maint'ain the rate of increase thut wns established in the early 1910s The trend in maize omput per head appears tn be ltnmune both to the impact of the refprtn program and to the events driving the Oat growth in t:he othe!t crops since the mid J 980s.2

More cnreful dccotnpo);illon of the sources of the groWth of output over time is possibltt,. including nn nssessm1mt of the conlnbution. of relative price changes. Some studies f)l' that i)'pe t~f¢ noted t'HJlow. = Thcs.e dtua rnay even also understau:d the rate of growth or mai1.c output if th•t typo of ~.Jn is hcing increasingly divcJted to unhmd feed and ttt)t c()Unttd in the reponed output. 1be likclihocJt'l that output is undettt!p()rtcd is discussed a~ain in a later scctlon.

The next: section 11rovide~ more mform~ttion on the conte"t in which funners are making outr)ut choices in China.

An nnporhtnt factor in the clmttge~ in the· grum ~ctor ure the force~ fmm the reNt of the economy on the agricultural ~ect.ur as ;a whole~ and on the composihml of agticultural outpUt. Grt'~ !-t ugricuhuml output ~rcw at O\t~r '-)per cent per ytmr in t·enl terms in the n.•fnrm penod up to J 984 aud at nearly 6 per ccm per year thereafter. Therefore ~tp.n~ulwral om,mt. ln tm••l ,;~lntinut•d to grow alUH\tt!!h gnun output g.mwth slowed down. Contributing. factor' were the clmrtge~ Hl re)uttve flrtcC\ for different crops and other n!!rkuhural produch. which \\·ere tnduced. t.n the shon term~ hy different rates of reform in tnar~cting m1·angcment~. Aho unpnrtam \Va"' the n:vers1on of lund once u~ed fmrnl!nlin to more ~uituhle use,. ,

Other tm·ces actm~ on agriculture nrc thn~o,e frnm the g.rowth m the- whole economy and from the process of mdu,trialiMt.tnm. 'fhe accurnulntlon nf cupltnl nnd Us rem vestment in other ~cct~'rs shift~ the nux uf nmput and dmw' ~nm~ of the mobile factors of production nut of ~tgriculture. Depend in~. on the J.~ace of technolngt<.~al dmng:e in a!!nculture 1 dt,t:U''-~~d a}pUil he! owl th~.- ngrit:ulturc ~ector •~ under (lt'C't\Ute 10 decline ( relntive tn other "ector'-~. in a growing economy 1 hcc Ander~o,on* I t)H7).

The'c nnpuch nf t!mwth nnd mternatmnnhsutiun in tht~ rest. of the cct,nomy hnve tt \tgnif1cnnt effect (ln agriculture. mcludmg the grain ~ector. They nrc powerftd cnntnhuttw .. hl the trend~ in ~tum output. As n consequence. especudly in some regions of China. there h a t'hing upportumt> co~t nf ugncuHuml output. An agricul.turul sy~tem tlperuting: at fronner effi,:iency level~ '''<lUid still fnce rasmg C(>st~ ur muinuuning that lev~l of output. The outcome ., lhcn hkcly to he greatcrreliuncc on the world J1Ulrket for grain 'upply. However. there nmy he ~cope to mcrense output at rel,lhv.ely low cm;t. when the ag,rn:uJtural sct·wr1 and grain production In piUticnhw. lies wHhin the existing set of pmductlon ro~'ihHiltC.\ The'c circum~tan.,:c!ot :m~ di~cu~~ed below,

Wu und Men g.; { l t)Q7u. hl note that the rapid crcntlon of J\lbs In other sectors ofthe rural ~·cunmny hu~ led to u concern uhout the relocation tlf htbour on ()Utput of ugtic.ulturai rruducts, und ()f grnin in purtaculnr. They use the CERU/MoA household survey data on grnin ~pecinhst households to ex1tmine the effects of labour n:IOf;;UUon on grain out,put.

Wu ;•nd Meng { l9<J7M first examine the contribution oflabour to gruin outputf They find thut t.he .retutn tn labour Ume i!<i relatively fow (a doubling of Jubout input .in terms of til11tf would raise gruhl output by 6 f>ercent). but the actual labour input is a bUnd~ ot' workor u me C()tnbined with farm worker exf't'ricn<:c and worker cduc•Uon. When thcr.e factors nrc taken into account~ the etu.~;Ucit.y of grain output: with te$pcct to itlttctnontallabout

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itlJ"ut rises to :!6~ < fnnn worker experience is twict us imporhUtt as worker education in then model The conttihuti<lU of educltti~n t(' grain output J.TO'·~lh; and tt• houschotd Income !u·owth. is di~cussed ag.ain he low. ·-·'"

\\~u tmd M(ing argue thnt nn important effect of the reloct\thm df lahour is likc:ly to be tmm the dttUlJ:!(- m the" mix of the ctumtcterillttcs in the UJ.tricultuml htbour force in temts of tt'- expc.~nctlct.\ educauon und ,sex They r;inmh•te tht> effe~t~ of the relocation oflabour by ~fmnprnp. the l:nmpn,Hton oft he n~r1cuhuml workft.m.:c. holding everything else consum.t. ·f ilt") l.,,mne that m th uh~ittmce of h1huur rnohihty the ttJtf'Jculturtd work. force in the hfi\1\Chnld wnuld tuwc the ~ame chaructertsttc!'; n~ the whole hnu~ehold on average. < rcn<.~r,Jlly the.~ fjnd thnt. accnrdmg to tht" method. In tlu!: ~hort run th~ direct effects of the rdnc~unm or lahnur ~,m rram nut put will not be: si~mifkunt. Thnt result occurs in purt lwcan\C the mnre tmporbtnl c._·ontrihutor.~ to grnin output are CKJ){'ritmccd und older male \Hltke-r'. Ttw lahout· that move I\ tend~.; to be younger workers with more education.

\Vu •md Mcng t J.tN7ul twt<.' dmt the withdrawal of hthuur from ngticuhure will tdso lt~ad in the k~rtg nut. a., the rduttv~ cn.,t nf labour rise-'. t+.l the .substitutton of other inputs for lahout. mclut.hnp, cat'ttal and nt.h~:.'r putch:tlied mput.!o!. 'l hey also argue that current farm \i/C\ m Chinn hmit the rangt" or technological. urtinns and thnt hu·ger ram\ and plot siles \\'lll he required to htclhtate the "uhsttt.uuon uf other inputs for labour. As that happen5, the} ... ug!!c-.t. the edul·ation level nr fnrm w~>rkcr-. may become n nmre importnnt tktcrmnwnt nf !!fttin output

< ;r~un r'rnd.~actton may nl~o he affected not. only by the sub~titutiou of purch~sed inputs for ~ . J~thnur hut tthu hy the lnn'!\tnlcnt that follows the rise in household incmne which is .. >~~! a"'ot:mted \\ith the relocation of labour. Wu und Meng ( 1997bl find ttutt the stock: of ~ capttal m gruin production lin grain !o.tlechdist· households) does rise fa.11ter than total

tnlU~:tehoh.lJ.tlcume~ but nlll) as ~til ot.hcr factors c,rc held constant. they find that as the 'tMre ·of non .. ugricultural inc<mle in total income ri~e~. hou~eholds tend to invest less in gr.lm ptoduct.itm. indicating the lnck of profitability of grain t>roduction compared to the altcrnath e~, Thies is~ue of the di'\tortion of fanner lncenti ves that are a consequence of gu,ermnent intervention in the mnrketlng system is discu,;sed in other work in tbis. project 1 'ec eg Findlay nnd Watson. 1996at Fftn U996 l reports that government inve»trnern in ugm:ulture reuched n peak in 1978 •. then neatly halved tn re~l tenns by 1987 and rose ~•gnin in the first half of the t t)90s. However the vulu¢ in real terms in 1994 wa.~ neatly a third low~r than in l987 •

.Nm· has the slower rate of fanne,· investment in agrkulture been. offset by public projects~ The ~tate had for some time been using the prictt1g system applying to grain in tnattlcuhar to transfer resources out of agriculture. thus agriculture w_.s not only under pressure from the structural change in the economy* but was also subject. tn dtUMratc ta~ation by the state <findlay and Watson~ J996at Fan (1996a) reports that totllJovernment investment ht agriculture reached a peak in 1978. then nearly havled by 1917 and increased in the foUowing yeats. The 1994 level in real terms was however about: • third

lower thnn thnt. in 197ft Fan ulso str~sses the fluctualions in investtnent~ the decline in Investment in tel;etrrch and development and during t.he sb.unp in investment after 19"18, the run .. down in the c:tpucity of th~ hrigutiot1 and drainage systems.

