1 Impetus for Reform (critical juncture)  Crisis of political legitimacy after death of Mao in 1976  Communist utopia? No!  Economic stagnation Per capita household expenditures  increased only 2.2% per capita consumption of  Grain, cooking oil, meat  lower than in 1950s  Nationalism (wealthy/strong China)? No!  Demonstration effect of East Asian “tigers” South Korea, Taiwan, Hong Kong, Singapore

2 Reforms to improve economic performance could also improve political legitimacy

3 Economic performance in the urban/industrial sector: inefficiencies  Inefficiencies of planned economy extensive development strategy  exhausted (using more and more inputs to produce output growth) 1950s  each 2.5 元 in additional inputs generated a 1 元 increase in output 1970s  each 5.5 元 in additional inputs generated a 1 元 increase in output  Sought efficiencies of market economy therefore, turned to intensive development strategy (using a given amounts of inputs more efficiently to produce output growth)

4 Economic performance in the rural/agricultural sector: inefficiencies  Grain production and procurement

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6  No blue print for reform “groping for stepping stones while crossing the river” 摸着石头过河  Tolerance for experimentation How to improve economic performance? Experimentation as policy approach

7 Deng Xiaoping seizes political opening for pragmatic reforms, starting in rural/ agricultural sector  Initial policy opening 3 rd Plenum of 11 th Central Committee (Dec 1978) marked the beginning of the “reform era”

Video clip  Video clip (10, 27:30-35:10) Ending the Communes China: A Century of Revolution  Part III: Born under the Red Flag, produced in 1997 Points to pay attention to:  How did household farming re-emerge?  Which came first Central directive? Local experiment?

9 Rural Reform: 1. Price incentives  3 rd Plenum of 11 th Central Committee  Primary source document “Decision on… Accelerating Ag Development” Re-introduce price incentives:  Increase price paid by state for compulsory grain procurements from peasants by 20%  Increase price paid by state for above- quota grain procurements by 50%

10 Rural Reform: 2. Household farms  Initial policy opening Unplanned  Did not plan on abolishing communes Addressed local crises  Local crisis in Anhui Wan Li, provincial party secretary  Household responsibility system in farming Evaluated experiment with household responsibility  Successful!  Became official policy Fully implemented by 1983  Wan Li became head of State Agriculture Commission

Rural Reform: 3. End of communes  Commune  Production brigade  Production team  Township  Village  Small group

12 Experimentation as policy approach  Note nature of policy process No “blueprint” Local experimentation allowed  If considered to be successful,  Then implemented on a wider scale “Seek Truth from Facts”

13 Improved economic performance and political legitimacy  Tremendous early success of rural reform Improve quality of life (rural and urban) Increase rural incomes Decrease poverty

14 Improved economic performance and political legitimacy Legitimacy from improved living standards improved rural incomes  rural per cap income incr’ed 70%  almost doubled in 4 yrs % of rural pop with <2200 calories/day decreased from 31% to 13%  cut in half

15 Implications for transition from ag to industry (keep in mind for next topic) Ag reform  Revealed surplus labor For alternative employment in industry  Increased household savings For alternative investments in industry Develop rural industry  2 nd major success

16 Problems emerge after 1984 Budget burden  High grain prices—burden on the state budget state subsidized grain price to urban residents  Policy reaction: slow down price increase weakens incentives for farmers  Farmers shift out of grain production

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18 Incentive problems for farmers Insecure land rights  Rural land is collectively owned by villages (or small groups) Households contract for limited use-rights from the village (or small group)

19 Incentive problems for farmers Policies to make land rights more secure  Household contracts Initial contracts only 1 year Later extended (according to official policy)  Extended to 3 years (early 1980s)  Extended to 15 years in some places (1984)  Extended to 30 years (1995) and allow transfer of land-use rights  Declined to extend to 70 years (2008); declined to allow rural land to be used as collateral for bank loans

20 Results of insecure land rights Disincentive for farmers to invest in  infrastructure—irrigation  long-acting fertilizer Growth, but Declining growth in output and yields by the late 1990s

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Readings  Zhu Keliang What land rights do households have? How close to private property rights?  Zhou Xueguang How much do households rely on markets? How close to a free market economy?

Take-home message  China’s development model What’s the role for private property and free markets in China’s rural, agricultural sector today?  Farm households have more land rights But not full private ownership  Free market trade in ag commodities

Policy debates over farm policy  Ministry of Agriculture Seeks economies of scale Advocates privatization of land  To allow for specialization, division of labor  Other ministries Land as social security  Fear landless peasantry, political instability 26

27 Other problems in rural sector Tax/fee burden on peasant households  To pay for local schools, roads, etc. (rural sector largely “self financing”)  Led to significant rural unrest Rural/urban inequality  Per capita urban incomes now 3x rural incomes  Among most unequal in the world

28 Addressing problems in rural sector Hu Jintao/Wen Jiabao regime puts new attention on rural development  Abolish rural fees (2001), ag taxes (2005)  Increase fertilizer subsidies  Increase intergovernmental fiscal transfers to rural areas to finance basic infrastructure  significant increase in roads, etc. by 2004 to finance rural teachers’ salaries “New socialist countryside” top priority of 11 th FYP ( )

29 Ag and WTO: Crisis or Opportunity?

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31 Ag and WTO: Crisis or Opportunity? Ag tariffs fell to avg 17% by 2004 Liberalize imports of major agricultural commodities Grant foreigners rights to import/distribute agricultural products

32 WTO—global markets Where is China’s comparative advantage?

33 WTO China NOT competitive in grain  Grain: land intensive; China: land scarce  Import grain China IS competitive in other ag products Comparative advantage: labor intensive products  Animal husbandry—pork, chicken  Horticulture—flowers, fruits, vegetables  Aquaculture—fish farming  Processing of ag products—processed foods