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Annex 3: Agricultural Policy and Food Security in China


Introduction
Food security and the performance of the agricultural sector
Agricultural development strategy, policies and food security
China's food economy prospects
Issues and challenges
Concluding Remarks
References

Introduction

China's effort to produce enough to feed its growing population has long been recognized. It feeds over one-fifth of the world's population with only one-fifteenth of the world's arable land. In recent history, China has either exported food or imported relatively little. China was a net exporter of food, even of grain, in the 1950s. Although China became a net importer of grain in the 1960s, the share of net imports to total domestic consumption was marginal. Net import shares reached approximately three percent in the early reform period (1978-84), then declined to approximately one percent in the following period (1985-90). China has since become a net grain exporter, except in 1995 when it had a record level grain imports of nearly 20 million tons. Net exports between 1992 and 1994 were over 5 million tons annually.

While China's grain imports may grow slightly in the coming decades, the nation has developed a strong position as a net exporter of food (both grain and non grain) in value terms by exporting high value-added foodstuff including livestock products and other processed foods during the reform period. Net food exports grew to 2.3 billion US dollars in 1985 and peaked at 6.3 billion dollars in 1993, from a state of balanced trade (in value terms) in 1980 (China Customs Statistics).

China's future food security, however, is a subject of growing concern. First, although China's food production has grown over the last several decades, year-to-year fluctuations of food supply and prices are significant. Market stabilization and food price inflation have been among the major targets of government policy since the late 1980s. The Chinese government considers maintaining a comparatively high level of food self-sufficiency, avoiding supply shocks, and stabilizing consumer prices, a matter of national security and stability:

Only when the Chinese people are free from food availability and stability of food supply worries can they concentrate on and support the current reform, thus ensuring a sustained, rapid and healthy development of the economy (The State Council, 1996).
To this end, the government recently adopted measures to stabilize domestic food supply and stabilize the market - these measures include administrative and economic intervention in food distribution and marketing systems, national and local food reserve schemes, price regulations, international trade, factor markets, and rural infrastructure development.

Secondly, food security and access to food are mainly poverty issues. Although national economic growth is strong, it is uneven across regions. Farmer's incomes in the central and eastern regions of China continue to grow more rapidly than those in the west and southwest. Income inequality among regions, between rural and urban areas, and within regions continues to grow (MOA, 1997). In the early 1980s, tremendous progress was made in addressing China's poverty problem, mainly due to the government's rural reform program. However, this progress has slowed down over the past ten years.

Finally, China's food supply availability could be a major food security issue in the coming decades if policies were not formulated in the right directions. Worldwide, food production growth rates have outpaced population growth in recent decades, implying increased food availability per capita. Furthermore, the decline of real food and feed grain prices internationally over the same period implies that supply increases have exceeded increased demand. However, the situation differs from country to country.

China faces the great challenge of feeding its growing population with declining land, water, and other food production resources, and increasing opportunity cost of labor and domestic food production cost. Food supply availability in China is important not only because it concerns a large proportion of the world's population and consumption, but also because rapid industrialization has led to competition for resources between agricultural and non-agricultural sectors, strong income growth, rapid urbanization, and population growth. All of these stimulate demand for agricultural products.

Government officials and scholars have focused food economy and food security concerns on the grain economy because grain (both food and feedgrain) is a major component of China's food supply. Historically, grain fundamentalism, the provision of adequate cereal grain supplies at low stable prices to urban residents, has been an overriding government concern. Recurring food shortages, particularly the famine of the early 1960s, increased the official desire for assured and secure grain supplies. This concern, coupled with rapidly increasing urbanization, domestic infrastructure and transport constraints, domestic grain price spikes in 1994/1995, Brown's 1995 prediction that China will become an importer of massive amounts of grain in the next few decades, the weaknesses of the fiscal system in the provision of public goods (particular agricultural research and extension), has attracted worldwide attention in the past 4 years.

A number of recent studies conducted by both domestic and international organizations have led to a consensus that while the increases in China's grain imports will be marginal and the nation will remain at a high level of food self-sufficiency in the coming decades, China's long-term food security is an issue of both national and international significance. The sheer size of China's economy and its rapid growth will make China a crucial influence in the future development of world markets for inputs and outputs of food and agricultural products, agribusiness, and industry. Along with this growth is its gradual progress toward market-orientation and global integration, urbanization, the shift of comparative advantage from agriculture to other sectors, and dietary diversification. Small adjustments to China's food supply and demand, agricultural input demand shifts, and the Chinese government's selection of food security policy will each have large effects on world agricultural trade.

This paper evaluates China's food security situation, reviews the performance of the food and agricultural sector, considers the role of food policies, particularly the most recent price and marketing reform policies, in improving the food situation, and identifies key issues related to food security which require further intervention. The next section reviews previous achievements and sources of growth in agricultural production and food security. The third section analyzes current government policies and programmes and their impacts on agricultural production and food security. The fourth section predicts the shape of China's food economy over the next three decades; while the fifth section discusses the major challenges and constraints to agricultural production and food security. Concrete measures and options towards sustainable agricultural growth and food production are suggested in the final section.

Food security and the performance of the agricultural sector


Food security: an overview
Summary of China's approaches to improved food security
Other issues
Changing role of agriculture in the economy
Agricultural production growth

Food security: an overview

China's ability to feed over one-fifth of the world's population with only seven percent of the world's arable land is widely acclaimed. China, with more than 1.23 billion people in 1997, is the world's most populous nation. Its experience demonstrates the importance of technological development, institutional change, improved incentives, and rural development among other policies in improving food security with limited natural resources.

Availability of food

China's per capita food availability and consumption have increased over the last several decades. Average per capita food availability has grown from less than 1700 kcal in 1960 to 2570 kcal per day in 1995 (Table 1)[19]. Increased domestic production is almost solely responsible for increased food availability. Protein intake and fat consumption per capita per day increased over the same period, from 42 grams to 70 grams, and 17 grams to 45 grams, respectively. Both figures exceed average nutrient availability in countries with comparable per capita GNP levels.

Nutritional composition changes of Chinese diets are consistent with growing income (Table 1). Nutrient sources are a powerful indicator of the population's economic wellbeing. In low income countries, the average diet includes a high percentage of nutrients from crops, while a typical developed country diet includes a relatively high percentage of nutrients from animal sources. In China, traditional diets were typically based on cereals, vegetables, and small quantities of meat and fish. Consumption of relatively expensive non-cereal food items, particularly livestock products and fish, have increased with rapid increases in per capita income, urbanization, and market expansion (Huang and Bouis, 1996).

Aggregate household food security

Aggregate household food security has improved significantly. According to the FAO's WFS (1996), Chinese household food security, as measured by the aggregate household food security index (AHFSI) and the level of food inadequacy, follow overall national averages. The AHFSI increased from a low level of 70 percent in 1969-71 to a relatively high level of nearly 80 percent in 1990-92, while food inadequacy declined from slightly over 14 percent to approximately 3 percent in the same period.

Table 1. Nutrient availability

Year

 

Energy

(kcal)

Protein

(grams)

Fat

(grams)

Crop Products

Animal Products

 

Energy
(%)

Protein
(%)

Fat
(%)

Energy
(%)

Protein
(%)

Fat
(%)

1960

1676

42

17

97

93

76

3

7

24

1970

2087

53

23

96

93

67

4

7

33

1980

2470

64

32

94

90

60

6

10

40

1990

2505

68

37

91

86

55

9

14

45

1995

2570

70

45

88

81

51

12

19

49


Table 2. Per capita daily nutrient intake by income group in sample provinces, 1990.

Income group

Sichuan

Ningxia

Hebei

Zhejiang

Guangdong

Beijing


Energy intake (kcal)

Average

2335

2402

2227

2460

2425

2309


Poorest 10%

1889

1819

1970

1971

2129

1960


10% - 25%

2068

2142

2093

2217

2174

1855


25% - 50%

2271

2319

2201

2314

2191

2091


50% - 75%

2485

2480

2256

2559

2583

2371


75% - 90%

2606

2642

2284

2711

2532

2605


Richest 10%

2852

3074

2559

2983

2797

2972


Protein intake (g)

Average

59.6

68.5

69.1

63.9

60.7

69.1


Poorest 10%

48.1

54.9

59.4

51.0

51.9

57.9


10% - 25%

52.5

64.6

64.7

57.0

53.0

55.0


25% - 50%

55.4

65.4

67.9

59.6

58.4

62.0


50% - 75%

61.1

68.7

70.2

65.6

64.5

70.3


75% - 90%

66.6

72.5

71.4

70.7

64.7

79.2


Richest 10%

73.6

84.5

80.8

79.2

71.8

90.5


Fat intake (g)

Average

36.0

33.7

34.0

33.1

39.1

45.5


Poorest 10%

25.5

21.5

27.4

20.2

28.9

35.5


10% - 25%

27.7

25.6

29.2

26.4

32.7

35.4


25% - 50%

31.3

31.1

31.9

30.3

36.8

41.1


50% - 75%

37.0

35.6

35.0

35.1

42.5

48.5


75% - 90%

43.4

41.0

37.1

39.8

42.0

52.6


Richest 10%

57.0

48.9

46.1

47.6

50.6

63.9


Annual per capita income (yuan)

Average

558

643

658

991

1027

1270


Poorest 10%

251

230

204

299

433

488


10% - 25%

347

321

349

508

624

705


25% - 50%

443

457

499

739

809

1012


50% - 75%

579

686

692

1058

1075

1346


75% - 90%

756

975

948

1457

1433

1748


Richest 10%

1115

1395

1453

2163

2033

2633


Household food security by income group

Tables 2, 3, and 4 show household nutrient intake and source by income group based on a food and nutrition survey conducted by the Chinese Academy of Preventative Medicine (CAPM) and the State Statistical Bureau (SSB) in 1990,. Tables 5 and 6 show the physical development of children and equity as well as poverty in the rural China based on a food consumption and expenditure survey conducted by the SSB for the years 1978- 95.

Nutrient intake varies greatly across income groups, although average per capita energy intake in all sample provinces topped 2200 kcal (Table 2). Daily energy intake of the 25% of the population with annual per capita income less than 500- 700 yuan (level varies by province) was below 2200 kcal. Energy intake of the poorest 10 percent was only 82 percent of the sample average. Protein and fat intakes decline as income falls in a similar pattern.

Table 3. Sources of energy by income group in China's sample provinces, 1990.

Income group

Sichuan

Ningxia

Hebei

Zhejiang

Guangdong

Beijing


Cereal grains and tubers (%)

Average

79.6

84.0

82.5

80.5

77.7

79.6


Poorest 10%

82.2

87.9

84.4

86.0

81.2

82.2


10% - 25%

82.4

87.1

84.2

82.8

79.3

82.4


25% - 50%

81.0

85.2

83.8

80.8

78.1

81.0


50% - 75%

79.4

83.4

81.8

79.3

77.3

79.4


75% - 90%

77.5

80.8

80.7

78.3

76.3

77.5


Richest 10%

72.9

79.4

77.6

76.3

74.5

72.9


Legumes (%)

Average

1.4

1.2

3.1

2.6

2.0

2.2


Poorest 10%

1.2

1.8

2.9

1.7

1.9

2.7


10% - 25%

1.3

2.1

3.2

2.3

2.3

2.8


25% - 50%

1.4

0.8

3.0

2.5

2.2

2.0


50% - 75%

1.5

0.9

3.2

2.7

2.1

1.6


75% - 90%

1.6

1.1

3.2

3.0

1.8

2.5


Richest 10%

1.7

1.2

3.4

3.4

1.4

2.1


Animal (%)

Average

7.5

3.4

3.4

6.1

8.1

6.4


Poorest 10%

6.2

2.0

2.5

4.8

6.4

5.4


10% - 25%

6.3

2.8

2.8

5.3

6.9

5.2


25% - 50%

6.8

2.9

3.0

5.9

7.6

6.4


50% - 75%

7.5

3.5

3.5

6.2

8.1

6.9


75% - 90%

8.5

4.8

4.1

6.9

9.5

6.5


Richest 10%

10.5

4.9

5.4

7.7

10.7

7.8


Pure energy (%)

Average

5.3

7.9

6.2

5.3

7.3

9.7


Poorest 10%

4.4

6.4

6.0

3.3

6.3

8.9


10% - 25%

4.4

6.0

5.4

4.6

7.0

9.5


25% - 50%

5.0

8.1

5.7

5.5

7.3

9.6


50% - 75%

5.4

8.2

6.4

5.7

7.5

12.0


75% - 90%

5.8

8.8


5.8

7.3

9.6


Richest 10%

7.5

9.8

7.7

6.4

8.3

9.9


Nutrient intakes are also strongly linked to income (Table 2). The income of the poorest ten percent would have to be doubled to meet the recommended daily energy intake of 2200 kcal. The average diet of the poor, as expected, constitutes a high percentage of nutrients from cereal grain, while the rich has a relatively high percentage of nutrients from animal and other sources (Tables 3 and 4).