\\'c d1.scus\ helow an more demit some current. itt!;UCS in I he agricultural research system. "'uc' Hl other O!!ncuhurul mfmMnacturc sector~. such a~ irtigauon. ure topics for further \\.(\t'f...,

l,.and losses

t \'ncern h often expre~\cJ ahout the Ins!\ of ug.ncuhurnl lund m ('httm. Vnrious esUtnntc~ ~m~ n'ailahlt~ nf the cxt.cnt t.o whtch lnnd is b...~intt tmn~o~ferred to other sector~ Wh1ch uppear tt1 hC' h•rgc in absolute terrw, Bnwcver the mtc uf which hmd is hemg transferred to other u~c~ appear~ tn be relatively low. [)ong ( 1996l report' data which suggests thnt between 195M and 199:~. arable land urea feU hy l2G. Dong· ... daH• even !\Ugge~ts that the rat.e of wlm:h the arnble area wa~ falling lm~ hec:n les~ot smcc 197R {0.31 lA u year) cm11pnred to the prcretbrm period t036c;..( u ycarL t.mdct1 (, 1996) ;tlsn provides a ~itmlar esbmate of the rate ~•t \\htch land is hemg: tmnsferred to othet·sector"'. At hir, c<ttitntucd rate. n would hl~C 2 decade' for Clune~e ,,gnculture to lo\e 10 percent of lt't land are••·

There arc also off)\cttmg fon~e"'. Some commentaton; argue that new .ltrable lund areas ~: ~\11 ll~ developed fDong •. 1996 > so that the ureu of urable land could respond to rtsing hmd \ uluc", Gtain \Hl\\'ll urea m Cluna can ulr,o follow a different trend to nrnble area, not only h~c:HU\e of the compo~ition of agricultural output~ but also within the grain ~ector when there.! is .~cop~ m irtcrc••~e the rate of dmable ci'Of1Jlmg. l.ts growth ha~ contributed to the mcrca'c in total output e\'en though urable t•rcn hns fallen.

Tht.' exwnt t)f muhiple cropping. nver time depends on the regional distribution of the loss of amble hmd .. those areas where the multiple cropping rate is high nl'4o are losing arable land at n faster rate. The impliCittions of regional vatJntions in the impacts of. forces for· \tructural change are discussed Ill the next section.

The actual land urea in China has in the past been undcrtet10tted. Even ,o~ the changes in the rate llf dechne nf urable ureas may still be reliahle unless incentives for uudcrrcporting hrwc changed over time. The implications of underrcporting of land area are discu-ssed below.

Another offsetting (actor to the loss of land to other uses is that other input.~ can substitut" for htnd in the production process~ for example. irrigation and fertiliser. Lindert ( 1996) raise~ the related issue of whether the process of the loss of land to other uses has tbt effect of the lowering the quality on average of the hmd remaining. One hypothesis is that the best land gets convert.ed to urban Ube. .But Lindert argues that industrialisation and urhunisation could huve offsetting effects since more effon. is put into improvins .the quality of the land remnining in agriculture. This is a question for funher work. Lindert provides ~orne estimates (his table 8) which suggest the not effect· of industtialis•ion IIKI

urhatlJ~ntion mt. average soil quality could be positive, particularly in terms of its content. of ''t·gntli(: matter and nitro11en.'

lleaional '·ariations

Tht.~ extent nt the l'hnnitc 1n the opportunity C'{"tst of agncuhuttll output \?arie~ between rc~H'"' A' a rc~ult. the ~~ompnrathe ~•dvnnHlge m ngnculture ch:\nges between regions "ht~h aftt:\?l~ mtcr .. regH.mal trade pattem~ Thc'le trend~ alst't hrive mtereshn~ imph~ation.' tor the mtx ot g;rnm rmtput and fnr Clnna·~ mtemnuomd gram tmde,. the extent ,1flhe ~hat·l!lC' m gram 'tX'ctnhsution :tnd trade w1thm C'hma HhJ\ttate the ~ig:nificance tlfthe prnt.·c~'ci~ 4\l the ~hange in the M.nu.:turc of the re~t of the C(~onomy for the 1\gricult:ure 'el·t,,r. tndudmg .gram

' ang H\mg. ( l996n, b l b;,, tdentHlcd the chan~e~ in the locatiOn t'lf gmm production in Chma. She fmd~ stgmfs~unt \ilrl~ttH10"' between region' in the rate of mnput growth. The ~u-ea' \\here nutput h prowmg more raptdly are lncated In nortl'ern Chinn. The growth tn gram. nut.pul sm ... ·e the \Utt1 4,)f the ret\'•rm program and the earl~t I 990~ wa~ over 60%- in Inner M\Ull!oha. Jihn. Hetlnnguan. Nmgxia and Xinmmg J.":(lmpnred tn the national average grm.\th rate over the ~o~ame J'lermd ofJU't m:er 40';r The ~outhem provmces of China rem~un rclativel} large m tenn' nl total output but thetr !-thare has dedmed.

One nnpnrtnnt ~·on,cquencc ha' been a rcdirectwn Ul the patterns of trade. The. traditional pattern .,,r u·adc \\ 1thm Chttht '"a·' to move southern grain to the north. The new pat.tem is m the oppo.'\Jte direct am t\ee 'Y;mg Hrmg. l9l16a. for detail~>. Forces for thts relocation art:" tho'c ''~sncmted with slnft~ot n1 compnmttve advantage 1n agricultunil production. The la~tcr gmwlng and more rap1dly induMtinlismg southern province~ are 1o!\ing their \i'limparaHve advantage withm China m gram productil)n t~ee Yang Uong. 1996c. for emptrical wnr~ on tfn~ pr<'JCcs~ t Pattern' nf trade are therefore reversed. ihese trends may also haH~ been l'elt1fOt~Cd by the Withdra\\al Of poJicy ~upport ft)f grain prodUCtiOn in 'imHhem pro\'inces.

The composition of the natl(ltutl output. of grain and of the grain traded wit.hin China i~ changing. Maize. in which nmthcrn China has a comparaUve advantage~ is now more itnt,ottant in both outpttt. especially since the mid 1980s~ and intemal trade. In volume ten11s~ mmze now accounts for nearly a quarter of total grain <lUtput,. compared to 18% in 191ft

A third hnpHcat.ion, stressed by Yang Hong t 1996bl. ill the greater exposure of the producti,on of grain to volat.ility on the supply side .. The share of national maize outpUt in HeilongjiangJ Jilin. Liaoning and Hebei has increased. Maize output h~ bocomina· mote concentrated jn those provinces which may expose maize •upply to areatcr volatility. og, as a c<lnsequence of some common shocks from the weather affecting all thoso J:"''Vir'k.""OS.

AOO«hor que$Uon is wh¢thcr ·;~aneuhural u~ itl~ff is de&r..-iniJOil qUality. Li~Mltrt ( 1996) fibdl httl~ supporting evidence for Chin~ pi:irticularly fur those soil c~-teri•Ucs whioh •• .fttr ngticu1tural prllduction.

New p~lltms of Rpecialisationa~d inttmalttade havt ~IOIIIed ~lcll&ea fllf lhe dotlimkl transpei; infrastructure. Y4\ng Hong quotes some meprch published in Cbinta \\•hich sUb~!~~tlts Utut '"onstratnts in th.lt system have in the past led to intomatiun•l maize e.•potU m. preference t\l !tale within Ctunu and have limited the extent of spcciaUsation in h'Nli• J'tt·ru.tuchon m those re!tion\. Self sufficictWY policy targets htwe reinforced this difficulty.

