By Xiao Junyan

I. Major Features in the New Stage of Rural Economic Development

The emergence of numerous new features in China's rural economy at the turn of the century indicates that the economy has entered into a new stage of development. Its major features are as follows:

1. The functions of rural economy in the national economy have expanded from the original supply function of producing agricultural products and industrial products for daily use in the main to a demand function of providing a consumption market for agricultural and industrial products, while its original supply function is maintained.

In the past twenty years of reform and opening, because the national economy as a whole started at a low level, the basic daily necessities such as clothing, food, housing and transportation were in severe shortage, the urban industry was in great need of capital accumulation and the consumption of urban residents was in urgent need of improvement, hence the function of rural economy was basically set at the level of supplying agricultural products and some industrial products for daily use, and the consumption of farmers was also set at the level of "food and clothing? With urban and township residents became better off, there emerged a relative surplus in the consumption of agricultural and industrial products. However, the production scale of agricultural and industrial products for consumption, instead of being decreased, had to maintain stable and increase slightly, owing to the pressure from the following two aspects. On the one hand, the basic demand for consumption among the middle and low income urban residents and the majority of the farmers was not satisfied, while such a demand was a result of the unbalanced economic development as well as that of the insufficient macro distribution of income. Therefore, the consumption capability of this group is desired to increase urgently. On the other hand, agricultural and industrial industries for consumption products need to maintain employment. And accumulation of capital is necessary for adjusting the product structures and quality. This means, the rural economy is required to perform a demand function to provide market. Although the increasing demand in rural market is merely potential today, it is of vital importance to the development of the national economy in the next new stage.

2. The balance between supply and demand, which used to be decided by the increase of total supply and the quantitative increase of supply, is now determined by the simultaneous increase of its the total supply and total demand and the match of the structures of supply and demand.

The supply of agricultural products in the past was in serious shortage, and the key element in the balance of supply and demand depended on whether the total supply could increase. Against the background that the supply of agricultural products can satisfy people's demand for food and clothing of the whole nation, its continuously decreasing price and difficult in sales, demonstrate two possibilities. On the one hand, it might mean that the supplier is not able to meet the changing demand even though its supplying system (including price, variety, quality and quantity) has been adjusted. And on the other hand, it might mean that the total demand is not sufficient, or the structure of demand is not balanced. The supply and demand of agricultural products in China at present actually has problems in these two aspects.

Mechanism of supply aiming at eliminating shortage will inevitably lead to the pursuance of increasing output by stimulating the price step by step. In the course of gradually satisfying demand, the logical results include: the structure of quantity, variety and quality of the supply can not be adjusted to meet the demand, the increasing price has prevented the market from developing different consumption levels, thus limiting the market expansion. In terms of demand, it has been assumed for long that demand is always vigorous and shortage of supply is common. Therefore, the development of demand has been placed on secondary position. Although the target of total supply is usually calculated on the average figure per capita, which is not high, the total demand is in fact worked out based on the urban population only, which account for only 20-30% of the total population. This has led to two consequences. Firstly, the demand for food of the rural population, which account for the majority of the total population, can not increase in accordance with the growth of total supply, hence a notch in the demand has emerged. Secondly, the consumption of agricultural products of middle and low standard by farmers and a large number of urban residents with middle or low income have been checked, hence a gap in the demand has emerged. The deep rooted elements that lead to this situation are complicated and need to be discussed separately. However, it is no doubt that the time has passed when the balance between demand and supply was determined purely by supply, and the time has come when the demand and the supply should accommodate each other.

3. The allocation of production elements in the countryside will, on the one hand, move from agriculture and the countryside to merge into non-agricultural sectors and the urban areas, and on the other hand, high quality inputs of production elements will be needed.