Table 4. Sources of protein by income group in China's sample provinces, 1990

Income group

Sichuan

Ningxia

Hebei

Zhejiang

Guangdong

Beijing


Cereal protein (%)

Average

71.9

83.6

77.7

68.8

64.4

71.5


Poorest 10%

74.8

89.4

81.3

76.5

64.7

71.5


10% - 25%

74.0

82.5

79.1

72.4

68.1

73.5


25% - 50%

73.5

87.5

79.1

69.5

65.9

71.5


50% - 75%

71.8

83.0

77.2

67.8

62.4

72.2


75% - 90%

69.7

78.9

75.9

65.3

63.4

70.9


Richest 10%

65.2

78.0

72.6

62.1

61.8

67.7


Animal protein (%)

Average

11.5

6.2

5.4

11.7

17.1

10.3


Poorest 10%

9.4

3.1

3.9

8.8

13.9

9.3


10% - 25%

9.6

4.0

4.2

10.0

13.6

7.9


25% - 50%

10.5

5.0

4.6

11.9

15.9

9.3


50% - 75%

11.5

6.8

5.4

10.6

16.9

11.3


75% - 90%

13.2

9.1

6.4

14.0

20.6

10.9


Richest 10%

16.3

9.6

8.9

16.3

24.2

14.2


Legumes (%)

Average

5.2

7.4

9.4

9.7

7.6

7.6


Poorest 10%

4.4

3.8

8.6

6.5

7.3

8.8


10% - 25%

4.5

4.8

9.4

8.8

8.7

8.5


25% - 50%

4.9

2.0

9.0

9.4

8.2

8.8


50% - 75%

5.4

3.1

9.5

10.1

8.1

5.3


75% - 90%

5.9

4.0

9.8

11.0

6.8

7.9


Richest 10%

6.1

4.0

10.1

12.2

4.9

7.3


The improvement in stunting and underweight children (under 5) situations in rural China is evidenced in Table 5. Percentage of stunting and underweight children declined from 41.4 percent and 22.6 percent in 1990 to 39.1 percent and 17.8 percent in 1995, respectively.

Table 5. Percentage of stunting and underweight (<-2SD) children (under 5) in rural China, 1990-95.

Year

Stunting (%)

Underweight (%)

1990

41.4

22.6

1992

39.7

19.4

1995

39.1

17.8

Source: Chen, 1996.
Table 6 shows household per capita income and the physical development of children under 6 years old in 1987. As expected the under developed children were more prevalent among the poor and less in the richer groups, and more in the rural than urban areas. It is interesting to note that while the proportion of children with stunting and low body weight declined as household income increased, this mostly occurred when per capita income was lower than 750 yuan in 1987.

Further increase in income does not contribute to the significant reduction in percentage of stunting and underweight children. This indicates that while the income is the first important determinant of child's health for the poor, other factors such as parent's education and feeding practice are also important for a nation as a whole.

Table 6. Percentage of stunting and underweight (<-2SD) children by income group in sample provinces, 1987.

Per capita

Stunting (%)

Underweight (%)

Income (yuan)

Urban

Rural

Urban

Rural

Less than 250

24.9

41.6

16.9

27.1

250 - 500

19.5

33.9

15.7

23.7

500 - 750

10.5

23.5

10.6

16.9

750 - 1000

7.2

18.5

10.2

14.3

1000 - 1250

7.5

19.0

10.2

14.3

1250 - 1500

7.8

14.8

11.9

10.7

Over 1500

4.6

19.6

10.1

10.9


Note: data are based on a survey conducted by the State Statistical Bureau in 9 sample provinces (including Heilongjiang, Inner Mongolia, Ningxia, Shandong, Hebei, Zhejiang, Guangdong, Sichuan, and Yunnan) in 1987.

Household food security growth is a product of rural income growth. Annual per capita rural income increased to almost four times its original level during the reform period (1978-95). Growth of the rural non-agricultural sector, in addition to that of the agricultural sector, is a major source of increased rural income. The ratio of agricultural (crop, forest, livestock, fishery) to non-agricultural income declined from 5.6 in 1978 to a low of 1.6 in 1996 (Table 7).

Table 7. Income, equity, food budget share and poverty in rural China, 1978-96.


 

Real per cap. income index

Agri/non-agri income ratio

 

Gini coefficient

 

Freq. of poverty (%)

 

Food budget share (%)

Rural

Poorest 20%

Rural

Poorest 20%

1978

72

na

5.6:1

0.21

32.6

68

70

1980

100

100

3.4:1

0.24

27.2

62

66

1985

189

165

3.0:1

0.26

12.0

58

63

1990

218

177

2.9:1

0.31

10.1

59

63

1995

272

193

1.7:1

0.33

7.6

59

62

1996

308

199

1.6:1

na

6.7

57

na

Sources: Computed based on rural food and consumption survey data, SSB and Statistical Yearbook of China, 1997.
A significant reduction in the number of people in poverty, one of the most important causes of under nutrition and food insecurity, have also increased China's food security. Per 1992 World Bank estimates, the number of persons in absolute poverty has fallen from roughly 260 million in 1978 to 96 million in 1985, a decline from about one third to 12 percent of the total rural population. By 1996, the figure declined to 58 million, about 6.7 % of the total rural population (Huang et. al., 1998).

Summary of China's approaches to improved food security

China's experience demonstrates the importance of technological development in addition to improved incentives, institutional reform, rural economic development, and other policies that increase food availability. Technology is the driving force behind China's agricultural economic growth (Stone, 1988; Huang and Rozelle, 1996). China's technological base grew rapidly during the reform and pre-reform periods. Shorter growth season photosensitive crop varieties, for example, increased intensive land cultivation, raised the multiple cropping index, and increased grain production per mu in the 1960s and 70s. Hybrid rice, pioneered by Chinese scientists in the 1970s, increased yields in many parts of the country and spread to almost one half of the rice growing area by 1990. Other grain crops have experienced similar technological transformation.

Institutional arrangements and government food policies are also important determinants of China's food production and availability. Prior to the economic reform of 1979, the centrally planned economy was solely responsible for both, at the expense of economic efficiency. China adopted an industrial-biased development strategy in the 1950s which made accumulation of capital for industrialization a top priority. Official policy kept industrial wages and food prices artificially low by replacing free market operation with state compulsory agricultural procurement, planned production, and food rationing. The industrial-biased development strategy and its practical applications affected food security at the national and household levels. The urban food rationing (food stamp) system guaranteed urban food supply and, to a lesser extent, rural food deficits. The rationing system provided a minimum amount of energy and protein to urban residents based on age, sex, and occupation. In rural food surplus areas, local production and state food procurement, based on previous production and fixed for three to five years, determined local food consumption. Procurement practices tied rural household food consumption to local production.

Low economic growth, caused by economic inefficiency, sustained rural poverty and blocked rural income growth. In 1978, one third of China's total population remained under the poverty line. After 1979, China adopted institutional and economic reforms to shift from a socialist to a more open, market-oriented economy with generally positive results. Agricultural production jumped as reforms liberalized production and consumption institutions and markets. The gross domestic product (GDP) growth rate during the reform period was roughly double that of the pre-reform period (1970-78, Table 8). Annual GDP growth rates have exceeded nine percent over the last 15 years. Agricultural production nearly tripled, and consumption rose to four times its original level during the same period (Table 8).

China's reform policies recognized that, given limited natural resources (especially arable land), agricultural production growth is a necessary but not a sufficient condition for creating a booming rural economy and raising rural incomes. Institutional reform-related efficiency gains created rural labor surpluses. Governments have chosen several approaches including migration from rural to urban areas, employment generation in rural areas (in both agricultural and non-agricultural sectors), and a combination of the two, to deal with surplus rural labour. Evidence from many developing countries indicates the importance of expanding industry in rural areas to generate employment. China is one of the most successful examples of this development strategy.

Table 8. The annual growth rates (%) of China's economy, 1970-96



Pre-reform

Reform period

1970-78

1978-84

1984-95

1996

Gross domestic products

4.9

8.5

9.7

9.6


Agriculture

2.7

7.1

4.0

5.1


Industry

6.8

8.2

12.8

12.1


Service

na

11.6

9.7

7.8

Foreign trade

20.5

14.3

15.2

3.2


Import

21.7

12.7

13.4

1.5


Export

19.4

15.9

17.2

5.1

Population

1.8

1.4

1.37

1.05

GDP per capita

3.1

7.1

8.3

8.5

Consumption per capita

1.6

8.0

6.8

6.9


Rural

0.6

9.2

4.9

9.7


Urban

3.7

5.2

7.6

2.5

a: Figure for GDP in 1970-78 is the growth rate of national income in real term.

Note: Growth rates are computed using regression method. GDP and per capita consumption growth rates refer to the value in real terms.

Source: SSB, Statistical Yearbook of China, various issues.

China's rural township and village enterprises (TVEs, including all enterprises in rural areas owned by townships, villages, and private individuals) grew rapidly following the rural reforms of 1979 and now play a substantial role in China's economy and rural income growth. Rural TVEs accounted for more than three quarters of rural gross output value by 1996 and dominate many industrial sectors including textiles, farm machinery and equipment, other simple machinery, construction materials, food processing, and various consumer goods. The development of TVEs in rural China not only generates employment for rural labor, but also raises farmer's income, promotes rural urbanization and market development, and stimulates structural changes in the rural economy.

Poverty reduction in China is closely related to rural economic growth. Broad participation in rural economic growth brought about a tremendous reduction in absolute poverty in China during 1978-85. The country has also generated employment for nearly 200 million rural surplus labour through the rural TVEs development, rural-urban migration, and other economic activities over the past decade. Official policy targets stability of food supply and access for the poor, both important aspects of national food security. The government has developed a disaster relief programme and large scale food-for-work schemes. China has adequate capacity to weather natural disasters (WFP, 1994). The major constraints to food supply stabilization are poor market infrastructure, internal transportation and inefficiency in buffer stock operations.

Other issues

Although general nutrition has improved, malnutrition exists, particularly among the poor and in inland provinces. Children are especially vulnerable. According to a recent survey conducted by the Chinese Academy of Prevention Sciences, on average, about 15 percent children under five are underweight, 30 percent stunted, and 3 percent wasted, though these levels compare favorably with developing country averages. An estimated one quarter of the population is at risk for Vitamin A deficit. Iron deficiency anemia is another significant risk, especially in rural areas. The income gap between inland and coastal regions and between rural and urban areas is growing wider. Within rural areas, the income gap between rich and poor has grown since the late 1970s. The real income growth of the poor is generally lower than that of the whole population (Table 7). Gini coefficients, measures of income inequality, rose from 0.21 in 1978, to 0.31 in 1990, and 0.33 in 1995.

Policies successful in the past do not guarantee future agricultural production growth. China has successfully developed new technology, altered institutional structures, and mobilized labor and other resources to support agricultural growth, but new technology is uncertain, subject to investment policy, and vulnerable to research institution reforms. The current technology extension system is deteriorating, and additional efficiency gains from institutional change are limited. Domestic food prices are close to (occasionally higher than) world market prices. Protection of domestic food production could be both costly and difficult if China wishes to meet the WTO's entry requirements. Stability of food supply and domestic market prices in the future will highly depend on the ongoing grain market and buffer reserve system reforms. In addition, resources have shifted from agricultural to non-agricultural sectors. Resource frontier expansion is problematic due to limited supply and high development costs. These issues will be discussed in more detail later in the context of other constraints and challenges.

Changing role of agriculture in the economy

Agriculture has made important, but declining contributions to national economic development in terms of gross value added, employment, capital accumulation, urban welfare, and foreign exchange earnings. Successive transformations of China's reform economy are based on economic growth in the agricultural sector. However, agriculture's role has declined. Before 1980, agriculture contributed more than 30 percent of GDP and half of export earnings. Each share fell below 20 percent by the early 1990s (Table 9). Agriculture employed 81 percent of labor in 1970, but only 50 percent in 1996.

The decline of agriculture's international trade role is particularly striking. The share of primary (mainly agricultural) products in total exports was 50 percent in 1980 (Table 9). By the mid-1990s, the share was less than 15 percent. The share of food export to total exports fell from 16 percent in 1988 to approximately 7 percent in 1996. Food imports fell from 15 percent to 4 percent in the same period.

The declining importance of agriculture is historically common to all developing economies. China is densely populated; farm sizes averaged less than one hectare as early as the 1950s. Population growth and limited land resources will shift China's comparative advantage from land intensive economic activities like agriculture to labour intensive manufacturing and industrial activities (Anderson 1990). Cropping is the dominant sub-sector within agriculture. In 1978, it contributed 80 percent of the gross value of agricultural output (SSB). By the mid-1990, its contribution fell to 58 percent. The shares of livestock and aquatic output more than doubled during the same period (Table 10).

Table 9. Changes in structure of China's economy, 1970-96.


1970

1980

1985

1990

1994

1995

1996

Share in GDP


Agriculture

40

30

28

27

20

20

20


Industry

46

49

43

42

48

49

49


Services

13

21

29

31

32

31

31

Share in employment









Agriculture

81

69

62

60

54

52

50


Industry

10

18

21

21

23

23

24


Services

9

13

17

19

23

25

26

Share in export



Primary products

Na

50

51

26

16

14

15


- Foods

na

17

14

11

8

7

7

Share in import


Primary

na

35

13

19

14

18

18


- Foods

na

15

4

6

3

5

4

Share of rural population

82.6

80.6

76.2

73.5

71.4

70.9

70.6

Sources: SSB, Statistical Yearbook of China, various issues; Rural Statistical Yearbook of China, various issues.
The decline of agriculture's comparative advantage has not been accompanied by declining agricultural self-sufficiency. Rice self-sufficiency fell slightly from 104 percent in the early 1960s to 102 percent in the 1990s (Table 11). Other major grain commodities show no sign of long term self-sufficiency declines. Contrary to expectations, meat, aquatic product, vegetable, and fruit exports have all expanded over the last two decades (Lu, 1996).

