China - Long-term issues and options (Vol. 3 of 7) : Annex B : agriculture to the year 2000 : prospects and options

Repor No. 5206-CHA China: Long-Term Issues and Options Annex B: Agriculture to the Year 2000: Prospects and Options May 22, 1985 Agriculture Division 3 East Asia and Pacific Reigional Ofiice FOR OFFICIAL USE ONLY Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS The Chinese currency is caLled Renminbi (RMB). It is denominated in Yuan (Y). Each Yuan is 1 Yuan = 10 jiao = 100 fen In earLy 1984 the official exchange rate of the Yuan to the US dollar was around Y 2 = US$1. The internal settlement rate (!SR) of Y 2.8 = SI, however, was used in most merchandise transactions. The official exchange rate is now about Y 2.8 = $1. On January 1. 1985, the Government abolished the ISR. WEIGHTS AND MEASURES Chinese statistics are usually in metric units; in addition, mu and jin are often used: 1 mu = 0.1647 acres = 0.0667 hectares jin = 0.5 kg FISCAL YEAR January 1 - December 31 TRANSLITERATION The Pinyin system is used in this report. Note: In tables, individual items may not sum exactly to totals because of rounding errors.  FOR OMCIAL USE ONLY CHINA: LONG-TERM ISSUES AND OPTIONS ANNEX B: AGRICULTURE TO THE YEAR 2000: PROSPECTS AND OPTIONS Table of Contents Page No. EXECUTIVE SUMMARY .................................................... vi 1. PERFORMANCE SINCE 1979 ........................................... I A. Introduction. 1 B. The Changing Policv Environment. I C. Growth and Productvity. 9 D. Incomes and Consumption .13 2. FUTURE DEMANDS ON THE SECTOR ..16 A. Present Consumption Levels .................................. 17 B. Projections of Consumption to 2000 .18 3. DETERMINANTS OF FUTURE GROWTH ..28 A. Land and Water Development .28 B. Fertilizers and Seeds .34 C. The Policy Environment .40 D. Agricultural Support Services .50 4. PROSPECTS FOR MAJOR AGRICULTURAL PRODUCTS .57 A. Food Crops .57 B. Industrial and Specialty Crops .64 C. Forestry .70 D. Livestock .72 E. Aquatic Products .87 5. OPTIONS AND ISSUES ............................... ...... 91 A. Projections of Agricultural Growth .93 B. International Trade ......................................... 101 C. Adjustments in Domestic Structure ........................... 103 D. Geographic Differencials and Income Distribution ............1 09 E. Prices ............ ......................................... 113 List of Tables in the Text 1.1 Agriculture in the State Budget. 6 1.2 Estimates of Rural Gross Capital Formation, 1982. 7 1.3 Effects of Price Reform on Returns to Crop CuLtivation .10 This document hasa resaied disribution and may be use by recpients only in the perfornance of |their ofricia dutis Its contents may not odise be discesed without World Bank authorifion|  Page No. List of Tables in the Text (cont'd) 1.4 Production Changes, 1979-83 .. ............................... 12 1.5 Composition of Rural Income and Expenditure, 1979-83 . . 14 2.1 Projected Demand and Consumption Targets for Selected AgricuLturaL Products, 2000 ..................... 20 2.2 Estimated Requirements in the Year 2000 for Concentrates and Feed Grains .. 24 2.3 National Supply Requirements in 2000 and Comparisons with Historic Rates of Production Growth . . 25 3.1 Cultivated and Irrigated Land, 1970, 1975, 1977-82 . . 30 3.2 Selected Data from Two Gullies on the Loess Plateau, Shaanxi Province, Undergoing Treatment for Erosion Control .. 32 3.3 A Comparison of Application Rates for Chemical Fertilizer, 1980 .. 35 3.4 Comparison of 1982 Border Prices with Domestic Procurement Prices .. 43 3.5 Ratios of Farm Level Prices for Nitrogen and Grain, Selected Countries .. 45 3.6 Comparison of Price Ratios of Animal Products to Feed with Efficient Feed Conversion Rates . . 46 3.7 Annual Investment in Capital Construction of Agricultural Development, 1984-2000 . . 48 4.1 Projections of Grain Production, Area and Yields by the Planning Bureau, MAAF .. 58 4.2 Gaps Between Provincial and TriaL Yields of Wheat . . 62 4.3 International Comparison of Industrial Crop Yields .. 65 4.4 Cotton Production, Consumption and Trade, 1980-83 . . 66 4.5 Area and Volume of Commercial Forests . . 71 4.6 A Comparison of Selected Aspects of Livestock Production in China and the United States, 1980 . . 74 4.7 Food and Feed Value of Various Oilseeds, China, 1981, per Hectare .. 85 4.8 Approximate Protein Requirements per Animal or Bird for Efficient Production of Pigs, Poultry and Eggs .. 86 4.9 Indicative Costs and Returns of Fishpond Improvement . . 89 5.1 Preliminary Government Targets for Agricultural Production and Employment ............... .. ................. 94 5.2 Agricultural Growth Projections, 1981-82 to 2000 . . 97 5.3 Comparison of Alternative Growth Patterns ......... ......... 100  - Lll - Page No. Appendix A - Tables A.1 Net Changes in Annual Lending to the AgriculturaL Sector, 1980-82 .............................. 116 A.2 Indices of Weighted Average Prices Received by Producers, 1978-82 ..................................... 117 A.3 Composition of Gross Agricultural Output, 1978-82 ........... 118 A.4 Rural Income Distribution, 1979-82 .......................... 119 A.5 Selected Rural Indicators for Major Regions, 1982, and Changes, 1979-82 ................................ 120 A.6 Food Balance Sheet, 1982 .................................... 