I. Introduction
1.1 Remarkable Achievement in the Past
Two decades of reform have changed the economic landscape of China. In the 1990s, per capita grain output reached a level similar to that in developed countries. Many farmers shifted into higher valued crops, making decisions increasingly on market-oriented principles. China's research system has steadily produced new technologies that have raised productivity at almost double the rate of population growth. The nation has by far the most sophisticated agricultural biotechnology program in the developing world — indeed many of its breakthroughs are of global importance. Emerging domestic markets deliver new technologies to farmers throughout the nation and the output of the farmers that use them is being delivered to consumers across ever-widening reaches of the nation. The markets for some agricultural commodities are among the least distorted in the world. Rising food exports demonstrate that China's farmers are now able to compete in international markets.
Off the farm, more than 40 percent of rural residents have employment; about 100 million of them have left home and moved to urban areas for employment — most of them young and eager to make new lives in the city. Rural incomes have risen significantly and hundreds of millions of people have escaped poverty during this time. Growth in agriculture, non-farm employment and rural industry and the transformation of domestic and international markets have changed the face of rural China and are playing key roles in the nation's modernization.
1.2 National Development Goals and Challenges in the New Era
While past accomplishments are impressive, there are still great challenges ahead. With the transition from a planned to a market-oriented rural economy mostly complete, China's main challenge has shifted to one of development. In the coming years, however, the development process will be fundamentally different from the efforts in previous times when meeting the nation's food needs, poverty reduction and economic growth were the main goals.
In China's new environment the main metric of success will be the extent to which the rural economy can become an integral part of the nation's push towards modernization. For China to successfully modernize, the nation's economy will have to experience a fundamental transformation — from rural to urban and from agriculture to industry and services. The necessity of this shift is borne out by the development experience of every other high-income country in the world. There are no middle- or high-income countries in the world that have more than 10 percent of their population engaged in agriculture. Change in this direction is consistent with the nature of China's economy. Land holdings are so small and other resources are so scarce that farming activities alone cannot continue to raise the incomes of most rural households. The challenges are how China can effectively establish linkages between rural and urban areas and encourage the large labor shift out of agriculture.
The new leaders of China have recognized that policy reforms, especially agricultural and rural policy reforms, have vital roles in the success of sustained rural development. The national development goals articulated in the "Five Balanced Development Strategies" are ambitious and a number of the proposed strategies and reforms are bold. However, national leaders also realize that there are many barriers preventing them from achieving these lofty goals. In some cases, factors that contributed positively to the success of China's economy in the past have become obstacles that hinder progress in pursuing the nation's future development goals. The goals are high and the problems are complicated, thus the new government has called for the development of new ideas to help China's economy find rapid and harmonious change. In proposed policy suggestions that are contained in this brief we try to raise (sometimes) new and (most of the time) practical ways that leaders can implement their Five Balanced Development Strategies.
1.3 The Agricultural and Rural Development Task Force
The Task Force was established in 2003 to produce a policy-oriented report with new ideas and recommendations that will help China's leaders to create a vision for agricultural and rural development in the coming years. To this end, the Task Force undertook analyses of a specific set of policy issues of current interest within the Government of China. The mandate of the Task Force was to make policy change recommendations that are consistent with national goals of income growth/poverty reduction and environmental sustainability. Given its prominence in current policy-making and its inextricable relationship with the rural economy, we also examine how the proposed policy changes will affect food security.
II. Assessing the Impacts of Policy Changes
In an ideal world we would be able to measure the rural economy's contribution to the modernization of the overall economy and China's other goals. Unfortunately, no single such measure exists. In this section, we review three metrics that can be used to measure progress towards China's goals.
2.1 Farm Household Income
The continued slow growth of the income of individuals in rural areas compared to those in urban areas is thought to pose a threat to both social and political stability and sustainable development. The growing income disparity between regions and among farmers within regions further threatens the stability of the society. Among the points made in China's new Five Balanced Development Strategies, balanced development of rural and urban economies and balanced development of more-developed and less-developed regional economies are priorities. In such an atmosphere the level of rural income and its growth is one of the most fundamental measures of success.
Key issues in farmer incomes that need to be addressed are:
Can farmers, particularly the poor, benefit from general economic growth so that income disparity between rural and urban, across regions, and among farmers within regions is reduced in the future?
What are appropriate policies for (and their priorities for) achieving agricultural/rural development and the income growth of farm households?
What are the roles of agricultural development and off-farm employment in stimulating the income growth of farm households?
Should China invest its limited fiscal and financial resources on improvement of the quality of rural China's human and physical resources or on income transfer and agricultural subsidies?
What are the roles of marketing and government programs in achieving the goal of balanced income growth?
Can the government develop and encourage new public-private partnerships (for example, by fostering Farmer Associations) to help accelerate income growth and extend it to those in poor areas?
To create a new environment that enables the rural economy to become integrated into the nation's economic development generally it should be recognized that beyond income, the most important policy measures are those that raise the quality of rural China's human and physical resources and accelerate building of the infrastructure within which those in the rural economy operate. With better access to resources rural residents will acquire the skills and abilities to integrate themselves into the nation's industrializing and commercializing cities. These changes will lead to increases in income and consumption of rural residents.
Successful development policy, however, also must recognize that modernization (and long-run income growth) is a slow process that will depend on maintaining a healthy agriculture and rural economy. Rising incomes can fund household investments in education and health and other human and physical assets that will increase productivity in the longer run. While average farm income will continue to grow with the growth of the general economy, income disparity between rural and urban, among regions, and among farmers within regions will increase further in the coming years if appropriate polices and reforms are not implemented.
2.2 The Nation's Grain (Food) Security
Food security is an important national goal. With its unique historic legacy and the nation's large population and limited resources, it is understandable that China's leaders continue to place high priority on food security. Policy recommendations that affect food security, including grain supply security and land protection, are within the Task Force's mandate.