Finally 1\ shnuld he noted thnt the grunt uude in Chim• nrc ulso affected by trtnds in the cnmpo~tttun of dcmund. l>enumd cmllJKl~Uion ~~ chnn!ttfllt but pussibly more s'owly than that cmnpt1sitton of muput.4 Till" dtffercnce hns led m t!';sues ·~~~ncilt,t:d with changes in rehtttvc pnce',. for ~xttmple. the n,mg price <lf rice Ul the fir~t hulf of the t990s.

l'ollcy r~adions

thc~e puttern~ of stntctuml change m·e not utdef'\~m.tent: of pohcy renctionst fot tt~amplc, tot he n!-tc m or expected n~e m the unpurt .t~nett\Utnn ul the rmtr~et ft1r gr"in. Oraln pnce~ tn China "tince Jater l9H4 hnve been hi~ht~·r th:m world ptlct:.s which is a consequent~ of the trend" u1 'upply noted m the f•gut·cs ohlwe cnmpured to the g.rnwth m demand, in the contex.t nf n.:-,tricuun~-, un t.rmle The nngms of nnd n~k\ n~'l\'~•~1ated with thic; position are "b~·:u.,sed by Oarnaut,. C'a• aml BuanJ!, c l()t)!lJ 4U\d hy Fmdlny anll \Vat'\i)fl ( I:()(J6b). The unphculions of th•" g.ap~ the r~l\tsumces ht chungc t.n dome sue .pnce~~ the scope for u greater degree of openne~' to \\Mid nmte Hl the grnm mnrket t1f C'hina and the bin~cs in the u.pphcation of uny pur~tult ol il greatet· degree of Jiram sen "ufficeency are iruJ)Qrtnnt , .. ,ucs. Ttlcre i~ concern m paruculnr ahout the rhk of Chinn shifting hy default to '' l"lth of protect~nm~t J'lnht') ~ reverl.inlg the eurher po,thun which w~;lh to tux rathetlhnn subtddise ,lgnculture, Thi~ hwnch In agm:uhumJ puhcy htt!o~ occurred in tlther E~l!;l Asian economies but could only be pur!olucd hy Chum at u n.~lahvely nmch lughcr cust nt thi'i su•ge of

Chmc'e development.

A mnre Interest mg. lmmedtate rs~ue ~~ the chnn{tc in the flllmngement of grain sec;tor policy, particularly the devoluttotl ut ret..ponsihUity to provHtcud und lower levels of govemment,s. Smne hnplicutitms of tht~ change~, m terms nf the u~e of ~uhsidies for grain production and the htck of tnulspareucy hl grain ~ectut policy, are disCU!;!ted by (*hengt findlay und W'at.,on f 1996).

There has been a deb"te over the effects of the agricultural reforms in China. w·atson ( 1.994) has reviewed the Uterature in general; and CIArt\1r(I99S) focus~ed on. the econometric work on the ~ources of agricuhural output growth. Jnput growth hi obviously one contributor t.o output growth and the forces operating on agdcultur•' input supply were di!ICtJ5St!d 111 the previous section. The studies of the other lloiii'CU ot' powth can be divided into different schools. Some put more str('a.$ on technological chan1o• others favour the importance of the institutional change,. ~)IHI a:1 tho. household

;• Se~ Wu •nd findlay< t996) for discu1si~ 11\ • .-nr: sc~'latiu •·or thint's. tntem•tiottJI ph ...... which ,;n·ct-~tlf the likeUhoc.ld uf lar,et vo1urMS of f"l.' ~t.tn iroJH)rfs,

respon-;ihilHy syswm <HRS)t and othtrb stress tbe conttribuUon of and continuing tnlJ'llrtnnce of m:•rk.~t reform mld ngetting prices righf.~ Recent work, particularly pape~ u~ir ,f. ~he CIE R t~/~·loA household survey data are now reviewed under these thtce hC~idH;!;l'\

s,lin(! ~11 ~·n~ \ht~h. nn :;J~~~mmt.~ng for '\OUrces of growth in Chinese agricultural bas put more \\~tF11l on th1: cnntrihutton frnm technological chnng:e. espcciaUy after the first round t•fft"\;'t' tlf lll\tHut.H.:HhH chnnpe h~tv(,. been exhausted t ~ec Clt Uuang. Rosegnuu and RozeUc. }l)Q(l)

An '"'uc m the U\,,es\m\!nt .of the· '"'·npc hw tc\eurch to play that role is the estimate of the cun~m i!ram }tdd in China . .E.\tunnhon of ytelds ts huwever comp1ic~ned b)' errors in the data nn hmd ~m'!a Repo11ed hmd area m Chma htt!\ hcen undersutted. nt lctt.st according to tht..' hth~'-t nfhcmllan~,.i sur\ c~ m Chum \\hu:h rt~vealed tl figun~ significnntly htghcr <20%) tlhln prc\mU"> 1!\hlllah:~·'- of ~lnJhle area' { "ndel"ll'l'«)rttng. docs therefure npt1ear to buve h\'en a pr•Ji'l~ll1 lt\ p!'t'SC11Ce l'Cflf't't~ tht.\C Jnl'etltiVC\ ~:reat<!d at the local level h}~ the land hi\ ') ~tcm and hy the tfl}Uircnumt' the \tcttl' Ul\fiU\C\ f\ll the p.rt\in \ector to suppl)' grain at hl\HH prt~c" h' ttw 'tate marl\etmll '~ \tem Cnncealm!{ the hmd avnalablc muy reduce the,(,.~ tax ('t\tnmittn1mt' mtpn,ed ''ttl an} nne cummumt)', The nctunl MtuuUon is bke1y to he ~~ cmnflutatwn of n\el'\tated yteld' and undcr,tated output

U gHutl nut put ()n the uth._..r lumu ~~ mca,urcd correctly then the e~timated yield (output. J1" idcd h} arc~H wtll hen\ e!'tated. l't As~ies~men.ts of the ~cope to mcren.sc· yietds based on cr,mparp~nrv .. ''' actual ~ teld~ m Chma with tholiie defined t.o be "fromlcr~' levels,. according h' n\(lr~ca' experien~c h'r e\!.amplc. wHI therefore he hnt~cd townrds the conclusion that th~rt! '' hHlc '..:ope fot 'udt un ttwre~t\C' m yteld~ m ChtrHl The correct metu;urement of ~· teld. hrm e\ er. rna~ lead to a more t1ptrnuMic view ot the ~CO(>e fc1r its tmpmvement. In that ca"!e. further technnlogic~ll ~hnnge has tbercfhre a hjgger role to plny than would be \Ugge,ted by yh~!d esthnate" has.ed on undetrepurted hm«J ar~M.

Vang HNtg: c l996d l. U\ing: the CERt'IMoA \Urve)' dnta. found that the iWeruge land area reported by tmu~.ehold~ is UJ'Pr<',Xittuttely l7 per cent .larger Uum the .flgure re:lOrtcd by the \ ma~e\, Thts a.Jlf1Ct\J'S to be anmhet· piece of evidence dmt an v··evious years re{X>rtcd at'l!a~ han~ been understated, Yang l·fong. ul~o foul\d that the vilhlge ~ppears to have reported u figure clo~e to actual yield' to higher Jeve1s. Thi~ result sugcests another po!;sibilJty which is that rather than rather thun y.ield" being underreportedt it is output, at leu~t at the villa~e level~ which is likely to be underrep(''"1Cd. Some s··ain output. is thet~fore concealed from higher levels of government. This output could be diverted into

There i~ nlso other work. includfn~ by Zhong and Caner ft99S). whostr~s t~ import-.-e:ufthe wenth«!t HI paucms of Stain production over tim¢. &tnd by HuatJtl and R-)~tlle ( 1995} who hilhliJhl the contrihutjon of the incrta$Ud inability to wnhstand the ct'f~Ctti of n•tural dh5'Utcrs. ri•ina•"inity and 5011 erosion. 11 CrO<.tk and Colhy t 1996} sug,eJtt that the State! StaUiitic$1 lurttu overat1te1 )'ields (wbklh it liM measures u~ing s;Unplc survey cuttings) in ~r t(• eom~notu tot the uncktstl1~tnenc ofland .,..,

the nntmnt sector und not nppenr in the marketing syKtem in its raw form. 1f this diversion has incn.msed over the last decade, us demand for animal products increased and as the' mnrketing system for those products has been reformed. then the official data may also undcrstmed th1~ rnte of growth of grain muput.1

1\ cotni"I~t·ison 1norc rcle\'llfll thnn compnrin~ uggregute averugc yh:lds in China with some u"'s\!,,smem of l,otcntinl hnl-ted on experience in the re.st of the world, i~ an assessment of ucmaJ ,~~n~us potcntiul )teld in Chinese conditions nt the rann level. The problem i!l to find m\ cMtmatc of potcnlinl yield.

Ltn mad Slum tl994) have undcrtnkcn u study of the potcnlinl to incrense ric~ yields by compurin!! acttm1 funn yield:, with the nsscs~mcms l'f whnt. is pos1dblc provided by agr"'nomist~ '"'d ~cientist'~ workhig in the industry. Lin and Shen dtstinguish hetween two yield ~u•ps. The fh·M is the gnp between the maximum expcrimcnt••l yield and the best pO\!o!ihlc nwm ylt.~ld. The second •~ the gap between. the best tlos~,ible :md the m~tual farm yteld. They find u ~ignific:.un combined g:up. for exmnplei cuscs where the muxinnun yield j, three tune' the actual fnnn ~leld. Mo'\l of the gap tubout 70%} is due to the first type of gnp. Lm und Shcn argue that there mny be hig.h returns to research on how to reduce the fuctor~ which tht!Y identify as contritnuor~ to hoth gaps. Biotcchnologicul rescnrch they st.lggc~t may uftt1l' the higtw.st retut·n,.

