Rural reform, nonfarm development, and rural modernization in China

10311. h<XL\* Economic Development Institute OWN;. of The World Bank 7 Rural Reform Nonfarm Development, and Rural Modernization In China Dong Fureng s.!~~~~C I" ! 's.z t', AN EDI SEMINAR PAPER * NUMBER 38 FILE COPY  The following EDI Seminar Papers currently in 27 What Is the Value of a Lake? F. Helmers. print are available from the Economic Develop- 1984. ment Institute of the World Bank, 1818 H St., 28 Institutional Framework and Public Enter- N.W., Washington, D.C. 20433, attention: Ms. prise Performance. V. Bhatt. 1984. Edith Pena. 9 Sterility of Equilibrium Economics: An As- 29 Asset Financing: Capital Equipment Leasing. pect of Sociology of Science. V. Bhatt. 1974. J. Upper. 1984. 30 Investing in Education: A Quarter Century of 1 1 Somne Aspects of Financial Policies and Cen- World Banh Experience. S. Heyneman. 1985. tral Banking in Developing Countries. V. Bhatt. 1981. 32 An Approach to Development Policy Analysis. 16 Industrial Development Banhs and Social Henry J. Bruton and Paul G. Clark. 1986. Benefit-Cost Analysis. F. Helmers. 1979. 33 The Search for School Effects in Developing Countries. 1966-1986. S. Heyneman. 17 Decision Structure, Technological Self- Reliance, and Public Enterprise Performance. 35 Economies in the Provision of Facilities for V. Bhatt. 1980. Teaching Secondary School Science. R. Mun- 18 Cost-Benefit Analysis and Decision Making. dangepfupfu. 1986. F. Helmers. 1980. 36 Uses of Examinations in Developing Coun- tries: Selection, Research, and Education See- 19 Choice of Technology: The Case of the Indo- tor Management. S. Heyneman. 1987. nesian Rice Mills. F. Helmers. 1980. 20 Some Aspects of Development Strategy and The following titles may be purchased from local Policies. V. Bhatt. 1974. distributors of World Bank publications (listed in 21 Development Problem, Strategy, and Tech- the back of the book) or, if there is no distributor, noelogypmhoie: Saroble, Sand Socialist Ap- from the Publications Sales Unit, World Bank, nology Choice: Sarvodaya and 1818 H Street, N.W., Washington, D.C. 20433. p roaches in India. V. Bhatt. 1979. 22 Project Evaluation Criteria and Technology 37 User Charges for Health Care in Principle Policy. V. Bhatt. 1981. and Practice. Charles C. Griffin. 1988. 2r Theories of Development and Development 38 Rural Reform, Nonfarm Development and - Strategy. V. Bhatt. 1981. Rural Modernization in China. Dong Fureng. 25 Price Distortions in Market Economies and 1988. Critical Comments. F. Helmers and A. Har- berger. 1982.  AN EDI SEMINAR PAPER * No. 38 Rural Reform, Nonfarm Development, and Rural Modernization in China Dong Fureng The World Bank Washington, D.C.  Copyright i 1988 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing December 1988 The Economic Development Institute (EDI) was established by the World Bank in 1955 to train officials concerned with development planning, policymaking, investment analysis, and project implementation in member developing countries. At present the substance of the EDI's work em- phasizes macroeconomic and sectoral economic policy analysis. Through a variety of courses, seminars, and workshops, most of which are given overseas in cooperation with local institutions, the EDI seeks to sharpen analytical skills used in policy analysis and to broaden understanding of the experience of individual countries with economic development. Although the EDI's publica- tions are designed to support its training activities, many are of interest to a much broader audience. EDI materials, including any findings, interpretations, and conclusions, are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Because of the informality of this series and to make the publication available with the least possible delay, the typescript has not been prepared and edited as fully as would be the case with a more formal document, and the World Bank accepts no responsibility for errors. The backlist of publications by the World Bank is shown in the annual Index of Publications, which is available from Publications Sales Unit, The Worlcd Bank, 1818 H Street, N.W., Washing- ton, D.C. 20433, U.S.A., or from Publications, Banque mondiale, 66, avenue d'Ina, 75116 Paris, France. Dong Fureng is director of the Institute of Economics at the Chinese Academy of Social Sciences. Library of Congress Cataloging-in-Publication Data Tung, Fu-jeng. Rural reform, nonfarm development, and rural modernization in China. (An EDI seminar paper ; no. 38) 1. Rural development--China. 2. China--Industries,, Rural. 