We address this issue, but in a way that does not detract from the pursuit of income in either the short or long run. In fact, since we believe that the traditional way of thinking about national food security is often at odds with the goal of improving rural incomes, we urge the government to reset the priority of food security from current focus of both food and feed grain to food grain only; we also believe policies that seek to improve the access of households, especially poorer ones—to food, when domestic prices are either high or low will be effective in ensuring food security of another kind—that is, household food security. While the government needs to develop some welfare and insurance-oriented provisions in the pursuit of household food security, the best way to meet household food security is by carrying out the same productivity-enhancing policies that are needed for rural income policies, and make sure that they are also targeted at households in poor and vulnerable areas. If these suggestions can be accepted, we show that most rural development policies focused on raising incomes are consistent with food security. In the end we will assess the acceptability of Task Force recommendations on the basis of how well they address these goals.
Key concerns in grain and food security that need to be addressed are:
Is China's food and grain supply security a serious problem now?
Will China's food and grain security be a problem in the future?
What should the focus be in China's food security? All grains or food grains? Should the focus be on national self-sufficiency or ensuring the all household have access to food?
Is the conversion of agricultural land to other uses a serious problem? What impact will this have on China's grain security? Likewise, does the nation's Grain for Green policy (that is, China's effort at implementing the developing world's largest cultivated land set aside program in poor and remote mountainous areas) have a large negative impact on grain food security?
What are the key determinants of China's future grain security? Can China rely on long-term productivity growth for grain security?
How can the nation best manage its grain reserve system?
2.3 Environment
The enormous strides China has made in agricultural productivity, food output, and poverty reduction are remarkable and well documented. However, these achievements have been made at a high cost to the environment. Farm incomes are now under pressure, in part because of degradation of the resource base. Environmental problems include desertification, soil erosion, grassland degradation, salinity on irrigated land, organic matter and fertility loss, burning of crop residues, aquifer depletion, high levels of heavy metals, nitrates and pesticide residues in soils and water, animal wastes and loss of biodiversity. Many of these issues have been addressed by CCICED Working Groups and Task Forces and policy and institutional change recommendations were made to CCICED. Yet, some environmental trends are still in the wrong direction.
Many current policies and practices are impediments to environmental sustainability because of their adverse effects on the land and water resource base. Environmental and economic objectives are frequently in conflict. Technological change, by itself, is unlikely to generate a sustainable agriculture sector. Policies and practices with complementary economic and environmental objectives are needed and are possible.
The ARDTF concentrated its efforts on economic impacts of recommended policy changes as per its mandate. This does not imply that environmental concerns were ignored. However, other Task Forces specifically addressed a variety of environmental management issues. Members of this Task Force cooperated with them.
Key issues in environmental sustainability of agriculture:
Are R&D programs and extension services developing and delivering appropriate technologies and information?
Are public good services in rural China adequate to educate farmers in production technology, marketing and financial management in a market economy?
When there are national and regional programs set up to combat environmental problems, are there sufficient fiscal resources and the institutions in place to implement and enforce the policies?
Are financial services in rural China adequate to enable farmers to adopt environmentally friendly practices and technology?
Are policies and programs available to enable resource-limited farmers to exit agriculture?
2.4 A New Framework for Sustainable Agricultural and Rural Development
To meet the goal of more balanced development and raising farmer incomes, leaders should recognize that both policy shifts and changes in government services are needed. First, reforms are needed in the organization of government. A new framework is needed for managing fiscal and other governmental matters, including the development of a plan to manage the environment and to generally meet the needs of China's modernizing and increasingly market-oriented economy. The new institutions need to instill a new ethic into government; officials need to change their roles, becoming facilitators of economic growth, equity and environmental protection, rather than direct actors. Reforms are also needed to encourage the emergence of new partnerships with rural citizens. China needs to promote voluntary, independent farmer associations and new arrangements with private enterprises that can help in the process of development and assist government in taking care of those who are in danger of being left behind.
Second, a concentrated effort is needed to improve the resource base of the rural economy. It is a government responsibility to prioritize and mobilize investments into those projects that have public goods characteristics and to encourage private firms and individuals to make productive investments that will raise incomes and provide employment. Despite the great progress of the past 50 years, many parts of the agricultural and rural sectors remain underdeveloped. There are 50 million more farmers in China than at the beginning of reform. Farms are fragmented, small and getting smaller. Other resources — such as water and forests — are becoming ever more scarce. Farm prices, at least for certain internationally traded commodities, will almost certainly fall as the nation implements its WTO commitments.
In such an environment the state and its partners have much to do to help farmers increase their resource base. China's most abundant resource, the labor of its rural population, needs to be the target of a sustained drive to increase the value of its human capital with investments into education, rural health and other areas. The productivity of agriculture and the rural sector will require modern technologies, those that are affordable and suitable to small farmers. Land and water also require large investments and new institutional arrangements that can increase the productivity and incomes of households; at the same time rental markets for cultivated land are needed to allow those left behind in farming a way to access greater quantities of China's most scarce resource. Finally, the rural sector needs a healthy and effective financial system to intermediate capital from those who want to save to those who have an opportunity to invest.
In short, if the government can create new institutions to transform the government's role in development, foster a new partnership with the people and improve the nation's resource base rural incomes can rise and the rural economy will be a force in China's modernization drive. If appropriate decisions are made, the policies will not adversely affect national food security and many policies will enhance the security of households. There are few inherent conflicts with environmental concerns and those with which there are can be offset by the adoption of appropriate complementary policies. Although complicated, these are essential components for successful implementation of the Five Balanced Development Strategies.
III. Creating a New Role of the State in the New Era
For the State to assume its new role as a facilitator of economic activity rather than as a direct economic actor, a new ethic needs to be instilled into leaders at all levels.
Key areas for policy initiatives:
Changing government functions
The emphasis should begin to be on those activities that are truly public goods; the private sector should be regulated but the goal should be to allow individuals and private firms to provide quality goods and services on the basis of market-determined prices and quantities. Markets should be fostered and the sources of market failure should be a target of policy revisions to ensure better performance. The government needs to allow the private sector to take over many of the activities that are currently being carried out by state agencies and quasi-state organizations.
