－－ISSUES　PAPER of 3rd Meeting of China Council for International Cooperation on Environment and Development Phase III

1. BACKGROUND

China is a large, rural country, but it is a country that is undergoing a fundamental transformation. The development of the rural economy and increasing efficiency of agriculture is of great importance in ensuring the rise of rural incomes, the maintenance of food security and the steady development of the national economy as a whole. With the rapid development of the industry in recent years, the share of agriculture’s contribution to the national economy has declined steadily. However, the share of the population in rural areas has remained high. Since agriculture is inherently less competitive, and because it provides a number of important services in the process of development (for example, poverty alleviation; the provision of high quality food and labor into the economy as whole), the rural economy deserves special consideration from policy makers.

Thanks to several decades of achievements, China already produces more food that it can consume, at levels of consumption enjoyed by most developed countries. Some parts of the rural economy have been the base for rapid industrialization and continue to be the source of exports. The rural economy has and will continue to be the sources of vast quantities of high quality, hardworking labor on which China’s industrialization and construction is being built. In light of these past contributions, starting from the late 1990s, China’s agriculture and rural development began to enter a new phase of development. The new period of development, while embodying a lot of potential for new growth, has its own set of problems. In trying to guide the rural economy into this new phase of development, leaders are going to need a new set of objectives, institutional arrangements and policy tools. In the 21st century, for China to be successful in development the attention of policy markers to agricultural and rural issues must become more concentrated and the investment in the sector must increase. Given this new environment and phase of development, we address the major subject of study placed before us: how can China manage the rural economy in order to raise farm income, guide the transformation of the rural economy to support the modernization of the overall nation while at the same time ensuring China’s food security

1.1 The Government’s Commitment to Rural Development

In beginning to address this set of questions, there should be no doubt about one issue: the national leadership in China—perhaps to a degree never before—is committed to the development of the rural economy and improving the livelihood of China’s rural population. As a way to show this commitment, China’s new leaders put forward their version of a new approach to development. The key phrase that characterizes their strategy is that they want to manage a balanced rural development. In their strategic transformation, they regard the problems of the three sub-section of the rural economy—those of agriculture; those of rural development; and those of the income of farmers—as problems of the first and foremost importance in building a well-off society. To implement this strategy, the top leadership has adopted a series of new policy initiatives. In particular, during the 16th National Congress of the Communist Party of China (CPC), leaders set the major tasks of developing the urban and rural economic and social development in a unified and planned way. The stress their overall goals are to build a modern agriculture, develop the rural economy and increase the income of farmers. In 2003, the new government adopted a series of concrete measures designed to meet the goals, including a.) the elimination of China’s dual economic structure, b.) the reform of rural taxes and fees; c.) the liberalization of China’s grain distribution system; and d.) increased investments targeted at increasing of the income of farmers.

Although there are many goals that are embodied in this overall strategy, the actions of the government, especially in a number of their main documents, demonstrates the importance of raising rural incomes. For example, in February 2004, the CPC central committee and the State Council jointly issued Document No.1, “Proposals on Policies of Increasing the Income of Farmers.” Subsequent documents make it clear that all avenues of economic development will be used (including technology; rural-urban integration; investment; etc.) to raise rural incomes. It is not just a matter of economic priority; it is being done for political reasons. A goal is set to try to eliminate the dualism in China’s economy and the metric of success will be to arrest the widening of the income gaps between urban and rural areas. In his government work report to the Second Session of the 10th National People’s Congress, Premier Wen Jiabao reaffirmed that the problems of agriculture, rural development and rural income were the center of the government’s attention during the current government’s time in office.

The new government has adopted the following measures to resolve the problems of agriculture, rural development and rural income:

(1) Raising the comprehensive grain production capacity to ensure food security.

The government remains interested in maintaining production of grains in the agricultural economy. Due to a fall in relative profitability, China’s grain output has been dropping in recent years. In order to motivate the farmers to grow more grain, protect and raise the comprehensive grain production capacity, the central government has adopted a series of measures to stabilize the general situation of grain production and supply. They include a number of strict controls on cultivated land protection. In addition, the government has begun subsidizing farmers to encourage the expansion of grain-sown area and higher yields. In addition, priority is being given in investments into the areas that specialize in grain growing, regions that produce 70% of China’s total grain output. Investments are in the form of both direct subsidies and are used to encourage the adoption of new seed varieties and the procurement of farm machinery. Direct subsidies have reached 10 billion yuan. In addition to increasing the output of grain, they also hope to increase the income of farmers. Ultimately, it is hoped that this policy will add to national food security.