Table 10. Sectoral shares (%) of agricultural and rural economy in China, 1978-96.


1978

1980

1985

1990

1994

1995

1996

Share in rural output value

100

100

100

100

100

100

100


Agriculture

69

69

57

45

26

25

na


Industry

20

20

28

37

50

51

na


Construction

6

6

8

6

7

7

na


Transportation

2

2

3

4

5

5

na


Commerce and others

3

4

4

9

12

12

Na

Share in agri. output value

100

100

100

100

100

100

100


Crop

80

76

69

65

58

58

58


Forestry

3

4

5

4

4

4

3


Livestock

15

18

22

26

30

30

30


Fishery

2

2

4

5

8

8

9

Real agri. output value (billion yuan in 1985's price

226

285

362

608

966

1129

1235


Crop

170

208

251

404

659

788

851


Forestry

8

13

19

32

44

49

52


Livestock

43

59

80

141

223

249

277


Fishery

4

6

13

22

39

43

49

Sources: SSB, Statistical Yearbook of China, various issues; Rural Statistical Yearbook of China, various issues.

Table 11. Self-sufficiency in grain in China

Year

Rice

Wheat

Coarse grain

1961-64

104

80

97

1965-69

103

86

101

1970-74

105

93

104

1975-79

104

96

103

1980-84

101

86

100

1985-89

100

87

96


Agricultural production growth

Agricultural production growth is one of the main accomplishments of China's development and national food security policies. Production growth rates have outpaced population growth since the early 1950s, except during the famine years of the late 1950s and early 1960s. Even between 1970 and 1978, when much of the economy was reeling from the effects of the Cultural Revolution, grain production grew at 2.1 annually (Table 12). Oil crop production grew 2.1 percent annually and fruit and meat output increased by 3 -7 percent.

Decollectivization, price increases, and relaxation of trade restrictions on most agricultural products fueled China's food economy take off (1978- 84). Grain production increased 4.7 percent annually, and fruit output rose 7.2 percent. Oil crop, livestock, and aquatic production grew spectacularly, expanding annually in real value terms by 14.9 percent, 9.0 percent, and 8.8 percent respectively. The one time efficiency gains of the shift to the household responsibility system were exhausted by the mid 1980s. Agricultural production decelerated. The decline was most pronounced for grains and oil crops, sectors in which prices and markets were still highly regulated. Growth rates of other crops, livestock and poultry, and fishery products have remained steady or increased during the reform period in response to rising demand and market and price liberalization (Table 12).

Studies demonstrate that a number of factors contributed simultaneously to agricultural growth during the reform period. The earliest empirical efforts focused on the contributions of the household responsibility system (McMillan et. al. 1989; Fan, 1991; Lin, 1992). These studies conclude that most increased productivity was a result of institutional innovations, particularly the rural household responsibility system that restored the primacy of the individual household in place of the collective production team system as the basic unit of production and management in rural China. Recent studies show that technological change has become the primary engine of agricultural growth since the completion of the household responsibility system reform in 1984 (Huang and Rozelle, 1996; Huang et. al., 1996). Technology improvements contributed the largest share of grain production growth even in the early reform period.

Results indicate that reforms beyond decollectivization have high potential to affect agricultural growth. Price policy has had a sharp influence on the growth of grain and cash crops during the post-reform period. Favourable output to input price ratios contributed to rapid growth in the early 1980s. However, new market force is a two-edged sword. Price ratio deterioration caused by gradually increasing output prices and rapidly rising input prices was one cause of the agricultural production slowdown of the late 1980s and early 1990s. Rising wages and land use opportunity costs constrained the growth of grain output throughout that period and the growth of cash crops since 1985. Growing environmental degradation (erosion, salinization, and loss of cultivated land) may reduce the agricultural land base. Erosion and salinization have increased since the 1970s, to the detriment of grain, rice, and other farm products (Huang and Rozelle, 1995; Huang et al. 1996).

Table 12. Growth rate (%) of agricultural economy by sector and selected agricultural commodities, 1970-96.


 

Pre-reform 1970-78

Reform period

1978-84

1984-95

1996

Agricultural output value

2.3

7.5

5.6

9.4


Crop

2.0

7.1

3.8

7.8


Forestry

6.2

8.8

3.9

5.6


Livestock

3.3

9.0

9.1

11.1


Fishery

5.0

7.9

13.7

13.9

Grain production

2.8

4.7

1.7

8.1


Rice

2.5

4.5

0.6

5.3


Wheat

7.0

7.9

1.9

8.2


Maize

7.0

3.7

4.7

13.8


Soybean

-1.9

5.1

2.9

0.1

Cash crops






Oil crops

2.1

14.9

4.4

-1.8


Cotton

-0.4

7.2

-0.3

-11.9


Rapeseed

4.3

17.3

5.4

-5.9


Peanut

-0.2

10.8

5.2

-0.9


Fruits

6.6

7.2

12.7

10.4

Red meats

4.4

9.1

8.8

11.9


Pork

4.2

9.2

7.9

10.7

Note: Growth rates are computed using regression method. Growth rates of individual and groups of commodities are based on production data; sectoral growth rates refer to value added in real terms.

Source: SSB, Statistical Yearbook of China, various issues; A Statistical Survey of China, 1996. MOA, Agricultural Yearbook of China, various issues.

Agricultural development strategy, policies and food security


Government targets for agriculture in 2000 and 2010
Public investment policies
Fiscal and financial policies
Food price and marketing policies before 1998
Ongoing grain market and reserve reform
Input price and marketing policies
Technology development policies
Land tenure policy
Foreign exchange and agricultural trade policies
Anti-poverty policy
Rural enterprise development policy

Government targets for agriculture in 2000 and 2010

Food self-sufficiency will continue to be the central goal of China's agricultural policy. The Ninth Five-Year Plan for 1996-2000 and the National Long Term Economic Plan call for continued agricultural production growth, annual farm income growth of four percent, maintenance of food self-sufficiency, and elimination of poverty. The plans hope to achieve the following key targets (Table 13):

Table 13. Government targets for agricultural development in 2000

Commodity

2000 (in million mt)

Grain

490-500

Cotton

4.5

Oil crop

25

Meats

58

Sugar crop

110

Aquatic product

32

Grain is measured in unprocessed form, i.e., rice is in paddy form.
Source: Li Peng, 1996.
Strategies to achieve these targets and goals include the following:

Public investment policies

The overriding concern of the industrially-biased development strategy was the accumulation of capital for industrialization. China looked to agriculture, the source of nearly 60 percent of national income and more than 80 percent of employment in the early 1950s, to provide the needed capital. Table 14 indicates that while government expenditure and investment had shown a general increasing trend in the pre-reform period, their shares to the total economy had a declining trend since the early 1960s.

Because the share of agricultural production (such as value added) in the economy has also been declining over time, we construct an index of government investment bias (IB) to evaluate public investment policy. This was done by roughly dividing the ratio of government investment (expenditure) in agriculture to total government investment (expenditure) by the ratio of agricultural GDP to total GDP. If this index value equals 1, IB=1 (or 100 percent), the investment policy is neutral, encouraging neither agricultural nor non-agricultural productions. If IB<1, there is an anti-agriculture bias in the government expenditure (investment) policy. Otherwise, IB>1 implies a pro-agricultural production bias.

As Table 14 shows, the bias index of government expenditure in agriculture is below the 100 percent level, indicating strong government expenditure biases against agriculture. While reform has accelerated the growth of agriculture since the late 1970s, Table 14 also indicates that the new institutional arrangement has not provided the incentive to invest in agriculture. The ratio of public expenditure in agriculture to total public expenditure declined sharply in the early reform period (1979-85). The magnitude of the estimated BI decreased from 48 percent in 1978 to 27 percent in 1985. Among various components of the public agricultural expenditure, the decline in the share of local government was highest in the agricultural capital construction investment (i.e., irrigation), which fell from 63 percent in 1978 to 47 percent in 1985 (Huang and David, 1995).

Declining public agricultural expenditures attracted attention to agricultural production sustainability and future domestic food supply problems. Investment policy reviews led to increased investment in the early 1990s (Table 14). Both the Ninth Five-Year Plan (1996-2000) and China's Long Term Plan to 2010 advocate increased public agricultural investment, including investments in rural infrastructure and loans and credits for agricultural production. Irrigation and water control are the top priorities of future government investment.

However, due to the weaknesses of the fiscal system, the new policy to increase public investment in agriculture has been hardly implemented. Many policies and regulations have been promulgated regarding the provision of a minimum level of agricultural and public goods, but there is no budget to back them up. Without sufficient budget or staff policies cannot be effectively carried out.

Table 14. Government investment (billion yuan in 1985 price) in agriculture, 1965-96.


 

Fiscal expenditure

Index of govt expenditure bias

 

Water control investment

 

Fiscal expenditure

Agric. share

 

Total

Agriculture

1965

60.3

7.1

12

26

1.3

1970

85.9

6.5

8

19

2.3

1975

108.3

13.1

12

32

3.4

1978

143.7

19.3

13

48

4.5

1980

145.6

17.8

12

41

3.2

1985

200.4

15.4

8

27

2.0

1990

190.2

19.0

10

37

3.0

1992

212.9

21.4

10

46

5.5

1994

239.2

22.0

9

46

6.9

1995

245.5

20.4

8

41

6.5

1996

269.2

22.3

8

41

6.9


Fiscal and financial policies

The previous sub-section shows under-investment in the agricultural sector in the past. To have a better understanding of government policy bias among sectors, we need to look at both fiscal and financial policies as well as the state agricultural product procurement policy (implicit tax). This section examines government fiscal revenue (tax or explicit tax, and other revenue) and expenditure in agriculture, and capital transfer from agricultural (rural) to industry (urban). The next section discusses accumulation of capital from agriculture for industrialization through the state agricultural procurement system.

Table 15 presents annual fiscal cash flows between agriculture/rural and industry/urban from 1978 to 1996. It shows that government fiscal expenditure on agriculture has been consistently higher than fiscal revenue from agricultural tax and other fees collected from agriculture. However, we will show later that this fiscal revenue from agriculture based on explicit tax and fees is only a small portion of the total agricultural capital contribution to the industry and to the urban sector. It is also interesting to note that rural development in TVE sector has contributed significant fiscal income for the government and has led to a net capital outflow of rural to urban sectors since 1985.

Table 15. Fiscal cash flow (billion at 1985 price) between agriculture and industry, rural and urban sectors, 1978-96.

Year

Fiscal revenue from

Fiscal

Cash flow from

Agric. tax

Agric. other fee

TVEs tax

Expend. in agric.

Ag. to ind'y

Rur. To urb.

1978

3.6

0.4

2.8

19.3

-15.2

-12.4

1979

3.7

0.3

2.8

21.9

-17.9

-15.0

1980

3.3

0.6

3.0

17.8

-13.8

-10.8

1981

3.3

1.2

4.0

12.8

-8.3

-4.3

1982

3.3

2.3

5.1

13.7

-8.1

-3.0

1983

3.7

3.9

6.6

14.9

-7.3

-0.7

1984

3.8

2.9

8.6

15.4

-8.7

-0.1

1985

4.2

4.5

10.9

15.4

-6.6

4.2

1986

4.2

3.4

13.0

17.4

-9.8

3.2

1987

4.6

3.4

14.8

17.2

-9.3

5.5

1988

5.5

3.5

17.6

15.9

-6.9

10.7

1989

5.4

3.6

17.2

16.8

-7.8

9.3

1990

5.4

2.4

17.0

19.0

-11.2

5.8

1991

5.4

2.6

20.0

20.8

-12.8

7.2

1992

6.8

1.7

26.7

21.4

-12.9

13.9

1993

6.3

5.5

47.6

22.1

-10.3

37.4

1994

9.6

2.9

47.4

22.0

-9.5

37.9

1995

10.0

3.0

51.7

20.4

-7.4

44.4

1996

12.5

3.3

48.7

22.3

-6.5

42.2

1978-96

104.5

51.4

365.5

346.3

-190.4

175.1


The financial system is an important channel that can transfer capital from one sector to the other. Tables 16 and 17 indicate that a significant capital outflow from agriculture to industry occurred in the last 2 decades through the financial system, particularly through Rural Credit Cooperatives (RCC). A much higher value of capital outflow from rural to urban sectors than from agriculture to industry clearly shows that capital accumulated from agriculture not only supports industrialization in the urban sector but also provides notable financial resource for the successful development of rural industry (TVEs). Most of this capital accumulation from agriculture to industry is through the RCC system.

Table 16. Financial flow (billion yuan in 1985 price) between agriculture and industry, rural and urban through ABC and ADBC

Year

Savings in ABC

Loan from ABC

ADBC

Cash flow from

TVEs

Agriculture

 

To

TVEs

to

Agri.

Loan to

Agri.