Clear divisions of central and local governments roles
The roles of different levels of government need to be delineated. When a level of government has a particular set of duties, duplication should be avoided and resources needed for their timely and quality completion should be assured.
Poverty, equity and the environment
In addition to helping overcome market failure, the main set of tasks for the government includes measures for reducing poverty; maintaining equity and improving the environment. To carry out these policies, the government needs to focus on: building a rural fiscal system; facilitating rural markets; and promoting farmer associations as a way to promote new relationships between the party and the people.
3.1 Rural Fiscal Policy
China needs a healthy public fiscal system to enable government to provide an environment for growth and development, including basic infrastructure and social services. For the rural sector, this includes providing or facilitating investments in farmland improvements, agricultural research and development, extension services, infrastructure such as roads and communications and social services (such as education, health and social security). The fiscal system also sets incentives that guide the allocation of resources and influence development.
Key areas for policy initiatives:
Fundamental restructuring of the fiscal system
Fundamental restructuring of the system is needed to set priorities on services to be provided and organizing the fiscal system in a way that each policy function is fully funded. A new commitment to transferring more funds to the rural economy is needed.
Reform current tax system to suit each region of the country
The current tax reform and agricultural tax reductions, although useful and successful in many places, is restricting development and income growth in others. Allowances are needed for regional differences. The impact of agricultural tax reform needs to be carefully assessed.
Review critical services and make a clear division of responsibility between government and the private sector
An in-depth review process is needed to assess the government tasks that are critical public services. Others should be dropped. Of those remaining, they should be divided into those that are needed to be delivered by the government (e.g., road building and maintenance and rural public health system) and those that can be provided by the private sector (e.g., certain types of agricultural extension).
Need for new systems of governance
Lack of transparency and accountability in the local governance institutions is a fundamental problem in the management of fiscal resources and investment efforts. The creation of institutions that provide for more transparency and accountability are needed for any of the new initiatives to be successful.
3.2 Better Marketing Environments for Development
Markets are needed for fostering specialization and for allowing farmers to reap the benefits of increased access to domestic urban consumers and international markets, In the past decades, despite attempts at controlling China's commodity markets, markets have developed rapidly and have become increasingly efficient, competitive and integrated. Indeed, many of China's markets for agricultural commodities and basic inputs are among the least distorted in the world. Despite this success, markets for some commodities remain vulnerable to government intervention.
Labor markets are important in facilitating the flow of labor among regions, and have improved dramatically over time. However, there are still considerable barriers to movement that need to be eliminated.
Key areas for policy initiatives:
Fostering domestic commodity and labor markets
These include: enhancing grain market reform; removing special considerations that have given advantages to state marketers in long distance grain trade; improving policies that will facilitate more liberalized regional labor markets (for example, the elimination of the hukou system).
Deepening integration across the border
These include: accelerating technology transfer/import from abroad; taking a pro-active aggressive role in the WTO Doha Round negotiation; implementing pro-poor policies to target those who are hurt and vulnerable during the course of trade liberalization; etc.
Market infrastructure development
These include investments in transportation, communications and marketing information networks and the development of a futures market for major agricultural commodities.
3.3 Building Partnerships with Farmer Organizations
In an economy with millions of small holders and an emerging market economy, it is imperative that farmers are able to organize to facilitate their interactions in commercial and investment transactions. Organization will help farmers in the adoption of new technology, access to inputs and the marketing of their output. In particular, value adding activities often benefit from cooperation.
Key areas for policy initiatives:
Need for government support
Although the impetus to meet and act as a group must come from the farmers themselves, the government can create an environment in which independent associations can thrive. These include legal support, financial aides, and technical services such as training of leaders, technical and marketing information services provision, etc.
New laws and regulations are critically needed
China needs to speed up the formulation of Farmers Associations (FA). New laws and regulations should promote and protect FAs. The legal status of groups needs to be clear. FAs need to have the ability to enter into contracts, act as legal guarantors and take loans. In short, FAs need the authority to be able to act for the members of their group. Along with this new authority, responsibility is also needed. Hence, in addition to additional authority, new rules and regulations are needed that protect the membership from the leadership, including the way in which the leadership is selected and monitored.
A catalyst is needed
The experience of FAs in other countries has shown that even when a favorable legal and regulatory framework exists, an independent catalyst (that is, someone or group outside the government) is often needed to get FAs started, expand and perform better. While China has a number of FA-promoting agencies, these institutions are controlled by the Government. Alternative models should be sought to create catalysts that are first and foremost responsive to the needs of farmers and FAs. In some nations the special associations are set up to promote FAs; in others cooperative extension agencies are created within the agricultural university system. The main role of such an advocacy organization is to facilitate their creation and provide information that allows its members to promote the interest of the association. Training of FA leaders is also critical.
IV. Investing in Agricultural and Rural Resources
Although there are many investment needs, four main categories of investment should receive special attention: investment in labor; technology for raising productivity and promoting water savings; land rental markets; and reforming rural financial markets.
4.1 Preparing for Migration Out of Rural Areas
Labor markets are the conduits of the forces of a nation's transformation from a rural to urban society. There are different channels: urban migration; local off farm wage earning jobs; self-employment. All are needed to provide the enormous volume of jobs that will allow farmers to move off the farm. Policies are needed to stimulate demand and encourage supply.
Key areas for policy initiatives:
On the demand side:
Restructuring China's economy
Encourage labor-using industrial development and discontinue policies that favor capital-intensive industrial expansion. Creating new and more non-farm jobs is a necessary and essential condition for China to have a successful economic transformation from a rural- to urban-based economy.
Eliminating restrictions on labor hiring
Remove barriers and regulations that prevent firms from being able to hire migrants; reduce regulations on all firms that are preventing employment from occurring in the manufacturing and service sectors.