(2) Promoting off-farm activities

Conditioned on the production of sufficient quantity of grain, the government wants to further promote the creation of jobs for farmers as a way to increase their income. Above all, leaders advocate reforming rural industries and promotion of urbanization as a way to encourage greater employment. Measures to reduce barriers for rural workers to enter the cities and the provision of job training are priorities. In addition, there also are additional investments that will try to help increase the employment opportunities in on- and off-farm agricultural enterprises.

(3) Continuing tax reform

The central government has given prominence to reducing the tax burden of farmers. Above all, the government waives all agricultural and specialty taxes except those on tobacco. The project reduction in tax payments will amount to 4.8 billion yuan. The government also will continue to lower the agricultural tax rate in the coming years. The plan is to reduce taxes by at least one percentage point per year until the entire agricultural tax is eliminated, which will be an additional reduction of 7 billion yuan. Since there will also be a reduction in the revenues of local governments from the tax measures, the central government earmarked 39.6 billion yuan as transfer payments.

(4) Deepening the reforms of grain markets, land requisition and the rural financial system

Document No. 1 issued by the central authorities committed to totally lifting any remaining control over grain purchasing and marketing by the state. According to the measures, all types of trading firms are allowed to trade grain and all barriers against trade are not allowed. These measures are being taken as an attempt to improve markets and protect the interests of farmers.

The central authority also calls for acceleration of the reform of land requisition system and follows the principle of protecting the rights and interests of farmers. Several measures are advocated, including controlling the amount of land that can be requisitioned and strengthening land use planning. The new regulations strictly distinguish between land for public welfare projects and land for business purposes. In doing so, it is hoped that the government’s land requisition procedures and compensatory mechanism are improved so fair and timely arrangements can be made for farmers that have lost their land.

The reform of the rural financial system is one of the most difficult and most crucial steps towards the future of China’s rural development. The goal is to improve rural financial markets. One objective is to keep the state’s financial institutions from retreating from rural areas and to improve the access by farmers to banking services. In order to strengthen financial support to farming households and rural medium-sized and small enterprises, the document calls for acceleration of the reform and innovation of the rural financial system. Directions have been made to rural financial institutions to increase lending to farm households and enterprises.

(5) Increasing investment in agriculture and rural development.

The government work report in 2004 called on the governments at all levels to increase investment in agriculture and rural development. In 2003, the central government earmarked more than 120 billion yuan for supporting agriculture; investments were supposed to have increased by at least 30 billion yuan in 2004, a rise of more than 20%. In 2004, leaders targeted investments for the support the reform of taxes and fees, rural education, health training, ecological building, and into a number of large and medium-sized infrastructure projects. A separate initiative invests in treasury bonds in order to support small projects to improve the infrastructure of rural areas. The document also calls for increases in poverty alleviation efforts.

(6) Promoting farm organization to improve access to markets

Document No. 1 also gives prominence to the creation of farmer profession associations (FPAs). In particular, it contains measures “… to encourage the development of all types of FPAs as well as households that seek to engage in the procurement of agricultural output and marketing of agricultural inputs.” The document called for new legislation to help establish a new legal basis for the development of FPAs in rural areas. In addition, investments were provided to aid their startup, especially of those FPAs that were engaged in activities that supplied information, technology, training, quality standards, certification and marketing services to rural households. The Ministry of Finance also was supposed to provide support to banks to support FPAs in their investment efforts in production, marketing and processing activities.

1.2 China’s New Stage of Agricultural and Rural Development

China is moving into a new, modern-phase of rural development. Although there are still traces of the traditional economy, the domestic and international environment within which China’s rural economy is emerging is more and more appearing like modernization is beginning. In the process of development, although its share in the national economy will drop, it will be taking on increasing importance in the overall development of China’s economy. In short, four changes demonstrate that China’s agriculture and the rural development is entering a new stage.

(1) Major changes in the nature of China’s supply and demand of agricultural products

In contrast to almost any time in China’s history, the supply of food in the nation exceeds demand. The ability of the nation’s grain producers has reached 500 million tons, Agricultural output on a per capita basis is rising. For example, in 2002, per capita meat output reached 40.8 kg and the per capita aquatic products output reached 35.6kg, well above the world’s average. In addition, in recent years, starting from the late 1990s, there has been successive number of good harvests. Until at least recently, grain in China’s storage facilities was sufficient. In short, total grain supply exceeds demand, as the agricultural product market has become a buyer’s market.