121 A.7 Per Capita Food and Nutrient Availability in China and Other Countries .............................. 122 A.8 Characteristics of the National Grain Bases ................. 123 A.9 Comparison of 1982 Border Prices with Domestic Procurement Prices (Y/ton) ....................... 124 A.10 Timber Production, 1981 ..................................... 125 A.ll Investment Requirements for Hypothetical Agricultural Development Program .......................... 126 A.12 Commodity Prices and Price Projections ...................... 127 A.13 Basic Characteristics of Comparator Countries ............... 128 A.14 Agriculture's Shares and Relative Economic Performance in ComDarator Countries ....................... 129 A.15 Per Worker and per Hectare Contribution to Agricultural GDP in Comparator Countries .................. 130 Appendix B - Specialization in Industrial Crops B.1 Provincial Comparative Advantage and Cropping Patterns, India 1977-78 and China 1981 .................... 133 B.2 Interprovincial Specialization in Industrial Crops in China and India .................................. 134 Appendix C - Potential for Ruminant Livestock C.1 Pastoral Herds and Grassland Area by Type, 1971 ............. 139 C.2 Metabolizable Energy by Source, 1980 ........................ 140 C.3 Potential Metabolizable Energy with Improved Management..... 141 C.4 Dry Matter Production Under Alternative Development Scenarios, 1980, 2000 ......................... 142 C.5 Overall Ruminant Production and Dry Matter Requirements..... 143  - iv - MAPS 1. Growth of Gross Value of Agricultural Output, 1979-82 2. Rural Per Capita income, 1982 3. Chemical Fertilizer Use per Sown Hectare, 1982 4. Major Commercial Crop Production Bases 5. Meat Production Per Capita 6. Pastoral Areas  v ACRONIYMS AND ABBREVIATIONS ATEG - Agro-technical extension center BGDH - bao gan dao hu ("contracting all actions to the household"') CAAS - Chinese Academy of Agricultural Sciences CAS - Chinese Academy of Sciences CBE - commune and brigade enterprise cu m - cubic meter cun - village FCR - feed conversion ratio GBSF - General Bureau of State Farms gm - gram GVAO - gross value of agricultural output, including sidelines GVAOR - a restricted definition of GVAO which excludes sidelines ha - hectare IARC - international agricuLtural research center ICOR - incremental capital-output ratio K - potassium kcal - kilocalorie m - million MAAF - Ministry of Agriculture, Animal Husbandry and Fisheries MCI - mulciple cropping index MWREP - Ministry of Water Resources and Electric Power N - nitrogen NGB - national grain base NSC - National Seod Corporation NVAOR - net value of agricultural output excluding sideLines NYJJLC - Nong Ye Jing Ji Lun Ceng (Essays in AgriculturaL Economics) P - phosphorous PRS - production responsibility system SH - specialized households SSB - State Statistical Bureau xiang - township  - vi - CHINA AGRICULTURE TO THE YEAR 2000 Executive Summary Performance Since 1979 1. In an effort to improve incentives and mAnagement at all Levels of the agricultural economy, the Chinese Government since 1979 has moved ahead rapidly to implement a comprehensive restructuring of rural institutions. The major feature has been introduction of the production responsibility system (PRS), the generic name for various contracting arrangements which define the rights and responsibilities of owners of assets (state, collective, or pri- vate), on the one hand, and managers of these assets on the other. The common PRS variant used in agriculture is the bao gan dao hu (BGDH) or "contracting all actions to the household" system. Under BGDH, the individual household has replaced the collective (production team) as the basic farm management and production unit. At higher levels, the commune is being renamed township (xiang), with its economic role confined to managing commune and brigade enterprise (CBE) development, while zhe brigade is reverting to the designa- tion village (cun) and losing much of its managerial and technical staff. Management of collectively-owned land is now contracted to households, usually in proportion to household size or labor force. Other coLlective assets are divided up, sold or contracted to individuals or groups willing to manage them. The household is obligated to pay taxes, make contributions to collec- tive welfare funds, provide its share of state procurement requirements, and contribute labor to maintain or construct public infrastructure. All remain- ing output may be retained by the household. BGDH has provided substantial rewards to those farmers who are able to increase production since obligations to the collective have been fixed in absolute terms, rather than on a percent- age basis, although amounts vary with the productivity of assigned land. 2. The shift in control over resources from collectives to individuals has raised the question of the adequacy of investment for rural development. Collectives appear to be handicapped by diminished income from agriculture and growing difficulties in drafting team labor for public works projects. The uncompensated "social labor obligation" to maintain infrastructure was estima- ted in 1982 to amount to Y 12 billion out of a total of about Y 65 billion in rural gross investment. Recent budget cuts designed to reduce the central Governmernt deficit have meant declining state investments in agriculture. Of the 1982 investment figure of Y 65 biLlion, investment by the state appears to have accounted for only 5%, though it represents perhaps one fourth of directly productive investment. Collectives accounted for Y 13 billion of fixed investment in 1982, of which about 60% was derived from the net incomes of the CBEs. Estimates suggest that private rural savings are large enough to be a major source of finance for ruraL development, if these savings can be effectively mobilized without undermining the newly-established production incentives.  - vii - 3. In order to improve living standards for farmers and provide incen- tives for increased production of certain essential commodities, the Government in 1979 made major adjustments in the level and structure of farm prices. Prices were increased by about 21% for grain, 15Z for cotton, 25% for oilseeds, and 25% for pigs. The farm price structure was built around quota, above quota, negotiated and free market prices. After fulfilling obligations for quota and above quota deliveries, producers may sell remaining supplies at negotiated prices which fluctuate at approximate parity with free market prices. Negotiated prices apply to sales to the state by individual farmers for production which may be legally sold on the free market. If no quota exists for a product, the above quota or negotiated price normally applies. As a result, increased procurements generally take place at higher than average prices and impart an uptrend to the weighted average price received by producers. With this more flexible, if complex, price structure in force, the number of agriculturaL commodities subject to state-established prices is declining. Measures are underway to further simplify the structure of agricultural prices. 4. The agriculturaL sector has performed exceptionally welL since 1979. The gross value of agriculturaL output (GVAO) in 1983 grew by 9.5%, following growth of 11% in 1982, 5.7% in 1981, and 2.7% in 1980. Grain pro- duction in 1983 reached a record 387 million tons, some 17% higher than in 1979, due Largely to a remarkable 22% increase in average yieLds. Though Chinese agriculture continues to be heavily crop oriented, the period has seen a steady decline in the share of crop production, a marked increase in side- line production (gross value of hunting and gathering and industries run by brigades and teams) and more modest relative gains in livestock. 5. Both incomes and consumption have risen markedly since 1979. In nominal terms, per capita incomes of farmers in 1983 were 2.3 times those of 1979. Incomes of employees in state enterprises (mostly urban dwellers) rose by 66Z during this period and were nominally 70% higher than rural incomes in 1983. In real terms, rural incomes may have increased by 70% while urban incomes were up by about 40%. Consumption gains have been substantial, espe- cially in red meat (up 53%) and vegetable oils (up 48%). By 1982 the daily average Chinese diet provided over 2,700 kCal of food energy. Urban residents generally have access to more animal protein, edible oils, fruits and vegetables, whereas rural residents consume considerably more grain per capita. While urban/rural and interregional disparities remain in per capita nutrient availability, China's food procurement and distribution system has provided basic food nutrients to most of the population most of the time. Future Demands on the Sector 6. Average per capita consumption levels in China markedly exceed those of other low income countries and an unusually high proportion of calories comes from grain. At 2,580 kCal (1980-82 figures), the daily energy avail- ability exceeds the 1975-77 average for middle income countries (2,560 kCal) and the world (2,570 kCal). While daily protein availability of 66 g exceeds the average for all developing countries (57 g) and approaches the world aver- age (69 g), only about 10% of protein intake is from animal sources, as compared to a world average of 35% and 21X for developing countries.  - viii - Similarly, the availability of animal and vegetable fat in 1980-82 was 5% below the average in developing countries and more than 40Z under the world average. At present, per capita availabilities in China exceed estimated requirements of food energy by more than 20X and of safe minimum levels of protein intake by more than 85Z. 7. If consumption patterns in China follow those observed in other countries, higher incomes will bring about a substantial restructuring of con- sumption over the coming decades. This would involve a marked reduction in direct per capita consumption of grain and a corresponding increase in con- sumption of animal products, along with other forms of dietary diversifica- tion. Analysis of food consumption demands in 2000, using alternative assump- tions of 3.5% and 5.5Z per capita CNP growth, shows in both cases a radical adjustment from the present dietary pattern to a more varied diet, in which meat, eggs, fish, milk, pulses, fruits, sugar and vegetable oil are larger components. Direct consumption of cereals and tubers would decLine by 15-20% overall, largely in the coarse grains and tubers. Within the fine grains category, it is Likely that per capita consumption of wheat, in China's cities in particular, will rise steadily in response to higher incomes and preferences for more convenience foods. 