Agri to

Industry

Rural to

Urban

Enterprise

Farmers


(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)


0.6

4.1

1.0

2.5

10.7

0.0

na

na

1979

1.0

4.8

1.8

3.8

12.0

0.0

0.2

-0.6

1980

1.3

7.3

2.6

6.3

12.7

0.0

2.6

0.4

1981

1.6

6.4

3.4

7.2

13.3

0.0

-0.9

-1.5

1982

1.8

6.9

4.1

8.3

14.3

0.0

0.3

-0.6

1983

1.9

6.8

4.9

9.0

15.5

0.0

-0.5

-1.0

1984

3.9

7.8

7.1

17.2

19.4

0.0

-0.8

-7.0

1985

3.1

7.0

9.9

18.8

19.7

0.0

1.8

-0.6

1986

4.3

8.8

15.3

27.2

23.4

0.0

3.5

-3.7

1987

4.8

9.4

23.2

30.8

26.4

0.0

5.6

2.4

1988

4.6

8.0

26.9

30.3

25.8

0.0

2.8

3.1

1989

3.5

7.0

32.1

26.5

25.4

0.0

4.6

7.3

1990

4.1

8.3

44.9

26.7

36.2

0.0

3.4

3.7

1991

5.2

9.7

54.9

29.9

43.3

0.0

4.2

2.2

1992

7.5

10.8

64.5

33.1

50.2

0.0

3.9

3.0

1993

13.7

8.8

71.0

38.9

45.1

0.0

9.6

10.0

1994

13.0

8.0

78.5

38.8

38.4

9.4

4.0

3.5

1995

11.9

7.8

88.1

39.8

42.6

11.9

2.6

0.5

1996

12.7

7.7

102.9

43.8

49.6

17.1

2.4

-0.8

1978-96

100.6

145.4

637.3

438.7

524.0

38.4

49.4

20.3

Note: ABC - Agricultural Bank of China; ADBC - Agricultural Development Bank of China

Table 17. Financial flow (billion yuan in 1985 price) from agriculture/rural to industry/urban through Rural Credit Cooperative (RCC), 1978-96.

Year

Savings in RCC

RCC's loan to

Cash flow from

Collective

Rural hhs

(farmers)

Collective

Rural hhs

(farmers)

Agri to

Industry

Rural to

Urban

Agri.

TVEs

Agri.

TVEs


(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

1978

12.0

2.6

7.1

2.8

1.6

1.4

na

na

1979

12.4

2.8

9.9

2.8

1.8

1.4

3.1

3.0

1980

12.5

3.5

13.9

4.1

3.7

1.9

2.4

1.2

1981

13.1

3.4

19.6

4.1

4.1

2.9

5.3

4.8

1982

13.7

3.8

25.9

3.9

4.8

5.0

5.0

4.7

1983

10.3

7.0

35.8

3.2

6.7

8.4

3.8

5.0

1984

9.8

8.8

47.7

4.2

14.7

19.7

-0.9

-7.0

1985

7.2

7.2

56.5

4.1

16.4

19.4

6.5

3.2

1986

7.9

8.7

72.3

4.2

25.1

24.3

11.5

4.3

1987

7.9

9.2

88.4

5.7

31.6

30.6

8.4

2.5

1988

7.3

9.5

84.8

5.9

33.8

27.6

-1.6

-3.6

1989

5.8

7.9

88.9

8.5

34.0

26.2

1.6

-0.2

1990

6.6

9.2

113.6

12.0

43.2

32.0

16.2

8.2

1991

8.1

11.5

138.9

16.0

54.6

37.9

17.0

7.8

1992

12.2

17.2

163.1

22.8

73.6

43.2

16.2

2.8

1993

12.4

18.2

179.5

30.1

89.6

44.2

8.1

-6.8

1994

11.6

17.8

198.6

33.1

94.0

44.6

14.9

10.0

1995

11.4

17.4

222.9

37.3

100.0

48.9

15.7

9.4

1996

12.7

19.2

260.1

58.6

104.4

52.9

13.2

10.5

1978-96

194.9

184.9

1827.4

263.3

737.8

472.7

146.4

60.2


After accounting for agricultural implicit tax through the government procurement system (see next section for details), China accumulated about 313 billion yuan (at 1985 prices) from the agricultural sector for national industrialization in 1978-96, and about 563 billion yuan from the rural sector for the urban economy in the same period (Table 18). Moreover, the shifting capitals from the agriculture to the industry, and from the rural sector to the urban have shown an increasing trend since the reform initiated in the late 1970s.

Table 18. Capital flow (billion yuan in 1985 price) from agriculture/rural to industry/urban through fiscal, financial and grain procurement systems.


 

Fiscal system

Financial system

Grain Marketing (implicit tax)

 

Cash flow from

Agri to Industry

Rural to urban

Agri to Industry

Rural to Urban

Agri to Industry

Rural to Urban

1978

-15.2

-12.4



17.9

2.6

5.4

1979

-17.9

-15.0

3.3

2.5

18.3

3.7

5.7

1980

-13.8

-10.8

5.0

1.6

16.6

7.7

7.3

1981

-8.3

-4.3

4.4

3.4

16.5

12.7

15.6

1982

-8.1

-3.0

5.3

4.1

18.9

16.2

20.0

1983

-7.3

-0.7

3.3

4.0

26.4

22.4

29.6

1984

-8.7

-0.1

-1.7

-14.1

22.6

12.2

8.4

1985

-6.6

4.2

8.3

2.5

5.6

7.3

12.4

1986

-9.8

3.2

15.0

0.7

10.8

16.0

14.6

1987

-9.3

5.5

14.0

4.9

14.2

18.9

24.6

1988

-6.9

10.7

1.2

-0.4

18.5

12.8

28.7

1989

-7.8

9.3

6.2

7.2

27.7

26.1

44.2

1990

-11.2

5.8

19.5

11.9

15.5

23.8

33.2

1991

-12.8

7.2

21.2

10.0

10.0

18.4

27.3

1992

-12.9

13.9

20.0

5.8

7.5

14.6

27.1

1993

-10.3

37.4

17.7

3.2

9.0

16.4

49.5

1994

-9.5

37.9

19.0

13.5

21.4

30.9

72.8

1995

-7.4

44.4

18.3

10.0

18.1

29.0

72.4

1996

-6.5

42.2

15.7

9.8

11.8

21.0

63.8

Sum

-190.4

175.1

195.8

80.5

307.1

312.6

562.7


Food price and marketing policies before 1998

Price and market reforms are key components of China's development policy shift from a socialist to a market-oriented economy. The price and market reforms initiated in the late 1970s were aimed at raising farm level prices and gradually liberalizing the market. These reforms included the following:

Nonetheless, the limited and differential rate of liberalization of the agricultural markets have had substantial impact on productivity and commodity composition at the household and national levels (Huang, Rosegrant and Rozelle, 1995). The shift from the collective and household responsibility system also raised the price responsiveness of farm-households. As the right to private trading was extended to include surplus output of all categories of agricultural products after contractual obligations to the state were fulfilled, the foundations of the state marketing system began to be undermined.

After a record growth in agricultural production in 1984 and 1985, a second stage of price and market reforms was announced in 1985. This was aimed at radically limiting the scope of government price and market interventions and further enlarging the role of market allocation. Farmers and state commercial departments were to "negotiate" purchase contracts before the planting season at the weighed average quota and above quota prices. Other than for grains and cotton, the intention was to gradually eliminate planned procurement of agricultural products; government commercial departments may only continue to buy and sell at the market. The contract system, however, also resulted in a negative impact on the agricultural production as the marginal price of producer declined (Sicular, 1991).

Because of the sharp drop in agricultural production and severe food price inflation after 1985, however, the implementation of the new policy was stalled. Mandatory procurement of grains, oil crops, and cotton continued at the "contract price" which basically was a weighted average of the former quota and above quota prices. To provide more incentives for farmers to raise productivity and sell to the government, contract prices were raised over time. However, the increase in the nominal agricultural procurement price was lower than the inflation rate, which led to a decline in the real agricultural product price.

As agricultural production and prices stabilized in 1990-1992, another attempt was made to basically abolish the compulsory quota system and the sale at ration prices to consumers in early 1993. While both the state distribution and procurement systems had been successfully liberalized, the state compulsory quota system was reimposed in most parts of China in 1994 and all over China in 1995. This reversed policy was a result of higher food price inflation and fear of the shortage of food supply. Several new policies have been implemented since late 1994. Government grain procurement again became compulsory.

In the meantime, China implemented the other important agricultural marketing policy in 1994-1995: the provincial governor's "Rice Bag" responsibility system. It is designed to strengthen food security and grain markets by making provincial governors and governments responsible for balancing grain supply and demand and stabilizing local food markets and prices. This policy has already contributed to increased output, more stable grain production and a significant reduction in short-run agricultural price fluctuations. However, such a policy is not without costs. Although its impact on national grain market integration is minimal and lower than expected (Rozelle et al, 1996; Yu and Huang, 1998), the policy's impact on the efficiency of resource allocation, diversification of agricultural production, and farmer's incomes should not be ignored.

To measure the impact of government policy on agricultural prices, domestic price is compared with the price in the absence of government intervention or under free trade. The impact of commodity-specific price interventions such as the domestic procurement and distribution system, tariffs, exports taxes, quantitative trade restriction on domestic prices is estimated by the nominal protection rate (NPR), the percentage difference between domestic and border price converted at the official exchange rate. To measure the total effect of government interventions, including the effect of exchange rate distortions, the net NPR is estimated, i.e., the percentage difference between domestic and border price converted at the equilibrium exchange rate. In order to investigate different price and marketing policies on the agricultural incentive, nominal price protection rates are estimated at various policy (price) levels. Table 19 shows the estimates of nominal protection rate based on various producers' prices from 1978 to 1996 for rice, wheat, maize, and soybean. Table 20 indicates the estimated NPRs for the same commodities based on the black market rate.

It should be noted that the black market rate is about equal to the secondary or swap market exchange rate, and thus the NPRs in Table 20 reflect the effect of the two-tier exchange rate system. The two different estimates of NPRs represent upper and lower bounds of the degree of protection or "disprotection" (taxed) due to commodity-specific and exchange rate policies. The exact rate of nominal protection rate depends on the proportion of foreign exchange earnings from exports or foreign exchange requirements of imports that can be sold or purchased, respectively, at the official vs the black market or secondary exchange rate which may differ across commodities and trading corporations and over time. It should be emphasized that the black market rate does not correspond to the equilibrium exchange rate which would have obtained under free trade situation.

Table 19. Nominal protection rates (NPR) of grain (at official exchange rate), 1978-96

Year

Quato procurement price

Negotiated procurement price

Market price

Rice

Wheat

Maize

Soybean

Rice

Wheat

Maize

Soybean

Rice

Wheat

Maize

Soybean

1978

-52

3

10

-1

-29

41

51

12

32

63

76

29

1979

-32

5

4

7

17

67

64

35

43

77

91

56

1980

-35

-1

-1

2

14

59

52

31

39

67

77

50

1981

-50

-12

-15

29

-10

40

22

25

9

48

41

44

1982

-50

-18

-8

30

-8

31

39

36

10

38

61

57

1983

-44

-12

-30

35

6

33

8

45

22

40

25

67

1984

-39

-19

-40

-11

11

14

-9

8

16

20

-7

25

1985

-24

-12

-18

-3

-11

-12

-14

10

-6

-4

-2

27

1986

-25

-7

-9

-8

-7

7

13

13

4

15

29

29

1987

-24

5

-8

-8

6

30

23

17

18

47

39

38

1988

-41

5

-24

-22

-9

42

3

7

13

72

25

35

1989

-38

-23

-23

-29

12

37

33

27

41

63

62

62

1990

-40

-38

-37

-28

-4

3

4

15

0

8

15

37

1991

-38

-18

-43

-30

-11

23

-17

0

-8

25

-9

19

1992

-38

-24

-37

-32

-27

-6

-17

11

-22

-1

-5

36

1993

-28

-12

-39

-34

-14

0

-14

16

-1

8

-2

28

1994

-40

-21

-33

-34

-24

-7

-12

-8

12

22

18

11

1995

-35

-26

-44

-18

2

5

-9

10

16

16

3

24

1996

-24

-31

-19

-33

-3

-13

6

1

7

-9

14

11


Several observations may be made from Table 19 and 20. The quota prices consistently represented a disprotection to farmers. The estimated rate of disprotection, as expected, is more severe when the black market rate is used as the exchange rate.

The introduction of negotiated procurement significantly reduced the disprotection from government procurement operations (see NPRs on negotiated procurement prices). Note, however, that the NPRs based on the black market rate remain negative for all grains in most of the years.

Not surprisingly, the most heavily taxed commodities are the exportable - rice and corn. Wheat, importable commodity, is more favored. Among grains, the most heavily taxed is rice which has the lowest NPR based on both the procurement and market prices. Aside from the lower quota price NPR for rice, the proportion of grain procurement at the higher negotiated price is typically higher for corn and soybeans. It is interesting to note that the proportional difference between market and procurement price is much greater for corn and soybeans compared to rice. Evidently, export controls are more restrictive on rice, the main food staple.