Hence, China is entering a new stage. Instead of trying to meet minimum nutrition needs (although food security is still an objective), today China’s farm sector is being increasingly asked to meet a number of different objectives: higher quality, higher efficiencies and producing in a sustainable way. As this happens, China will increasingly have an opportunity to restructure the agricultural economy. It will allow leaders to move the focus of its attention from grain to other tasks that will allow higher quality food to be produced more efficiently.

(2) Major shift in employment and the rise of off-farm jobs

As the pace of industrialization and urbanization has picked up and agricultural productivity has risen, China’s rural economy is beginning to shift its focus beyond the traditional borders of rural life. During the past 20 years, more than 150 million people have found jobs off the farm and the growth of income in rural China is almost completely due to the rise in off farm employment. The job is not done, however. There are still more than 100 million people in the rural areas that are engaged in relatively low productive, farming tasks. Given a chance, these people will opt, like others in rural China, to move across different regions and enter into China’s cities to seek jobs. This major shift in the focus of future employment is sure to bring about a series of changes in other areas.

(3) Major shifts towards urbanization

China is also urbanizing and the distinction between rural and urban is gradually beginning to fade. Historically, China’s industrialization created a dual economic and social structure. Farms were isolated from factories. Those living in rural areas were separate from those living in cities. As labor and commodity markets emerge, the line between rural and urban is starting to become less evident. The ties between agriculture and industry and between town and country have been strengthened. In many cases, there is an increasing interaction and symbiotic relationship between the development of cities and rural areas. Since the forces of macroeconomic policy are such that in the end a modern China will be mostly an industrialized, urban nation, many of the solutions of rural problems actually lie in urban areas. But, there are remaining constraints. The central government realizes that there are still fiscal, taxation , policy and other biases against agriculture and rural areas.

(4) Major shift towards market integration, domestic and global

After China became a WTO member, the nation is becoming increasingly integrated into world markets. The nation’s accession brings both opportunities and challenges to China’s agriculture. From a long-term point of view, integration with international market will allow China to exploit its comparative advantages. Indeed, even before WTO, China’s farmers have begun to import capital and technology and export a wide range of high-valued, labor-intensive agricultural products. At the same time, China is beginning to import more land-intensive products. Although these products are those that China should be importing, for those farmers that specialize in the production of these commodities, there will be a period in which they will bear the cost of world market integration. Moreover, if China is to begin to import land-intensive products, in the traditional sense of food security, there could be a conflict.

At the same time, China’s domestic markets are integrating rapidly. With the rise of millions of traders and improved infrastructure and communications, China has built a network of domestic markets that are among the most efficient and integrated in the world. In short, there are few economies in the world with a less distorted agriculture. While this is something that leaders should feel proud of, it also means that changes in prices due to shifts in trade and other agricultural policies will affect almost all farmers in the economy, whether in the rich coastal areas or in more remote regions of the nation.

Hence, China is in a new stage of development. Its producers are more than capable of producing enough food for the nation. There is great potential for export. With food productivity high and prices falling (as they will as supply exceeds demand), the top objective of most rural households is to move into the off farm sector. The distinction between urban and rural also is disappearing. Finally, the flow of goods and services and people are not only moving in an integrated way around China, but also into and out of the world market. In face of the above major changes in agricultural and rural development, China must be well prepared in the change of governmental functions, policy readjustments and technical innovation so as to satisfy the development requirements in the new stage. In short, a new development strategy is needed to bring agriculture and rural areas onto the path of sustainable development.

1.3 Need for New Approaches

Within the new stage of the rural economy, a new approach to government and increased effort in investment are needed in order to meet the overall goal of a more balanced development that will raise farmer incomes, improve food security and protect the environment. First, reforms are needed in the organization of government. A new framework is needed for managing fiscal and other governmental matters, including the development of a plan to manage the environment and to generally meet the needs of China’s modernizing and increasingly market-oriented economy. The new institutions need to instill a new ethic into government; officials need to change their role, becoming facilitators of economic growth, equity and environmental protection, rather than direct actors. Reforms are also needed to encourage the emergence of new partnerships with rural citizens. Because of the rise of markets, China needs to promote voluntary, independent FPAs and new arrangements with private enterprises that can help in the process of development and assist government in taking care of those who are in danger of being left behind. In particular, the rural social organizations lack legal status. The spirit of Document No. 1 that encourages the development of FPAs is a good opportunity to push the emergence of these organizations. It is, therefore, necessary to produce supportive policies while accelerating legislative procedures and providing financial support.