Other v,:ork ha~ u~ed u different mcthmlology to ~~vnluute th<! returns to further investment m rc~~mrch and development m Chum. A~ noted ahovc. work on nccounting for the g.ruwth in gmin output in China reHml~ thnt in the 11n't technological change has played an &mportnnt rule. A more recent p;•per tnes to find n direct hnk to research effort, rather th~m inferring t.hc contributionuf technological change from the unexplained part uf the ttcmls in output ·~t'(lWth. l;'nn < l tJ96hl includes a research Vllriahle inn production function ~tudy of the trcmh~ in grain output over time. By making as~umptions about the Jagged structure or the effects of research. Fan is able to estimate the returns to ugricultua·at reseurch which lie in the nmgc from 44% to 169%.

Even if there nrc hi~h returns to agriculturul research. would th~ .investments be made'! RnzeiJc < 19961 und Fan< 1996albl hnve reviewed the ref<lrros, including cnnunercinlisation. in the research and development system in Chinn lUld the fall in rcul ~pending on re~cmch. Reseurch in recent years does fll1t nr;pcur to be contributing to un increase in the yields of commerciully used varieties. the number of new varictios has increased but the rate of increase is lower in the first half of the 1990~ compared to the J.oecond half of the 1980s. These .results raise some questiotts about the bottofits of the reform process in the reseat·ch sector. Rozelle and others also note that a remaining issue in the reform process in ~he rescnrch sector .is the strengthening of the propett.y rights regime.

1 thi~ ro•ult might. a~ so help e~plain P'-rt of •he apParent in&;~oo$h•tlifK:Y between tt. arowth in ttrnin out rut in Chitta !lttd the vrowth .in m~ut t'Utput. Fm ii dhiCU!Udan ,.f other ccmtibutot5 iiMlludinl tht rc.,te uf grain hnpt)tts, 5ee Lu PengCIW6).

One issue in thh~ work is the evaluation of the p.nformance of the teMarch sector. As Rozelle notes the result that ~~ields of new vurictie.s are constant c<.•uld co~oal other features. the data used ''.) evnlu,ue rcsturch performance refer to ''ariotids in com..,tci•l use. Mnrket :uld profit oriented farm households muy now be sele(!ting varieties which contribute mure l<l housch<lld incotnt ntthcr thnn outlntt. The new vurieti"s may require rewer 1nputs, fot· cx.umplc. This qutNtimt is n toptc fot· further work. If so, howevtr. it cnltld tndicatc :J .~ucccs~ in the commcrcmlis~tion pn1eess in the re;;earch sector ruther than pnot· pcr·tnrmunce.

Pmy, Ro1ellc itlld Huunc. < l996) aiM\ review ~ume of t.he related issues an the reform of the ~ccd mduMt·y ltl Chinn and stress the returns tu eusmg hnrt·iers to entry into the market for '~Clh to rrtisc to the ;ext.enr of competition in the market an . ..t the tetums to rcmuving nJ,tdU~\l Ctltm·ob on seed price~.

The household survey datu nva.ilahlc m d11s project' rcvenl some fcnturcs ()f seed use in gram pHlduction. Grain for seeding i~ nn tmportunt. use of gmtn output. The rntio of seed mput to gram output. i.lCl'<mJttlg tn the CHRU/MoA survey dntn, is 3.4% for winter wheat, 0.6t'( 1'\1{' mitlliJe .. late indtca and 0.9~1 rnr lllall.C, Some e.stjnmtes mdicate thnt there is aho a ~tg.mh!.."nntlo~s of ~ccd!i in tht' sowmg pmtc''· <lrcntcr efficiency in seed use CtlUid tnakc uv~ulablc millmtP, of tonne' of gnun fnr othet· uses.

Hart} \\~u in \H)fk m pr4;1grc~' on fanner chm~.~es nhqut ~ecd UM! hu~ identified the tol1nwmg tC'ltahlc hypllthc!-te!\:

• Fm·mcr\ tend to ~hoo~c high-yaekl vurietae't if they are t;Ubjcct tn sales quotas with fl)~tni '\tate J"~t·iccs, thut i~. they emphusise quantity rather than qunHty; nt the same tune. under central govc•·nment pl'e~sure to meet nutput turgets. Jocalgovemmentil; lmv~ strung incer1tive~ tu dcveh>t1 und prumot.e tugh .. yadd vnnetiey,;

• The nature of vnricties thm huve been used .m the pust determme the frequency of change of varieties .. hybrid rice vnrieties often tequit·e more frequent changes in seeds:

• Farmers· respon~<~I'J to the ~wailnbihty nf high .. yield vnridies is subject to their budget c(uv,u·uitu. the panmteters of which nre seed qunfity, the prices of new HeedsfvutieUcs und the cost of ussocioted inpuh (tllJUlY new vutieties require higher .input of fertili·klr or/and lubour; in fuct, many high .. yield vunetie~ are developed to be more t·esponsive to fcrtiH~er uud intensive labour input: quality matters since fant\ers hnve to use fJlQIC

'eeds or have to reseed if emergence rate is tow.)

Prelimimuy ~urvcy fi;uJang~ using the CERU!MoA duta to be reported by Wu indudt the followin~:

• Almost nll grain futttter~. ~\arveyed have changcut varicticK since the introductioJJ ofthe hou~e. old re~;pon"ihility syKtem <HRS). not only for r.hc tn•Jor crop. but ab~tl for ocher cropst eg. 95% of dee farmers in Ouungdong and 92~ of rice ,..,...,. in Ji~ttl•i h•vo changed varieties for the same crop sh~c HitS;

• For the m«\ior crop~ 82% of the houscholdfl chl\ngod varieti~~ at to:..at 3 times sint~ HftS. 60% l\t least 4 tim~s •. ~md 37% "' least s thues. and 20% of hoo~holds ohanald vnriehcf, from 6 totO times;

• More importtu\\ll·· most li5C,f) houl'lcho1d11i chnnged varieties in 1994-9.5 when the: government re .. emt'hn!~.iscd quantity control over gmin production through the gmcntur J'C\J1llUSlhtllty syMcm~

• Fm· their h\t~"t chnnge of v~u·tety. new varieties incrensedyietd per (sown) mu by 43kg f.,,r wheat, 36kg for curl~ lnthc~t. 4~kg fnr hue lndica~ 35kg: for Japonicn nnd 67kg tor l.l\Ulll!.

• The Mltvcy alMl ft1Ut1d thnt see~t mput (per mul ~~ pusihvely cm-relnted with yield and negaovely cnrrcloted with the price of ~e~ds {sUtlisticnUy significant, the two f'nctors ~.·an explnin 30.,40«:.1 of the qunntHy of ~eeds used).

Thc,e· re~o,ulh 'iUggc'it that nmner~ do consider the effect~ uf seed price and quality on yu~ld. The rate of change to new vnrietic~ is nl:,<l an indicator that farmer decision making i~ not nece.l\s~u·Uy a barnet to the mtroduction of newt technologies at the fartn level. On thC' other hand. there does appear to be sig.nificunt variation Wtthitt the sam,,le in the rate tlf us.:! l)f seed~t. Mi.\Ximum seed mput for winter whent was L7times the twernge~. for nuddlc Jnte Indica rice wa~ 6.6 times the a\ ernge nnd f<lr maize wa)i 7 .S times the a.verage. Tht!\ tn[\tlt. while it is \UhJect to econmnisang hehtwiour by farmers in general, appears llkcly tn he nne ttl \\·hich there ts con~iderahlc ~cope for technical efficiency gains.· A side cfh!l'ltlf greater effidency in th~" use nf 'eeds wiH he an increase in the nvnilnbility of grain tor nthc:r u'~~.

tn \ummary. resc~m:h nnd dcvcloprnent can clearly play nn importnnt role in drivhtg output: in the fp'am sector. The mujor puHc~· issue •~ therefore the manngement nnd evatuat.ion of re'\curch ~tnd development program~ ·\lhich apply to grain. Key elements in achieving an cfftcieru outcc.lme will be the institutional changes in the resenr,;;h ~ector and in the seed industl')' which were O()ted nbovc. A more developed seed market rnay also contribute to un imprnvement performnnce in terms of ~eed use at the farm leveL Choices of research cffnrt in China will nJso he m()re efficient if they takes into nccomu. the cost of Chinn's alternutive sources nf grain, such ~•:-~ tntrchases from the rest of the world. The scope for change in other hlstimtinns m rural China to contribute to flroduct;vity growth is dh,cussed in the next scctinn.

ln1tltutional change

1-luang and K;•Urajan { 1996} argue there is scope for yield increases whi(!h appear to bo higher for maize than for other crops, and higher in Sichuan compared to other pr()vincos in the sample. thts arJ1utnent i~ bas~d on their a.,.scss~nt of the gap botwcon acruat

.... ,1

nutput nnd nn assessment ofl)Otential output of betweon 33% and SO% llf QUtrent yiclds.tt These estimates are considerably lesK than those of Lin and Shen ",v.hoM~ typo 11 gaps rang, bctwe~n 50% and 65% of actual yields. Perhaps the explanation is Jh~ a&sessment by scientists of uyields under favourable conditions.,, which are the suurct of the Lin and Shen est.imntes of pmentinl yields, und which exceed the observed best commercial pra.,:tice in the household survey datu.

