China’s Agriculture and the Path Towards a Modern Industrial State

Scott Rozelle, Stanford University

Jikun Huang, Center for Chinese Agricultural Policy

Transformation Path

Percent of Pop’n in Ag. Sector

Income per Capita World Development Report

Overall Increase in Off­farm Work

0%

20%

40%

60%

80%

100%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

off-farm busy season part time farm only

In 2000: 45% of rural labor force have jobs off the farm … more than 80% of households have at least 1 person working off the farm

In 1980: only 4% worked full time off the farm

>50%

2006

Percent of Workforce Off­farm, by Age Range

Age Range 1990 2000 16­20 23.7 75.8 21­25 33.6 67.2 26­30 28.8 52.5 31­35 26.9 47.6 36­40 20.5 43.3 41­50 20.8 37.6

2006

85­90% 85­90%

> 70%

Migration­fastest growing segment

0%

4%

8%

12%

16%

20%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Percent o

f Total W

orkforce Migrant

Wage Earners

Self employed

TVE/Local wage earning local

migrant

0%

4%

8%

12%

16%

20%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Percent o

f Total W

orkforce Migrant

Wage Earners

Self employed

TVE/Local wage earning local

migrant

Self employed also growing fast … sign of healthy growth or break down of formal wage sector?

In 2000: > 80 million people work in these micro­enterprises (or should we call them nano­firms—1.4 persons/firm

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1980 1985 1990 1995 2000 2005

Proportion of self employed

Trade/Transportation/ Enterprise

Handicraft

Custom labor provider/services

While in some countries the rise of a self­employed sector is seen as symptomatic of the failure of the formal wage sector, in China there is evidence, the self employed sector is healthy, growing and increasingly sophisticated …

Relatively capital intensive … growth rate of profits and capital stock exceed that of TVEs

From petty traders and marginalized street vendors …

... to manufacturers and …

… to high­end tradesman!

Hourly Earning for Self Employment and Wage Jobs

Mean Medain Std. Dev.

Wage Earning 2.0 1.4 3.9

Self Employment 7.8 2.4 36.8

Hi return Hi Risk

Hourly Earnings for Self Employment and Wage Earners

Self employed rural enterprise employ nearly 100 million people in 2005!

Therefore, it can be seen self employment is entrepreneurial; employment­creating; and engine of growth …

Per capita income in rural Average:330%; Bottom 10%:180%; Top 10%:407%

­500

500

1500

2500

3500

4500

5500

6500

7500

1980 1985 1990 1995 2001

Average

­500

500

1500

2500

3500

4500

5500

6500

7500

1980 1985 1990 1995 2001

Botton 10% Top 10%

Transformation Path

Percent of Pop’n in Ag. Sector

Income per Capita

Since 1980 … China has clearly begun the path of transformation …

But, with still only about 40 percent of population in urban areas … if it is to continue to be successful in developing … it needs to necessarily continue to move along this rural­urban transformation path …

Necessary but not Sufficient • Shifting labor to off farm sector / shifting population from

rural to urban is necessary … key is job creation in cities in industrial/service sectors

• But not sufficient … – Need to make sure those who are left behind are taken care of … – Need to make sure those who do not get jobs off the farm are being

invested in … – So: process can continue … – And, so: there is stability …

• Here is where the Role of Agriculture comes in … the poorest are still in agriculture … Agriculture is going to provide a large part of the resources for the remaining rural households to make the transformation ..

Goal of Rest of Presentation • Can China’s Ag/Rural Economy Continue to Grow and Overcome the Problems Inherent in any Long­run Development Process?

– Environment for Continued Growth

– Potential Constraints to Growth of Rural Economy

– Responses

Environment for Continued Growth

• Technology • Domestic Markets • International Trade

Does China have the “technology tools”?

Agricultural Productivity and the Technology that is Driving it

TFP for Wheat in China, 1979­95

50

80

110

140

170

200

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

First 7 year period: > 7% annually

Since 1985 … 2% per year

Growth of Wheat, Rice and Maize TFP in China, 1979 to 1997

Rice

Wheat

Maize

TFP for Wheat in China, 1979­95

50

80

110

140

170

200

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

First 7 year period: > 7% annually

Since 1985 … 2% per year

Rice

Wheat

Maize

What about after mid 1990s?