Second, a concentrated effort is needed to improve the resource base of the rural economy. It is a government responsibility to prioritize and mobilize investments into those projects that have public goods characteristics and to encourage private firms and individuals to make productive investments that will raise incomes and provide employment. In such an environment the state and its partners have much to do to help farmers increase their resource base. There are a number of concrete steps:

• Evidence shows that agriculture is more and more depending on the advancement of science and technology. It has to rely on the advancement of science and technology if China is to produce more agricultural products with the limited water and land resources and in order to reduce cost and raise competitiveness. The nation needs to intensify investment in research as well as make fundamental reforms to the agricultural research system, cutting redundancies to increase efficiency and creating the conditions for the private sector to invest in agricultural research.

• China’s most abundant resource, the labor of its rural population, needs to be the target of a sustained drive to increase the value of its human capital with investments into education, rural health and other areas. Above all investment in rural education is needed and elementary and middle school should be made free, like it is in all other modern nations in the world. Increased investments need also to be made to the health system. Investing in clinics and other rural health systems are a priority. The progress that has been made in the extension of a public-supported rural health insurance should be built upon. It has been welcome but needs to be made more flexible.

• Land and water also require large investments and new institutional arrangements that can increase the productivity and incomes of households; at the same time rental markets for cultivated land are needed to allow those left behind in farming a way to access greater quantities of China’s most scarce resource. Finally, the rural sector needs a healthy and effective financial system to intermediate capital from those who want to save to those who have an opportunity to invest.

• Investment also is needed for an independent effort in food safety and environmental protection. As markets change, both domestically and internationally, farmers are going to have to begin to improve the quality of their food from a food hygiene point of view, an effort that needs to result in food that meets health standards. Traditional practices, such as, irrational application of fertilizers and farm chemicals have become important factors standing in the way of a sustainable development. Society also is beginning to demand that the environment be given priority. In past it may have been possible for leaders to ignore harm to the environment in the name of meeting the nation’s basic needs. This is no longer true, since maintaining a clean environment is crucial to improving life in the rural economy and meeting the food needs of the nation. Therefore, it is necessary to work out a set of new laws, regulations, management rules and standards that will ensure the food farmers produce is safe and the practices that they use to produce the food does not harm the environment. Implementation is as important as the rules themselves. Finally, it is also necessary to spread the production of organic and green food. In areas where the ecology already has been seriously damaged, new and continued investment efforts are required to restore the ecology and reduce economic losses.

In short, if the government can create new institutions to transform the government’s role in development, foster a new partnership with the people and improve the nation’s resource base rural incomes can rise and the rural economy will be a force in China’s modernization drive. If appropriate decisions are made, the policies will not affect national food security and many policies will enhance the security of households. There are few inherent conflicts with environmental concerns and those with which there are can be offset by the adoption of appropriate complementary policies. Although complicated, these are essential components for successful implementation of the Five Balanced Development Strategies, a strategy that will provide for higher rural incomes, food security and a better environment.

2. RURAL DEVELOPMENT: INTERNATIONAL TRENDS AND INTERNATIONAL PERSPECTIVES ON CHINA’S SITUATION

Almost everywhere in the world, rural landowners, farmers, inhabitants of smaller towns and cities, and natural resource-based industries are facing a common set of new challenges. These include:

• the growing significance of global accords and influences that affect local action and opportunities

• tug-of-wars among competing demands for use of scarce resources such as water, and between different approaches to agricultural and natural resource development and conservation

• layered incentive systems and regulatory frameworks that work against sustainable development and, often, against sustainable rural livelihoods

• the need to protect environments, and enhance ecological services and biological diversity, sometimes at the expense of economic opportunities

• dangers associated with new technologies, loss of farmer’s rights, and need for equitable compensation, adequate access to rural credit, plus safety nets.

Alarm bells are ringing in both poor nations and rich about the consequences on rural people, on ecological security, and on both quality and quantity of food and natural resource production. Yet there is also a spirit of rural innovation that draws upon both continuity and change factors.

China’s situation is to some extent unique, but the country clearly will be influenced by international trends on rural development. And people elsewhere in the world carry their views and biases about the changes taking place in the Chinese rural areas. These perspectives are important in that they may influence international consumer behavior, China’s success in various international negotiations, and, perhaps, foreign investment in rural areas of China.

This section provides a brief summary of the dynamics facing virtually all agricultural countries, plus an overview of a half dozen major international trends influencing agriculture and rural development. These are trends occurring, or influencing both rich and poorer nations. And in the latter part of the section, several of the international perspectives about China’s rural development are introduced, with brief discussion on why China should recognize their potential impacts.