3. China--Rural conditions. 4. China--Economic conditions--1949-1976. 5. China--Economic conditio:ns-- 1976- . I. Title. II. Series. HN740.Z9T86 1988 307.1'4'0951 88-280'20 ISBN 0-8213-1140-9 EDI Catalog No. 030/113 ISSN 1013-2015  Abstract China's economy, like the economies of many developing countries, has a dual structure. To change this structure and to introduce rural modernization requires a two- pronged approach: reforming the rural economic system andhastening the pace ofindus- trialization. China's experience in promoting rural modernization has been mixed. This paper discusses the impact of rural reforms and industrialization strategies on the mod- ernization process in, and the economic structure of, rural areas during two historical periods-1949 to 1978 and 1979 onward. Because of a series of structural reforms, the rural economy has undergone profound changes since 1979; the rapid growth of the nonfarm sector is one of the changes. In promoting the nonfarm sector, two development models have been followed: the devel- opment of publicly owned nonfarm industries and the development of privately owned nonfarm industries in rural areas. Heated discussions are continuing in China on the choice of the development model. The author offers some of his own ideas, formed on the basis of surveys he has conducted in rural areas. The paper reaches a number of conclusions. System reform plays an important role in developingthe rural economy. But such reforms mustbe welcomedby the rural people, must support their initiatives, and must promote the growth of the rural economy. An important prerequisite for agricultural modernization is the development of industry, but the industrialization strategy should be conducive to increased rural income and to the coordinated development of both agriculture and industry. In promoting the growth of the rural nonfarm sector, no uniformity of development should be demanded and no restrictions or bans applied. The development of the nonfarm sector will create a host of problems; these will need serious attention, but they can be resolved gradually. iii  Acknowledgments While writing this paper, I received help from many individuals. Mr. Yin- Kann Wen and Mr. Emmanuel D'Silva of the Economic Development Institute (EDI) were instrumental in transforming my ideas for a paper into a reality. Mr. Wen oversaw the whole process, beginning with the draft outline and ending with the publication of the paper. In March 1988, he also organized two seminars at EDI at which this paper was presented. Mr. D'Silva edited the paper in record time. Messrs. Suman Bery, Jacques Crosnier, and David Davies, EDI; Professor Samuel Ho, University of British Columbia; and Mr. Alan Gelb, Mrs. Rapeepun Jaisaard, and others in the World Bank offered many useful suggestions. Messrs. Bob Li and Janson Chang of the EDIWUNDP China Program arranged financial assistance for me (under UNDP Project CPRJ85/089) to prepare the paper and to visit EDI. Mr. Ching-Hao Kung and Mrs. Betty Ting, World Bank, translated the paper from Chinese into English. Mrs. Judy Tung and Mrs. Dulce Afzal provided administrative support; Mrs. Tung also typed the manuscript in its final form. To all these individuals, I extend my heartfelt thanks. Dong Fureng Chinese Academy of Social Sciences iv  Contents 1. Rural Conditions before 1978 1 China's Dual Economic Structure 1 Farming System Reform and Agricultural Modernization 3 Systemic factors in development 3 Land reform 3 Agricultural collectivization 4 Industrialization Strategies and Agricultural Modernization 5 2 Reform Measures after 1978 7 Changes in Overall Development Strategy 7 Rural Reforms 10 Rural Nonfarm Industries 12 3 Nonfarm Development Models 15 The Southern Jiangsu Model 15 The Wenzhou Model 17 Other Models 18 The Role of Nonfarm Industries in Rural Modernization 18 4. Issues and ]Future Directions 23 Issues and Problems 23 Funding 23 Energy and raw materials 24 Technology 24 Skills development 25 Marketing 25 Tradition 26 Coordinated development of farm and nonfarm operations 26 The price of developing a nonfarm sector 28 Conclusions 29 5. Annexes 31 v   1. Rural Conditions before 1978 China's Dual Economic Sructure Sir Arthur Lewis, among others, has pointed out the existence of a dual economic structure in developing countries-the side-by-side existence of a modern industry in urban areas and a traditional agriculture in rural areas. This dual structure remains a basic feature of the Chinese economy, despite the achievement of significant structural changes since 1949. The dualistic