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Rural reform bumpy, but promising
2003-10-14
China Business Weekly
The new Party leadership has resolved to tackle issues concerning agriculture, rural areas and farmers since it came into power late last year. Experts agreed at a recent seminar that efforts should be made from a macro-economic perspective rather than within rural economy itself, and farmers' employment in non-agricultural sectors is the key to achieve a prosperous rural economy in Central China and policy adjustments need to be taken to boost western development.
Redundant rural population poses problems
"All of the problems in the rural economy are related to the large rural population, and nothing can be achieved in rural economic development without successful population migration," said Justin Lin, director of Peking University's China Centre for Economic Research (CCER), when giving his research report on the rural economy at a recent CCER seminar.
Sponsored by the Asian Development Bank (ADB), the research was designed as a policy-oriented reference for ADB's poverty relief activities in China.
This migration, he stressed, refers to not only employing rural labourers in the cities, but also the changing role from farmers to workers, including part-time workers that still farm on the land during busy seasons.
"It is impossible for all of them to rush into big cities," he said.
China now has a population of 1.3 billion, 70 per cent of which are working on 100 million hectares of farmland.
"Farmers cannot raise their incomes and living standard by just working in the fields," he said.
The output of each household is unlikely to increase by large margins, despite better cultivation technology, since farmers are only assigned very limited areas of land.
Moreover, farmers usually suffer, rather than benefit, from the increased yield, as prices of agricultural products have been lowered on the market, where demand failed to grow accordingly, said Lin.
That explains the growing income gap between the urban and rural populations since 1984, although the launch of the contract system with remuneration linked with output unexpectedly aroused farmers' enthusiasm in production and brought more income to farmers until 1984.
Lin suggests the key emphasis of a successful migration is the migration of farmers from central regions -- between eastern developed coastal areas and western inland regions.
The central regions here cover South China's Guangxi Zhuang Autonomous Region, Central China's Hubei, Hunan and Henan provinces, East China's Anhui and Jiangxi provinces, Southwest China's Chongqing Municipality and Sichuan Province and North China's Hebei and Shaanxi provinces, with a total rural population of 500 million.
The poor environment in those areas results in inefficient agricultural production, and the large population further worsens the situation. Migrating people from this area to towns and cities is less costly and more efficient than offering poverty relief to improve the environment.
"Experience in developed countries also proved it is necessary during the process of urbanization," he said.
Statistics released by the World Bank indicate that rural labourers account for 69 per cent of the total population in developing countries, while the corresponding figure in developed countries is only 5 per cent.
The rural population in the United States accounted for 50 per cent of the country's total in 1870, at the beginning of its industrialization, dropingp to 2.2 per cent in 1985. For Japan, the figure decreased from 70.1 per cent in 1870 to 5.9 per cent in 1993.
"China has made great achievement in helping farmers get employment in non-agricultural sectors," said Huang Jikun, a researcher with the Centre of Rural China Economy, affiliated to the Institute of Geography of the Chinese Academy of Sciences.
Only 50 per cent of the non-urban residents still work in the fields all year round, while out of the rest, half are already employed in non-agricultural sectors, at least on a part-time basis, he said.
Shrinking business
Viewed as an important way of supporting China's rural economy over the past two decades, small and medium-sized enterprises have faced tricky issues regarding their further development in recent years.
"Small and medium-sized township enterprises in counties and sub-county level regions are able to absorb most of the redundant rural labours," said Lin, adding that they are still an important means of maintaining stability in the rural economy.
Statistics indicate that the number of labourers employed in village and township enterprises remained above 120 million between 1994 and 2000, when China's State-owned enterprises cut off their workforce from about 110 million to 80 million in the economic reforms turning them into market-oriented companies.
However, village and township enterprises have developed less rapidly in recent years, which led to fewer job opportunities for farmers.
Industrial-added value of village and township enterprises in China was estimated at 2,730 billion yuan (US$323 billion) in 2000, a year-on-year increase of only 10 per cent, a record-low growth rate since 1994. This growth rate remained around 50 per cent in the early 1990s.
Despite some internal problems -- poor corporate governance, less developed technology and low productivity -- the slowdown has much to do with the country's financial reforms since 1997 in the context of economic deflation, said Lin.
The four major State-owned commercial banks -- the Bank of China, the Construction Bank of China, the Agricultural Bank of China and the Industrial and Commercial Bank of China -- have been required to tighten their grips on issuing loans since 1997.
Currently the banks are trying to eliminate their non-performing loans and minimize their risks in new loans.
Many village and township enterprises with poor credit are not able to receive sufficient bank loans, which is often their only access to funds.
Moreover, the "Big Four" have begun to focus their businesses on infrastructure investment in cities for higher, stable profits, while many of their outlets in rural areas have been shut down.
