Economics 162

The Economy of China

Topic 5 Chinas Agriculture

Professor David Roland-Holst
Department of Agricultural and Resource Economics
Tuesday and Thursday, 3:30-5PM, 10 Evans

Agriculture
Rural Area Agriculture Sector Urban population 1/3; Rural population 2/3 But agriculture labor force is around Why? Many working in the urban areas without urban residence permit (counted as rural residents) Many rural residents working in rural industry not in agriculture (Township and Village Enterprises)

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The Importance of the Agriculture Sector

China is the worlds largest consumer and producer of food The traditional sector, largest in terms of employment The disastrous sector under central planning The successful first reform sector Economic linkages to other sectors Releasing excess labor (very important) Providing savings (now going in reverse) Generating consumer demand (eventually)
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Rural Organization
Natural Units Market town Large village Small village or neighborhood Household
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1962-84

1984-present

Commune(2000hh) Township Brigade (200hh) Teams (50 hh) Village

Household

Household
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Basic Features of Agricultural Collectives

Property Rights: The land was pooled and worked in common
Land is collectively owned

Management: The collective served as the basic accounting unit Distribution: Net income was distributed to households on the basis of work points
Households accumulate work points over one year The collective after paying taxes, deducting collective accumulation (retained public funds) distribute income to households by the year end, in grain and cash

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Benefits of Agricultural Collectives

Achieves governments goal of product mix
Grain is priority in planning: Take grain as the key link

Mobilization of resources for big projects

Consolidation of scattered land Big construction projects such as irrigation system

Local public goods

Water supply Education Health care (barefoot doctors) Some insurance (risk pooling) functions

Non-agricultural activities
Rural industry (small factories and workshops)
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Costs of Agricultural Collectives

Terribly inefficient in agricultural production Why? Incentive problems Structural features of agricultural production
Output takes long time (usually one year) to produce A long sequence of tasks (sowing, weeding, watering, harvesting, etc.) Important input is effort, which is hard or costly to measure Workplace only measures time spent Adjustments made according to age, gender, health, but imperfect (manual work)
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Outcome of Agricultural Collectives

Grain production growth between 1957 and 1978
Annual growth rate: 2.2% (from 200mt to 300mt) Per capita growth rate: 0.2% (300 kg per capita)

Non-grain agriculture output growth even lower

Cotton growth rate: 1.5% Oilseed growth rate: 0.5% Per capita growth rates below zero Per capita consumption of poultry, eggs and fish also declined Infant mortality: declined Life expectancy: increased Literacy rate: increased Rural infrastructure (roads, irrigation): increased
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Some other social indicators improved

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Agriculture Reform: Household Responsibility System

Main features
Form 1: linking the remuneration of a small group or household to the output of a specific plot of land Form 2: an individual household pays a fixed amount to the government and keeps the rest

Individual household farming

Form 2 is essentially individual household farming (with lump-sum taxation) But it is not a legal privatization of farming Land is still owned by the village collectives
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Agriculture Reform: Household Responsibility System

Why it works? Incentives Form 1: share cropping max [yi (ei) c(ei)] (dyi (ei)/dei) = c(ei) Form 2: residual claimant max [yi (ei) Fi c(ei)] dyi (ei)/dei = c(ei) Under diminishing returns, Form 2 elicits more effort. Tradeoff: incentives vs. risk sharing (Stiglitz (1974), Incentives and Risk Sharing in Sharecropping)
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Agriculture Reform: Household Responsibility System

Labor days per hectare 1953 Rice Wheat Cotton 250 120 300 1978 421 461 980 1985 328 281 643

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Patterns of Agriculture Reform

Started as an experiment by peasants themselves The first recorded practice: December 1978 Xiaogang Production Brigade, Fengyang County, Anhui Province 20 peasants representing 20 households put their fingerprints on an agreement:
to divide the commune's land among the households to fulfill the procurement quota of grain to the state in case trouble, surviving households have obligations help others

Spread to other counties in Anhui The central government encouraged the practice only in 1982 Spread throughout China by 1984
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Agriculture Reform: Household Responsibility System

