Innovation and Economic Development in Rural China Jikun Huang Center for Chinese Agricultural Policy, and School of Advanced Agricultural Sciences, Peking University

China: some facts Population: billion ≈ 20% world population Water availability: ≈ 5% of world total Arable land: ≈ 8% of world total Food self-sufficient: ≈ 96% in 2014 Agricultural GDP grew at 4.6% annually in past 35 years

Rural population under poverty (million) 更新数据 国家贫困线 100 元 / 人年 Poverty line 2: 1196 Y/yr Poverty line 3: 2300 Y/yr Poverty line 1

Rural household per capita income (2014 constant price) Sources of farmers’ income (%)

Questions How China has been able to largely meet its growing demand for foods? How China has been able to significantly increase farmers’ income and massive reduce rural poverty? What are the challenges and policy forward?

Agricultural growth: 4 Major driving forces - Innovated institutional reform - Innovating technology - Market reform - Investment in agriculture Raising farmer income and reducing rural poverty - Agricultural growth - Inclusive rural transformation Challenges and policy responses Concluding remarks The rest of presentation

Total Factor Productivity for rice, wheat and maize in China, (note: similar trends for other products) Rice Wheat Maize Institutional change (decollectivization, allocated land equally to all households in each village) was a major source of growth in Huang and Rozelle, JDE, 1996; Jin, Huang and Rozelle, AJAE, 2002

Total Factor Productivity for rice, wheat and maize in China, Rice Wheat Maize TFP growth at about 2% After middle 1980s, technology has been major factor affecting productivity growth

Total Factor Productivity for rice, wheat and maize in China, Rice Wheat Maize TFP growth at about 2% After middle 1980s, technology has been major factor affecting productivity growth

Source: Jin, Huang and Rozelle Total Factor Productivity Rises Mostly Technical Change (rising of production frontier) … China is already operating efficiently (at frontier) Total Factor Productivity for major crops,

Wholesale market: Consolidation and specialization have also been occurring A key link between the farm and markets

Integration in China’s Markets (% of market pairs that have integrated price series; Note: similar results for rice, wheat and other products) Corn Soybean When using statistical tests (on more than 800 pairs of markets), almost all markets move together in an integrated way, up from only about ½ in the early 1990s (when markets were NOT integrated)

Facilitated agricultural structural change Shift to high-value commodities Better return to household land and labor Helped farmers: cheaper input’s prices higher output prices Market reform

Expansion of irrigated land in China Million ha About 50% of cultivated land Investment into agricultural sector Government budget support (billion yuan in 2008 prices)

Agricultural growth: 4 Major driving forces - Innovated institutional reform - Innovating technology - Market reform - Investment in agriculture Raising farmer income and reducing rural poverty - Agricultural growth - Inclusive rural transformation Challenges and policy responses Concluding remarks The rest of presentation

Average annual agricultural growth rate (%) Population under extreme poverty in rural China (million)

StageMajor indicators 1Primary on staple food production 2Agri. diversification (labor intensive + high value products) 3Rising non-farm employment: 3.1 Farming + part time non-farm employment 3.2 Increasing specialization on farming or non-farm 3.3 Agri. mechanization and more off-farm employment 4Rural urbanization and integrated urban-rural development Pathway and speed of rural transformation

Share of gross value of non-cereal products (%) in Rapid transformation: China, Indonesia and Laos; Vietnam recently Moderate transformation: the rest of Asian developing countries Exceptions: Cambodia and the Philippines Source: Huang and Dong (2016)

Rural transformation: within agriculture (annual change in share of gross value of non-cereal products) and annual rural poverty reduction in 9 countries for the period indicated Source: Huang (2016)

Transformation within agriculture and rural poverty reduction Rural poverty reduction SlowModerateFast Slow AT Pakistan Philippines Cambodia Moderate AT Laos India Bangladesh Fast AT Indonesia China Vietnam

Successful rural transformation has stimulated economic growth and structural transformation Successful rural transformation has stimulated economic growth and structural transformation Economic growth and structural transformation further has enhanced rural transformation and rural poverty reduction Economic growth and structural transformation further has enhanced rural transformation and rural poverty reduction - Labor-intensive industrialization, create more jobs for rural labor, including the poor

Overall Increase in Off-farm Work In 2012 more than 90% of households have at least 1 family member (or son / daughter) working off the farm In 1980: only 4% worked full time off the farm 72% 2012

Pathway and speed of agricultural transformation StagePaths of TransformationMajor IPIs 1Primary on staple food production Institutions (e.g., land) + water infrastructure + technology 2Agri. DiversificationPlus Mkt reform + mkt/road infrastructure 3.1Farming + part time non- farm employment Plus Local SMEs policy in rural 3.2Increasing specialization on farm or non-farm job Plus urbanization; labor & land rental mkt 3.3Agri. mechanization and more off-farm job Plus mechanization, land consolidation etc. 4Rural urbanization and integrated urban-rural development Plus eliminating discrimination between rural and urban in all aspects 1)Institution, Policy and Investment (IPIs) matter 2)Sequence of IPIs matters

Rural population under poverty in China

Rural income per capita in 2011 Difference in regional rural transformation Ratio pf urban and rural income

However, Now China has reached a stage of agricultural and rural development: -- previous challenges intensified -- new challenges emerged

Previous challenges intensified Increased food production has been at the expensive of sustainable development － groundwater over-exploitation; － falling soil fertility; － rising non-point pollution; － rising concern on food safety; － …

Previous challenges intensified and policy responses: agriculture Decision in the late 2000s: bring food safety to policy agenda Decision in 2011: Double investment in water conservancy (630 billion US$) in Decision in 2014: Plan to reduce fertilizer & pesticide uses Decision in 2015/2016: emphasize on production capacity, land/water conservation, and technology… 藏粮于地；藏粮于技

New challenges: Rising opportunity cost of farming labor Manufacturing wages (USD/year) China Thailand India Indonesia China Li et al (2012)

Composition of farm gate price (yuan/kg) Rice Wheat CCAP survey: : 8% of annual growth rate of real labor cost : 10% of annual growth rate of real land rent cost

New concerns and policy responses Rising production cost, less competitive, and food insecurity Large urban-rural income gap Remaining rural poverty Agri. Subsidy (decoupled) Income support - Price intervention  income transfer Land consolidation - Rental market - Support farmers to expand farm size Eliminate poverty by 2020

Concluding remarks: Past successes and experiences Agricultural growth and poverty reduction: - Innovated institutional reform - Innovating technology - Market reform - Investment in agriculture Farmers’ income growth and poverty reduction: - Agricultural growth - Inclusive rural transformation (RT): (IPI matters and its sequence also matter)

Concluding remarks: Challenges and enabling factors Sustainable agriculture Agri. competitive and food security Large urban-rural income gap Remaining rural poverty 4 major experiences learned in the past (IIMI) Emphasize on productivity, production capacity and “two markets” Fostering more inclusive RT Targeted poverty alleviation Lessons from EU: reducing non-pollution, sustainable agriculture and better rural environment

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