Hmmg und Knlirnjnn find thnt the gl\P between octut\l and the estimated potential jlCtf<mmmce is sm.tller for cnch of rice, wheat and maize if:

• the• household average educ••tion level i~ higher

• the household head has 'longer agrlcuhurul e~veriencc

• the total hmd arcu being fnnned t!\ lurg~r

• the propnrtnm of the grain output so'ld to the market Is higher.

• the h\gtwr the proportion of duy\ spent workmg off the farm.

lhliutg aml Kahnwm use thc~c ·c~ult" to su·e~l\ the "tlmrt term gnins Ill productivity that mtphl b~~ n'lsodt.U.cd with lut·gl~r farm sizes, n greater mnrket orientation in grain output r the mnrkcung mte in the sample ts Mill only just ovc~r one third> und the growth (>f off .. farm work. They sn·e"\ twwever that in the longer run, ufter the immedhlte productivity tmin~.t m·e cxh\tUst~d. ~ome of these changes muy not have net positive effects on total output One e.~mupJc b .strm.:tun•l change. including the growth nf rural it~dusu-y. the tmpm:t of which wa!-1 lti!'!cu-,sed If\ set.~Uon 3 of thi~ puper.

·rhe~e re,ult~ hig,hhght both the mle of the extent of use t)f markets und other institutional change"· for example, tho1-1e affecting hmd area~ in the performance of the grnin sector, Jn the rest of this section we concentrate nn .input markets; noting not onJy the output effects hut also other con';equc:mce.~ uf reform. The impactl-1 of output nu•rket· developments on productivity grnwth are dis<.:u~sed m the following scctu.m.

I•tat ~-,,mst~lidntlm;

The issues U!,sociated with the .l!icale of production ure examined by Nguyen, Cheng and Findlay < 1996>. According to their resuhst there is a statistically significant potdtive relutionship between plot size nnd output for all three crops: mni1~~ wheat and rice. However, the positive relationstup for rice is obscured by differences in varieties, by the luhtmt· intemdve nature of rice production and hy Ute very small plot size in southern China where f'ice is muinly g,rown. The clusticity of wheat and maize yields <and aU other inputs constant} with respect to plot size is estimated to be. 17%. v•.w-\W*'-t·~~,........-..o;:>~~~~

11 .Puh'mtial output is dctiv~d f'rom an estbnate or the production frontier which i• e5tilftlted by • uu:luditl~ only ructots of production in the tegtcF.siun rquPUnn. Other \!OOJributorl' to varhUitm:& in outpul ute coniid•:red inth¢ S«lcond step of che .-nalysl$.

Page 1.3

The genernlly obberved ()()Shive relationship between plot si~e and output fbr tn~jor grain cl'ops in Chinn, Nguyent Cheng and Findlay argue. suggests that fragmentation involved a significant. cost. Further. they stress rhat they te~n~d for the effects of both farm size {total ureal mtd average plot size (.total urea divided by the number of plots). The immediate gain" arc a~M.lCtated with econmnies in plot site rather thun farm size.9

Gt\:t'rl ftxed hmd areu~ ~md th(' pressure of continuing population gn~wth. the nlready very ~mull pints of hmd in many ,1reus of China ure being fragmented further. The results of Nguyen. Cheng and Findlay indicau~ thi~ i.n&tcome could be ex.pensive in terms of output foregone. The Htenuure Pn this i~sue :,uggests Umt UV()iding this outcome will require a dcepemng of the r;~form pruce~s. Experiment~ involv.ing these prnctices, which are already undcrVfay, will ha\'t: tu h~· promoted actively in other areas of Chinn before problems of Jailing plot ~i:te i\re resol\ied.

From uneconomic pcrspechve, hmd ccm~oHdatinn in Chimt involve" not only gains~ but abn rosb. The po~"tble co~ts include~ first! the exp()SLre of~mnll hou~cholds to extra tisk.s t:au"c:d hy hmd ctlO~<·hdation. For cxm-lple~ f~)Uowing land consolidation. the losse~uf rrop~ In one plnl du~ to flood' or other Oi\lurnl adver~ihe!\ ure less likely to he palliated by ~1 f!<Hld or lmntMl harvest trnm plots in dil'ft~rent ~~lcatiuns.

A t\~UI.;" an rC'lilted to tbt*se que~~twn!-f ot sct,jlt~. and the interest in either con~olidath1g plots, m.:rt:~l\ing htrnl size or hoth. t' t.he hmd tenure ~y~t.em. The debuteon lund tenure in China t~ n:v lt!Wcd by Zhang. Buang and Ro1eH~ ( 1996}. "fhe collective hmd of the vUinge is still t:nntrnllcd by the l~!adcr~hlp hut can he allocated in a ~·uriety of way,. The mechtmisms mvoht>d Hre dmn~cteristtd t"Y u lack of securily of t.rnure which can weaken the incentive h) mvc~t'. n!dur.:e!-1 tht' ~il~t! of acct,is~ to credit ami. !n the absence of u mnrket for hmd use nght-,. dcme~ gain' from ~pccmlbation. The emptrical significance ofthese effects is n toptc torh.n1her work. A market m hmtl use rights {even without privnte ownership) would tw:ihtate both consolidauon and lhe uctuevemem of greuter ~cule if they were profitable. Some mndel"i nf' or experiments with new land tenure arrangements in Zhejiang ;m! examined by Fahlbeck und Uuang c J 996).

Fanner ed11ct#itm

Another \ ariuble ~u·e,~ed in the l·h ... ng and Kalknjun re~ults i!'f the impact of educati'Jn, or the quuhty ot· the iuhmu· input. on productavity. "!'he impact .or format education is examined by Nguyen and Ch,~ng ( 1996) who queshnn its importance in the performance of grnin producing houhehotd~. Nguyen auld Cheng report regressJon results using fann int·ome ns the dependent vuriubJe which suggest dmt

• the returns ttre statistically :~~gnificunt fot· the educati()Jl of the household heads but not for the education of f~tml worker~ generally

I) Huang 11nd Knhrt,jnn found thnt totAl ar~•t W\1.~ stgnUicantly rehtfcd t() prod.-ctivUy. althctuah they thd nut iJit:lude a. plcu litl.C vurmble in !heir equaucm* :md thct•~ is a. cotrollll·ion. between total area •nd uvemge plot~a~c.

• the relttrn<i nre considentbly higher for the first three yenrs of education of tbe huu<ielmld head than for ~ubsequent yeltrs.

\Vu un l t\:teng { 1996:.~ h) nnd Cheng ( l9t)6} report othm· n:.gression equations using grain <'ltll.put u' the dependent variable itt \\ hich the education level as well ns wnrk experience t'l hrtust.'lwld twutls,;t~ al~;,n important.

~,!!ttyen nnd Cheng argue theit• re,mlt(\ conf1rm that household bends, who arc decision mai-..cr~.; \\it bin e~wh farm. are hamJkapped in p:etttng the best of the imprcwed seeds and mnd~rn a£trh:ultut·itl practlce" if they cannot r·ead ur \VIile,

Then.~ b hn\\ever an ct.:nnnmt""trit: qunlificmion tn the st.• result~. Nguyen and Cheng refer tl' rt~"'ulh frnm \Vu. Riclmrd!-illrl nnd Travers ' 1996 l who t'eport the amllysis uf survey of \Oille \ery poor households in tttral China. This survey suggests that low levels of literncy antllo\\ incnm~;1.' are the joint effects of the 5ame cau~es. Nguyen and Cheng suggest that further\\ nrl.. i' required tn check that the significant economic effec:t of educatiml in their nVt n regression re~ult~o;. und u• man\ mher ..;tudiet;. wu~ not achieved by misleadin~ly mduding in. the 'ample u group nf outliers (eg the grNtp of pnor households with illiterate heath 1n thetr nVrn studyl mnong whid1 u lnw education level i't twl c~u~sed by poverty rather than the other way round.