Providing better financial services
Continue to improve the banking environment so banks can provide financing for local enterprises and the self-employed.
On the supply side:
The three most important policies are: Improve rural education; improve education of rural migrants in cities; improve skills training of migrants in rural and urban areas.
Improve the provision of rural health services and health insurance.
Enforce the land laws to encourage rental opportunities without threatening the security of the renters' land rights.
Eliminate barriers in the cities that reduce the benefits of migrants and discourage farm families from moving to the city permanently.
4.2 Raising Productivity on the Farm
4.2.1. Land-enhancing technologies
Successful transformation of China's economy has been based on agricultural growth. In the past three decades, agricultural growth has been remarkable. The growth has come from increases in material inputs and productivity as well as institutional changes. High input levels in many areas of China and diminishing marginal returns, however, mean that increasing inputs will not provide further large increases in output. Water shortages and increasing competition from industry and domestic use do not provide much hope for large gains in the area under irrigation and the total output from irrigation expansion. Providing incentives while providing large one-time shifts in the early 1980s, has been shown to be largely exhausted in China.
Given current technology and policies, China's farmers are approaching an upper limit to their ability to supply greater quantities and higher values of foods from their current land resources. In the future, many have predicted that almost all gains will have to come from second- and third-generation Green Revolution technologies such as biotechnology and agricultural structural changes. New research and development and extension efforts are needed to create and spread the next generation of technologies.
Key areas for policy initiatives in land enhancing technologies:
Deepening agricultural research and extension reforms
China's leaders should take a decisive step to further its reforms in agricultural R&D so that a modern and effective agricultural research and extension system can be created. Some research institutes need to be closed; others need to be commercialized; others need to be merged; others need to be expanded. There are too many agricultural research scientists; current resources and additional new resources need to be focused on the best. China needs to clearly delineate public and private roles in agricultural R&D and establish effective mechanisms for public-private partnerships. The reforms should also recognize that not all agricultural research institutes and technologies can be commercialized. Commercial businesses of the research institutes require a market-oriented institutional and management system. Human resource skills of most researchers and academics in marketing and commercial managements are generally inadequate for successful enterprise development.
China needs to substantially increase its investment in agricultural research and extension
Commercializing part of its current agricultural research and extension systems does not imply weakening of the government's role in financing agricultural research and extension. Agricultural research driven by commercial interests would naturally be directed towards the most commercially viable products and technologies. A wholly market-driven research system will leave research directed to food security, poverty reduction, and environmental sustainability seriously under-funded.
The current needs for agricultural research and extension indicate that public funding should be a primary source of agricultural research and extension in the decade ahead. Difficulties in implementing and enforcing a strong IPR system also imply the importance of a viable public financial support system for agricultural research and extension.
We recommend that public agricultural research investment should be increased from the current level of less than 0.3% to 1% of total agricultural GDP in the near future. And at least a similar public investment in agricultural extension should be reached. China should also continue to encourage the development of biotechnology and its application to agricultural production and processing.
4.2.2. Facing the Challenges of Water Management
Water shortages pose a serious barrier to growth, are limiting efforts to alleviate poverty, and are becoming a major source of environmental problems. Current policies have either not worked or have not lead to real water savings. Many traditional strategies are unlikely to solve China's water shortages since there is little incentive to adopt new technologies or they do not lead to real water savings. Even with South to North transfer projects, there will still not be enough water to solve the crisis.
A fundamental shift in the way water is managed is needed though complicated, we summarize here the steps that the Government must take in order to begin to manage north China's water resources.
First, water savings in irrigated agriculture need to focus on reducing the water consumed per unit of crop production. This requires an integrated approach of improvements in irrigation technology, agronomic practices, and farm water management.
Second, water management agencies need more authority to implement the difficult measures that are needed.
Third, to achieve true water savings while avoiding inequitable outcomes, a system of water rights for both surface and ground water is needed, with rights extending to individuals that live in specific areas and the total amount of the rights limited to water availability after taking into account the environment and other needs.
Fourth, after water rights are established, China needs to begin the investments and management shifts that will allow for volumetric pricing and regulation of water.
Finally, with the institutions and facilities in place to implement a system of water rights and charge for water volumetrically, the nation can begin to move forward to take several concrete steps such as to raise water prices, promote new water saving technologies, and reform management institutions in order to achieve cropping intensity levels and cropping patterns, as well as municipal and industrial use levels that will be sustainable.
The efforts on the conservation side must be matched on the pollution abatement side in order to stop the mounting, and often irreversible, damage to China's water resources.
CCICED should consider immediate formation of a new Task Force on water management in North China to report to the next AGM.
4.3 Encouraging Land Rental Markets
China's size and the nature of its integration into the world economy imply that rural development in this country has to respond to big challenges that can not be solved by resorting to government intervention, but instead require the operation of well-functioning rental markets for cultivated land. For markets to work well, there must be an absence of barriers that are de-linking land and labor markets, such as market imperfections, institutional rigidities and other barriers.
Key areas for policy initiatives:
Guaranteeing permanent land use right
Several specific policies can facilitate the improvement of permanent use rights. First, the new Rural Land Contracting Law needs to be more rigorously enforced. The provisions are pro-rental, but understanding of the law is still weak.
Second, a province-wide (or region-wide) system of land registration is needed to ensure the security of land holdings for the duration of rental arrangements.
Finally, demand for land rental could increase if mortgages were allowed, since borrowing against land could break capital constraints that are dampening the demand for land and may facilitate out-migration by providing the liquidity needed for moving.
4.4 Experimenting with Rural Finance
Mobilizing and efficiently using available financial resources is important for achieving high rates of economic growth, especially in developing countries where such funds typically are in short supply. As economies grow, financial institutions often play an important role in directing resources to their most productive use. As a result, greater financial intermediation (loans as a share of GDP) usually accompanies higher incomes. One of the most important lessons from other developing countries is that poorly functioning rural banking systems reduce growth and slow poverty reduction efforts. This is almost certainly true for China.