It is the internal demand of the economy that production elements move to sectors and areas with higher performance. The production elements in the countryside used to be restrained within the agricultural sector before the reform and opening. Moreover, under the policy of "taking grain as the key", they were also constrained in the internal structural allocation. The structure of rural economy is being shifted to market economy after the reform and opening and the increase of free flow of rural labour, land and capital. However, the rural economy is still at such a stage that the primary objective is to provide people with enough food and that the non-agricultural sector almost doesn't exist. The flow of production elements is mainly within the agricultural sector and the non-agricultural sector in the countryside. This flow has promoted the harmonious growth of the production of grain, cotton and other products as well as the development of rural industry, which is represented by township enterprises. At late 1990s, farmers were better fed and clothed, they had an urgent need for increasing incomes, while the development of the non-agricultural sector was constrained by local production elements and the higher marginal cost in expanding the market, hence resulting in the reallocation of large numbers of rural labour and capital out of the countryside for higher marginal efficiency. This has been evidenced by the fact that the number of rural labour flowing into the urban areas is on the increase, and that the township enterprises and private sectors are moving towards, and even entering into the urban areas.

In addition, high quality elements are required to be injected into the countryside so as to form a productivity that is more suitable for the market. It is necessary to input advanced technology, capital and agricultural production material if the agricultural growth is to be changed from quantitative growth to the growth in both quantity and quality. Although the non-agricultural products have accumulated assets on a great scale and have fairly flexible systems, the overall quality of the capital is not high. It is necessary to have a second round of undertaking reform as it happened in the 80s-90s, when technology, talents and capital were absorbed from the state-owned enterprise and foreign invested enterprises.

4. The stability and restructuring of the national economy will rely increasingly on the de-agriculturalization of surplus rural labour or large scale.

It is an inevitable trend to adjust the structure in the national economy. However, the adjustment is confronted with the serious problem of "gap in the changing demand". Demand is required to contribute to the national economy in two aspects. First is to consume the surplus industrial and agricultural products for daily use to maintain the stability of the economy. Second is to accumulate enough capital for investment and realize structural adjustment after the traditional industrial / agricultural products have obtained stable, or even increased market share. One of the key points in creating new demand is to increase the overall income of farmers and promote the capability of consumption by means of transferring the surplus rural labour on large scales. Judging from the current income and expenditure of urban residents, we can see the following: Firstly, the overall consumption level has entered the stage of low increase. International experience has shown that it will normally take over 10 years before obvious changes can be seen. Secondly, the current and expected expenditure on housing, medical care and education has increased. All these "over ten thousand yuan" expenses will certainly reduce the speed or delay the increase of other consumptions. Thirdly, the increase rate of urban income has dropped significantly. It is mainly because the national economy has entered a period of violent adjustment. International experience has shown that it will take 10 years or even longer to complete such adjustment. As a contrast, the rural income and consumption are only equivalent to the urban levels of the mid 80s. The key in rural consumption is to increase the quantity. Take grain alone for example, if each farmer increases the consumption of animal food and indirectly consumes an additional 50 kg of grain, the annual total consumption will be over 40 billion kg. That is nearly half of the 100 million tons of low quality grain.

5. The capability of the rural household contract system in releasing the pressure from surplus population has obviously decreased. The potential of spontaneous de-agriculturalisation of farmers has almost reached its limit.

The contradiction between man and land has been fierce in the countryside in recent years. This has led to a variety of social contradictions. There were three ways to solve this problem in the past 20 years of reform and opening. Firstly, land was allocated equally according to the number of people or labour. Families contracted "land equally". All farmers were guaranteed to have a small piece of land to make a living. There were no landless farmers flowing into cities by large numbers. Secondly, farmers will use land as capital to invest along with their labour to establish non-agricultural sector on the spot combining external capital, technology and market. Thirdly, being pulled by the urban economy, farmers go to work in cities and towns without giving up their contracted land. The above three ways have contributed significantly to the economic growth in the past 20 years and will exist for long. However, with the national economy developing into a new stage, the limitations have become obvious. Firstly, operation on small pieces of land can not increase the living standard after rural population have solved the problem of food and clothing. It is difficult for farmers to continue to tolerate the huge gap in income and consumption level between the rural and urban residents. Secondly, the non-agricultural use of land is increasingly limited by the shortage of land. The advantage of farmers in using land as initial capital is decreasing sharply. Thirdly, along with the market development and the increase of competition, market demand that was typical in the period of shortage no longer exists. The requirement on the quality and quantity of the production elements for non-agricultural sector is increasingly higher. The development of the rural enterprises has effectively proved this statement. The annual employment was 4.09 million from 1990 to 1998, which decreased by 42% than that between 1980-1989, with net decrease of 20 million from 1997 to 1999. It is predicted by the officials concerned that the annual employment of rural enterprises will be between 2-3.5 million in the tenth Five-Year-Plan period.