Table 20. Nominal protection rates (NPR) of grain (at shadow exchange rate), 1978-96

Year

Quato procurement price

Negotiated procurement price

Market price

Rice

Wheat

Maize

Soybean

Rice

Wheat

Maize

Soybean

Rice

Wheat

Maize

Soybean

1978

-68

-32

-27

-34

-53

-6

1

-25

-12

9

17

-14

1979

-54

-30

-31

-29

-22

12

10

-10

-5

18

27

4

1980

-50

-24

-24

-21

-13

22

17

0

7

29

36

16

1981

-58

-27

-30

8

-25

17

1

4

-9

23

18

20

1982

-59

-32

-23

9

-23

9

16

13

-8

15

35

31

1983

-54

-28

-42

12

-13

10

-11

20

1

16

3

38

1984

-47

-30

-48

-23

-4

-2

-21

-7

0

3

-20

8

1985

-27

-15

-21

-7

-14

-15

-17

6

-9

-8

-5

23

1986

-36

-20

-22

-21

-20

-8

-3

-3

-10

-2

11

11

1987

-36

-11

-22

-22

-10

10

4

-1

0

25

18

17

1988

-66

-40

-57

-55

-48

-19

-41

-39

-35

-1

-29

-23

1989

-65

-56

-56

-59

-36

-22

-24

-28

-19

-7

-8

-8

1990

-57

-55

-55

-48

-30

-26

-25

-17

-28

-22

-17

-1

1991

-50

-34

-54

-43

-28

-1

-33

-19

-26

0

-27

-4

1992

-51

-40

-50

-46

-41

-25

-34

-12

-38

-21

-24

8

1993

-50

-39

-57

-54

-40

-30

-40

-19

-31

-25

-32

-11

1994

-41

-22

-34

-34

-24

-8

-13

-9

11

21

17

10

1995

-36

-27

-45

-19

0

3

-11

8

14

14

2

22

1996

-26

-33

-21

-34

-5

-15

4

-1

5

-11

11

8


In sum, despite substantial efforts to liberalize the price and market structure of the agricultural sector, most major agricultural commodities continued to be heavily penalized by commodity specific policies. When the impact of the overvaluation of the domestic currency due to the trade protection system is considered, the agricultural incentives would decline even more. These distortions in price incentives depress agricultural production and redistribute income from farmers to urban consumers and the agro-processing sector.

Ongoing grain market and reserve reform

With three record levels of grain production in China in 1995-1997, almost zero inflation since 1997, raising grain stocks, and decline in food prices recently, China is initiating a new grain marketing and reserve reform. This was, one of three major reforms (grain marketing and circulation, SOE, and financial reforms) announced by Zhu Rongji in April 1998. The overall goals of the reform are "to improve the efficiency of grain marketing system and to reduce central government's fiscal burden in financing grain circulation and reserve system."

Major components of the ongoing reform include the following:

1) Clear separation of commercial and policy arms of grain market.

A new reserve system will be set up with 0.6 to 0.7 million people from the current grain bureau system (4.13 million people including retirees), the rest will be in commercialized arm of grain trading companies.

2) Clear separation of commercial and policy functions of grain market.

Commercialization of all but the storage arm of the grain bureau (the new reserve system) will be undertaken and will have no storage responsibilities for the buffer stocks or disaster relief grain. Traders will be responsible for profits and losses and completely independent of the budget. They will have responsibilities to collect and ship quota collections, but will do so for a fee for the grain reserve system.

3) Clear separation of responsibilities between central and local governments.

The central government will play no part in inter-provincial grain transfers. All will be done by companies in each of the respective provinces. The central government will be responsible for disaster relief and stabilizing prices using centrally held stocks. These stocks will be held separate from the provinces and from any commercial enterprise. Local governments will be responsible for local disaster relief and stabilizing local prices. Governors "Rice-Bag" Responsibility System will still be in effect.

The central government will allocate only 3.5 billion yuan for all 31 provinces, which will be mandatorilly matched (at a rate of 1:1.5) by local allocations for running the subnational disaster relief and local price stabilization. This will be called a "grain risk fund." This means a minimum (provinces could spend more) of 8.7 billion will be used at the subnational level for disaster relief and price stabilization.

4) Clear separation of old and new grain debts.

Currently, the grain debt reaches 190 billion yuan, of which 130 billion is policy loan (all in default, called "debt overhang") and 60 billion to commercial operations. Goal is to get rid of 130 billion yuan, part is bad debt of grain agencies themselves (they borrowed money, got reimbursed by financial bureau and never paid bank back), part is bad debt of local government (they ordered grain bureau to take loans to procure grain, received the fiscal transfer from financial bureau, and diverted the money to other uses).

Each locality must have a plan by the fall in 1998 to pay back the debt in the coming 10 years or so. After repayment plan is in place, the central government will stop interest and pay back all accumulated debt and will continue to do so if the schedule of repayment is met to pay all interest back. Central government will be not responsible for any new debt incurred in local levels due to mismanagement and grain bureau's commercial loss.

5) Others.

All quotas (after 1998) will still be assessed, but the quota price will always be set according to the market price. Individuals and private companies are prohibited to procure grain from farmers. Commercial arms of grain bureau and grain reserve system are the only ones who will procure grain from farmers. Grain sale prices by grain bureau should be set at a level higher than procurement prices in order to avoid loss in marketing by grain bureau.

Input price and marketing policies

China has liberalized most agricultural input prices and markets, but after one and a half decades of reform, fertilizer, one of the most important agricultural inputs, has not been fully liberalized. The central government issued a series of new measures to control input, especially fertilizer, prices in order to balance supply and demand in the face of persistent input price increases.

Policy makers formulated a fertilizer market retrenchment policy in 1994, but it was weaker than the grain quota procurement policies. The state readjusted the factory price of chemical fertilizer and applied a new fertilizer factory-gate target band to control price inflation below the wholesale level. Another fertilizer market control mechanism was to shift trade to the main state channel. The state council called a national work conference on reform of the distribution system for agricultural inputs in late 1994. The goals of fertilizer market policy were to strengthen macro control and market management, reduce marketing costs, and stabilize fertilizer prices.

In 1995 and early 1996 the government adopted measures including the following:

a) implementing the provincial governor's responsibility system for fertilizer pricing and marketing, making provincial governments responsible for satisfying excess agricultural input demand and maintaining stable input prices;

b) controlling fertilizer distribution (the maximum any factory was permitted to sell through non government channels was kept at ten percent); and

c) controlling trade (all imports were licensed and managed by government appointed trade agents).

China depends heavily on the international market for fertilizer, importing about one fourth of its requirements. Domestic potassium production is extremely limited; 90-98 percent of the potassium used in China is imported. Trade policy has a substantial impact on the domestic fertilizer price and market.

Estimates of the nominal protection rate (NPR) show that the government's pre-1985 policy promoting domestic production of agricultural inputs forced farmers to buy domestically produced inputs at prices higher than the world market level, as much as double (100%) in the early 1970s (Huang and David, 1995). The difference has generally declined over time because depreciation of the yuan raised import prices to levels approaching domestically produced input prices. Farmers did not receive a significant price subsidy, close to 30 percent, until the early 1990s. When the government lifted retail price controls in 1993, the fertilizer NPR exceeded 20 percent. The input price policy has not compensated for artificially low procurement prices that apply to many food commodities. The World Bank estimates that average nominal protection for agricultural crops was -40 percent in 1993-94. When implicit tariffs on agricultural inputs are considered, the effective rate of protection falls even lower to -43 percent. The evidence suggests that input price policies exacerbated the policy bias against agriculture.

Technology development policies

After the 1960s, China's research institutions increased, from almost none in the 1950s, producing a steady flow of new varieties and other technologies. Chinese farmers used semi-dwarf varieties several years before the release of Green Revolution technology elsewhere. China was the first country to develop and extend use of hybrid rice. Chinese-bred corn, wheat, and sweet potatoes were comparable to the best in the world in the pre-reform era (Stone, 1988).

Table 21. Agricultural research expenditure in China, 1985-96

Year

 

Agri research expenditure at 1990 price

Share of state finance (%)

 

Agri research intensity (%)

 

Expend./ scientist (yuan)

 

Total (m)

State finance (million)

Dev't income (million)

1985

2196.7

1645.3

551.4

75

0.52

54559

1986

2058.5

1464.7

593.8

71

0.48

46917

1987

2000.3

1351.2

649.1

68

0.44

41352

1988

2142.9

1430.1

712.8

67

0.46

39613

1989

2139.5

1429.4

710.1

67

0.47

38303

1990

2049.8

1242.9

806.9

61

0.39

35213

1991

2313.8

1246.9

1066.9

54

0.43

39981

1992

2546.3

1330.0

1216.3

52

0.44

43735

1993

2667.1

1269.4

1397.7

48

0.46

44646

1994

2952.3

1387.6

1564.7

47

0.44

48688

1995

2832.3

1423.7

1408.6

50

0.39

47396

1996

2879.7

1514.4

1365.3

53

0.36

36657

Source: The State Sciences and Technology Commission.
However, fiscal constraint has limited China's ability to invest more on agricultural research and extension since the 1980s (Tables 21 and 22). A nationwide reform in research was launched in mid-1980s. The reform attempted to increase research productivity by shifting funding from institutional support to competitive grants, supporting research useful for economic development, and encouraging applied research institutes to support themselves by selling the technology they produce (Rozelle, et. al., 1996).

Although competitive grant programmes may have increased the efficacy of China's agricultural research system, reliance on commercial revenue to subsidize research and compensate for public funding shortfalls has weakened it. Empirical evidence demonstrates the declining efficacy of China's agricultural research capabilities in the early 1990s (Rozelle et, al., 1996). The Chinese government, taking into account the role of science and technology in raising agricultural productivity and the recent weakening of the research system, established several programmes to stimulate agricultural technology development and facilitate farmers' adoption of new technologies. Both the Ninth Five-Year Plan and the Long Term Plan for 2010 concluded that China will rely heavily on new technology, particularly new crop and livestock varieties, to raise future agricultural production.

Table 22. Agricultural technology extension expenditure in China, 1986-95

Year

Real agricultural extension expenditure (million at 1990 price)

Real agricultural expenditure per staff (yuan at 1990 price)

Agricultural extension intensity (%)

1986

1737

4508

0.24

1987

1810

4472

0.32

1988

1691

4113

0.24

1989

1545

3599

0.23

1990

1740

3828

0.23

1991

1993

4021

0.25

1992

2099

3408

0.25

1993

2081

3444

0.23

1994

2089

2850

0.24

1995

2170

3215

0.23

Sources: A desk survey conducted by author in the Ministry of Agriculture, and the Ministry of Finance.

Land tenure policy

China initiated rural economic land reform in 1978. Production teams distributed agricultural land among households depending on family size or in combination with labor, although ownership remained collective. A number of publications highlight the importance of this reform to agricultural production growth in the long term. The effects of equitable distribution of land to farmers on food security and poverty are obvious.

Renewal of the land contract system is a significant shift of agricultural land institutional arrangements. The new land contract introduced in 1994/1995 offered 30- or 50-year term extensions from the expiration of the original contract. Farmers may also transfer land use rights in return for payment, although land remains collectively owned. Policy makers designed use right transfers to encourage farmers to invest in agricultural, especially grain, production by counteracting the effects of unclear land titles and small scale holdings. The policy may also encourage land consolidation and agricultural commercialization. A recent land tenure survey in eight Chinese provinces indicates that efficient land and input use and increased farmer investments resulting from a well defined land use right and tenure system might increase agricultural production. Further investigation is necessary to determine the extent of possible increases.

Foreign exchange and agricultural trade policies

China has become a much more open economy with foreign trade growing at an even more impressive rate than GDP. The value of trade (export and import) relative to GDP rose from 12 percent in 1980, 23 percent in 1985, and up to 36 percent by 1997, a three-fold increase during the reform period. Total value of agricultural trade of China increased from US$11.6 billion in 1980 to US$31.2 billion in 1997, by 1.7 times. However, the share of agricultural trade in the total trade value decreased from 30.4% in 1980 to 10% in 1997 due to higher growth of manufactured goods.

China's open door policy contributed to this rapid growth of external economy and greater reliance on both domestic and international trade to meet consumer demand. Historically, the overvaluation of domestic currency for trade protection purposes has reduced agricultural incentives. Real exchange rates remained constant and even appreciated during the 30 years prior to reforms, but depreciated rapidly after reforms, with the exception of several years following the high domestic price inflation of 1985. From 1978 to 1992, the real exchange rate depreciated more than 400 percent. Economic productivity growth and technological innovation in agriculture, foreign trade, and industry contributed to low inflation and the success of exchange rate adjustments. Within Asia, China is second only to Indonesia in aggressively adjusting exchange rates over the last two decades except in the recent 5 years (real exchange rate has appreciated by about 30 percent from 1992 to 1997). Falling exchange rates increased export competitiveness and contributed to China's phenomenal export growth record (i.e. non-grain food products) and the spectacular national economic performance of the 1980s.

Although China is not a member of the World Trade Organization (WTO), it participated in the UR negotiation on agricultural trade and made commitments to change agricultural trade policy in accordance with multilateral trade rules, and to reduce the tariff level according to UR Agreement on Agriculture. In fact, China has been making great efforts to establish a trade system in conformity with general international trade rules in preparation for joining WTO. This process will certainly promote reforms in China's agricultural trade policy in the future. In addition, China also made commitments at the Asia-Pacific Economic Cooperation (APEC) forum to support its long term goal of investment and trade liberalization in a manner consistent with WTO objectives. China also signed the Bogor Declaration of APEC in November 1994 in which APEC set a target of eliminating trade barriers by 2010 for developed member economies and 2020 for developing member economies. At present, the topic of early liberalization of sectors including aquatic products, grain, edible oil has been discussed at APEC. All of these suggest a change of China's agricultural trade policy over the next couple of decades.