Although China has made a number of efforts to reform its rural financial system in the past, most agree the measures taken so far have not been successful. The reforms have been incomplete, and rural bankers have little incentive to provide good service. China often uses state control of the banking system to pursue policy goals that are not always consistent with efficient intermediation. Recent state banking reforms in China have reduced access to commercial loans by rural borrowers.. Informal institutions have thrived across China, replacing formal banking channels, in effect, taking control over rural financial markets and out of the control and oversight of the state. Competition from such sources is indirect and less effective in promoting efficient management.
Key areas for policy initiatives:
Promote comprehensive reform of the rural financial system
Resolution of the current outstanding problems of China's rural financial system cannot be confined to minor repairs and adjustments to the current system. It is necessary to take a holistic view and undertake comprehensive reform of rural finance across the institutional spectrum—the Agricultural Bank, the Agricultural Development Bank and the rural credit unions—with the aim of establishing a more complete and more vigorous rural financial system that truly serves the "Three Agricultures." More complete and more far reaching RCC reforms are needed; experimentation should be allowed; it is critical to try to provide the new management teams with strong short and long-term incentives.
Enact new laws and regulations to promote and formalize rural informal credit markets
In addition to RCCs, non-state banks should be encouraged. A regulatory environment that encourages safe and efficient banking practices is needed, but should be set up in a way that facilitates the entry of private banks and other money lending and deposit taking institutions. More flexibility is needed on the number of products and lending practices.
Enhance micro finance program
The government should try to encourage micro-finance and allow localities to experiment with their own forms. Regulations that keep NGOs from operating and expanding their operations should be eliminated. Micro-finance units should be allowed to take deposits.
V. A New Framework for the Nation's Grain (Food) Security
China has a large resource base and a solid record of productivity in the past to ensure national grain and food security. China can achieve its high level of food grain security in the coming decades. There is need to shift China's focus on grain and food security. Since 1983 China has been a net food exporter. In recent years, China has become a net grain exporter. From a national food security point of view, China is probably the most secure nation in the developing world. In the future, even if the nation completely liberalized all trade (which is beyond its current trade commitments under the WTO), economists in China forecast that by 2020 rice and wheat will still be almost fully produced in China. Although the nation will be a net importer of feed grains and soybeans, by 2020 the export of vegetables, fruits, livestock and aquatic products will grow. In the coming years, China needs to make fundamental changes in national priorities on food and grain security and in the way that the grain economy is managed.
Key areas for new initiatives or shifts in policy:
Shift in emphasis from food or grain security to food grain security
In order to maintain the spirit of China's food security policies without imposing excessively costly and ineffective restrictions, the national government should redefine its food security goals in terms of rice and wheat, the two major food grains. This would provide considerable protection against any external economic threat while being attainable without causing major distortions.
Shift in emphasis from aggregate national food security to household food security
While we do not believe China as a nation faces a food security problem (provided it continues to promote productivity-enhancing technologies and invest in its rural infrastructure), there are still tens of millions of households that live at or under the poverty line. For many of these poor households, there are significant risks that sooner or later they will not have sufficient food to keep their members healthy and productive. The main focus of national food security policy should be placed on these households. The measures to make these household food secure are in fact mostly consistent with those measures that are needed to increase income, promote movement into the off farm sector and generally make rural household more productive and increase their access to resources. Supplemental measures are also needed in the short run to protect these households against large negative income shocks. While policies that take incentives away from households to improve themselves must be avoided, there are policies that are consistent with good incentives. Rural health insurance is one policy that will help insure farmers against sickness and injury. Maintaining the ability of the government to deliver food in times of natural disaster also is needed. Such measures will be effective in raising incomes and promoting the transformation of the rural economy; they will also improve household food security.
Emphasizing long term productivity growth instead of short term subsidy programs
China's food grain security program will rely mostly on raising long-run productivity. Although well intentioned and welcome by farm households (every farm household likes receiving money), subsidy programs such as the "Grain Direct Subsidy" that was implemented in 2004 could be very costly, reduce the government's fiscal resources for public services, and have much less effect on national grain security than other measures. Unless the government commits to long-term subsidy programs, farmers will not be likely to spend much of their subsidy; they will save it. Hence, the return to such investments will be low. Instead, investments in R&D, extension, education, health, irrigation and other rural infrastructure, have been shown to have high multiplier effects, especially in poor areas.
Balancing land uses between agriculture and non-agriculture
Considerable quantities of land are being converted from agriculture into built-up areas. Although conversions may have increased since 2000, according to research by the Chinese Academy of Sciences using highly reliable landsat data, between 1985 and 2000, the amount of land that was converted from cultivated to non-agricultural uses was more than offset by land converted into cultivated uses. China had 2% more cultivated land in 2000 than it did in 1985. Although the quality of new cultivated land is lower than the land converted to non-agricultural uses, the fall in bio-productivity is less than 0.5 percent. Hence, far from losing production potential, between 1985 and 2000 China's output potential actually increased by 1.5%. Hence, at least until 2000, the conversion of cultivated land into non-agricultural uses has had no effect on grain production and prices.
With the future of China's development relying on rapid industrialization, it is certain that there will be high demand for further conversions. Indeed, since 2000, although it is difficult to gauge the exact magnitude of the loss of cultivated land due to poor data, most observers agree that conversions increased. This should not be surprising. Employment, income and productivity growth are all associated with the conversion of land from low-productivity agriculture to high productivity industry and services. It should also be noted that compared to other nations (e.g., Japan, Korea, the US, many European nations), China's rate of cultivated land conversion is low.