De\pite this qualification to the ~t)c.;e~'ment of the size of the rehttiouship between educutmn untl either income or p:min output. tht~ <.!otmection could stHI be significant. The rt nhlcm h. U) measure tlt:rumtely the \ile of the hnk. Even if that link is now small! the unpnrtam nr educmion i~.o likely t(' rise. \Vu and ~feng f. 19<l6a) tdso argue this case. Cheng f l996 l ohserves that with the increused use of chemical fertilisers. new seeds and other modem inputs. grain pn,duction become~ more and more capitnJ .. inten'iive and hcth:e demand t(1r quuHt) labour inputs rise't tthat i'\. more educated !about becomes more prnducti\'e t More attention should be given. he argues. to the further education and training. for those household .. heads in their forties and fifties who are usually the major dedsion mukers in China's gruin production and marketing. and \vho are les~ likely to move out nf grain production completely.

A tunher qut•,tion is that. if education is signit1cant; how much is required? At present. the returns to education beyond n busic level. may be c;malt. That was the main result of Nguyen and Cheng ( 1996) Whl>Se concent about the econometric qualifications to their assessment uf the r~elationship js not likely to affect thi5 conclusion. However for reasons discussed by Cheng ( 1996) ~U1d others. the returns to longer tenn education are likely to rise over time.

0/f•farm: work

Another int.ere~tiug issue in household management is the rote of off-farm work by household heads. the results are mixed. Huang and kalirajan ( 1996) argue that the extent of off .. farm work in industry is positivtly related to productivity in grain production. While familie~ for whom off-farm work is more important may spend less time on fann

wurk~ they muy work ;non: product.vety when they ~'re spending_ time on the fnrt~'· Yang Um•J.! < 1'}()(-.c> on the other hnnd findsa negative relnti<mKhip between s;ruin out.t)Ut and the 'iluue of tmn .. funu incmnc in tnt at hou~ehold income <nll other inputl't. ctlJ\tttant).10

( 'h~·n~·, t )()96) \tudy rxumim-d n purticuhu· fortrl of nff .. farm work. He found that there iA an U\'1ouut.um hrtween th~ nttkml position of t.hc huusehntd heud und grain output Cht'H!! Hi!-!llr' thawd nn hi., ht•ld work) that UtCt'e is no sy~:~t~tnntic n~h.ttion,;hip between nt f u. tal po,ttHltl\ i.tUd twttt>r quuluy nf hmd .. The Jlnsthvc cff(~ct'i uf official position ott ~mun nut put an~ rnot(' hkcly tn ht'" rauwd hy tlw coHt~t:lt\lt' owncft,hip uf some lnrge fntm t>l}tnptllt~nt and pt l \ l k~pcd 4\<.'t"C~" to 'tate ~Uh\idi~ed fl.trtll inputs. llUhlic ItOUdr,r !iUCh U!\

tnt~mkd wah.'f and wdmi<:al tnformatnm und ~uppmttug \erviccs,

( Jm.• mt(!t[H'(~tutum ut thJ~o, outcome., that it repn~"'cnb u form of (:utnpen~mtnm for undt•rtaktnv, an nfft~'lHl tw .. k t.n tht" nllagc. Chcnf! note~ th~" problems n,';~ .. x·iated with this t.tpptnadt He pn,.~ft'ts lll\lcmJ a markttt .\nluttmt of hoth hi!lht.>r pt·iccs to gr~tin producers to ~~n~.:nm t\gX' on I m m ptodw.·th it.y 1Uld dln•ct cumpen~uttun tn nffktul~ fm· time .-,pent in ttuu rnh· < hu: optwnlw 'npgt.""t' wnuld lw ttw ct<N.ltwu uf oue or two full·tintt·pnsitionc; fol' \IIJilJH~ uffli.Ht(\ and Ow J<:tftltJUHl of th(.~ tntaltmmher of vilhtf!_t'\ offh.:hd~ (CUI'I'Ctltly there ;ut:' ••hout thrttt• to ftH"tMil tun!."\ tlhtge;, ufftt.'htis whn au.~ pnitl fmm the hmd use lees>.

Et fH;·um"·y .1 ,f h.~rt d l"'~~~u~e- '" th~t:U\\,t!t' : •y l "hen g. Nguyen tmd f.iiudluy ( l9lJ6 }. They c~anuuc the uHoratJ\'C elflt.:u.•ur! in the U\c nf urea uhc muin cotntKmcm ufwhich is mtH'~!!t:tlll and an a}!pl'<.'t!ilt~ nJ all other fcrtih\crs ccg ptmsph~·t~s) in production. They ''I''PIY th~ profit m:.t\mli.~in}! tH·m~.~ rule on input U:tl' to find thnt ureu is uud~nnlli"t~d Ul nH hut nne: <'f the t'nunttes in the «-.ample. while ntht.:>r tcrtili~ers were muJ("nntlt,ed m J timf!.xi but nvcttmh~cd in OtHJHgtlnnl,!. • 1

J·1cld \\otk hy Cheng supgcst"< thut u f.'nntributnr to ntlot·ative incffictertc)~ of rice prnduct·r~ \'-""the n~k" mvnlved in th~ udiustntcnt ofittput usc. which was a·eJuted to lht" luck of knnwletlgc c.:f the technical relations between int,ut nnd output for rice pr·1ductwn. Fot cx.utnplc. loHowmg. nn incren!,e in the price of tu en~ households nm) nnt reduce their U\e of urea uccordtngly. tf they w·~re uuccntuin nhout the nut put effect~ of c,uch a reduction. They may be t:oncerned. hw example. that u c.,tnaU dct\rcnse in fertiliser U\ie mi~ht h·nd ton lnr~e fall in output. They ttre therefore con-;ervatlvc and hltse their input. choice~ on their own limited experience of the tcchnicul rclutiun~hiJ1.

11' 11lt.~ tJUfenm\.'e tn te~mlt~ tnuld tdlcct ~~~ $l4t.isUctd mcthodft used which trru.tt the nutusurentertt

er.rnr., llkt~ly w be nMucuncd with the: input w•rhtblcs in diffct~nt w"ys. tl 'On:tc Ute quuUfic,.tiOtl~ tu these tC'S"UhS ~CklUS~ uf OttlUtod va.ri•blt.t; ptt.lhtcnt (telated to tfll cxctusnm ot u 5oil ~u~tllty varhtb!t• find organic f~rtliscrs, d•ta for \14rhJch we~ httf· available) •'"' al8t' btcuusc of the t•tt,@re~ation of the tertiHsct type~. Huang •nd kaUtajaen (1996) •hio found tblt tJYotatl .tct'lUiset!S were used telativ¢1)~ it..:ffldeutt)'.

The respousivene~' of rice producers to changes .in input and output prices irt ~out hem China could have been influenced by other factors as well. These tieton~ mngefrom

• the Jack nf price infonnution for smnn rice producers!

,....6

• the exugg:et;:ttion of price Ouctuubons ussociated with the b~•rrie.rs to trade hetwcen the l\Vo provinces and between counties m n province, and

• the rnessages from central and local governments urgmg fanners to mcreuM! nee output t~'llowing. a full in nee output since lute 1993.

1'he lnc-ffktency uffertlhser use· could ,\Jso be due tolncnl shortages of fertilisers l purth:ulat1y ureal or credtt to pny for them. Policy ttn('licauons thct·cfore include the value nf more techntcnt infonnation to fnrmel's. but pnwtded itt the context of ccotlomic d~~·t,iml making. not output tarp.ets.. There also ~ome intere~ting; technical issue;; about the impnct t)f un~a usc in southern C'himh .md about the benefits nf other methods of tertiH..,er apph~utinn L~omp~trt;od tu those \'Urtctul.y in u~e.

A theme \·,f the!-!e result" i~ the unpnt1ance of the operntiun of markets for inputs, it•cluding hmd.lahour. ant..l purchu,~.d item!\ ~uch u~ terti User. Current restrictions on some lt!!ru.:ultumlmput nmrkct~ reflect the absence of other tmukcts, for example. for dealing "Hh ri"'k" tn the agr·tcuhurat rwoductmn. The data suggest that institutional change~ in the"e urea.., ,:an htwe t' sigmficnnt effect on productivity .. f«lr the example .. significant hcncftt\ would he uvtuhthlc. according; V.> this research. from institutional changes which led fnrmcr~ thcmsel\'e~ to consohdate thetrplots of hmd. It was stressed however change m market~ other than jur;;t th"se for farm would be required in order to this outcome to occur by intUatives at tht~ village lever. that is. to <)(~cur in an efficient way. There may also he hig.h return" to information about the effects of fertilisers in grain prnduction and about method" of applicntkm. Longer runlssue.s include decisions on thl'~ extent of and funding uf f~nner cducataon in China.

