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NBER Working Paper 13958, March Jikun Huang, Yu Liu, Will Martin, and Scott Rozelle (2008)

This study finds that market and trade liberalization were essential in increasing the incomes of China’s rural farmers over 1981-2005

China has witnessed spectacular economic growth since the inauguration of wide-sweeping reforms in 1978.  Standard development theory holds that developing countries generally tax agriculture and subsidize industry in the early stages of growth.  This was certainly the case in China, yet curiously, China’s rural farmers experienced increasing incomes in all provinces and for all crops throughout the reform period.  Despite worries that rural incomes would be harmed by China’s ambitious liberalization program, the authors comment that today, “Even scholars who have long worried about poor income growth in the rural areas are admitting the incomes and rural welfare are rising as never before.”  This study investigates the policy and market conditions that made such broad-based growth possible.
In analyzing this phenomenon, the authors pose two questions.  Firstly, how much government intervention was there in China’s agricultural sector from 1981 to 2005?  Secondly, why have China’s rural farmers fared so well in the face of falling agricultural prices?  In particular, they examine four factors: agricultural technology investments; agricultural market deregulation and structural adjustment policies; rural infrastructure programs, transfer programs, and tax cuts; and internal migration policy.

Methodologically, the authors estimate the nominal rate of public assistance at the farm level accounting for border and domestic distortions affecting farmer returns.  They analyze 11 commodities accounting for approximately 75 percent of the value of agricultural output in the late 1980s, including: rice, wheat, maize, soybeans, cotton, pork, milk, poultry, apples (representing fruit), tomatoes (representing vegetables), and sugar.  They calculate the rate of support to farmers from data on grain supports, seed and machinery subsidies, and commodity taxes.
This analysis finds that over the 1981-2005 period, China’s agricultural economy was transformed from “one characterized by high and variable distortions to one that is relatively liberal.”  Domestically, the early period was characterized by controls requiring rural farmers to sell output to urban areas at government determined levels and prices.  Internationally, it was characterized by high export tariffs.  Over the next decade, however, Chinese policymakers cut border tariffs and instituted a dual-track system in which farmers could sell above-quota production at market prices.  The authors report that these reforms have “created an economy that is one of the least distorted in the world.” 

Agricultural protection dropped to nearly zero over this period, a change one might expect to decrease farmer incomes.  However, several factors offset this trend.  Firstly, net trade policy increased farmer welfare because liberalization in other sectors reduced taxation in the agricultural sector.  Secondly, China has been at the forefront of agricultural research and extension.  China was an early adopter of Green Revolution technologies and hybrid rice, is second in the world in public spending on agricultural biotechnology, and studies show that technology has been one of the main drivers of its agricultural productivity growth.  While there were some dips in agricultural research and investment in the 1980s, total factor productivity has increased at a “healthy” 2 percent per year for all provinces and all crops.  Thirdly, Chinese policymakers “stepped aside” and strongly encouraged the development of agricultural markets.  The authors report that “Above all national and regional governments invested in the hardware—roads, landline telephones and cellular technology—that reduced transaction costs and accelerated the flow of information and goods.”  Today, China’s agricultural markets are very efficient, with commodity prices in different regions following each other closely.  This has allowed specialization among rural farmers, a key factor in their movement out of poverty.  One study found that nearly 40 percent of Chinese villages specialize in producing a single commodity, compared to fewer than 20 percent in 1995.  The authors argue that “Such integration has allowed relatively small and poor farmers to participate in emerging markets and to accrue the substantial income gains associated with moving from subsistence to a market orientation.”

This market and liberalization led poverty alleviation was even more remarkable because it took place in the relative absence of public welfare programs.  Though the government has significantly stepped up social programs for the rural poor (such as a grain subsidy and technology program) in the past five years, during the study period, these services were extremely limited.  Chinese rural social services have historically lagged far behind those in other developing Asian nations such as South Korea and Japan. 

Overall, the authors find an important role for markets and trade liberalization in agricultural development and poverty alleviation.  They argue that in the Chinese case, “Even where market and trade liberalization has reduced protection and necessarily adversely affected income, the rising productivity and efficiency effects have at least partly offset these negative impacts.” 

They conclude that “In the 1980s and early 1990s (or the early reform period) there were distortions in both external and domestic policies that isolated domestic producers and consumers from international markets.  …In contrast, since the late 1980s and early 1990s (the late reform period), the liberalization of domestic markets has reduced the distortions from domestic policies (as the market gradually has replaced the state as the primary mechanism for allocating resources and has become the basis for farmers’ production and marketing decisions).  At the same time, especially in the case of importable commodities, trade policy has been liberalized, with distortions from border measures falling substantially.  As a result, we find that in recent years (that is, by the end of the late reform period) China’s agriculture is much less distorted in two ways.  First, the differences between international and domestic market prices have narrowed considerably for many commodities due to trade policy liberalization.  Second, the elimination of domestic policy distortions increased farm prices for many commodities.  Reductions in protection to non-agricultural tradables—a major element of the WTO accession negotiations—also appear to have reduced the costs imposed on the agriculture sector.”