However, while industrialization and modern development demands that conversions continue, efforts are needed to ensure that land use policies promote rational land use. The policies to follow, however, should not be across-the-board bans on conversions. Land policy should emphasize rational, long-run land use planning. The government's role should be to decide on what land should be used for what uses. Modern urban planning methods should be used to determine these needs. The incentives for local governments to convert land to non-agricultural uses for fiscal reasons can be reduced by reducing the role of the government in the conversion process. After land plans are in place, development should be done by the private sector and negotiations for land purchase should be made directly with rural residents. To make this process work, rights need to be given to farmers to ensure that those who lose their land are directly and fairly compensated. New measures also are needed for improvement and enforcement of land laws and regulations to ensure that land acquisition is implemented fairly. These include a clear definition of land ownership and use rights; a clear differentiation of land acquisition for public uses and private business activities; market-based compensation for land acquisition; awareness, transparency and accountability.
A system of land conversion permits might be considered for use across China that allow only a limited amount of land to be converted each year. It is important to make such permits tradable so development can occur in the places that are most optimal.
China's Grain for Green Program cannot be blamed for recent price rises, is not a threat to national food security and should not be halted for reasons of food security.
Grain for Green, the nation's Cultivated Land Set-aside Program, has set aside more than seven million hectares of cultivated land over the past five years. While there have been serious implementation problems (which bear looking into to make the program work better and to avoid abuse by implementation weaknesses), it should be recognized that on the whole Grain for Green has been successful in reducing soil erosion, increasing forested area and doing so by providing farmers with compensation that have led to higher incomes and rising asset values.
Despite its vast scope, there is no evidence that Grain for Green has had a large effect on grain prices in the past year and there is no basis for stating that Grain for Green would have any significant effect on national food security. Research shows that Grain for Green, not land conversion to built-up area, has caused most of the decline in cultivated land in recent years. However, the productivity of the land that was converted to forested area was extremely low, according to the survey commissioned by the State Forest Administration, the average yields were less than 50 jin per mu (400 kilograms per hectare). With more time available and with access to the capital from program payments, yields on the plots that were not converted also rose. According to research conducted by the Center for Chinese Agricultural Policy using their policy analysis model, the price impact of Grain for Green was minimal. Of the 40 percent grain price increase that occurred between 2003 and 2004, less than 5 percentage points are due to the Grain for Green program. While the scope of the original program may need to be reevaluated because of implementation problems, the program should not be halted due to food security concerns. At the very least, the current program commitments should be fulfilled and increased effort should be given to effective implementation.
Changing national grain reserve management practices
Although some aspects of the grain reserve management system have improved in the past several years, it is still one of the weakest and least understood part of China's food security program. In many ways, despite the reforms, it is dysfunctional. The rules for management and release are unclear. There is confusion among the different holders of grain. The lack of transparency creates chaos in grain markets and contributes to greater variability in grain prices. Because no one knows the level of stocks or the quantities of planned (or actual) release, domestic producers and traders and international trading agencies can not make decisions based on full information. Rules for purchases and sales need to be open; public information on markets can internalize all of the factors that will affect short- and long-run price expectations, which will affect production and storage and sales decisions.
VI. Environmental Impacts of Policy Changes
In all of the issues studied by this Task Force, the positive economic effects of recommended policy changes are likely to also result in better environmental management in rural China. Some regional impacts may be negative. Specific observations on all of the issues studied by this Task Force follow.
Rural Fiscal Policy. Implementation of Task Force recommendations would increase resource allocation to rural China in public good services such as education, health and rural infrastructure, re-define roles of the various levels of government and the private sector and develop more equitable, regionally sensitive tax policies. Given the established positive relationships between income and environment and education and environment, rural fiscal policy reform should result in better environmental performance in rural China.
Better Marketing Environments for Development. Competitive domestic commodity and labor markets, trade liberalization and market infrastructure development are expected to increase rural incomes and positively impact rural resource management.
Building Partnerships with Farmer Associations. Legislative changes to facilitate voluntary, independent farmer associations that can operate in the interests of their own members in adoption of new technology, access to inputs and marketing are expected to improve the incomes of farmers as they have in developed economies. International experience demonstrates that farmer associations have been leaders in improved land and water resource management. It is in farmers own economic interests to improve the long-term productivity of their resource base.
Preparing for Migration Out of Rural Areas. The resource base of farmers who stay in rural areas will be augmented by the departure of their neighbours. This will improve their income potential and provide incentives for better stewardship of their land base.
Raising Productivity on the Farm. Increased public investment in R&D and extension services would be expected to produce and extend environment friendly technologies in areas such as pest and fertility management, conservation tillage and planting systems, grassland management and biotechnology; all of which can produce positive environmental outcomes.
Encouraging Land Rental Markets. Well-functioning land rental markets and more secure land user rights will expand the resource base of farmers who remain in rural China. Improved stewardship of resources is a consequence of more secure tenure.
Experimenting with Rural Finance. Financial services to rural residents in China are weak. This discourages holding of savings as deposits and encourages savings to be held in assets such as animal herds/flocks with consequent damage to grasslands and water resources. Reforms that would facilitate rural services such as credit unions and sustainable micro-finance programs would have positive environmental spin-off effects. Better access to credit is needed to facilitate adoption of new technology for better land and water management.
Grain Marketing. Greater transparency in management of grain reserves, enhanced private sector participation in grain markets and narrowing of grain self-sufficiency targets to a national food grain security target would reduce pressure on fragile landscapes and the consequent environmental costs.
Cultivated Land Protection. Loss of cultivated land to urban and industrial uses is an inevitable and necessary cost of development. More secure land user rights and more transparent and equitable processes for land acquisition would reduce excessive land taking and mitigate environmental effects. The Grain for Green program is targeted to remove fragile land from cultivated uses and thus should have positive environmental effects. Continuation of the program with more effective implementation is needed.
Trade and Poverty. Trade liberalization has and will have mixed environmental effects. Changes in comparative advantage resulting from changes in relative input and product prices are expected to reduce output of some land-intensive products in north China with consequent reductions in environmental pressure on land and water resources.