features are outlined below. FIRST, AGRICULTURE CONTRIBUTES a greater share to GDP than other sectors. As a result of changes in the past 35 years in China, the share of agriculture has decreased, relative to industry; but it is still large-35 percent in 1986 (see table 1). Table 1. Sectoral Shares of Production and Employment in China, 1952-86 (percent) Production Employment Sector 1952 1957 1979 1986 a 1952 1957 1980 1986 Agriculture 57 47 31 35 84 81 72 61 Industry b 24 33 47 52 7 9 16 22 Material services c 19 20 22 13 9 10 12 17 GDP d 100 100 100 100 100 100 100 100 Note: The figures provided by the World Bank have been adjusted to facilitate international comparison. a. National income. h Includes construction and mining, manufacturing, gas, power, and water. c Freight transport and commerce. d. At market prices. Sources: World Bank. China: Socialist Economic Development. Vol. 1, 1983, p. 87; China Statistical Yearbook, 1I' and 1987; China Social Statistical Data, 1985; and China Statistical Digest, 1987. SECOND, FARM POPULATION accounts for over 80 percent of the total population and over 60 percent of the labor force. China's farming population is even larger than India's (see table 2) because services in China are relatively underdeveloped. Another interesting difference in China is that the share of the rural population is 1  2 smaller than that of the farming population because many urban residents are also engaged in farming. 1 However, the change in the relative shares of farming and nonfarming population more accurately reflects China's true economic structure than the change in the relative shares of urban and rural population. Table 2. International Comparison of Population Distribution, 1950-84 (percent of total population) Share of: China India Japan U.S. Britain France Rural population 1950 89.4 82.7 43.7 a 36.0 22.1 44.6 1975 82.7 79.3 24.9 28.1 10.3 25.0 1983 76.5 75.3 23.6 26.0 8.6 23.6 Farming population 1950 83.4 69.8b 44.4c 15.Od 25.4e 1975 84.6 66.6 14.5 2.8 2.4 10.9 1984 82.1 f 60.2 8.4 1.8 1.8 7.1 .. Not available a. 1955; b. 1951; c. 1952; d. 1951; e. 1946; f. 1983. Sources: State Statistics Bureau of China. International Economic Statistical Data, 1950- 1981, 1982, p.3; China Statistical Publishing House, Abstracts of International Economic and Social Statistics, 1986, 1987, pp. 15-16; China Statistical Yearbook, 1985, p. 186; and Brilliant Achievement in Chinese Agriculture, 1949-1984, p. 136. THIRD, LABOR PRODUCTIVITY of traditional agriculture is extremely low. The average cereal output of a Chinese farm laborer in 1985 was 1.1 tons compared with 83 tons for an American farmer; meat output was 56 kilograms per Chinese and 4,250 kilograms per American. Low productivity imakes it necessary for the vast majority of the population to be engaged in agriculture; and subsistence agriculture leaves little, if any, surplus of food and raw materials to support those employed outside the farm. FOURTH, THE AVAILABILITY of tillable land is limited and much of labor is surplus. China has less than 100 million hectares of land for more than 800 million people engaged in farming: an average of 0.13 hectare per person. Though accurate statistics are hard to come by, an estimated one-third to one-half of the agricultural labor force is considered surplus. The existence of this large surplus labor means the marginal productivity of labor is low, perhaps even zero. 1. There has been a change in the definition of "urban." Since 1984, townships with populations under 20,000 are considered 'towns' (and therefore, urban) if the number of nonfarm residents exceeds 2,000 in the place where the local government is located. Since the change in definition, the proportion of the rural population in China has declined from 76 percent in 1983 to 58 percent in 1986.  3 FIFTH, AGRICULTURAL INCOME is low compared with industrial wages; rural incomes are lower than urban wages. On average, urban wages exceed rural incomes by a ratio of 2:1. But if we take into account the subsidies enjoyed by urban workers, and the contribution made by farm families to these urban subsidies, the ratio of industrial wages to agricultural wages increases to 3:1.2 Differences in labor productivity account partly for the gap between farm and nonfarm income; differences in prices and taxes are the other factors. In recent years, industrial labor productivity, based on net output value, has been found to be four to five times higher than agricultural labor productivity (see table 3). Table 3. Comparison of Net Output Value Produced by an Industrial and