What hasnt changed?
Land still owned by the village collectively Use right is transferable but not ownership right Land cant be used as loan collateral Redistribution of land still happens to accommodate demographic changes

Why?
Stabilization of rural populations The role of land as a means of security and insurance Political economy: the landless are a risky constituency
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The Side-Effect of Reform

Decline of some rural public services
Health care: barefoot doctors disappeared, hospital beds stagnated, village and township paramedics declined, private facilities increased but expensive
1978: 70% covered by inexpensive socialized facilities 1990s: less than 1/3

Elementary school: despite nationwide 9 year compulsory education, rural education suffering
Supply side: local public finance constraint, quality declining with real wages and migration Demand side: drop out rates seem to be rising
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Will China Starve the World?

Lester Brown: Who Will Feed China? (1995) Washington Post: How China Could Starve the World? (August 28, 1994)
Growth => Increase demand for food Import massive amount of grain Rises in world food prices and no one can supply

Scott Rozelle: How China Will NOT Starve the World (1996) David: China will reverse a 50 year downward trend in global food prices. (2010)
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How we got here:

Total World Grain and Oilseeds
Index: 1975 = 100
200

180

160

140

120

Peak

100
Peak

80 1975

1980 Production

1985 Yield

1990

1995 Area Harv

2000

2005 Percap Use

2010

2015 Population

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Source: USDA.

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Agricultural Technology Change I

Expanding output through intensification of land use
Land improvement through terracing: carve small flat plots on hills Multi-cropping: multi-cropping index over 150
Rotation Intercropping Relay cropping

Changing crops
Grain crops: Rice, wheat, maize, potatoes, etc. Economic or cash crops: Cotton, oil seeds, sugar crops, tobacco, vegetables, fruits, etc.

The Green Revolution

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Agricultural Economics
Demand
Calories and protein came mainly from grain Changing diet: shifting from grain to meat, vegetables, fruits, fish, poultry, etc. Forecasting future demand critical for world market Grain production is land intensive: China is a land scarce country Meat production requires a lot of grain: high conversion ratio for pork (4:1) (but low for poultry (2:1)) Comparative advantage of labor intensive products: vegetables, some fruits, etc.
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Supply

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Agricultural Economics
Government policies
Before 1996: redistribution from rural to urban (agriculture product prices below world prices) After 1996: redistribution from urban to rural (agriculture product prices above world prices) Agriculture tariffs (average) Wheat: 24% Maize: 29%

China both imports (wheat and maize) and exports (rice) grain. A net importer. Net self sufficiency rate in grain: set to 95%
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Agricultural Technology Change II

The Green Revolution crops: High yield varieties Three complementary ingredients to make the green revolution work
Improved seeds
hybrid rice and wheat Research and development (R&D) Multi-level research facilities

Fertilizer
Domestic production (imported big factories and small local factories) Imports

Water
Irrigation facilities Rice growing region (south of Huai river) vs. wheat growing region (north of Huai river) (Huai river is between Yangtze River and Yellow River)
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Complementarity: Fertilizer and Seeds

High-Yielding Variety Ou tpu t

Traditional Variety

Fertilizer Applied

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Fertilizer and Irrigated Area

45

60

40 50 35 Irrigated Area

30 Million Tons (Fertilizer)

40

25 30 20

15

Fertilizer

20

10 10 5

Million Hectares (Irrigated Area)

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Rural Motive Power

450

400 Million (head of animals; kilowatts of machinery)

350 Mechanical Power (kilowatts)

300

250

200

150 Draft Animals (head) 100

50

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Sources of Agriculture Growth

Inputs (land, labor, capital) Productivity
Institutional change (introduction of household responsibility system) Price change (increase of procurement prices for grain) Technical innovation
Using different types of inputs (seeds, fertilizers, irrigation) Shifting cropping patterns (multiple cropping, non-grain crops) Change to other high value products (off season vegetables, organic products)
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Chinas Agricultural Potential

Opportunities 1. Productivity growth impressive but not keeping pace with other sectors 2. Economies of scale serious institutional challenges Constraints 1. Land area small and shrinking 2. Water nationally scarce, most major aquifers are already in overdraft
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Asia Pork and Poultry Production

Million metric tons
14 12 10 8 6 4 2 0 1994
Source: USDA.

