Rural Reform and the Economic Growth of China

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Rural Reform and the Economic Growth of China

• Lecturer Zhigang Li

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Questions

• How important is the rural reform to the economic
  growth of China?
• Sources of rural productivity growth
• Rural labor supply

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Basic Facts

• There are 3.8 million villages and hamlets in
  China.
• In 2004 there were 632,000 of administrative
  villages.
• By 2003, 619,000 villages had a telephone. Motor
  vehicle access was available to 642,000.
• Other infrastructure (running water, cooking
  facilities) are less well developed.

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Collectives

• Purpose
• To procure a steady supply of agricultural
  produce at a low relative price.
• To provide new social services
• To improve production inputs
• Duration Mid-1950s to the early 1980s

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Main Features of Collectives (before 1978)

• Land Pooled and worked in common
• Labor Rewarded based on a work-points system
• System The Collectives served as the basic
  accounting system.

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Collectively Owned Land

• Except for a small share of private plots (3
  to 10 of cultivated area), the ownership of all
  other productive assets (especially land) was
  transferred to the collective, meaning the
  residents of a given village.

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The Work-Point System

• Reward for inputs Individuals earned work
  points as the work assigned was done.
• Total net income of the collectives was divided
  by the residents according to their work points.
• The system gave the collective the ability to tax
  itself to finance various activities (e.g.
  education).
• Methods of assigning work points may differ for
  different collectives.

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Negative Effects of Collective

• Efficiency loss
• Weak incentive system
• Distorted monetary reward system
• Distorted distribution of resources
• Difficulty for the collective to coordinates
  tasks among households.

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Distortion The Grain First Policy

• The pressure on peasants to meet or exceed their
  grain-procurement targets significantly retarded
  the agricultural growth.
• Quantitative targets rather than prices
  (suboptimal decision)
• Loss of opportunities for regional specialization
  and a decline in interregional shipments of
  grain.
• Total grain output grew at 2.2 annually while
  cotton output grew 1.5 and oilseed 0.5 before
  the reform.
• Rural household per capita consumption of
  poultry, eggs, and fish declined.

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Positive Effects of Collective

• Help mobilize resources
• Increased land supply (e.g. by consolidating
  scattered fields)
• Mobilize labor during the agricultural off-season
  (e.g. by assigning labor to repairing irrigation
  systems)
• Help organize nonagricultural activities
• Integrated rural credit cooperatives and supply
  and marketing cooperatives
• Provision of basic education and health care
• Buffer risk

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Rural Reforms

• Across-the-board increase in agricultural
  procurement prices
• Reaffirmation of the right to self-management of
  collectives
• A nationally defined program of contracting land
  to households (household responsibility system)
• By the end of 1982 more than 90 of Chinas
  agricultural households had returned to some form
  of household farming.

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Consequence of the Rural Reforms

• The growth of grain production accelerated
  dramatically.
• Grain output growth jumped from 2.2 to 4.1.
  China even exported grain in 1985.
• Cotton and oilseed production grew at 15 and 16
  per year. Meat production grew at about 10.
• A shift toward a less labor-intensive agriculture
• Farmers work shorter hours and shifted
  cultivation toward crops with lower labor
  requirement.

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Consequence of the Rural Reforms

• Rural public service declined
• The supply of health care and education declined.
• The number of hospital beds per thousand rural
  residents reached a peak of 1.5 in 1985 but
  steadily declined to 0.72 in 2003.
• The coverage of rural population by the
  cooperative insurance system dropped from about
  80 before the reform to less than 10 by
  mid-1980s.
• In 1998, rural residents paid for 87 of their
  health care expenses while urban residents paid
  44.

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Township and Village Enterprises (TVEs)

• Between 1978 and 1996, TVEs played the catalytic
  role in transforming the Chinese economy from a
  command economy to a market economy.
• TVEs were more efficient than SOEs.
• TVEs were more suitable than private firms in
  early reform years of China.

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TVEs are more Efficient than SOEs

• TVEs faced factor-price ratios that reflected
  Chinas true factor endowment.
• The ratio of labor to fixed capital in TVEs was
  nine times that of SOEs.
• TVEs can freely enter empty niches miscellaneous
  consumer goods (buttons, ribbons, colored elastic
  bands) and surging demand from the rural society
  (e.g. rural housing construction) due to rapid
  economic growth.

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TVEs are more Efficient than SOEs (continued)

• Favorable institutional framework for TVEs
• Formal taxes were low on rural industry
• Local governments and bank capital were
  supportive
• Existing credit institutions (local rural credit
  cooperatives) were easily adapted to support
  TVEs.
• Organizational diversity There was no single
  organization model that the TVEs had to follow.

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TVEs vs. Private Enterprises(Jin and Qian, 1998)

• Why TVEs grew rapidly despite its weaker
  managerial incentives, greater political
  intervention from the government, softer budget
  constraints, and market ability to private
  enterprises?
• Institutional factors favoring TVEs
• Central governments influence
• Community governments power
• Underdevelopment of market

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Why Central and Local Governments Like TVEs More?

• TVEs may be a more effective instrument than
  private enterprises to achieve the goals of
  governments
• Financial Objective
• Governments revenue
• Political Objective
• Employment
• Income

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Favorable Factors for TVEs Growth I

• Access to credit
• Due to (central and local) governments influence
  and underdevelopment of the capital market, TVEs
  have access to a larger pool of capital than
  private enterprises have.
• Transaction costs
• TVEs, with help from the community government,
  have a lower transaction cost in accessing SOEs,
  an important source of technology and materials.
• In contrast, private enterprises have lower
  transaction costs in competitive markets.

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Favorable Fators for TVEs Growth II

• History Matters Twenty-years of commune system
  had accumulated huge amount of physical and
  capital and given TVEs organization advantages
  over private enterprises.
• Local governments can provide better political
  security to TVEs when the rule of law is absent.
• TVEs facilitates community governments to convert
  land to cash when the development of land rental
  markets lags behind that of product markets.

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How Important are the Factors? (Jin and Qian,
1998)

• Data
• Provincial data from 1986 to 1993.
• Proxies for economic factors
• State supply of credit Loan to TVEs divided by
  their output
• Local political strength Share of rural
  households not adopting Household Responsibility
  System by 1983.
• Product market development Transaction volume in
  rural free markets divided by total rural output.

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Theories Supported

• Access to credit theory
• Provinces with more credits from state financial
  institutions see larger TVE outputs.
• Transaction cost theory
• Provinces with more developed product market have
  smaller share of TVE.
• Provinces with larger state industry see larger
  share of TVEs.
• Political protection theory
• History matters theory

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Key Factors

• Key Factors
• Initial collective assets
• Product market development
• The size of state industry
• The above factors explain over 70 percent of
  interprovincial differences in TVE-PE ratios (in
  employment of output).