In the past, the trade regime in China has changed dramatically from the system of state trading monopolies prevailing until 1978. Prior to reforms, twelve foreign trade corporations (FTCs) handled all imports and exports, including foreign exchange, which were distributed by administrative planners. Reforms have introduced greater competition in international trade and indirect control instruments. The reforms of 1984 decentralized the foreign trade system. The government allowed provinces to establish their own FTCs and permitted provincial branches of national FTCs to act independently. Although firms must obtain approval to trade, this has been given very liberally and there are now approximately 200,000 firms eligible to engage in foreign trade (Martin and Bach, 1998). On the other hand, China's food trade policy featured import/export license and quota system.

Significant reduction in tariff has also occurred in the past decade. China unilaterally reduced its average tariff rates (unweighted) from 47.2 percent in 1991 to 23 percent in 1996, and 17 percent in 1998. At present, the tariff rate on grain, cotton, log timber and other primary agricultural products is very low (2% for log timber, 3% for cotton). The rates for other agricultural and processed products are usually high. After tariff was unilaterally and substantially reduced in April 1996 and October 1997, the average tariff rate for agricultural is about 20.4 percent (down from more than 40 percent in 1995, 32.6 percent in 1996). Further reduction of tariff is planned in the process of China's accession to the WTO.

China began seeking to resume its membership of GATT in 1986. Past studies have already demonstrated that the accession of China to the WTO would accentuate many of the beneficial effects of the Uruguay Round. Specifically, it would boost not only China's trade but also that of many other countries, adding substantially to the world welfare (Anderson, 1997, 1998; Wang, 1997). But despite 18 accession meetings during the Uruguay Round and several meetings since WTO was established, it is still waiting for its membership to be finalized. The major stumbling blocks causing the delay in accession include the following: whether China would be granted developing country status in the WTO; whether China would be a "fair" competitor given the dominance of state-owned manufacturing and trading enterprises still there; what would be the extent and conditions of market access into China; and whether China can deliver on its promise of stricter enforcement of intellectual property rights (Anderson, 1997).

Anti-poverty policy

Both central and local governments are committed to poverty alleviation. In the early 1980s, tremendous progress was made in addressing China's poverty problem. The rural population under poverty line declined from 260 million in 1978 to 89 million in 1984. The poverty incidence (share of the poor in the total population) declined from 32.9 percent to 11.0 percent in the same period (Table 23). Much of the credit for the early reduction in poverty is attributed to the rapid rural economic growth resulting from better incentives and the government's rural reform programme (Huang et. al., 1998).

A number of agencies and line ministries[20] play considerable roles in poverty alleviation. In 1986, the State Council established a task force and executive agency structure applicable to all administrative levels in order to better organize poverty reduction work and institutionalize the anti-poverty program. An inter-ministerial task force called the Leading Group for the Economic Development of Poor Areas (LGEDPA) manages poverty reduction work at the central government level. The Poor Area Development Office, the executive anti-poverty agency, reports to the State Council via the LGEDPA. This institutional structure facilitates policy implementation and strengthens the leadership of the national anti-poverty program.

The first major systematic effort launched by the government to alleviate poverty was in the mid-1980s, anchored by the national Leading Group's poor area investment, credit (run by Agricultural Bank of China, and Agricultural Development Bank), food-for-work programmes (administered by the State Planning Commission, emphasizes infrastructure improvement), and development fund.

Table 23. Rural poverty in China, 1978-96

Year

Rural population (million)

Absolute poverty (million)

Incidence (%)

1978

780.14

260

32.91

1979

790.30

239

30.24

1980

790.47

218

27.58

1981

795.65

194

24.38

1982

799.01

140

17.52

1983

801.74

123

15.34

1984

807.34

89

11.02

1985

807.57

96

11.89

1986

811.41

97

11.95

1987

816.26

91

11.15

1988

823.65

86

10.44

1989

83164

103

12.39

1990

84142

85

10.10

1991

85280

94

11.02

1992

84799

80

9.43

1993

85166

75

8.81

1994

85549

70

8.18

1995

859.47

65

7.56

1996

864.39

58

6.71

Sources: Poverty data for 1978-1989 are from World Bank (China: Strategies for Reducing Poverty in the 1990s, 1992; 1990-1996 data are from China Agricultural Development Report, various issues, MOA; Rural population are from SSB, Statistical Yearbook of China.
Targeting and reaching the poor were emphasized in the early stages of the anti-poverty programmes the poor area fund uses. But when faced with the new directive issued by the State Council to eliminate poverty by 2000, the lack of confidence in the poverty alleviation approach in effect at that time led to a restructuring of poverty policy. This policy tried to create a "more effective way" to channel investment funds, focusing on developing the local economies of poor areas with integrated agricultural development schemes. This was done by shifting to direct lending to enterprises and economic entities (jingji shiti) beginning in 1990 and ending in 1995 when the policy returned to emphasize household lending.

China's experience clearly follows the typical pattern found in other developing countries. For example, when the subsidized loan programme was begun in the mid-1980s, the government believed that households needed capital (which was not provided by the formal system) to pull themselves out of poverty. Hence, in the first phase of lending, priority was on giving low-interest loans directly to poor households for agricultural-related activities. Because of some repayment problems and impatience in the pace of development, the government switched from its emphasis on household in 1989 when the Leading Group began to encourage "integrated economic development." by focusing their attention on the development of jingji shiti for assisting the poor.

In theory, these jinggi shiti were in a better position to run integrated agricultural and rural development programs. In the early 1990s, over 70 percent of poverty loans were distributed in this way. Economic entities were enterprises (or village committees) engaged in some kind of productive or service activities that helped poor households to escape poverty. At least 50 percent of the "members" or contracting clients of the jingji shiti entities were supposed to be poor. This change arose since government officials believed that most poor farmers could not make good use of subsidised loans on their own because they lacked the necessary technological and management ability and could not achieve economies of scale in operation. Jingji shiti, on the other hand, were managed by persons with more experience and management ability who could organize farmers into groups that could take advantage of scale economies. An important goal of the reform also was to improve the productivity of loans and achieve higher repayment rates.

There was a growing consensus among some of those interested in poverty work that by the mid-1990s, however, subsidized credit directed at jingji shiti for integrated agricultural/rural development had not met any of its goals. Repayment rate on loans did not increase markedly.

The effectiveness of subsidized poverty loans in stimulating local development also became increasingly suspect. Field work frequently uncovered cases in which farmers were forced into collective projects in pursuit of scale economies that they did not want to participate in. In other cases, loans were taken out by jingji shiti managers for projects that were not appropriate for the local economy, projects that often ended in failure and unpaid debts. Loans were often diverted into economic entities that had political and fiscal importance (Park et al., 1996).

But the largest problem of lending to economic entities may have been that there was less effort to direct the funding to poor households. Many of the loans were given to township and village enterprises (TVEs) or county-owned enterprises, which increased the local revenue base for local governments but did not greatly benefit poor households. The failures of the programme in reaching the poor were criticized. At the national work conference on poverty in September 1996, the Chinese government decided to return the lending focus to direct loans to poor households.

The adequacy of financial resources for the poor area fund is the other challenge in China's poverty alleviation. While the total poor area fund in the nominal terms increased over time, the real investment in the poor areas declined in the late 1980s and the early 1990s. For example, annual government subsidized credit in nominal term increased from less than 1 billion yuan to 2.3 billion yuan in 1986 and 8.7 billion by 1997 (Table 24). But measured in the real terms, there had been no growth during 1986-1996. A similar trend was indicated for the poor area development fund. Although the fund for food for work increased rapidly before 1994, it declined in real terms after 1994.

With increasing concentration of the poor in the more remote areas, the changing lending strategy (moving the target from household to jinji shiti), inadequacy of financial resources, and slowing down the growth of rural economy, the progress achieved in the early 1980s has slowed over the past ten years. Rural poverty now stands at about 50 million people, or approximately 6 percent of the rural population.

Eliminating absolute poverty completely for the remaining 50 million people by the end of this century is the target of the government poverty reduction program. The national "Eight Seven Poverty Reduction Program" (eight for 80 million poor, seven for the 7 years to the year 2000) was initiated in 1994. Its main features are the following:

a) to achieve sufficient food, clothing, shelter and income for the poor through stimulation of income growth in the poor area, targeting the poor county and poor household, and strengthening agricultural production;

b) to strengthen the infrastructure in the poor areas; and

c) to improve educational, cultural and sanitary conditions.

Table 24. Investment in the poor area (100 million yuan), 1986-97

Year

Subsidized credit

Food for work

Development fund

Total

Nominal

Actual

Nominal

Actual

Nominal

Actual

Nominal

Real

1986

23

22

8

7

10

9

41

39

1987

23

21

8

7

10

9

41

37

1988

29

22

2

2

10

8

41

31

1989

30

19

2

1

10

6

42

27

1990

30

18

7

4

10

6

47

28

1991

35

21

38

23

10

6

83

49

1992

41

23

36

20

10

6

67

49

1993

35

17

51

25

11

5

87

48

1994

45

18

61

25

11

4

117

47

1995

48

17

61

11

9

3

118

30

1996

57

18

31

10

13

4

101

32

1997

87

28

31

10

28

9

146

45

Total

483

483

336

124

142

130

961

462

Note: Real value is at 1985 price.
Sources: Huang, Ma and Rozelle, 1998.
To achieve the above, the programme called for increased funding for the poor areas, particularly for 592 national designated poor counties. However, Table 24 shows that raising funds for the poor area has not been realized since 1994. Indeed, the real investment (at 1985 price) in the poor area has declined from 4.8 billion in 1993 to only about 3.2 billion in 1996. Although the investment in the poor area surged in 1997, it was still lower than the level obtained in the first year (1994) of "Eight Seven Poverty Reduction Program" (Table 24).

Rural enterprise development policy

Chinese TVEs expanded at a rapid rate following the reforms of 1979. The number of TVEs increased from about 1.5 million in 1978 to more than 23 million by 1996 (Appendix Tables 1 and 2) and now play an important role in China's rural economy. The gross output value of TVEs in real terms increased at an annual rate of 23.5 percent between 1978 and 1995. By 1996, rural TVEs accounted for about three-quarters of rural gross output values and about 40 percent of China's export earnings (SSB, 1996).

The development of TVEs in rural areas has maintained momentum by absorbing surplus rural labor. The sector employed 135.1 million rural laborers in 1996, 4.8 times more than in 1978, an increase of more than 6 million annually (Tables 25 and 26). Aside from absorbing the labor surplus, TVE development increases farmers' incomes, promotes rural urbanization and market development, and stimulates structural changes in the rural economy.

Table 25. Employment (million) in TVEs by sector in rural China, 1978-96

Year

Total

Agric.

Industry

Construction

Transportation

Commerce & food service

1978

28.3

6.1

17.3

2.4

1.0

1.4

1980

30.0

4.6

19.4

3.3

1.1

1.5

1985

69.8

2.5

41.4

7.9

1.1

16.9

1990

92.6

2.4

55.7

13.5

7.1

14.0

1994

120.2

2.6

69.6

16.2

7.3

24.5

1995

128.6

3.1

75.6

19.3

9.5

21.0

1996

135.1

3.4

78.6

19.5

10.6

19.2

Note: figures for 1978 and 1980 include only those enterprises run by township and village, while figures for other years include all enterprises in the rural area except for the data for 1995-96 which do not account for "extremely small enterprises" defined by State Township and Village Enterprises Administrative Bureau.

Source: Statistical Yearbook of China, various issues.

Policy played an important role in setting up and encouraging TVE development in China. Rural industry in the early 1950s was primarily staffed by farmers with part-time jobs in commercial handicraft industries. Many of these workshops were quite small because their technology or work organization offered no economies of scale. Commune era (1958-78) reforms organized workshops and individual handicraft workers into a large number of communes, brigades, and team enterprises. Local governments and other entities arranged many profitable business deals during this period. These included the production of building materials and some farm inputs, subcontracting of various sorts from urban industry, and some simple agricultural output processing.

The post 1979 economic reforms drastically altered the operation of the commune-run enterprise system. State-owned enterprise (SOE) monopoly and monopsony powers deteriorated as urban economic opportunities became more accessible to TVEs. With central government recognition of individual and private enterprises in 1984, employment in cooperative and private enterprises expanded by 34.2 million between 1984 and 1990 (Table 26). Below village TVE's employment growth, at an average annual rate of 25 percent, accounted for 85 percent of total TVE employment growth between 1984 and 1990.

TVE development is characterized by labor-intensive industry and flexibility to respond to changing market conditions. TVEs have responded to China's growing demand for a greater variety of consumer products by employing surplus labor in rural areas. TVE development is closely linked to the growth of urban industry, especially in the early stages of development. TVEs subcontract production from large urban industries, hire retired urban technicians (either directly or indirectly) and purchase retired equipment. Asset transfers from urban industry, including retired equipment, accounted for 35 to 45 percent of new TVE assets between 1978 and 1984.