… and beyond … TFP Growth Rates of Grains and Cotton (1995­2004)

0

1

2

3

4

5

Early Indica

Late Indica

Japonica Wheat Maize Soybean Cotton

TFP

Jin, Huang and Rozelle, 2007

Percent per year

Contributions to Productivity

• Before 1984: – MOST: property rights reform (decollectivization) – SOME: technology – a bit to extension and education

• After 1984 – ZERO: property rights reform (decollectivization) – a bit to market emergence and education – none to extension – MOST to technology

Contributions to Productivity

• Before 1984: – MOST: property rights reform (decollectivization) – SOME: technology – a bit to extension and education

• After 1984 – ZERO: property rights reform (decollectivization) – a bit to market emergence and education – none to extension – MOST to technology

Yield “Frontier” of Rice, Wheat, and Maize,

0

2000

4000

6000

8000

10000

12000

1982 1984 1986 1988 1990 1992 1994 1995

Tons per Hectare

Rice Wheat Maize

Sown area weighted of sample provinces Sown area weighted of sample provinces

Rise of “Yield Frontier” in China’s Experiment Stations for Rice, Wheat, and Maize

Around 2 percent per year growth

Average Variety Turnover

0

0.1

0.2

0.3

0.4

0.5

1983 1989 1995

Rice Wheat Maize

All varieties turnover every 2 to 5 years!!!

Varietal Turnover in China’s Agriculture, 1983 to 1995 (proportion of area planted to new varieties)

Agricultural research investment intensity (%) in China

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Plant biotech research expenditure (million yuan in 1999 price, 22 institutes)

0

10

20

30

40

50

60

70

80

90

100

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

Total­­1999: $100 million US

Total—2003: $300+ million

Bt cotton areas in China, 1996­2003 (thousand hectares)

0

500

1000

1500

2000

2500

3000

1996 1997 1998 1999 2000 2001 2002 2003

More than 5 million farmers adopted Bt cotton in 2003

Major findings on Bt cotton impacts in 1999­2001 (per hectare)

• Reduce pesticide use: 34 kg 923 yuan • Increase yield: 9.6% 930 yuan • Increase seed cost: 570 yuan • Reduce labor input: 41days 574 yuan

• Increase net income: 1283­1857 yuan (US$ 155­225)

A net increase of about 20­ 30% … this is a HUGE increase in productivity!

How good are China’s Domestic Markets?

Corn and Soybean Marketing Regions and Flows

Distance from port

y = ­0.0002x + 2.0022 0 1 2 3 4

0 500 1000 1500 2000 2500

km

Price (yuan)

Changes in corn price across China as markets increase its distance from port, 2000

Port—New Orleans

Location of Major Corn Markets in Greater Mississippi Valley

St. Louis

U.S Soybean (1985) price

480.00

490.00

500.00

510.00

520.00

530.00

540.00

550.00

560.00

570.00

580.00

Sample markets: distance from coast

Price ($/100

bu)

US Corn Prices

Percentage change in price for every 1000 kilometers of distance from port

8% ­3.5% ­5% US – 1998

­7% ­4% ­3% 2000

­9% ­9% ­4% 1999 ­10% ­10% ­4%

China 1998

Rice Soybean Corn

Dalian

Guangzhou (Shekou Port)

Soybean Market Integration between Regions

­4.83* ­4.33* ­4.01* ­3.93* ­4.84* ­5.87* ­5.36* 1996

­3.84* ­3.82* ­3.21* ­4.15* ­5.21* ­4.33* ­3.88* 1997

­4.02*

­4.84*

AH=> NX

­ ­ ­ ­ ­3.73* ­3.57* 1999

­4.05* ­4.85* ­4.67* ­4.72* ­5.56* ­4.13* 1998

GD=> GS

GD=> SaX

HLJ=> DL

JL=> TJ

AH=> SaX

AH=> SD

Year

Dicky­Fuller Test critical value rejecting null of no integration @ 5% (10%) level is ­3.3 (­3.0)

Integration in China’s Markets (percent of market pairs that have integrated price series)

95

93

1997­00

98

100

2001­2003

46 Corn

56 Soybean

1991­92

More than (45*44)/2 = 800 pairs of markets

Percent Grain in Sown Area in China: 1950s, 1970s and 2003

1970s

2003 Grain

Grain

Other

Other … including horticultural producers

Steady rise in cash crops / fruits / livestock / aquaculture

Other

Grain

1950s

Rise of specialization (entire nation)

• In a recent survey of 650 communities in China, we asked the leaders: – Do farmers in your village specialize in the production of a field crop, tree crop or livestock commodity? 0

5

10

15

20

25

30

35

1995 2004

Data source: China National Rural Economy Survey (CCAP) 56è61è73

International Trade

… and: Falling Barriers and Opening to the Outside World

­20

0

20

40

60

80

100

78­79 80­84 85­89 90­94 95­97 98­99 26­Jun

Rice Wheat Maize Soybean

Huang, 2001

including WTO’s Accession

China has one of most liberalized tariff schedules in the world

Growth in International Ag Trade

0

5

10

15

20

1980s 1990s > 2000

Percent P

er Year

• Exports > Imports – Between 1982 and 2006, only 2 years in which Im > Ex (2005/2006)