Intensity of production is likely to increase in horticultural crops and rice in SE provinces with increased application rates of fertilizers and pesticides. Application of food safety standards inherent in WTO accession may induce or force rationalization of input application rates if Chinese farmers expect to compete in domestic and international markets. (See the reports of the Non-Point Source Pollution from Agriculture and the Trade and Environment Task Forces for further discussion.)
Expected income and environmental impacts of implementation of ARDTF recommendations
Issues Effect on Income Effect on Environment
Investment in Public Goods ++ +
Farmer Associations ++ ++
Off –Farm Employment ++ +
Grain Marketing Reform + ++
Land Rental Markets ++ ++
Cultivated Land Protection + +
R&D and Extension ++ ++
Rural Financial Reform + +
WTO – Land Intensive - +
WTO – Labor Intensive + -
Overall Impact ++ ++
Key: + positive effect
- negative effect
China's Agricultural and Rural Development in the New Era:
Challenges, Opportunities and Policy Recommendations
Agriculture and Rural Development Task Force,
CCICED
Since 1980 incomes have grown, employment has expanded, and per capita food output has reached a level similar to that in developed countries. Growth in agriculture, non-farm employment and rural industry and the transformation of domestic and international markets have changed the face of rural China and are playing key roles in China's modernization. While past accomplishments are impressive, there are still challenges ahead. Unlike the past when increasing food production was the main goal, in China's new environment the main metric of success will be the extent to which the rural economy can become an integral part of the nation's modernization. For China to successfully modernize, the nation's economy will have to experience a fundamental transformation — from rural to urban and from agriculture to industry and services. The challenges are how to effectively establish linkages between rural and urban areas and encourage the large labor shift out of agriculture. The process will take a long time. During the coming years those that are left in the rural economy will need both higher incomes and greater opportunities to move off the farm into jobs in the cities and into their own businesses. Higher levels of human, physical and social capital are needed to accelerate this process, to continue to make agriculture more productive and to help close the gap in the standard of living between those in rural and urban areas.
A New Framework for Sustainable Agricultural and Rural Development
To meet the goal of balanced development and raising incomes, leaders should recognize that both policy shifts and changes in government services are needed.
First, reforms are needed in the organization of government. A new framework is needed for managing fiscal and other governmental matters, including the development of a plan to manage the environment and to meet the needs of China's increasingly market-oriented economy. The new institutions need to instill a new ethic into government; officials need to change their roles, becoming facilitators of growth, equity and environmental protection, rather than direct actors. Reforms are also needed to encourage the emergence of new partnerships with rural citizens. China needs to promote voluntary, independent farmer associations and new arrangements with private firms that can help the process of development and help the government care for those that are in danger of being left behind.
Second, concentrated effort is needed to improve the resource base of the rural economy. It is a government responsibility to prioritize and mobilize investments into those projects that have public goods characteristics and to encourage private firms and individuals to make investments that will raise incomes and provide employment. Despite the great progress of the past 20 years, many parts of the agricultural and rural sectors remain underdeveloped. There are 50 million more farmers in China than at the beginning of reform. Farms are fragmented, small and getting smaller. Other resources, such as water, are becoming scarce. Most farm prices will fall as the nation implements its WTO commitments.
In such an environment, there is much to do to help farmers increase their resource base:
• China's most abundant resource, rural labor, needs large investments to increase the value of its human capital by improving education and rural health.
• The productivity of agriculture and the rural sector will require modern technologies, those that are affordable and suitable to small farmers.
• Water also require large investments and new institutional arrangements to improve efficiency and equity of use and increase the productivity and incomes of households
• Rental markets for cultivated land are needed to allow those left behind in farming a way to access greater quantities of this scarce resource.
• The rural sector needs a healthy and effective financial system to intermediate capital from those who want to save to those who have an opportunity to invest.
Policy Recommendations
Many new policies are needed to implement this policy framework. The Task Force has selected a small subset of policies that they believe should receive priority for increasing farm household incomes:
• Rural Fiscal Reform and Setting New Investment Priorities
• Promotion of Farmer Associations
• Improve Opportunities for Rural Residents to Work Off the Farm
• Enhancing Productivity Through Investments in Agricultural Technology and Technologies and Institutional Innovations that save water
• Rural Financial Reform
Rural Fiscal Reform and Setting New Investment Priorities
China needs a healthy public finance system to enable government to provide an environment for development, including infrastructure and social services. The fiscal system sets incentives that guide the allocation of resources.
To meet this goal, there are several key areas for policy initiatives:
• Fundamental restructuring of the fiscal system
• Reform the current tax system to suit each region of the country
• Review critical services and make a clear division of responsibility between government and the private sector
• Develop new systems of governance
To implement these policy initiatives, several key actions are needed:
• The government needs to set priorities on services to be provided; keep only the most important functions and fully fund them;
• Functions should be divided into those that are needed to be delivered by the government and those that can be provided by the private sector;
• Transfer more funds to the rural economy; on a per capita basis, China is only investing a fraction of what was invested into the rural economies of Japan and Korea and Taiwan during their periods of rapid growth;
• The current tax reform and agricultural tax reductions, although useful and successful in many places, are restricting development and income growth in others. Allowances are needed to reflect regional differences.
• Lack of transparency and accountability in local governance institutions is a basic problem in the management of fiscal resources and investment efforts.
Building Partnerships with Farmer Organizations
In an economy with millions of small holders and an emerging market economy, it is imperative that farmers are able to organize to facilitate adoption of new technology, access inputs and market their output. Key areas for policy initiatives are:
• Government support including legal support, financial aid, and technical services such as training of leaders and technical and marketing information services provision.
• New laws and regulations are needed to clarify the legal status of groups. Farmer Associations (FAs) need the ability to enter into contracts, act as legal guarantors and take loans. In addition to authority, new rules and regulations are needed that protect the membership from the leadership, including the way in which the leadership is selected and monitored.