"It seems that our financial reforms fail to bring substantial benefits to the rural economy," said Wen Tiejun, president of China Reform magazine, "and we have yet to find a solution that works, especially in the central regions. But the complicated financial problems in rural areas need more than one solution."
Reforms of taxes and fees: Who pays the bill?
"Although the reforms of taxes and fees are carried out in rural areas, farmers bear an even heavier burden today," said Lin.
"The point is that the local governments of county and sub-county levels have to pay 70 per cent of the country's fiscal expenditure, but their fiscal revenue accounts for only 20 per cent of the total," he said.
According to Lin, unless the central government transfers a large proportion of its fiscal revenues to the local governments, or many local officials are laid off to reduce the expenditure, farmers will continue to suffer more. This is because the growing investment in public facilities and infrastructures in rural areas, designed to improve local farming and traffic conditions, will surely increase the fiscal expenditure of local governments, which in turn, have to collect more taxes and fees from farmers.
Wen also offered some suggestions.
First of all, any item of fiscal expenditure at local government levels should be clarified so that government departments could be responsible for their own expenses.
"In other words, whoever spends the money must pay the bill," he said.
In particular, central government officials should not be dispatched to local governments with heavy financial pressures, as these officials are paid by the local government.
Wen speculated that in this way, the fiscal debt of governments at county and sub-county levels is expected to be reduced by at least 30 per cent.
Fiscal debt results from the fiscal expenditure that fails to cover fiscal revenues. China's total fiscal debt is estimated between 600 billion and 800 billion yuan (US$72.29 billion and 96.39 billion).
However, "the huge piles of bills will not be paid out," according to Wen, "because we have too many redundant officials working in local governments, and some of these governments' functions overlap. A reshuffle is urgent."
Wen also suggested local governments at different levels, for example, the government of a village and that of a county, have a trade-off as independent economic bodies.
"Only with all the above measures taken can our tax and fee reforms take effect," he stressed.
Policies to be reconsidered
"Western development cannot bring instant benefits to poor farmers in western and central regions, despite its long-term benefits," said Lin.
China initiated its cross-century western development programme during former Premier Zhu Rongji's term of office, with a key emphasis on improving the infrastructure and environment in western China.
Poor farmers cannot expect to become rich soon after highways and railways are built near their villages, as farming is still their major, and probably only, source of income, he said.
Nevertheless, the improved traffic conditions will fuel long-term local economic development.
Infrastructure investment will be able to stimulate domestic demand and ease deflation, so that the national economy resumes its sound, rapid and sustainable momentum and creates more job opportunities in non-agricultural sectors, he said.
The Chinese Government has issued large amount of national debts since 1997 to increase its infrastructure investment in the western and central regions.
But Huang considers the western development as a policy aimed at social cohesion more than instant economic benefits. But he doubts "the aid is too slow to be helpful."
Meanwhile, the government is paying too high a price to improve the fragile environment in western regions, making the policy an impractical one to implement.
"The expenditure on compensations for farmers who convert arable land into forestry has become a heavy burden for the central government," said Lin.
The Chinese Government paid more than 2 billion yuan (US$240.96 million) and offered 3 million tons of grain to farmers for the 2 million hectares of land converted into forests last year. China has promised to convert a total of 100 million hectares of cultivated land to forests by 2005.
"This means at least 20 billion yuan (US$2.41 billion) and 30 million tons of grain each year, and how can the central government pay for such a huge cost?" said Lin.
According to Lin, those who benefit from this improved environment should pay the cost, but this will need more consideration before it is put into practice.
China's environment is becoming far more fragile than two decades ago, although the average income per capita has been increasing during this period. The Yangtze River flooded three times in the 1990s, causing huge economic losses in neighbouring areas.
Agricultural subsidies
Experts suggest the government subsidies to agricultural sector should be used for purchasing and maintaining agricultural facilities to improve farming conditions, instead of being allocated to individuals.
According to China's WTO commitment, the Chinese Government will gradually raise its subsidies to agricultural products to 8.3 per cent of the sector's total production value.
Before the WTO entry, the Chinese Government spent about 4 billion yuan (US$481 million) annually on agricultural subsidies, accounting for only 2 per cent, and now has reached 30 billion yuan (US$3.61 billion).
Despite the large amount of subsidies, each rural household receives very limited amount of aid that is not enough to enhance the income. However, if allocated to local governments and used collectively to improve farmers' farming conditions, the subsidies will generate more profits to farmers, said Lin.
Meanwhile, more favourable policies should be made to attract foreign direct investment (FDI) in China's agricultural sector, suggested Lin. The current situation is that only 1 per cent of the country's FDI goes to agriculture, he said.
The government is also supposed to invest more in rural education, including nine-year compulsory education (primary and junior middle school education) and vocational training, so that farmers can soon adapt their roles to becoming workers in the secondary and tertiary sectors, he added.
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