II. Strategic Tasks of the Rural Economy in the New Stage of Development

Complicated situation with mixed problems and contradictions has arisen in the rural economy in China in the later period of the 90s. The outstanding issues include: the decrease of marginal return of small-scaled land operation, the relative surplus and price decrease of the agricultural products, the slowdown of the increase of farmers' income and the deterioration of the rural environment. All these are key problems and must be solved, of which, two are of overall and strategic importance to the rural and national economy: to maintain the total supply of agricultural products stable but with slight adjustment, and to speed up the de-agriculturalisation of rural surplus labour. The key point of the first one is to be stable and the key point of the second one is to be flexible. So long as the stability and flexibility are achieved, the rest of the problems and contradictions will be easy to resolve.

1. The strategic function of the total supply of agricultural products, which is stable but with slight adjustment, should be maintained.

Firstly, the stable total supply of agricultural products is still playing a fundamental role in stabilizing the national economy. The sufficient supply of agricultural products contributed significantly to maintaining the progress of the major reform and the stability of rural and urban economies in recent years. The excessive drop of price of agricultural products and the difficulty in sales are obviously unfavourable to the farmers. However, the number of employees being laid off or diverted to other jobs from the state-owned enterprises, collectively-owned enterprises and government offices in urban areas has increased significantly. The income for this group has increased slowly or even decreased, while their expenditure (both current and expected) of the "ten thousand yuan grade" on housing, education and medical care has increased significantly. The dropped price of agricultural products happens to offset their insufficient income to certain extent and is particularly helpful for the low income stratum in the urban area to make a living. The food price for urban residents changed from increase to decrease in 1997 and then decreased absolutely for two consecutive years. In general, the retail price of food in urban areas dropped by about 25% in 1999 as against that of 1996. It means that the expenditure per capita for urban residents decreased by 500 yuan, or the income increased by 500 yuan, which was equivalent to the expenditure increase in medical care, education, culture, housing and transportation in the same period. This sum is more significant to those with middle or low income, which account for the majority of the urban population. What we need to judge now is how the national economy will develop in the future. If it can come out of the low web, the income of urban residents increases fast and the price of agricultural products increases accordingly, it will not be a big problem to decrease the total supply of agricultural products. However, there are a lot of uncertainties in the development trend of the national economy. And it is a simple fact that the economy is in the stage of severe adjustment. International experience has also proved that the adjustment of economic structure cannot be completed in a few years. Therefore, it will be helpful to take the strategic initiative if we can maintain the stability in the supply of agricultural products, especially the agricultural products in large quantities.

Secondly, it is also of fundamental importance to maintain the comparatively stable income of farmers if structural adjustment is conducted while maintaining the stability of the total supply. The reasons for the surplus of agricultural products in the recent years were complicated, including the variety and quality not in line with the changing demand, the low level of processing and transformation, the too-high price in the previous years and the insufficiency in the demand as well as the imbalance of the structure, etc. Under this circumstance, it will lead to higher loss for farmers if they are required to plant on large scale high quality crops with higher prices, because the input of such varieties will be high and sales of the products will be difficult as a result of the shortage of total demand. On the contrary, if they rely on the former varieties they will be able to achieve small profit. If the adjustment of structure is carried too far and the total demand is insufficient, the result will be excessive decrease of total output, at the same time, new products will be difficult to sell. It will be a great discouragement to farmers’ enthusiasm in production.