Table 26. Employment (thousand) of TVEs by ownership in rural China, 1978-96

Year

Total

Township

Village

Others

Cooperative

Private

1978

28266

12577

15689




1979

29093

13144

15949




1980

29997

13938

16059




1981

29696

14176

15520




1982

31129

14950

16179




1983

32346

15670

16677




1984

52081

18792

21030

12260

5239

7020

1985

69790

21114

22157

26520

7714

18805

1986

79371

22749

22664

33959

8341

25618

1987

88052

23975

23208

40870

9236

31633

1988

95455

24904

24035

46515

9766

36749

1989

93668

23836

23366

46466

8837

37629

1990

92648

23332

22592

46723

8143

38580

1991

96091

24310

23360

48421

7263

41158

1992

105811

26083

25405

54323

7710

46613

1993

123453

28808

28869

65776

9137

56639

1994

120182

29607

29381

61194

na

na

1995

128621

30294

30311

68016

na

na

1996

135083

29588

29940

75555

9943

65612

Source: Statistical Yearbook of China, various issues; Agricultural Yearbook of China, various issues; China's TVEs Yearbook, various issues.
Strong growth of TVEs by private sector since 1980s provided a dynamic source of growth in the rural economy. By 1996, the private and cooperative TVEs employed 75.6 million rural labourers, and accounted for 56 percent of the total TVEs' employment.

China's food economy prospects


Issues and debates
Food requirements: baseline projection results
Availability of grain supply: results of baseline projections
Alternative scenarios
Summary

Issues and debates

China's ability to feed itself in the 21st century has been widely discussed and is a subject of much concern and study among researchers of China's agricultural economy. The preponderance of serious evidence indicates that China will be able to feed itself, although grain imports will probably rise over the next several decades. Yang and Tyers (1989) forecast that China would import roughly 50 mmt annually in the late 1990s. Rozelle et. al. (1996) and Huang and Rozelle (1997) predict that China will need to import 30-40 mmt annually to meet domestic demand for the first two decades of the twenty first century. Most international food trade and production specialists believe that current suppliers can meet China's rising import demands without long-term price increases or threats to world food security.

Some researchers foresee impending disaster. Garnaut and Ma (1992) forecast that China will face up to a 90 mmt grain shortage in 2000. Brown (1995) argues that China's production will fall between 216 and 378 mmt short of demand, forcing the nation to use foreign exchange earnings from the booming export sector to import enough grain to fill the gap. He predicts that China's imports will drain world grain supplies, force prices up, and deny poorer nations the grain necessary to feed their population.

Such a wide range of net import predictions is perplexing. China's emergence as either a major importer or a major exporter could have enormous consequences for world grain markets and prices. China is experiencing rapid development and transformation. Continual reforms and the dynamic nature of China's economy require that researchers update predictions frequently.

This section reports projection results which incorporate recent government policies based on a projection model developed at the Centre for Chinese Agricultural Policy (CCAP) in cooperation with FAO's Policy Assistance Branch, Regional Office for Asia and the Pacific. CCAP's Agricultural Policy Simulation and Projection Model (CAPSiM) is a partial equilibrium multi-market model. It is the first most comprehensive model for China's food demand, supply and trade analysis. Most of the elasticities are estimated econometrically with imposition of theoretically consistent constraints. In the projection or policy simulation, prices can be determined endogenously or exogenously. CAPSiM explicitly accounts for urbanization and market development (demand side), technology, agricultural investment, environmental trends and competition for labor and land use (supply side), as well as the price responses of both demand and supply.

The projection considers the recent policy trends discussed in the last section in addition to other factors that will influence future supply of and demand for food. These trends are the basis for growth assumptions of key simulation parameters. Decline of returns to agricultural research and irrigation investment is assumed in the model. Appendix Tables 3-7 summarize the demand and supply elasticities used in CAPSiM model. Key assumptions on macro economic variables and major exogenous variables are presented in the Appendix Table 8.

Food requirements: baseline projection results

The analysis concludes that China's per capita food grain consumption peaked in the late 1990s (Table 27). The average rural resident will increase consumption until the year 2008 and then reduce demand thereafter. Declining demand in rural areas takes place when income elasticities, although lower than the late 1990s, are still positive. As markets develop, rural consumers will have more choices, and move away from food grains. Urban food grain consumption declines over the entire projection period.

Per capita demand for red meat is forecast to rise sharply throughout the projection period (Table 27). China's consumers will double consumption of meat by 2020, from 17 to 32 kg per capita for pork, from 2 to 4 kg for beef, and 1.2 to 2.9 kg for mutton. Although rural demand growth lags behind the growth of urban demand, urbanization will shift people from rural into high-consumption urban areas. In 1996, an average urban resident consumed about 60 percent more red meat than rural counterparts. Per capita demand for poultry and fish, although initially lower, will rise proportionally faster than red meat demand.

The projected demand increase for poultry, fish, and other animal products will place a pressure on aggregate feed grain demand (Table 28). The baseline scenario predicts that demand for feed grain will increase to 138 mmt by 2000 and climb to 239 mmt by 2020 (all figures measured in trade grain, rice in milled form, not unprocessed grain). Feed grain as a proportion of total grain utilisation will grow from 27 percent in the mid-1990 to about 41 percent in 2020.

Table 27. Projected annual per capita food consumption under baseline scenario, China, 1996-2020.

Alternative scenario

 

Per capita food grain consumption (kg)

1996

2000

2005

2010

2020

Foodgrain


National

191

192

192

190

180



- rural

218

219

223

225

222



- urban

126

126

127

127

126

Pork


National

17

20

23

26

32



-rural

15

17

19

22

26



-urban

22

26

29

33

39

Beef


National

2

2

3

3

4



-rural

1

1

2

2

3



-urban

3

4

4

5

6

Mutton


National

1.2

1.5

1.8

2.2

2.9



-rural

0.8

0.9

1.1

1.3

1.7



-urban

2.2

2.6

3.1

3.5

4.4

Poultry


National

4

6

7

8

11



-rural

3

3

4

5

6



-urban

8

10

12

14

17

Aquatic


National

7

10

12

14

19



-rural

5

6

8

9

12



-urban

13

16

19

22

27


Aggregate grain demand, taking projected population growth into account, will reach 504 mmt by 2005, an increase of 21 percent over that in 1996 (416 mmt). Although projected food demand levels off over the later projection period, grain demand will continue to increase in response to population growth and increased demand for red meat, poultry, and fish. Aggregate grain demand is expected to reach 605 mmt by the end of the forecast period (Table 28).

Table 28. Projections of grain production, demand, and net imports (million metric tons), baseline scenario, 2000-2020

Item

2000

2005

2010

2020

Production

458

483

516

571

Net import

6

21

24

33

Demand

464

504

540

605


Food

244

255

263

267


Feed

138

163

187

239


Seed

13

13

12

11


Industry

32

36

41

53


Loss

37

37

37

35


Availability of grain supply: results of baseline projections

Baseline projections predict that China's grain production will gradually fall behind increasing demand. Aggregate grain supply will reach 483 mmt (in trade weight) by the year 2005, an output increase of only 8 percent over 1996.

Production is expected to increase with greater rapidity in the second decade of the forecast period. The resumption of investment in agricultural research during the forecast period will lead to faster growth rates. Aggregate grain production is expected to reach 516 mmt in 2010, an increase of 13 percent over the preceding decade, and 571 mmt by 2020, an 11 percent increase over the 2010 level.

The projections indicate rising grain deficits as the annual growth rate of production falls behind demand. Imports will surge to 21 mmt in 2005 and peak at 33 mmt in 2020 (Table 28).

Alternative scenarios

A number of alternate scenarios were run by altering baseline growth rates of key variables including income, population, and investment in technology to test the sensitivity of results to changes in underlying assumptions. Results indicate that low population growth rates would reduce grain demand, compared to baseline estimates, by 5 mmt, 12 mmt, and 25 mmt in 2000, 2010, and 2020, respectively, and reduce total grain imports to 8 mmt by 2020. If population growth is higher than expected, annual imports are expected to increase to about 15-25 mmt in 2010- 2020. Low income growth reduces projected grain demand from 605 mmt to 560 mmt in 2020. If income grows more rapidly than expected, imports will rise significantly.

Altering assumptions of investment in agricultural research has the greatest impact on production and trade balances. The result is hardly surprising given the large contribution that agricultural research, and the technology it has produced, have made to agricultural productivity in recent years. A one percent increase in the rate of growth of agricultural research (and irrigation) investment from a baseline level of 4 percent (and 3.5 percent) is projected to shift China from an import to an export position by 2020. If, instead, investment falls by one percent, the 2020 production would fall and imports would rise to more than 60 mmt.

Such a high level of grain imports depends on a continuing decline in the growth of agricultural investment (deceleration) and a lack of government response to rising import levels. Agricultural research and irrigation investments have recovered in recent 2 years. Government policy makers have responded to rising grain prices caused by short term tightening of supplies with promises of greater investments in agriculture. The government may choose to look to international researchers for technical products, allowing China time to redevelop its own agricultural research system. China plans a technological transfer programme to introduce advanced agricultural technologies from abroad. Such measures will reduce the expected decline of grain production growth rates and decrease the expected level of grain imports, even if public investment decelerates.

Production, demand, and imports are insensitive to small changes in price trends. Output prices do affect China's grain balance, but the effects are minimal. For every 0.5 percent increase (decline) in the annual projected grain price, imports fall (rise) by 2- 3 mmt. Fertilizer price shifts have similarly small effects; by increasing (decreasing) the projected growth of fertilizer prices by one percent, imports increase (decrease) by 4 mmt. If fertilizer prices are higher than grain output prices, the low output to input price ratio will lead to increased imports to meet the nation's projected deficit. In the medium and short-run high imports would force prices up, offsetting part of the deterioration of the output input price ratio.

Finally, assuming a constant production response to erosion and salinity as environmental degradation increases has little impact on output predictions. Slight increases in erosion and salinity trends (e.g. a growth rate shift from 0.2 percent to 0.4 percent) do not significantly reduce productivity (production would only drop 7 mmt by 2020). Acceleration of erosion and salinity rates would not have substantial impacts until they increase to at least five times current levels, a one percent per year increase in erosion and salinity. Even at such high levels of environmental stress, projected grain imports would only increase to 65 mmt.

Summary

Food self-sufficiency has been and will continue to be one of the central goals of China's agricultural policy. CAPSIM projection model, which incorporates likely future policies and economic development, estimates that, under the most plausible assumptions, China's imports will rise steadily through the next decade. By 2005, imports are expected to reach 21 mmt, stimulated by growing demand for meat and feed grains. Grain imports are predicted to reach 33 mmt in 2020. The on-going recovery of investment in agricultural research and irrigation should sustain supply growth.

Variance of both short and long-term assumptions produces a considerable range of projections. As expected, changing rates of agricultural investment and income growth causes some of the largest shifts of expected imports. Although a few scenarios project high levels of imports, the true risk is smaller than the model suggests, because certain factors may prevent China from overwhelming the world market once adjustments are taken into account.

Issues and challenges


Resource constraints
Technical constraints
Food and agriculture policies

China will neither empty the world grain markets nor become a major grain exporter if government policies remain favourable (see projection results). Instead, China's importance as a world grain importer will grow over the next thirty years, but not to overwhelming proportions. Estimates of net annual grain imports range from 20 to 35 mmt or 4-6 percent of domestic grain demand, a level the Chinese government will likely find palatable.

Estimates of China's net grain imports shift under various scenarios. Relaxing any major policy assumptions or changing factors considered explicitly, such as competition for agricultural water use, the trade-off between importing feed grain and meat, protection of domestic grain production prompted by rising domestic prices, declining returns to investment in agricultural research, the impact of grain and fertilizer market reform on grain production, etc. will have a significant impact on China's predicted food supply and demand. Ensuring the availability of food is only one part of ensuring national food supply. China may face formidable challenges from its growing population (an annual increase of nearly 14 million in the 1990s), inefficient use of limited agricultural resources, technical constraints on food production, and complications in formulating food and agricultural policies that encourage agricultural production and achieve a higher level of national food security.

Resource constraints

Decline of limited agricultural land area

China is an extremely land scarce nation. Total cultivated land in the early 1990s amounted to about 95 million ha. Total cultivated land has been less than 0.1 ha per capita since the 1980s (declining from 0.13 in 1970 to 0.08 in 1996). Although official data may underestimate land area by as much as 30 percent (Crook, 1994), this does not suggest that China's estimated grain yields are low or that China can reduce future grain deficits or become a grain exporter by "realizing" the underestimation of cultivated land. Potential grain yield on "unreported land" is very limited. Recent household surveys conducted in Zhejiang, Jiangsu, Fujian and Yunan provinces in late 1996 and early 1997 indicate that unreported lands are most often marginal, fragile, "corner", or newly reclaimed land and are usually "private plots" planted with vegetables and other minor crops for home consumption. Rural household crop food consumption (i.e. vegetable) may be underestimated if consumption data is based on national production and food balance sheet figures.

Pressure on agricultural land area will increase as competition for land from non-agricultural uses grow, environmental degradation increases, and irrigation water supplies decline. China uses land resources efficiently, and potential for land reclamation or expansion of the land base is modest.

Water shortages in the agricultural sector

The water shortage in China, particularly in the North China Plain and in the Northwest, has become more acute over the last decade and continues to worsen. Rising demand for urban and industrial water poses a serious threat to irrigated agriculture because the marginal benefits of water are generally believed higher in non-agricultural uses. Unless the government specifically allocates water to agriculture, much will go to other sectors. Government technical and engineering projects, most of which started before 1980, have attempted to improve agricultural irrigation. The cost of new irrigation investment has risen rapidly since 1980. Existing irrigation systems perform badly. Many water projects have deteriorated due to waterlogging, salinization, and mining of ground water aquifers. Agricultural productivity growth in irrigated areas has slowed.