– 2007: Ex > Im

• China is now the 4 th largest ag trading nation in the world

-10000

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

12000

1985 1987 1989 1991 1993 1995 1997 1999 2001

Land Labor

Agricultural Trade Balance by Factor Intensity, 1984 to 2002 (mil US$)

Labor intensive crops

Land Intensive crops

Net exports

Imports – soybeans, cotton, hides

Exports – fruits, meats, aquaculture

Summary

• Some of the basic foundations of a supportive environment exist for continued rural growth:

– Technology for raising technical efficiency / expanding productivity

– Markets for raising allocative efficiency / gains from specialization

– Gains in Domestic / International Market Liberalization

But, there are problems …

• Small Farmers

• Scarce Land (and falling??)

• Scarce Water

Small Farmers and Lack of Organization

• Since 1950, China’s average size of farm has fallen …

• between 2005 and 2006, first year average farm size rose

Growth of Cooperatives and Farmer Associations – Targeted mostly at provision of

technology and inputs and marketing

0 10 20 30 40 50 60 70 80 90 100

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Index (2003=100)

And, these small farmers are mostly “on their own”

Cooperative movement still small

Percent of villages with Cooperatives / FAs

Percent of households that belong to Cooperatives / FAs

8 % 2 %

In Greater Beijing: only 4% of villages had cooperative / only 8% of farmers (China Horticulture Survey)

Comparing with other nations: Percentage of Households Participating in Coops/FAs

0

20

40

60

80

100

US (early 1900s)

Japan (1950s)

Korea (1970s)

China (now)

Loss of Cultivated Land?

[Shenzhen in 1980 and 2000]

Production + import trends

PLUS pictures such as these …

Land use maps by six categories in 1985

Cultivated land (paddy + upland)

Forestry area Grassland

Water area Built up Area­­BuA Unused land

Land use maps by 6 categories in 2000

Cultivated land (paddy + upland)

Forestry area Grassland

Water area Built up Area­­BuA Unused land

Area converted from cultivated land to other land use categories (1988 to 2000)

But, conversion is a “two­way street”

Area converted to cultivated land from other land use categories (1987 to 2000)

Accounting for changes in cultivated land in China, 1988 to 2000

+ 5.7 million ha ­ 3.0 million ha 2.7 million ha (NET GAIN)

[ + 1.9%]

Between 1988 and 2000, China actually experienced a net increase in cultivated area … different than Ministry of Land Resources

From other uses to farm land

From farm land to other uses

0 5 10 15 20 25 30 35 40 45

1 2 3 4 5 6 7 8 9 Eco­environment degree

%

Comparing the change of “quality” of cultivated land that was converted to other uses with the “quality” of newly expanded cultivated area in China, 1985­2000.

Final Result: Decrease in “quality”: around 0.5%…

Lost cultivated area

New cultivated area

Using Eco­Environment Measure

China’s Water Problems

• They are severe … in some places … and loom as a serious constraint …

• Groundwater table falling steeply … but, only in 8% of northern China (about 4% of China’s arable land area)

• But water quality is improving …

Recent Responses:

The “tidal wave” washes into Rural China

• Public Infrastructure Investment

• Subsidies

• Other Programs

Composition of investment projects public vs. development

13%

87%

Total number of projects in sample

9,138 projects (in 2459 sample villages)

Development Projects

Public goods investments

Most of projects in rural China now focus on the provision of public goods … different than the 1980s

Nearly 4 per village during the study period … or almost 1 per year

Type of PUBLIC GOODS projects

Around 2/3rds of public goods investments into 5 types of projects

Clinic, 3 Drinking water, 11

Irri., 14

Schools, 14

Roads, 21 Other

public projects,

37

11

Rising Investment Over Time (100 village study)

• Nearly all villages experienced rising investment into public goods

• Poor received greater increase, absolutely and in percentage terms

• In 2004, per capita investment almost US$100/capita 2004 0

50

100

150

200

250

300

Richer Villages

Poorer Villages

2000

2004

2004

2000

Yuan / year

Table4. Determinants of number of public goods projects at village level between 1998 and 2003 Dependent variable: Number of public goods projects