Thirdly, the favourable elements for simulating the total supply phased out and the unfavourable elements increase. There were a lot of favourable elements that resulted in the continuous increase of agricultural products in the previous years. The main elements include: the curb on "heatness of taking land" by the central government to maintain the planting areas; provincial governors were held responsible for agricultural production and the sharp increase of purchasing price for grain and cotton; the faster growth of national economy, which led people to expect the increase of price and demand for agricultural products, thus stimulating the production; and the favourable climate with big risks but without big disasters. However, the situation has changed significantly. First, planting areas need to be reduced to improve the environment. It is predicted by the departments concerned that about 100 million mu need to be restored from tilling to tree or grass planting by 2010. Second, decrease in price and difficulties in sales have demonstrated the negative effects. The farmers maintained stable production in recent years, because they wanted to wait and see if the demand and supply will change in the market. However, the market price, purchasing price and protection price have kept decreasing. Some varieties are no longer under protection. The farmers would have reduced the output even the government hadn't advocated reduction. The planting areas for grain shall be decreased by 50 million mu this year. This is a significant decrease. A large part of that will simply be left unplanted by the farmers. Third, the period of bad weather has arrived. The output of about 60% of the land in China depends on the weather. The stable increase of agricultural production in 1995-1999 coincided with the wet season. Although there were floods, no great disasters occurred. It is often the case that serious flood is followed by serious drought. This is the main threat to China's agriculture. The nation suffers from serious drought this year. It is difficult to predict how the drought will be like in the coming years. The Chinese people are experienced in fighting against the flood, but not against the drought. Fourth, the international and domestic political and economic situations are becoming complicated. The financial burden of the state has increased. It is not likely that the government is able to provide policy support to agricultural production as it did several years ago. Fifth, the pressure from demand is increasing. It is unrealistic to expect the total demand for agricultural products to increase absolutely in a short time. However, the pressure from relative demand is high. Take the demand for grain for example, some 100 million mu will become forest by 2010. If the average output per mu is 200 kg, the decrease of total output will be 20 billion kg. The farmers who become landless in this event will need 20 billion kg grain each year. Take the low consumption level of 300 kg per capital for calculation, if the population increases by 100 million, 30 billion kg grain will be needed. All these situation were not in existence before.

2. The strategic role in speeding up the transfer of surplus agricultural labour into non-agricultural sectors

It is inevitable that surplus agricultural labour will transfer into non-agricultural sectors in the course of industrialisation and urbanisation of a country. The transfer of surplus agricultural labour has started since the reform and opening and the transfer has been on very large scale. It may sound superfluous by talking about speeding up the transfer alone. However, it is actually necessary to raise this point, given the past and future trend of the social and economic development in China.

Firstly, the income of farmers has been low for long and unemployment has been serious. Such a situation can not be allowed to continue, otherwise the possibility of social upheavals will increase. The living standard of farmers has increased significantly since the reform and opening. However, the starting point is too low. Moreover, the national economy has inherited the development strategy of the previous 30 years, that was to "develop agriculture in the countryside and industry in cities". Hence, the space for the income increase for farmers is little. Such a situation has continued for 50 years since the founding of the nation. The feeling of unfairness was relieved in the early founding years and in the 80s when farmers had enough to eat and clothe as a result of reform in the countryside. But the problem was not solved completely. Now the key issues are as follows. On the one hand, given the slow increase of income of farmers, the gap between the living standards of rural and urban residents has widened, aggravating the farmers, feeling of unfairness. On the other hand, due to the reform of the social and economic systems, the degrees of opening between rural and urban areas as well as home and abroad have differed significantly. Information and media have become popular. The traditional concept of "30 mu of land with an ox, wife and children on the bed" is no longer acceptable to the young and middle-aged farmers. They are eager to catch up with the urban life. The key is that it is impossible for small-scale land operation to make high quality living for the surplus population. The situation that people are satisfied with enough to eat and clothe will no longer continue. Increasingly large numbers of farmers enter into cities to look for work since the 1990s, regardless of the rise or drop of the price of agricultural products. One can hardly imagine what will happen if 60-70 or even 100 million young labourers flow into the big and middle sized cities without stable work nor income.

