1 Farmers, State and Market in China Yuk-shing CHENG Department of Economics Hong Kong Baptist University

2 Introduction: The plight of Chinese peasants in the age of globalization In the early 1990s, Chinese leaders decided to establish a socialist market economy in China. Since then, it has further liberalized local markets and integrated into the world economy. Apparently, there were contrasting phenomena: An unabated rapid industrial growth. a deterioration of the livelihood of the Chinese peasants. Why? Losing comparative advantage of Chinese agriculture? Disadvantageous group in the market economy forgotten by the state? This paper argue that it is rooted in the political economic system that the Chinese party-state has set up to strive for economic growth.

3 Changing relationship: Farmers, market and state in the China The planning economy ( ) The State extract agricultural surplus for industrialization: mandatory procurement of agricultural products at below-market prices. Most markets were suppressed. The state controlled agricultural production indirectly (and imperfectly) through the Peoples Commune system.

4 Changing relationship: Farmers, market and state in the China Market liberalization after 1978 The state has retreated from the control of many agricultural products market liberalization The state continued to procure some products (e.g. grains), at higher procurement prices less extraction of agricultural surplus Peoples commune were abandoned. Farmers started to have autonomy in production Each rural household can contract land from the collectives The state attempted to re-establish its governance in rural area by setting up township governments and village committees, both of which remained up the control of the party. Consequence: the revival of peasant economy in agricultural production.

5 Changing relationship: Farmers, market and state in the China Rural problems in the late 1980s Problems: Unorganized Small peasants did not respond well to the changing demand of urban residents (e.g. not sufficient good-quality grain, domestic grain prices falling down) How to organize small peasants to participate in large markets? Diversification of rural economy Rapid development of rural industries and thus rapid income growth (in some regions) Commercialization of the agricultural production Consequence Slowing down of income growth of agricultural producers (particularly grain farmers) in the late 1990s (see figure)

6 Growth of farmers incomes

7 Changing relationship: Farmers, market and state in the China Implicit social security in rural China Despite various reforms, rural land remained collectively owned. Under the household registration system, rural residents have been denied the rights to enjoy social security in urban area. Land is the last resort of the farmers for having incomes. Land is divided evenly among community members to ensure that everybody has the access to the social security. They are contracted to the farmers for a period of time. With this implicit social security system in rural China, social stability should be ensured. However, ……

8 Changing relationship: Farmers, market and state in the China Rural Unrest in 2000s Two major sources of anger Excessive financial burdens (taxes and fees) collected in arbitrary and brutal ways. Expropriation of land by the state without proper compensation to the farmers Resistance Increasing (publicized) cases of suicides Farmers leaving land unfarmed to escape from tax burdens Recurring farmers protests, riots and demonstration Recent policy responses The central government committed to pour financial resources to build a new socialist countryside.

9 Managing the market economy by the party-state The Chinese model of decentralization Chinas central party-state decentralized most economic powers to its the local party-states. Characteristics of this system. Local party cadres are evaluated mainly by the economic performance of the area under their jurisdiction. They are engaged in inter-jurisdictional competition. Hierarchy of power. Higher level party-states have bigger power than lower level ones. The former are able to extract resources from the latter and to shift some of the responsibilities to the latter.

10 Managing the market economy by the party-state Decentralization and inter-jurisdictional competition Qian et al. (1995 and 1997) focus on the first element. Chinas fiscal decentralization involves the introduction of fiscal contracts between successive levels of governments stipulating formulae to share locally generated revenues as well as subsidies from or remittances to the next level of government. A freer rein given to local governments in tapping off-budget resources (to raise funds through multiple channels (duoqudao jizi) Long-term and stable fiscal contracts gradually nurture a reputation of credible commitment by the centre. China is thus a de facto federalist state with local governments enjoying a high degree of fiscal autonomy.

11 (cont d) The grabbing hands of local governments are constrained by inter-jurisdictional competition and factor mobility. The local governments offer their helping hands to enterprises to boost economic growth To give preferential treatments to capital (a mobile factor of production). Qian Yingyi and Barry Weingast, Federalism as a Commitment to Preserving Market Incentives. Journal of Economic Perspectives, Fall 1997, 11(4), pp Qian Yingyi, Gabriella Montinola and Barry Weingast, Federalism, Chinese Style: The Political Basis for Economic Success in China (with). World Politics, October 1995, 48(1), pp

12 Managing the market economy by the party-state Power hierarchy The above analysis ignore the existence of the power hierarchy within the party-state. Higher level governments extracting resources from lower level governments Forcing lower level government to fulfill high economic targets (growth and fiscal revenues) Behavior of local party-states Lower the production costs and provide preferential policies to attract the mobile factor of production, i.e. capital. Increase the tax burden of the immobile factor of production. Burdens are successively transferred down to the rural areas.