~larkt't development

The development or the grain marketing syste111 is discussed .in more dehtil b)1 findlay and \Vat son f l996a) and Watson C 1996). Obviously, the changes il1 relative prices that emerge from market retf.mns have effects on Lhe trends in grain output. Findlay and Watson < l996ul document examples of the supply response of grain output to relative price dumges nssochtted with nu•rketing system reforms.•~ In this sectiont the focus is on tho

·~ A r<>rcnt e)tatnple ts ttl¢ \•cry htgh ~tain output e~pect4'd in l996, the result not ool)' of good w..,athut in sotne part.~ of China but .als<J ·~ increas~ in $OWn area. ,_ .io(:teasc in sown are• is Ukeiy \tl be the result of ¢"pccuttions of higher pti~"s for grain bQtd on prices ~ived in .19!N and 1995, .,... ittccnttY.:s that cnllt.rgcd frcm the appli'-1ltion l)f tho governor responsibility Jystem. 1be·l•p output Qd

.,. 17

way that the developtuent of markets aftect.; the productivity with resources are used, rather thun on the \'olumes of inputs which are applied to agricultural r•odnction ..

Jimmg mtd Kalira_tan ( t 996l tested the cffec•· of the rute nt which households sold t.heir g.r"\m on the market nn the prrlllucttvny of the hou~ehold. They found that more market nnentcd honsehnld" u~c their illflUl~ nmre pt'oducHvely in the ca~e of aU three crops. llu~mg uml Kahn~Hm also e~peeted thm a higher stnte shure In a household's mnrketed mnput may not encottrape fMmcr~ to produce t.hnt ompuc effktcntty. A relntaomdup in tht~ dtn•cuon was t.'tnand in the (i\\C nf wheat but nut nee and muill!.

Other re,eurchers have found n fUl\ittve .rclottnn~tup between the size of the quota. and OUtJ1lU. eg. Stcular ( 1995\ finds first that <JUotas do affect the aUocntion of re~ourccs at the farm level:. quot:us are not inframarglllaL She also finds that quotas have a significant effect of taxmg household income. But qu\lU\s iu bel' re~uU'i also appeut to have tt positive effect on pr('lducti\:tt~ One explmmtiouls th~•t the other ~erviccs. are provided alongsidtt the quotns. for· exmnplc. the (lrtl\lsmn of new techmques, ncce!-.s to fertilisers which mi~;,tht nlft~n' t\C he con\trained. access to crcdtt to hu,y input~ in an efficient combiuntion. "-Upcn Ntm hj It)\; a I officials uf on .. farrn choice<,. provic,i.on of farm services at lower costs nn o.tt:ollectt\c bw~t' etc 1

t

< >nc mtc:.~rprctatwn of the:-.t• re,ult" l\ thnt the quota .<,ystetn is a sel ,md best method of 1h:htc\ ing an eff•cicnt alloc:mon nf the uv~ulnble inputs into the productio&l proce'\~ bt:l\\Ccn hou~o,chold~. The quota ~ystem Is acting as an as.,essment of the appropriate degree nf \peCiah~nHon by household~ m grain production. Available inputs ar·c being aU,Jt:atcd a<.:t·nn.Hngl) nnd acceli\ to tho"e input~ has eff~cts on totnl g,ralu output of the hnu\t~lmlu. not JU~t the quota component. .However these effects are likely to be larger ln rh.:her ~ounttes which provide slth\idie!\ for grain produchon.

The alternative to thi~ use of the quoto syst.em i~ not only to let households make their own choices of their speciuh~ation in grain production but also to reform input markets so that the nmrket mechanism can Ul'hieve the efficient allocution of inputs into grain produchon. The net effect is likely to be, according to results tlf research reported hete, lugher grnin output. The c(mccrns about food supply security, which is one of the origins of t.he quota. systern. curl be met through the development of a more market orientated productJon process.

the uc(!umulation of stocks in 19'16 is likely to lead t(l expectations oflowcr t'utut~ price5 and •lower tiOWn area next year. 1

' One e1lplaruuion for the difference between the restllts of Sic.utarand ~of Jfuan& and KaUra jan about the imp~t ()f the quot" is lhat tt.y U$e different data .sets. Sicular uses data fl'()m t.me cc•unty in northc:.rn Chinn.

Another marketing tssue i~ the s~t or barriers to inter .. regional trade in China. 'these hnrner~ could he due t(l the Jlresencc of bottlenecks in the transport lnfra~uucture or to dchberate rohcy chmcc~. Ml~h us the g.ovemor re~ponsibihty system tsee Chtng~ Findlay and \\ at,on. f9t)tJ t. l«' cause each reg a on to be more ~elf reHnnt. If those bun·iers were, ''!!Utftcant. then, the ~:on,equenct ts n h.tck ut SJ'CCittlisnt10n by region within the grain "e"'·tnr Th~<t fmlure m put~uc spcciahsatlml mentts that ,,omc output •~ fc..,regone. Whett f'(.*gnlll~, 'ifiCchth~e they com.·cntrate nn the grnms wtth the lnwer t'lflportunity costs ht tem1s t\f ,·~thcr IYJ)eC.. nf ~:tram foregone, \Vhcn rel!mns differ in their ottporttmlty costs of pnlliucuon of \ ~mnu~ tYI>e' of gt'ain\ a" is the ca~e m Chum. then the output foregm1e in t.Hl~ n:guml!~m be n1o~ than nU\et. hy the mcrentent~ to output in other rc~lons. The grmn outtnat of the whole economy '' tncreased U!\ n consequence,

Ot \!\.ntr~c the \4\llle l\sUe~ an~c \\ith n •. 1\!Ct tu choice" llCtwcen grain and other goods and ~en kc\ In pa.rt1culnr~ there t'l the quc~ttun of whethct· the price·:, to which Chh1ese Iarmer\ are re'flotu.hnp· nrc dt\·Orccd from world pri<."cs and thcrefon~ frorn the point of \:te\\ of the whole economy there t\ an ineftktent, volume of grain being produced. comparN-l to it" real cn\t of pn.-.cu1·ernent fmm the rest of the world.

Barner~ to market mt.cgnu.wn lmve a "~cond tUlJ10rtant consequence from the point of 'IC\\· t•f output. deci-,JOO.'t:. \Vhfle demand fhr grain is relatively stable within nny one rcgum. tht' ~uppl~ within a reg.hJfl cnn nucmate ~ignificnntly as n result ot' changes in wcnther. in relattvc price!~ or nthcr crop~ which affect st~pply decisions or in local policy. The con~equence ts m"cly to he a greater degree of price tnstability. ln more integmted market" there i" ubo a. lower degree uf correlntlon he•ween ptices and Y•(!lds in .any one regwn. Matket development al'lo lmver' the costtt of making tnmsacHons.

Pnrk c 1995) models the effects of the"e dlmensJOtls of market development on household betuwiour in the presence of yield and price uncertainty. Market dev~topment itwolves a number of offsetting effect'i. Park finds thnt the effects on gtain stornge on the farm and on gram sown area nrc nmbiguous. The complications arise from the dual role of houseboJd, as both COOS\•mer~ Utld producers hl Which roles price 0UCtUatiUttS have different implication~. There~~ scope for further work to identify the empirical Importance of the vatlous effects so as to he ab)(1 more carefully grnin producer output and storage decision making.

The rese~rch reviewed here indicates that it is JX'H$ible to raise the ptoducUvity of inputs used in grain production in China. The condif.ion however required for this chanse is an even greater role for markets in the ttnmugement of grain production.. Contributors include

• plot consolidation. tacilitated by the development of 1and usc markets

• the development of markets for other purcha.-ced agricultural inputs

'l

• the dercghlntion of the ~eed annrket.