2.1 Conceptualizing Rural Development in the World Today

Since the start of the Industrial Revolution and colonial times, agricultural change has been driven by the pull towards cities; the emergence of new livelihoods; and, in some cases, by famine, war and landlessness resulting from population growth, civil conflict, land consolidation by legal and illegal means; and, of course, by opening of agricultural lands in forests, wetlands or other natural areas. The two key outcomes have been: (1) drastic reduction in the fraction of people engaged in agriculture once industrialization begins within a country; and (2) agricultural land use characterized by areas with intensified production and by larger areas with lower inputs, often of marginal productivity. The pressures and tensions on rural people in both rich and poor countries have led to many situations where it seems the only constant is change. Rural governance models have great difficulty in addressing local and regional needs, especially in an era when problems are becoming more complex and interconnected, and where factors such as global trade have become significant. The net result is that rural people can feel disenfranchised, forgotten, or the victim of policies forged far away and sometimes without their best interests in mind.

The view toward agricultural and rural development in the modern world has changed dramatically in the past several decades, evolving to a view that China can learn from (but which, in fact, is fairly close to what leaders have been doing already). The new view of development differs drastically from the past. Traditionally, agriculture was thought of an inferior partner in development. Since the size of the sector falls during development, it was logically considered that it could be ignored. Why do leaders want to invest in a sector shrinking? Some thinkers urged policy makers to treat agriculture like a black box, from which resources could be costless extracted. All investment was supposed to be targeted at the industry and the cities. As a low productivity sector, it did not deserve investment.

Unfortunately, countries that took this path seriously soon found out that while such a strategy may work in the initial years of development, in the longer run it slowed development and often ended up in failure. Neglect of agriculture meant that a large part of the population was left out of the development process. If those in the low productive part of the economy were not invested in, they found it difficult to shift to the developing parts of the economy. Dual economies grew apart. It was found that in many cases, production in agriculture fell and food prices rose. Many households fell into isolated subsistence. When their situation deteriorated more, in many nations farmers finally reached a point in which the most rational action was to rebel against the government and those wealthier inhabitants in the cities. When this happened, of course, the stability that is required for growth disappears and development stagnates and can even go into reverse. There are many examples of countries that encountered these difficulties, such as, Argentina, Mexico, Nigeria and even to some extent the Former Soviet Union.

The Five Roles of Agriculture

Modern development economists mostly agree that the role of agriculture and rural development is absolutely an integral part to process of nation building and healthy development. Agriculture plays five roles in an economy:

(a) supplying high quality labor to factories, constructions sites and the service sector;

(b) producing low cost food which will keep wages down for workers in the industrial sector;

(c) producing fiber and other crops that can be inputs to production in other parts of the economy;

(d) supplying commodities that can be exported and earn foreign exchange which can help finance imports of key technology packages and capital equipment;

(e) raising rural incomes, which has several important functions:

• directly improve the welfare of those left behind in rural areas during the first wave of migration into the cities;

• provide means of investment for rural residents that will allow them to invest in their future—in education; in migration to the city; in small businesses both on- and off-the-farm;

• increase demand for products being produced by industry and the service sector.

If it is accepted that having a high quality population that is able to produce abundant quantities of low-priced food and other agricultural economies (as well as having a rural sector that does not believe it is disenfranchised), then the strategy that a government needs to take in fostering the rural economy should be clear. An economic environment needs to be set up that will allow rural people to mobilize the resources and make the investments from which they can begin the long process of shifting from the rural to urban economy. This means there has to be a responsive government. The needs of rural people in different parts of a nation at different times of the development process vary widely. In some places (such as suburbs and locations in rapidly developing parts of the economy), there needs to a sustained effort to build up villages and make them into places that villagers will live in while the city grows up around them. In other places, a supportive environment is needed as people begin to move to the cities. There will be those left behind. The social services need to be there so their lives can go on even while their children and grandchildren are settling elsewhere. When farms are small and households are poor, organizations are needed to help farmers take advantages of the new opportunities that markets offer and not be taken advantage of. In short, government is needed that will play an enabling role and develop partnerships with the people to help them fit into the modernization process that is going on around them.

Large volumes of investment also are needed. Especially in the later stages of development (such as the time that China is nearing), investment is needed so agriculture and the rural economy can play its role better. Investment in education, training, health and social services are needed to increase the productivity of the labor force when they arrive in the factories. Investment is needed in agriculture to improve productivity to keep food prices low, allow farmers to adopt new technologies and farming practice as markets change, and to raise incomes of those that are still in farming. Investment is needed in technology, land, water and other key inputs. Rural financial organizations need to be available and responsive to the needs of rural people so they will not be constrained from making the moves that can help them improve their lives.