Secondly, the national economy is confronted with a series of major problems, the solution depends on the large-scale de-agriculturalisation of surplus agricultural labour. There is a great "gap in the changing demand" in the course of achieving economic stability and structural adjustment in China. The consumption demand for products of traditional industries and the demand for low-cost labour in these traditional industries are all very important. The pressure from the huge population is too heavy in China. The living standard of the people as a whole is still low. It is extremely important to the development of national economy and the social stability that the traditional industries are stable and expanding. Moreover, the market expansion of traditional industries will provide necessary capital accumulation for the structural upgrade. From the point of view of the countryside, the de-agriculturalisation of large number of surplus labour will increase the income of both the transferred farmers and those who remain in agriculture. Thus, the consumption demand for middle and low standard agricultural products and industrial products for daily use will be vibrant. From the point of view of non-agricultural sectors, it is difficult to reduce the high labour cost and the consequent high product cost which were resulted from the old systems in state-owned enterprises. In the course of reform, some labour-intensive sectors employ by large batches the surplus rural labour, whose salary is only 1/3 –1/4 of that of urban employees in the state-owned enterprises. These sectors are able to achieve higher profit with competitively low-cost products. From the point of view of the state, it is one stone killing two birds strategy to realize de-agriculturalisation. When the state finance experienced difficulties in the later period of the 80s during the structural adjustment of the economy, it was the "farmers" who helped the country overcame the difficulties. The "farmers" refer to the township enterprises. The main advantage of township enterprises lies in its cheap labour.

The time for the adjustment of the rural economic development strategy has arrived. The strategic task for rural economic development in the past 20 years of reform and opening was to solve the problem of serious shortage of supply of agricultural products. All the key measures in the rural reform were set to achieve this aim. Now the supply of agricultural products is stable. People have enough to eat and clothe. The total demand is not sufficient. The potential for raising price on the part of the government is limited. The number of farmers moving around to look for jobs has kept increasing. All these mean that the rural economic development strategy for the new stage needs to be adjusted. In other words, the old strategy of solving the shortage of supply needs to be changed to a dual strategy which focuses on maintaining the stability of supply while achieving adjustment in structure, and on speeding up the de-agriculturalisation of the surplus rural labour.

III. Difficulties in the Reform and Development in the New Stage

1. The difficulty in smooth transition. Before the surplus rural labour are transferred on large scale and before the emergence of the new demand, there is no enough powerful support for the stable supply of agricultural products and the expansion of traditional industrial products. If the government fails to provide the support, it will exert negative impact on the national economy. If the government provides greater support, it needs careful planning to maintain a balance between the demands of state finance and policy credit from other sectors and to make sure that the financial support will actually become farmers' income, that is, to conduct current consumption without being stranded or lost on the way.

2. The difficulty in achieving balance between the large scale transfer of surplus agricultural labour and lack of funds. Transfer of surplus agricultural labour on large scale is only possible with large-scale input of funds. Otherwise the strategic role can not be achieved. However, industrial upgrade and urban employment also demand for huge funds. Therefore, a balance point and a mode of balance need to be sought among industrial upgrade, urban employment, lack of funds and the transfer of surplus agricultural labour.

3. The difficulty in increasing the ability of farmers to organize themselves against the market risk. In the past 20 years of reform, the state has tried to reform the rural supply and marketing cooperatives and the credit cooperatives into farmers co-operative economic organizations. It also experimented to set up economic associations in the countryside. Although certain achievements had been made in some areas, it was not successful in general. Farmers have also tried to set up similar organizations, although most of them were lose, small-scale technical associations or institutions with little influence. From the perspective of the whole nation or a province, there is no comprehensive or professional self-service organization for farmers with the nature of an economic association. Such a situation is not helpful for farmers to enter the market, nor for government to guide the market. There are two reasons for this. Firstly, the operation scale and capital of the farmers are small, hence the inadequate capacity to cover the cost of running such organizations. Secondly, the current circulation system and commercial capital have prevented such organizations to develop. It will be a difficult task for a long time in the future for the government to support but not to interfere with the self-organization of farmers, and to achieve balance in their relationship with the current commercial capital.

4. The difficulty in setting up highly efficient government system for agricultural service and adjustment. At present, the government departments that provide support to agriculture and the service departments supported by the government, such as finance, agriculture, supply and marketing, grain, information, are staffed with around 15 million people, they take a large amount of finance and credit funds, but the services they provide for farmers are far from enough. The superficial reasons include: lack of co-ordination among different systems and failure to exercise joint effort; ill-defining of the system and the function, too commercializd, or without any orientation; and the high loss the government input. The fundamental reason lies in the fact that there lacks adequate measure to solve contradiction between farmers' high demand for service and their small capital and insufficient paying ability. In other words, effective joint point is yet to be found between the small farmers' behaviour and the government behaviour under the market economy.

Research Department of Rural Economy

(Participants in discussion: Lu Wenqiang and Cui Xiaoli)

July 2000