13 Managing the market economy by the party-state Cadre management system Tsui and Wang (2005) emphasize on the vertical control of cadres Local party-states are subordinate and less autonomous agents of the upper level ones. A cadre.management system is used in the reform era that lays down the incentive structure for local cadres. The target responsibility system (mubiao zerenzhi, TRS) is a set of performance criteria that induce local cadres to allocate their fiscal resources in ways commensurate with the preferences of the centre. Some targets are soft and some are hard. The evaluation system place paramount importance on economic growth and fiscal revenues.

14 (Cont d) Lower level cadres have to maximize its benefits (promotion probability, bonuses due to fulfillment of responsibility contract and private benefits) subject to resource constraint. Very often, when their bosses hardened one target, they would put in more resources for fulfilling of this particular target and leave other tasks unfinished. There is only upward accountability, but no downward accountability. Tsui Kai-yuen and Wang Youqiang, Between Separate Stoves an a Single Menu: Fiscal Decentralisation in China, The China Quarterly, March 2004 (No.177), pp

15 Land problems (1) State and land in China As mentioned above, rural land is collectively owned and functions as an implicit social security system in rural area. However, the state has constitutional power to expropriate land in the public interest. Who represent the state (all levels of government)? What is public interest? Low cost of land expropriation compensation to farmers (stipulated by the Land Management Law) In many cases, local governments even do not pay the stipulated compensation.

16 Land problems (2) Urbanization and land expropriation Urbanization drive in the Governments of various levels expropriated land to establish development zones which can be used for industrial or residential estates to attract the mobile capital to invest in the zones. A survey in mid 2003 indicated that the total areas of the new development zones amounted to 3.6 million ha (36000sq km), more than the total increase of urban area since It is estimated that currently there are million rural residents that are landless.

17 Land problems (3) Fiscal motives Local governments can obtained huge amount of land conveyance fees after developing the expropriated land. 30% remitted to the central government; 70% retained by local governments (mostly as extra-budgetary funds). Over 910 billion in As big as half of the budgetary revenue in many cities. Local government can collect other taxes and relevant fees.

18 Public finance reforms (1) Tax and fees Taxes (agricultural taxes, special agricultural and forest taxes and slaughtering taxes) 5 levies by the township government (for education, family planning, social welfare, training of militia and road construction) 3 levies by the village committee (for public accumulations, administration fees) MANY other fundraising activities, surcharges and fees. Still, the villages and townships are running fiscal deficits and have incurred large amounts of debts.

19 Public finance reforms (2) Tax-for-fee experiment (2000) Experimented in Anhui Province and selected counties of other provinces Principle: raise the tax rate and forbid other fees Measure: Fix the rate agricultural tax at 7% and allow a maximum of 20% markup for villages. (Levies for township and all other fees were to be abandoned) Consequences Township and village do not have sufficient fund to carry out the administrative works (e.g.no salaries delivered to the local cadres and school teachers). Provisions of public goods were reduced or stopped (e.g. road constructions were stopped).

20 Public finance reforms (3) Stopping the experiments The experiment were initially planned to be extended to nationwide in Due to the apparent adverse effects and strong resistance of local governments, the State Council then called on a halt of the experiments. In 2002, the State Council initiated reforms again by giving specific transfer payments to the experimental areas and pushing the reforms in a more gradual manner.

21 Public finance reforms (4) Reflections Township governments have many departments corresponding to those in the upper level governments. Very often, the former established departments on the demand of the latter. Township governments have too many unfunded missions, e.g. compulsory education, family planning, public works, etc. Local government has multiple targets (including reducing farmers burden) but could not accomplished all under a budget constraint. To the extent that local governments need to carry out justifiable duties, where should the money come from? Should the farmers be taxed at all?

22 Public finance reforms (5) The need for comprehensive reforms To increase the accountability of the local cadres – this is important but not sufficient to solve the problems Administrative reforms to reduce the size of the bureaucracy to merge villages and townships to abolish some levels of governments Public finance reforms increase the fairness of taxation to improve the redistribution mechanism of the fiscal system