Shifting labor to the non-agricultural sector

As rural non-agricultural sectors (industry and services) grow, they create non-cropping and off-farm jobs that lead to large shifts in labor use patterns. Labor use for all crops fell substantially from 1975 to 1994 after steady increases, especially for grain production, from the early 1950s until the 1970s. Rice farmers today use less than half of the labor they used in the pre-reform era (Table 29). Wheat and soybean labor usage has followed suit. Most laborers who remain in the agricultural sector are either elderly or unskilled farmers.

Technical constraints

Research and technology

Although research and technology have played critical roles in the growth of food production in the past, falling public budgetary commitments weaken the research system. Public agricultural research expenditure has presented a declining trend since the 1980s (Table 21). China's agricultural research investment intensity is one of the lowest in the world (Huang and Hu, 1998), though the country's grain yields are among the highest in the world. Further research is required to sustain productivity gains. A recently initiated national seed programme hopes to maintain stable crop yields and agricultural production increases, but a number of issues must be resolved in order for the programme to succeed. These include barriers to entry, allowing markets to set prices, phasing out of subsidies and protecting intellectual property rights.

Table 29. Labour inputs (days/ha) in agricultural production in China, 1975-95.

Year

Rice

Wheat

Maize

Soybean

Cotton

Rapeseed

1975

638

402

375

221

919

453

1980

506

384

360

213

818

442

1985

347

222

270

190

680

317

1990

309

210

259

180

664

288

1995

287

190

240

160

625

252

Sources: SPB (1988-96).
Public agricultural technology extension investment intensity presented a similar trend as that for agricultural research. Agricultural extension investment intensity peaked in 1987 (0.33%), then declined to 0.23% in 1995 (Table 22). Agricultural extension expenditure (at 1990 prices) per extension worker declined from about 4500 yuan in 1986 to only about 3000 yuan in the mid-1990s. A recent CCAP study concluded that more than half of village level extension stations had disappeared or existed by name only in the past 10 years. Extension workers spent only 76 percent of their time on extension work in 1996, about 10 percent less than 10 years ago. Nearly 20 percent of extension workers are considering moving to other organizations or private sectors. Regression analyses show that the most significant factors affecting extension worker's effort (i.e., time allocated to extension work and frequency of visiting farmers) are extension expenditure and wage.

Infrastructure

China's limited grain handling and internal transportation will continue to limit food supply stability in the future. Rail transport, the primary mode of freight movement, is efficient but insufficient to meet transport needs. Shipping grain (i.e. maize) from northeastern to southern China is more expensive than importing it into the south from abroad. The volume of grain stored in deficit areas is greater than would be necessary under improved transport conditions. Short term food production fluctuations in local areas often cause price fluctuations. Farmers may have difficulty selling their produce (in case of a good harvest as in 1996-97) which hurts farmer's production incentives.

Food and agriculture policies

Policies are recognized as an important part of ensuring food supplies, stabilizing the food market, and broadening access to food for the poor. However, there are constraints and challenges in dealing with food production and food security in future.

Land tenure system

China should continue to reform its land contract system. Recent land tenure modifications may not have had much short-term impact on agricultural production and land investment because the institutional and legal framework that the market requires to work efficiently have not been established. The current legal framework for land and other factor and product markets is not well suited to the rapidly expanding increasingly market-based economy.

Water management

The historically vital task of managing water is still important today. The individual household responsibility system initiated in the late 1970s made agricultural production more efficient and accelerated production growth, but has also created a number of water management problems. The breakdown of the commune system led to a decay of water management system. Current water management is commonly believed to be one of the major reasons for increasing water shortage problems, but, to date, it has been largely ignored by reformers.

The irrigation systems show signs of structural deterioration and declining productivity resulting from poor management, unclear water property rights, and inadequate maintenance. Unsuitable operation has damaged the irrigation system. Water use conflicts have expanded beyond agriculture, occurring not only among farmers within the same irrigation district, but also between government departments which fight over the right to manage water, in particular the right to collect water fees and give water withdrawal permits (Cao, 1992).

Investment policies

Reforms have accelerated agricultural growth since the late 1970s, but the new institutional arrangements do not provide adequate incentives for both public and private investment in agricultural infrastructure, research, and extension. The decline in agricultural research investment in the late 1980s weakened the base of future productivity gains, at least over the medium term. During the rural reform period, the government faced the challenge of improving the education and technological capabilities of millions of farmers. Given the importance of technology to agricultural production, policy makers should ensure strengthening research, education, and extension receive high priority. The government has initiated several programs, including the Harvest Plan, but all are constrained by increasingly short funds.

Food price and marketing

After nearly two decades of reform, the grain bureau still requires farmers to deliver specified quantities of grain. The Provincial Governor's Grain Responsibility System (Rice Bag) policy initiative made provincial governors responsible for balancing provincial grain supply and demand, with focused concern on urban residents. The responsibility has been transferred to lower jurisdictions and appears to create inefficient resource allocation.

The grain market reform initiated in 1998 has led to a wide debate among economists and policy analysts on the ability of the new grain marketing system in stabilizing domestic grain market and in improving grain market competition. While it is too early to evaluate the impact of these new grain market reforms on grain production, price and marketing, several key issues have been raised by researchers.

Input price and marketing

Although food prices stabilized in 1996-1997, the prices of agricultural inputs have continued to increase at a rate higher than overall price inflation. Chemical fertilizer drives agricultural input price increases. Reformers took this as an indicator of the failure of the fertilizer liberalization policy, and so initiated the fertilizer market retrenchment policy in 1994.

There is little evidence to indicate that fertilizer market retrenchment policy has had the desired effect. Fertilizer prices continue to rise at a remarkable rate. The retail price of urea reached 1600 yuan per ton in most parts of China in 1994 and more than 2200 yuan per ton in 1996, compared to the 1400 yuan per ton "ceiling price" set by the government. The situation raises several questions: Is recent fertilizer price inflation related to private sector participation in the fertilizer market, state monopoly market and trade policies, manipulations of private traders, or supply deficits due to domestic production and trade policies?

Trade

External trade policy has cycled through periods of liberalization and retrenchment. In 1992, the government delegated partial responsibility for international grain import/export transactions to provincial authorities. Concurrently, the government reemphasized licensing and control measures for major food commodities (grain).

Other important issues include the costs and benefits of importing feed grain and livestock, trade management system reform, and coordination of production, domestic trade and international trade. As consumption of livestock products increases, it becomes more important to know whether importing livestock products is more efficient than growing or importing feed grain to produce livestock domestically. Lack of coordination causes conflicts between domestic and international trade, production and marketing arrangements, and input and output policies.

Poverty

Since the late 1970s China's poverty alleviation policies have been largely successful. Further reduction of poverty has proven difficult due to wide dispersion of poor populations in remote upland areas, fiscal constraints in raising fund for the poor area investment, and the increasing income gap between poor areas and the developed coast. Rapid poverty reduction through rural and agricultural growth was largely exhausted by the end of 1984. The annual reduction in the poverty population declined from 28.5 million in 1978-84 to 2.58 million since 1985 (Table 23). The population in absolute poverty dropped by only about 31 million after 1985, leaving 58 million in poverty in rural areas in 1996, and accounting for 6.7 percent of the rural population. Most of the remaining poor are trapped in remote upland areas, implying that the marginal cost of poverty reduction is rising. Resources for the poor area fund need to be reviewed and increased.

On the other hand, investment priorities should be reviewed and evaluated. There is growing concern for investment portfolios in the poor area, efficient resource allocations, and targeting the poor. If the goal is to increase productive use of labor and hence the income of the poor, the most abundant asset in the poor areas, the most important asset to invest in is labor itself (through education and health). The importance of education in the poor areas is shown in Appendix Table 9. The quality and quantity of human capital must be built up. In addition, the productivity of factors which are complements of labor (i.e., infrastructure, land, and technology) must be improved or expanded.

Concluding Remarks

China, the world's most populous country, is highly recognised for its ability to feed over 20 percent of the world population with only about seven percent of the world's arable land. Despite extremely limited natural resources and a population that has doubled over the last four decades, per capita daily availability of food, the status of household food security, and nutrition have all improved significantly. Increased domestic production is almost solely responsible for increased per capita food availability. The growth of agricultural production since 1950, particularly after 1970, is one of the main accomplishments of China's development and national food security policies. China's experience demonstrates the importance of technology changes, institutional reform, incentives, rural development, and sector specific policies to ensure the adequacy of food supply through domestic production.

China's research system has produced a steady flow of new crop varieties and other technologies since the 1950s. The robust growth of China's stock of research is in large part responsible for its dramatic agricultural growth rates. Improved technology has been the largest factor, by far, behind grain production growth, and as such is a major source of increased food availability in China. Institutional reform and alteration of farmers' incentives have also brought significant agricultural production growth. Irrigation is another important determinant of China's agricultural growth in recent decades.

China's experience demonstrates that strong rural economic growth is a key element of absolute poverty reduction. Broad participation in rural economic growth reduced absolute poverty between 1978 and 1985. The country has successfully created jobs, both farming and non-farming (particularly in rural industry), for rural surplus labor since the early 1980s. Diversification of production and development of rural enterprises (TVEs) raised farmers' incomes and improved rural living standards.

Policies, including the grain reserve system, strong disaster relief programs, and large scale food-for-work schemes, have contributed substantially to the stability of China's food supply and access to food for the poor. China's experience also demonstrates the importance of relations between economic growth, political and social stability, and food security in a large country whose economy is undergoing fundamental adjustment and growing rapidly. Maintaining a relatively high level of food self-sufficiency is desirable in terms of both domestic and global food security.

Food self-sufficiency has been and will continue to be the central goal of China's agricultural policy. The Ninth Five Year Plan for 1996-2000 and the National Long Term Economic Plan both call for continued agricultural production growth, rising rural income, continued high levels of food security, and the elimination of absolute poverty. The strategies to achieve the above targets include:

The projection results, which incorporate recent policies and economic trends, show that China will neither drain the world grain markets nor become a major grain exporter. Instead, China's importance as a world grain importer will increase over the coming decades. China's growing grain imports will benefit grain exporting nations in the short run, especially those selling wheat and maize. Net grain imports over the next 3 decades are likely to be between 20 and 35 mmt annually. Accelerating demand for meat and food grains and slow agricultural growth due to reduced investment are the major reasons for increased food import projections. China's grain economy is increasingly animal feed oriented.

China may face great challenges in feeding its growing population and maintaining high level food security in the coming decades if future policies do not further these goals. It will need to import 70-80 million tons in the worst case scenario. Other scenarios are less dramatic. China has the capacity to feed its people; whether it is able to do so is a matter of economics and the government's willingness to invest. There is reason for optimism, but there is also reason to worry.

Areas of growing concern include efficient use of limited agricultural resources, overcoming the technical constraints to increased food production, and complications in formulating food and agriculture policies that will increase domestic agricultural production and national food security.

China is land-scarce and is short of water. Competition for land and water from non-agricultural uses, further environmental degradation, and declining efficiency as a result of poor land and water management can only worsen land and water supply problems. Increased opportunities in the non-cropping and off-farm sectors have prompted agricultural laborers to move to the non-agricultural sector. Policy makers have not yet addressed key issues including the unbalanced use of fertilizer, the inefficiency of the state monopoly in fertilizer market and distribution system, and (to some extent) fertilizer import policy.

The recent decline of the government's budgetary commitment to research has weakened the system. The agricultural technology extension system needs to be strengthened. Development of an efficient seed industry is not without roadblocks as appropriate supporting institutions (i.e. eliminating entry barriers, allowing the market to set prices, phasing out subsidies, and protecting intellectual property rights) take time to mature. The signs of poor land/water management and unclear land/water property rights have started to show in the form of structural deterioration and declining productivity. A better incentive system is needed to encourage both public and private investment in agriculture. Limited grain handling and internal transport capacity will be one of the predominating constraints shaping China's economy.

After nearly two decades of reform, the grain bureau still requires farmers to deliver specified quantities of grain. While it is too early to evaluate the impacts of 1998 new grain market reforms on grain production, price and marketing, issues related to the ability and willingness of local government to hold sufficient buffer stock for price stabilization need to be addressed. China has taken great steps to alleviate poverty since the late 1970s. Further poverty reduction has proven difficult because the remaining population in absolute poverty is widely dispersed in remote upland areas. Although nutrition has improved over the last two decades, malnutrition remains.

In sum, China is generally capable of solving its food problems. The government may play a substantial role in improving both national and global food security. Full knowledge of present policies and their impacts on food production, stability of supply, trade, and household food security are essential to design appropriate policy measures and the institutional framework to improve food security. China's agricultural polices and their economic impact are of interest also to the rest of the world as the country is integrated into the world market.

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[19] Nutrient availability is based on a food balance sheet which may underestimate grain for feed use, so figures in Table 1 are larger than those in the following figures based on a food nutrition intake survey
[20] These include the State Education Commission, the State Science and Technology Commission, the Agricultural Bank of China, the People’s Bank of China, and the Ministries of Civil Affairs, Finance, Agriculture, Labor, Domestic Trade, Water Resources, and Public Health

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