1 STRUCTURAL ECONOMIC CHANGES IN CHINA AND VIETNAM: POLICY ISSUES AND CONSEQUENCES FOR AGRICULTURE Clem Tisdell Professor Emeritus School of Economics The University of Queensland Brisbane Queensland Australia 9 th Biennial Pacific Rim Conference of WEAI, April 26, 2011

2 1.INTRODUCTION Market reforms began in China and Vietnam in their agricultural (rural) sectors and then spread to the rest of their economies. Agricultural reforms were the catalysts for restructuring the entire economies of China and Vietnam. Although agricultural reforms were the prime movers for restructuring these economies, changes in agriculture are now being driven by developments in the other sectors of these economies. Consequently, developments in their agricultural sectors must be analyzed in an economy-wide context.

3 1.INTRODUCTION Therefore, in this paper I consider: The urbanization of China and Vietnam and trends in the sizes of their major economic sectors. Factors influencing the movement of agricultural workers to urban employment. Structural changes within the agricultural sectors of these economies. The vexed question of whether policies should favor the development of large-scale commercial agriculture and discourage small scale household production.

4 2.URBANIZATION Since beginning their market reforms, both China and Vietnam have experienced rapid urbanization. Almost 50% of China’s population resides in urban areas and this is just under 30% for Vietnam. Rural-to-urban migration is continuing rapidly. China’s urban population is expected to exceed its rural population in the second part of this decade.

5 2.URBANIZATION Why is China more urbanized than Vietnam? Reasons include: –China began its market reforms almost two decades before Vietnam –China may have a greater comparative advantage in urban-based industries than Vietnam –China’s policy of promoting town-and-village enterprises provided an important stepping stone for rural-to-urban migration.

6 3.CHANGED IMPORTANCE OF MAJOR SECTORS Following their market reforms and increased openness, both China and Vietnam have experienced rapid and sustained economic growth accompanied by rising per capita incomes. The relative importance of their agricultural sectors for employment and in contributing to GDP has declined significantly whereas that of the industrial and service sectors has grown substantially. Nevertheless, Vietnam remains economically more dependant on agriculture than China. In 2008, agriculture employed almost half of Vietnam’s labor force compared to just under 40% of China’s labor force, and it accounted for 22% of Vietnam’s GDP compared to 9.6% for China.

7 4.EXITING AGRICULTURE FOR URBAN EMPLOYMENT Surplus agricultural labor has been a problem in China and Vietnam but exiting agriculture for urban employment involves transaction costs. These costs reduce labor mobility but have largely been ignored in economic theory, e.g. the theory of Lewis. Some relevant theory is outlined in this paper. These costs are policy relevant. A barrier (amongst others) to farmers quitting agriculture in China and Vietnam is an inadequate market in agricultural land. Availability of non-farm employment near a farmers residence is an enticement to shift to non-farm employment – it minimizes transaction costs.

8 4.EXITING AGRICULTURE FOR URBAN EMPLOYMENT China’s policy of developing town-and-village enterprises facilitated switching of its rural workforce from farming to non-farm employment because the transaction costs of switching were low. In 2005, 42.6% of China’s rural workers were in non-farm employment; much higher than in Vietnam because Vietnam did not emphasize the development of town-and- village enterprises. However, non-farm rural employment is now rising in Vietnam Although many of China’s town-and-village enterprises are unlikely to be economic in the long-run, they have made a valuable contribution to China’s economic adjustment.

9 5.STRUCTURAL ADJUSTMENT IN AGRICULTURE Apart from labor movements out of agriculture, two important changes have occurred in the structure of agriculture in China and Vietnam. These are: –An increase in the relative size of the livestock sector compared to the crop sector. –A dual system of agricultural production involving supplies from small-scale household producers as well as from larger scale commercial producers. The demand for livestock products is more income elastic than that for products derived from crops. With rising per capita incomes in China and Vietnam, demand has, therefore, shifted in favor of livestock products. Therefore, the livestock sector has grown more rapidly than the crop sector

10 5.STRUCTURAL ADJUSTMENT IN AGRICULTURE It is also true that farmers have greater freedom in China and Vietnam to adjust the composition of their production than in the past. They are, therefore, more responsive to market forces than previously. The increased demand for livestock products has outstripped growth in domestic supply and their prices have escalated. Imports of coarse grains for livestock food have risen because demand for fresh meat limits imports of meat. Increased prices of livestock products, such as pork, are of concern to policy-makers in Vietnam and China.

11 6.HOUSEHOLD AGRICULTURAL PRODUCTION VS. COMMERCIAL Small-scale household producers still account for the major share of agricultural production in China and Vietnam. For example, household producers in Vietnam accounted for 90% of Vietnam’s pork production in In 2006, most Vietnamese households keeping pigs had one or two pigs, and over 80% had 5 pigs or less. Nevertheless, the number of larger scale commercial agricultural producers is increasing. Some policy-makers e.g. in Vietnam, believe that household production is inefficient and favor policies to expand commercial production. These policy-makers also predict that this expansion will curb increases in the prices of livestock products.

Small-scale household pig farm versus large- scale commercial farm in Vietnam.

Small-scale cultivation versus large-scale cultivation in China

14 6.HOUSEHOLD AGRICULTURAL PRODUCTION VS. COMMERCIAL Given the low opportunity cost of household agricultural labor, supply of agricultural products by households remains efficient in transition. But with expanding demand for livestock products, some supply by commercial producers is also efficient. With continuing economic development, the opportunity cost of household labor will rise and agriculture will become more commercialized. The following figure is used in my paper to illustrate the efficiency of a dual agricultural system during economic transition.

15 $ P2P2 P P1P1 O X1X1 X2X2 X3X3 X D1D1 D1D1 A B D2D2 D2D2 E1E1 C E3E3 E2E2 F Quantity of agricultural product Figure 3An illustration that with rising demand for an agricultural product, it becomes economic for a growing proportion of it to be supplied by commercial producers. In this case, household production remain economic and actually increases as demand for the agricultural product rises. 6.HOUSEHOLD AGRICULTURAL PRODUCTION VS. COMMERCIAL

16 7.CONCLUSION Since beginning their reforms both China and Vietnam have experienced a large decline in the relative contribution of agriculture to their GDP and employment. This decline is more marked in China’s case than Vietnam’s. Impediments still exist to the exit of farmers from agriculture but the development of town-and-village enterprises by China was effective in inducing many farmers to take up non-farm employment.

17 7.CONCLUSION Significant structural change has occurred in agriculture in China and Vietnam. A major change has been a substantial increase in the size of the livestock sector relative to the crop sector. The reasons for this were mentioned. However, in these countries, increased supply of livestock products has not kept pace with rising demand and their real prices have risen considerably. Some policy-matters blame the heavy dependence of agriculture on household producers for this.

18 7.CONCLUSION Policies to favor and subsidize large scale commercial livestock production have been proposed by some Chinese and Vietnamese policy-makers on the grounds that commercial producers are more efficient, more able to expand supplies and limit price rises than are household suppliers. But as demonstrated in my paper, in transition, commercial agricultural producers are not likely to be more efficient from an economic point of view than are households.

19 7.CONCLUSION In transition, there can be economic value in having both types of agricultural suppliers; household and commercial ones. With continuing economic growth, household agricultural producers will tend to disappear. Market intervention in favor of commercial agricultural producers is unnecessary in this case and is likely to be inefficient.