India Thailand Bangladesh Pakistan Indonesia Malaysia Philippines

1999

2004

2009

2014

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Asia Pork and Poultry Production

Million metric tons
100 90 80 70 60 50 40 30 20 10 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: USDA.

India Thailand Bangladesh Pakistan Indonesia Malaysia Philippines China

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China Pork Production

Million metric tons
120 100 80 60 40 20 0 1979 1984
China World

1989

1994

1999

2004

2009

2014

Source: USDA. Source: USDA .

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Chinese Arable Land is Scarce

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and shrinking.
Provincial Land Stock Changes

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Water too is scarce

Annual Rainfall

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Most Major Aquifers are in Overdraft

100 Million Metric Tons
650 600 550 500 450 400 350 300 2000 2010 2030 2050
Available Water Resources Water Demand, Best Case Water Demand, Worst Case
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Yellow River Basin Water Use

And cities are thirsty.

Urbanites are more than twice as water-intensive
Urban and Rural Residential Per Capita Water Consumption (L/personday) in Chinas River Basins

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Chinese Supply Conditions

Productivity growth has been impressive, but resource constraints are very serious. Output growth might sustain current trends for the next decade, but it is unlikely to accelerate in any major categories.

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Chinas Food Requirements

One of every seven people on the planet is a Chinese farmer. Should other farmers be worried about this? No. One of every five people on the planet is a Chinese consumer. Average incomes are rising fast, and so is the resource intensity of consumption. Concluson: You aint seen nothin yet.

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Income is Rising in China

(Current USD normalized to unity in 1980
100"

10"

GDP" GDPPC"

1988"

1998"

1980"

1982"

1984"

1986"

1990"

1992"

1994"

1996"

2000"

2002"

2004"

2006"

2008"

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Source: World Bank.

2010"
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1"

36

and so is Inequality

Source: USDA.

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Chinas Population is Moving,

(Rural and Urban, millions)
Half a billion people will switch from the food supply side to the demand side.

Source: UN.

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Urbanites have more purchasing power,

Chinas urbanites do not need food price suppression. This stimulates both domestic prices and imports.

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and Diets are Changing

Resource intensity

kcal/person/day

Percent of caloric intake

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Emergent Imbalances
Despite significant progress in productivity, the implications of these trends in supply and demand are both obvious and inevitable. Chinas growth can only be sustained with increased absorption of resources and resourceintensive products. As it has with energy, China will emerge as a leading global importer of agricultural products.

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China Soy Demand

Source: USDA.

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Chinas Soy Tsunami

Net trade in soy products (Million MT)

Source: USDA/ERS.

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Chinas Import Trends I

Growth rates are five-year averages of annual rates!
Product
Almonds Beef Cereals Cherries Crustaceans Blueberries Fish - whole (chilled, frozen) Fish - fillets (chilled, frozen) Frozen Potato/French Fries Grapes Hazelnuts Infant Formula Juices and Concentrates Lobsters (uncooked) Mollusks Oranges Pistachios
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Millions in 2004
4.048 7.110 2,218.543 2.334 312.036 1.163 1,516.575 45.556 51.485 67.546 2.297 88.821 61.001 0.131 332.462 36.994 17.432

Annual Growth 1999-2004

22.5 4.4 34.9 160.5 20.5 29.1 30.0 24.9 71.3 23.4 17.6 27.5 35.4 159.3 26.6 31.4 21.9
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Chinas Import Trends II

Product
Pollock Pork Poultry Prunes Raisins Salmon Scallops Soybeans Soy Flour Thickeners Whey Powder Wine (containers less than 2L) Wine (containers more than 2L)

Millions in 2004
1.250 54.452 153.413 0.922 14.666 26.612 8.023 6,956.654 1.758 12.604 119.744 25.247 24.436

Annual Growth 1999-2004

1.9 17.5 -17.8 39.4 104.5 63.0 15.5 50.9 5.9 14.7 15.6 30.4 -2.0

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Food Cost is Rising in China

Annual CPI change by commodity, 2006-8

Can a single economy reverse global food price trends?

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