Population weighted

Tobit

Targeting factors Net per capita income, 1997 (yuan) 4.10e­08 ­0.00014

0 ­1.22 Net per capita income square, 1997 (yuan) 1.66e­08 0

0.7 (1.88)* Percent of minority population 0.002374 ­0.00291

0.79 (1.86)* Percent of hilly land over 25 degree 0.007085 0.002949

(3.64)*** (1.91)* Distance from village committee to township seat (km) 0.011216 ­0.01641

0.97 (2.06)** Distance from the village seat to the nearest road (km) ­0.01607 ­0.00658

(3.81)*** (1.96)* Total population, 1997 (person) 0.00021 0.000271

(3.57)*** (6.34)*** Distance between two most distant small groups within this village (km) 0.002905 0.039351

0.2 (2.93)*** Demand side factors Number of collective enterprise 0.107772 0.074373

(2.75)*** (2.67)*** Percent of self­employed households 0.026779 0.019392

(3.28)*** (3.65)*** Percent of migrant labors ­0.00576 ­0.00572

­1.48 (1.96)* Per capita land (mu) ­0.04014 ­0.02637

­1.39 ­1.33 Percent of effectively irrigated land ­0.00685 ­0.00866

(3.95)*** (6.66)*** Other factors Number of fellow villagers with township­ above governments, person 0.030891 0.020646

(4.12)*** (3.94)*** Village head turnover, 1998­2003, 1=yes,

0=no 0.22298 0.102749

(1.71)* 0.97 Village head occupation prior to office: 1=fulltime farmer, 0=not 1 ­0.21257 ­0.16451

(1.88)* (1.75)* Schooling of village head, year 0.003529 ­0.01813

0.14 ­1.07 Party secretary occupation prior to office: 1=fulltime farmer, 0=not 1 ­0.10934 ­0.06384

­0.93 ­0.66

Determinants of Public Investment

Summary on Investment Spending: Where? To Whom?

Determinants, investment in public goods from above: – Poor

– Minority

– Smaller

– Remote

– Mountainous villages

it is almost as if leaders were following a blueprint drawn by development economists … progressive and well­targeted

Rising … But Still Not Enough! Total Spending: China versus Japan/Korea

0

100

200

300

400

500

Japan­­ 50s

Korea­ 80s

China­ 2000

China­ 2004

Total Inv./Capita (US dollars, PPP terms

New Subsidy Programs

New Subsidy Policies in 2004 (source: ERS China team)

Policies Estimated Cost

Direct Subsidies $5 billion (PPP terms) to Farmers

Agricultural Tax Reduction $5­10 billion

Input Subsidies $200 mil.

China also eliminated more than 2 to 3 billion US in exports subsidies (for cotton and maize??) …

But, Doubled Size of Program in 2005/06

• $15 per acre (at nominal exchange rates)

[$60 per acre in PPP terms]

• Can they continue?

• Below 4 percent gross value of production [China is allowed 8.5% percent by WTO rules]

Source: our own survey

Higher in 2007/2008?

Tax Reduction Program Completed

• Completely eliminated taxes

• Farmers now pay no taxes or fees

• No grain quota 0

2

4

6

8

10

2003 2007

0

8.1%

Percent of Value of Output

Other New Programs

New programs to upgrade rural education …

All compulsory education (grades 1­9) is now tuition free …

• Nascent Rural Health Insurance Program

• Even More Nascent Rural Social Security Program

Gradual improvement in rural governance …

Every three years there are nearly 1 million village elections in China …

… increasingly formal and more and more competitive

Final Summary

So where is China? What does it need to do to keep moving?

Percent of Pop’n in Ag. Sector

Income per Capita

Stage 1 – Development Strategy

• Get Property Rights Right (1978) • Get Technology Right (1980s/1990s) • Get Prices Right (> mid­1990s)

– Inside the domestic economy – Across international borders

Summary of this presentation: China is doing this well … mostly … so far

What do they need to do in next stage?

Transformation of Agriculture – Stage 2 In the longer run, the challenge may be more complicated!

Commodity Markets

Increase specialization

Raise allocative efficiency

New Technology/Investment

Increase output / unit of land

Raise technical efficiency

Mechanization

Substitute for ag labor

Raise labor productivity

Cultivate Land Rental Mkts / Tenure issues

Increase land quantity

Raise labor productivity

Continue!

Stage 2 (continued)

Stage 2

Added Challenge

Needs a lot more investment 4 times this years … and do for 25 years in a row!

0

100

200

300

400

500

Japan­­ 50s

Korea­ 80s

China­ 2000

China­ 2004

China­­ 2020?

Total Inv./Capita (US dollars, PPP terms

The REAL CHANGE in AG

• Cornè Fuel …

• Things will be very good for all of those that have land in the future …

• Farmers are now in the Energy Business!

• Probably more important than anything the gov’t will do!

Thank you