The grcut.er degree of integration of do..-.stic grain markets W(.U)d al50 havo significant effects on aggreltate omput. through the opportunities for specialisation and trade .ad through the effects on tcl!hnictd efficiency at the farrn level. Pressures fot structural chaup.e thnt vary llCtwcen regions wilt m the st~me time be changing the ndt. of grain output that Chmu can cx~ct. These rrcs~urcs will detem1ine the patterns of ttude in grain m Chmn throu~h an mtegrntcd nnuomtl mnrket.

t>e~ptte the likely ~UHl"t tn economic terms, there are cOtl!;tmints to the deepening of the hlle nt nmr~.ct"' m the !tt:un 'cctnr in Chinn Market development inevitnbly lends to ,uh,hmtlal redt\trthtUt\'C effect~. mvolvtng growers nf grnin. trading hJtcttncdiuries. iuput ""uppher" tmd con\umer". The "cnsithmy nfthe progrc.~s nf und pnthofmurket • development tn thr puhtu.:al r~actulll\ tu thc.~c redt~tributivc eff(:Ct~ hm~ been docun1ented h~ fmdlay and \\\tt\on t I 9t•6al A" that paper expJujus. a pnrticulnrly important issue is th~ role nf the p:mln hurc~m\,

h t\ .,.,,u pn~'ahlc tn \Iliff \lUt the posuton of the ~nun production frontier. Substantial utl'rea'tl" 1t1 ytdd~ even hc~und tho'c ut tht fronttcr~ under current (echnol.ogies uppeat to he pn,,thle The J\\Ue m that ~a~.~c h the nmnugement and evnlunhoh of reseurcb and '-k"\Cklimc•nt pmgtnm~ whkh at'l'lS to gmu~. Jnt,htutionul chunges in the research .st~ctor +1nd m the ~ooced mdu-,try. a"' noted above. arc key nhje~ti,,es. Jn addition to the ltlatket tefortw~. thcrctnret

• th~ extent of puhln.· inYe~tment m ugncultumllnfral)tructum ttnd in research nnd d~\ c lopment .•

• the dc,ign of the extetl\1011 system, and

• the long run development of former education J'lOiicy

~•rc m1portant is~ue"

Chinn can change the trend itt grain nut put pet· head reported nt the start of this paper. The t(UC\UOil to be an~wercd however is whnt will it co~t. to change the trend. There ate reforrn~t. tncluding the development of input. markets nnd the integration of output market-,, that nmy be undertaken through regul.-.tory ref<lrrn at relatively law cost. Ooing further could involve more substantial investment and therefore lead to chulhmges to I'K)IiC}' makers to make careful judgements ubout the costs and benefits. Using the resources available in the rest of the world to supply grain to China i~ another option to be consideted at thnt time. The iutegration of the domestic and international markets for grain will assist the assessnu.mt of un those options.

., I

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PMk. All''t.\rt. ltN5. Hllou~chold gram nmmtgcment nnd prccnutinnnry Mtving ·in Chinn's f"ll\U ttt·~~b*\ mmwn. t~nnd Re\fim:h h\,tttUl~. StnnfonJ llruversity~ November.

Pl\l}. Cml. Scott Rntelle und J ,.,un 1 tunng. l'l96. ulncmnplcte conunercinh,ntion of the l 'hllt\,.~C ~red mdU"MY · tfW !l\!'Cd tor furtht"l' t'Cfonn*'. r1apet presented to the \\nrk,htlp nn agru:ultmal ptndu~:tt'Vtty mul R&D puhcy in China* of the conference l'\mdu\.'t~d h} ttu~ Ctm\ hwd Fund hn lntenH•tinnnl Attncuhural Research on Olobal Agt.t('Ultural s~.·t~'l1t.'~" Pnhl.'y tur the TWt'tU~· FtrM ('eu•ory. Melbourne, August.

H.\'ldh:. s~.·~.,tt. JLNh. ··A!!U(tJltutal rC"~"ard1 pnhcs m Chmn teMmg. the htnll.l\ nfthc \,'l)tnntct\.:tah,~m~m fed n:·hwm··. paper prc'-1Ct1l\!d t.o the work,lu>t, on ~Agnc:ultural pnl~.luctl\ tt). and R~..\r.D P''ll(~)· m Chma • of thC' '-'ontetencc conducted hy the· < ·ra,\furd Fund tnr lntcrnaUt1tntl Agt1cultural R~ .. M~ttrch ott Global Agticutumd Srum1.'t! p~,h~.'y tor the Twenty Fn\t Centtuy. Melbourne. August.

~h.tthu. T tltN!'t .. \Vh~ qmhhJc uhnut quntR"i',: the effects of planning in rurnl Chinn~\ p.tpcr rn.'\\!lltcd tl'l the cnntercm:~.~ nn uomm m;trkct ref~lnn and it.s implications'\ b.1~t \\'e't Ct'ntre Ha\\ uu. Sertcmher l9l):\

\\tfhon. Andn.'\\. 1<-N.t. ucluna·"' Ct.'n!hllnl!.' rch1011~. l t)87 .. J9()3: growth nnd cycles'\ A \ltiH Pt~ri/lc' LcnlltiHUc Ulci"lUW't'. 8 r ll. 51~6!t

\\'at~nn. Alldre\\. ltJ96, ... The tnrm: of market reh1r:m~ the development of grain wholesale m~trkat-.. in Chum"~ paper· presented to the conference ()Jl HOut11ut gt'owth .. market development r.;ld ~nternatwnah,auun 1n Chiru.t•."' grmn sector". M.inistty of Agriculture. Heijmg Octnhcr 4 nnd 5.

\Vu nuob•H). Sue Ricbatd,nn and Peter Traver\. I 996, .. Rural poverty und its causes in China··. Chme.,c tconmny Re\earch Un\t. Workmg l)nper~ 96/Y.x.

\Vu~ Harry and Xm ,Ment~-. J 991.lt, uthe dm~ct itnpnet of the relocation ·or farm labour on Chmese grain productn:m ... China l~c·mumtil" Review. forth.

Wu. Hurry nud Xitl Men~. l997b. J•r.>o Chine~e (annets reinvest in grain production?'\ China l:.'l:mwmic Rt'Jdtw, forth. ·

Wu. Harry~ 1997~ ''A note ~'n.the CE.RU .. M\1:\ grain farm household surv¢y in China'\ CMtm J;ironnmic Review. forth.

Wu, fhury nnd Christopher Fjndbty, 1996, uchinn's gruin demund nnd suppl·y: trade impH(•ations\ pnpcr presented to the wotlt~hopon ngricuhund policies in China, OECD,.Iluri~. December (S0/CHINA/CA<96)23l.

Yaup Hon~, l996u·. ~~rrcnlls in regional grnin production und their implications'\ pn(let presented to the \!onfercoce on "Outjlut growth* mnrket development nnd uuem:mrm;\li~ntlon in Chinn·~ gmin sector'\ Min,.lt;try of Agl'icuhure. Beijing. o~wbt1 r 4 nnd s. ·

' Ynn!! l lon~f llN6b, uchinu''-~ mnile producti\ltl und supply from )a ~ruvincial tlerspectiveu, paper prest:*ntcd tn the conference Ull uOUlpUt tfr«'Wth, nmrk~l'·t~VChl(\ll'lCOt tltld tntcrnmimwlisatton in China·, S!rain se~tof'\ Mimst.ry of Agrh:uhu~~. Beijing, Octnhcr 4 and .5. ~,.,

'• Ynng Hnn.~~ ll).l)(lc,. us.o.U.rl:C\ \ .. II pl'odt.IC. tivi~) .. 1 dhpnruies In r. egaonnl gmin·p· roductiui'Nrt.

Ctnna'\ pilpcr presented tn the confl:m:mce on uoutput' ~rowth. mnrket ' dcvelupnwnt and intcmat1nnuli~mutm in China'~ gr·am sector!\• Ministr'y uf ''· Mncultur~.l1cjjing. Octnber 4 ;md 5, ,,

V nng Hong. I9Q6d ... l lnt.Jerrcporting nt Chtna·h \ i Uage J~md iHld lt.s unplicnuun!-i for grain "'-ytcld~· nn unaly~.i" of farm hoti\Chn1d ~urvcy data ... pU[lC.r pn~sented. w the l'unlcrencc on "Output growth~ m;.trket development and mtcr·naUonnlisatHlll in China·s gn1in l\ccttu·"~ ~Mitust.ry of Agricultme\ Beijing. October 4 and 5.

Zhanp. Linxm. Hunng Hkun and Scott Rozelle. 1996. ·~Land f')()lk·y and hmd u~e ir, Chitul", l1~lpcr presented tt.l the wnt·k\hnp on agt'kultural puhcics in Chinn. OECD. J,uris, Dcccmher (SG/CHINA/CAt96)91.

Zhang Bm und C'nlin Carter. l994t ~·Rural reforms. the weather and productivity growth in Chinu~s gt·uin sector'\ Chinese Economy Resenrch llmt \Vorking Pnper 94/2.

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