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Market-oriented Reform and Coordinated Development of China’s Urban and Rural Areas (Abridged)

Feb 11,2005

Zhang Yongsheng, Department of Development Strategy and Regional Economy of DRC

Research Report No.187, 2004

II. The Inherent Mechanism for a Coordinated Development of China’s Urban and Rural Areas: How Market Forces Play Their Roles

1. The land system of the people’s communes and the disequilibrium of urban and rural development

Before China began reform and opening up, the land system of the people’s commune was a major cause of the urban-rural disequilibrium. Under that system, the peasants were unable to break off the yokes of land and the population flow between the urban and rural areas was strictly restricted. On the one hand, the collective mode of production tied the peasants to the land. On the other, the access for residing and working in the urban areas was closed to the peasants under the system of the people’s commune. Besides, the mandatory distribution systems for housing, food and other daily necessities also made it impossible for the peasants to live in the urban areas. In addition to the price scissors, there were at least three factors that had directly caused rural poverty before 1978 from the pure perspective of agricultural production. First, as rural labor was unable to freely move to urban areas, the pressure of China’s huge agricultural population had nowhere to release and the per capita land possession was very low. Second, as the per capita land possession was low and there was a large amount of surplus labor in the rural areas, the effective per capita labor input was low. The result was that both land and labor inputs, the two basic factors for agricultural production, were very low and the rural labor productivity was also very low. Therefore, a flow of rural labor to the urban areas had two potential effects for raising agricultural outputs. One was to expand the real per capita land possession in the rural areas, and the other was that the effective labor input by each peasant would be higher thanks to the higher real per capita land possession. The simultaneous increases in both per capita land possession and labor input, the two major factors of production, could bring about an effect of partial increasing returns on agricultural production. A quantitative analysis of the data from China’s 30 provinces and municipalities done by the author in 2003 proves that a tangible effect of increasing returns existed in the production of cereals and cotton. But as the labor was unable to freely move to the urban areas under the system of the people’s commune, the above benefits were unable to manifest themselves. Third, under the mode of collective production, laziness and a free ride were rampant in agricultural production because the peasants had no right to directly claim the residual .

2. The substitute functions of the household responsibility based land system for land market and the coordinated development of the urban and rural areas in the 1980s

The flow of agricultural labor must be backed up with a mechanism for the reallocation of the rural land resources. In other words, such a flow must have both a rural labor market and a rural land market at the same time. Otherwise, such a flow would lead to an inefficient allocation or waste of land resources. Ostensibly, as land was collectively owned and as there was no system for the transfer of land-use rights, the reform based on the household contract system failed to bring about a formal rural land market and the flow of rural labor to the urban areas seemed likely to have a negative impact on agriculture due to the absence of a rural land market. But the truth before the 1990s was precisely the opposite. The reason was that although a formal land market was non-existent, the land system based on the household contract system created conditions for an informal land market. When some members of a family flew to the urban areas for employment, their land was operated by other members of the family. This intra-family land transfer was equivalent to an informal land market. As China had too many people for too little land, this intra-family land transfer had a large room for substituting a formal land market.

Therefore, the household contract system had made two unnoticeable contributions to China’s agriculture, in addition to the well-known contributions of greatly stimulating the peasants’ enthusiasm for production. First, after the peasants flew to the non-farm occupations or urban areas, the land resources could be reallocated within families and hence the peasants’ real per capita farmland would be higher. At a time when a formal land market was absent but the functions of a land market must be available, this substitute function played a key role in promoting a coordinated development of the urban and rural areas. Second, less surplus rural labor helped increase the effective labor input of the peasants in agricultural production. With the simultaneous increases in per capita land and labor inputs coupled with the upward adjustments of the prices of farm products, China was very successful in developing its agriculture after the introduction of the household contract system. When rural labor moved to urban areas, industrialization, urbanization and agricultural performance all advanced. The peasants’ income increased steadily, and coordinated development between urban and rural areas also appeared. Therefore, the household contract system China introduced in the 1980s can indeed claim to be a great creation. Such a clever institutional arrangement enabled the functions of a market economy to work normally when some institutional conditions were absent.

3. The disequilibrium of the urban and rural development in the 1990s and the absence of a rural land market

In the 1990s, the disequilibrium of China’s urban and rural development became extremely grave, characterized by the problems of agriculture, peasant income and the rural areas. From 1995 to 2003, both grain output posted a downturn and the growth of peasant income also slowed down. The annual growth rate of peasant income was only 4.3 percent during the 1990-2002period, far lower than the 7.2 percent annual growth rate for the 1979-2002 period (National Bureau of Statistics, 2003). This of course was a result of diverse factors, such as peasants’ financial burdens, rural tax and fee system, grain policies, flawed land system and the absence of self-government by peasants at the grass-roots level (Chen Xiwen and Han Jun, 2003). Here we attempt to investigate the impact of the absence of a formal rural land market on the urban-rural disequilibrium in the 1990s.

As the limited function of the household contract system to substitute the land market ceased to be effective with the appearance of a massive flow of migrant workers, which had a great impact on the coordinated development of the urban and rural areas (Zhang, 2003). In the mid-1990s, China witnessed an unprecedented migration wave involving hundreds of millions of people. The mode of intra-family land reallocation failed to cope with the demand of China’s rapid industrialization and urbanization. Under that circumstances, a series of land market-related consequences appeared. One of the most serious consequences was that a large amount of land was left idle. This land idling was closely related to China’s unique land system. Before a new land contracting law was introduced in 2003, the transfer of land-use right had no clearly-defined and operable legal basis (though the documents of the central authorities encouraged land concentration in the good hands in farming). When returning land to the collectives would not be compensated, leaving it idle could reserve the land-contracting right. Therefore, leaving land idle became a rational choice for many peasants who went to the urban areas for employment. Some people attributed land idling to the excess cost of agricultural production. But the phenomenon of turning leased rural land into contracted land indicated that the fact that land ownership was unable to realize optimal allocation through free trade could be a more important cause of land idling. The result was that when the flow of rural labor reached a certain scale, a continued absence of a formal rural land market would significantly weaken the efficiency of land resource allocation and make it difficult to improve the efficiency of agriculture along with the industrialization and urbanization.

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