• A catalyst is needed. The experience of FAs in other countries has shown that even when a favorable legal and regulatory framework exists, an independent catalyst is often needed to get FAs started, expand and perform effectively. The main role of such an advocacy organization is to facilitate their creation and provide information that allows its members to promote the interests of the association. Training of FA leaders is also critical.
Preparing for Migration Out of Rural Areas
Labor markets are the conduits of the forces of a nation's transformation from a rural to an urban society. Several channels—urban migration; local off farm wage earning jobs; self-employment—are needed to provide the volume of jobs that will allow China's farmers to move off farm. Policies are needed to stimulate demand and encourage supply.
Key areas for policy initiatives on the demand side:
• Restructuring China's economy by encouraging labor-using industrial development and discontinue policies that favor capital-intensive expansion;
• Eliminating restrictions on labor hiring by removing barriers that prevent firms from hiring migrants and reducing regulations that prevent employment in the manufacturing and service sectors;
• Providing financial services to finance local enterprises and self employment.
And, on the supply side:
• The 3 most important policies are: Improve rural education; improve education of rural migrants in cities; improve skills training of migrants
• Improve the provision of rural health services and health insurance.
• Eliminate barriers in the cities that reduce the benefits of migrants and discourage farm families from moving to the city permanently.
Land-enhancing and Water-saving technologies
Successful transformation of China's economy has been based on agricultural growth. In the past three decades, agricultural growth has been remarkable. Continued growth will depend on new productivity-enhancing technologies and overcoming water constraints:
• Deepening agricultural research and extension reforms by reforming the agricultural R&D system into one that is modern and effective. Some research institutes need to be closed; others need to be commercialized; others need to be merged; others need to be expanded. Better coordination among research institutions at all levels is essential.
• China needs to substantially increase its investment in agricultural research and extension. The Task Force recommends that public agricultural research investment should be increased from the current level of less than 0.3% to 1% of total agricultural GDP in the near future. And at least a similar public investment in agricultural extension should be made. China should also continue to encourage the development of biotechnology.
• Critical steps are needed to manage north China's water resources: First, water savings in irrigated agriculture need to focus on reducing the water consumed per unit of crop production. Second, water management agencies need more authority to implement the difficult measures that are needed. Third, a system of water rights for both surface and ground water is needed, with rights extending to individuals that live in specific areas and the total amount of the rights limited to water availability after taking into account environmental needs. Fourth, after water rights are established, China needs to begin the investments that will allow for volumetric pricing and regulation of water. Finally, with the institutions and facilities in place to implement a system of water rights and charge for water volumetrically, the nation can begin to raise water prices, promote new water saving technologies, and reform management institutions.
Experimenting with Rural Finance
Mobilizing and efficiently using financial resources is important for achieving high economic growth, especially in developing countries where such funds typically are in short supply. One of the most important lessons from other developing countries is that poorly functioning rural banking systems reduce growth and slow poverty reduction. Poor rural financial markets in China are certainly reducing growth. China has made an effort to reform rural finance in the past, but the measures taken so far have not been successful. The reforms have been incomplete and rural bankers lack incentives to provide good service. Informal institutions have thrived across China, replacing formal banking channels. The key areas for policy initiatives are:
• Promote comprehensive reform of the rural financial system by moving to more complete and far reaching RCC reforms and experimenting with new approaches that provide management teams with strong short and long-term incentives.
• Enact new laws and regulations to promote and formalize rural informal credit markets Private banks should be encouraged. More flexibility is needed on interest rates and on the number of products and lending practices.
• Enhance micro finance programs by allowing localities to experiment with their own forms and removing regulations that keep NGOs from operating and expanding their operations. Micro-finance units should be allowed to take deposits.
A New Framework for the Nation's Food Security Policy
China should shift the focus of the nation's food security policy to minimize the cost borne by farmers and consumers. China has a large resource base and a solid record of productivity that has ensured national grain and food security. Since 1983 China has been a net food exporter. In recent years it has become a net grain exporter. China has the ability to import. From a food security point of view, China is among the most secure nations in the developing world. It is time to develop new food security priorities:
• Shift emphasis from food or grain security to food grain security
The national government should redefine its food security goals in terms of rice and wheat, the two major food grains.
• Shift emphasis from aggregate national food security to household food security
While we do not believe China as a nation faces a food security problem (provided it continues to promote productivity-enhancing technologies and improve its infrastructure), there are still millions of households that live under the poverty line. The main focus of food security policy should be placed on these households. The measures needed to make these households food secure are mostly consistent with measures that are needed to increase income, promote employment and make households more productive.
• Emphasize long term productivity growth rather than short term subsidy programs
The return to direct subsidies are not appreciated by farmers in the long run and the returns to such investments are generally low. Instead, investments in R&D, extension, education, health, irrigation and other rural infrastructure, have been shown to have high multiplier effects, especially in poor areas.
• Balancing land uses between agriculture and non-agriculture:
The nation needs to develop rational long-run land use plans. To date, the conversion of cultivated land to non-cultivated uses has not significantly affected grain prices, domestic availability or imports. Compared to other nations in the world, China's rate of cultivated land conversion is low. The future of China's development is dependent on industrialization, thus there will be high demand for further conversions. Stopping conversion will hurt growth. The government's role should be to develop transparent processes for land use decisions. Given these processes, development should be done by the private sector and negotiations for land purchases should be made directly with rural residents. Farmers need clear rights to ensure that those that lose their land are fairly compensated. Titling would help.
• China's Grain for Green Program cannot to be blamed for recent price rises and is not a threat to national food security and should not be halted for reasons of food security.
Conclusions
If the government can create new institutions to transform the its role in development, foster a new partnership with the people and improve the nation's resource base, rural incomes can rise and the rural economy will be a force in China's modernization drive. If appropriate decisions are made, the policies will not adversely affect national food security and many policies will enhance the security of households. There are few inherent conflicts with environmental concerns and those that occur can be offset by the adoption of appropriate complementary policies. Although complicated, these are essential components for successful implementation of the Five Balanced Development Strategies.