an Agricultural Laborer, 1952-86 (agriculture = 1) 1952 1957 1975 1979 1983 1986 Industry/Agriculture 1.6 3.2 6.2 6.1 5.6 4.6 Note: The 1986 data cannot be compared with other years. For that year, the industrial net output value in villages was included under net industrial output value, whereas in all previous years it was included in net agricultural output value. Source: Abstracts of National Economic Statistics, 1984, p. 62. The gap in labor productivity is greater in China than in other low-income countries because of the relatively higher material productivity and higher prices in China's industry. Consequently, industrial product--:y has grown faster (519 percent between 1952 and 1986) than agricultural productivity (149 percent). Again, the existence of a vast surplus of labor and the slow progress of agricultural modernization account for low agricultural productivity. Farming System Reform and Agricultural Modernization Systemic factors in development In the past, economic, political, social, cultural, systemic, and institutional barriers have hindered economic development. While the removal of these barriers is necessary, reform should not be a one-time intervention, but rather a continuing process. Land reform The feudal land system had been a serious obstacle to improving China's agriculture and economy. Prior to the 1949 revolution, landlords and rich farmers, 2. Institutional subsidies include those for neighborhood schools, cadre subsidies, family planning stipends, and payments by farm households to continue agricultural production. See Zhu Qingfang, "Tentative Study on Changes in the Income Gap Between Different Social Strata in Our Country.' In Studies in Sociology, No. 3, 1986, p. 54.  4 who accounted for less than 10 percent of the rural population, owned 70 to 80 percent of rural land. Landlords, cruelly exploiting those who tilled rented land, generally took 50 percent or more of the harvests, and extorted other payments through levies and services. The landlords used their spoils for consumption and saved or invested very little. During 1950-52, China instituted a land reform nationwide. Nearly 700 million mu 3 (or 46 percent of total arable land) was expropriated or requisitioned for distribution to 300 million farmers. The annual land rent exempted reached 30 billion kilograms of grain. In addition, millions of draft animals, farm tools, houses, and other assets were redistributed. The land reform stimulated rural people to increase production, and agriculture was quickly rehabilitated. By 1952, farm income increased by about 30 percent, and per capita personal consumption rose by about 20 percent, over 1949 levels. Agricultural collectivimzation Because of a large population and little tillable land, the parcel of land available per household was small and the tools available for production were primitive. Therefore, agricultural collectivization was introduced. In the beginning, private ownership of the means of production was retained: payments were made for the share of labor and for the land "contributed" by participating farmers. Later, private ownership of the means of production was done away with. Except for small tools, land and other means of production now belonged to the collective. Farmers were paid only for their labor. By 1956, 96 percent of farmers had joined producers' cooperatives of various types. By 1958, 98 percent had joined people's communes. Communes were larger units containing on average 28 co-ops or 4,600 households. Because of their size, communes were expected to help the industrialization of agriculture, build infrastructure, and promote overall rural development. The communes also had a higher degree of public ownership4 than the co-ops and were integrated with such publicly owned entities as banks, commercial organizations, and other enterprises. Some communes practiced a distribution system that combined "pay according to labor" with 'pay according to need"; others took care of meals, clothing, housing, education, medical care, and other services. Such a distribution system, while ensuring egalitarianism, made it impossible for those who worked more to earn a larger income. Thereforie, changes were necessary. The advantages of agricultural collectivization were that it could help the dual economy evolve into a monostructure, and woulcd be useful to promote rural modernization, since it created economies of scale, helped capital accumulation, promoted modern farming, increased productivity, and improved agricultural infrastructure. 3. One mu equals 1/15 hectare. 4. In this paper, the term 'public ownership" is used for two types of enterprises: those owned by the state and those owned by the collective. Collective ownership of enterprises is vested in townships (where the organizational unit is the commune) and in villages (where the organizational unit is the production brigade and the team). Also included are collective enterprises run by cities, counties, towns, and neighborhoods in towns.  5 Initially, labor productivity on the farm rose fairly quickly: the net output value per person increased by 1.9 percent per year between 1953-57; thereafter, agricultural production decreased rapidly. Not until 1964-65 did production return to 1958 levels. The establishment of the people's commune brought great calamities to China's agriculture because the principles of gradualism and voluntarism were not observed, and also because the proper form of collective was not chosen. (The organizational form of the collective economy was changed many times.) In an attempt to restore production, unified communes gave way to a three-level ownership and accounting system (the production team, the brigade, and the commune). Industrialization Strategies and Agricultural Modernization Whether agricultural modernization can proceed smoothly depends not only on the reform of the farm economic system, but also on the choice of strategy for industrialization. The word 'industrialization," as it is used here, refers to the process of change from primitive manual techniques to machinery-based technologies; therefore, industrialization includes agricultural industrialization. In this section, we focus on the strategies of socialist industrialization5 for transforming the dual structure into a monostructure to industrialize and modernize agriculture. Traditional Chinese strategies for socialist industrialization were based on the 1924-28 Soviet strategies, which emphasized the establishment and development of heavy industry-particularly steel-as the focal point of socialist construction. The belief was that the development of heavy industry would assist the growth of the entire industrial sector, of agriculture, and of other productive sectors. High-speed growth became the goal of socialist economic development, and construction of large new enterprises was seen as the means of achieving high-speed growth and industrialization. Funds for industrialization were to depend only on internal accumulation, not on borrowings from abroad or foreign investments. The aim of industrialization was to realize self-sufficiency. Industry was to be developed only in the cities, not in the countryside; it was meant to satisfy the needs of the domestic market, not of exports. As industrialization progressed, it was expected to absorb the surplus population of the rural areas. Finally, socialist industrialization was to allow only the development of public ownership, not the development of private economy. Some elements of private economy that existed in the initial stages of industrialization were to be abolished totally or transformed into public ownership. The traditional strategies had some good points. They helped to build an industrial, particularly a heavy industrial, foundation within a relatively short time. As industrialization progressed, the products of heavy industry-farm machinery, power equipment, fertilizer, and farm chemicals-gradually became available for use in promoting agricultural modernization (see table 4). However, grave mistakes were made in agricultural collectivization. 5. In recent times, the use of "modernization" is considered more appropriate because it covers a wider spectrum and can accommodate the application of all modern technologies to all productive sectors.  6 Table 4. China's Agricultural Modernization, 1957-78 Farm machinery Large-, medium- Small tractors or (total power size farm tractors power tillers Year in 10,000 hp) (total units) (units) 1957 165 14,674 1962 1,029 54,938 919 1965 1,494 72,599 3,956 1978 15,975 557,358 1,373,000 Machine- Powered Fertilizer Rural power tilled area irrigation applied consumption Year (10,000 ha.) (10,000 ha.) (10,000 t) (100 m. Kwh) 1957 263.6 120.2 37.3 1.4 1962 828.4 606.5 63.0 16.1 1965 1,557.9 809.3 194.2 37.1 1978 4,067.0 2,489.5 884.0 253.1 .. Not available Source: 'China Statistical Yearbook, 1985," pp. 275, 281. The main adverse effect of these strategies on agricultural modernization was the draining of the surplus out of agriculture to finance the investment in heavy industry. This was done by * levying agricultural tax and other rural taxes;