8. The amount of indirect grain consumption depends heavily on the efficiency of production in the animal husbandry and food industry sectors. While estimates based on high and low feeding efficiency factors vary considerably, they clearly indicate that high future demand for livestock products would require correspondingly large increments of feed grains and protein meals. Assuming rapid economic growth, the difference between added feed-grain requirements under efficient versus inefficient livestock produc- tion systems would exceed 85 million tons of feed-grains annually by the year 2000. More difficult to project are the requirements of the industrial sector for non-food products and additional demands which might be placed on the sector to generate export earnings in support of overall economic growth. If the Government's income and population growth targets were met, total grain supply in 2000 would have to increase by about 50% from 1980-82 levels (2.2% p.a.) and more than a third would be committed to livestock feeding (versus 10% at present). Feed grain requirements would exceed Government projections of supply. On the demand side, price and foreign trade restrictions can be used to encourage consumption behavior to conform to available production. Other countries, both developed and developing, have used these measures to hold food consumption to levels below those expected or "normal" for a given level of GNP per capita. Present Chinese price policy has probably had the reverse effect, because food prices have been kept low relative to prices of industrial consumer goods and the supply of urban services (e.g., housing) has been subsidized and restricted. Because basic nutritional requirements have already been met on the average in China, some restraint of consumption may be acceptable from a nutritional point of view. On the supply side a key consideration may be the nutritional and resource tradeoff between direct consumption of grain and its use in livestock feeding.  - ix - Determinants of Future Growth 9. Land and Water Development. Unique features of Chin.-'s agriculture include the relatively smaLl portion of the total land area which is culti- vated (about 10Z as compared with 75% in India) and the large portion of the total cultivated area which is irrigated (45Z, as compared with 23% in India). Uncertainties exist regarding the actual cultivated area in China. Although official figures of just under 100 million ha continue to be used, the actual figure may be a quarter to a third higher (and actual yields correspondingly lower). Official figures indicate that the cultivated area has declined marginally in recent years. The reported area of cultivated land in 1983 (98.4 m ha) was only about half a million ha larger than it was in 1949. Future availability of agricultural Land largely depends on (a) the extent to which reclamation -will compensate for land lost to non-agricultural uses and (b) the extent and effectiveness of future irrigation development. 10. The Government assumes that China's cultivated area will remain essentially unchanged over the next 15-20 years, as land lost to roads, urban- ization and industrial development is approximately offset by newly-reclaimed Land. Estimates show perhaps 3-5 m ha as suitable for development in the medium-term for sustained production of annual crops. These figures may be compared with the reported loss of about one m ha annually to non-agricultural uses in 1959-78. Annual losses at present are not known but, outside major municipalities, there are few legal restrictions on conversion of farm land to non-agricultural uses. The current surge of rural housing construction suggests that losses of agricultural land will continue to be substantial, despite government efforts at prevention. 11. Given China's land scarcity, irrigation and drainage take on par- ticular significance as means to increase the sown area. MWREP projects additions to the irrigated area by 2000 of 8-10 m ha (from 45 m ha to 53-55 m ha). The amount of land actually irrigated has not increased significantly in 1978-83. About half (4.3 m ha) of MWREP's planned expansion of irrigated area would fall in the rice region south of the Huai River, largely through upgrading of existing facilities. Another large component (1.6 m ha) wouLd occur in the North China PLain, primarily through the project to divert Yangtze River water northward. The remainder would be split between the Northeast and the arid areas of the Northwest Loess region as well as the two provinces of Xinjiang and Gansu. In addition to expansion of irrigated area, an estimated 23 m ha of cultivated land require drainage facilities to prevent waterLogging and to reduce salinity. 12. Fertilizers. Increased use of chemicaL fertilizers has been an important factor in China's impressive agricultural performance in recent years. Application rates for chemical fertilizers doubled between 1977 and 1981 and by 1982 averaged 169 kg of nutrients per cultivated ha. Since 1979 chemical fertilizer use has been stimulated by greater availability and improved fertilizer:product price ratios resulting from recent price reforms. China also has a long history of using organic fertilizers and organics will continue to be important sources of nutrients, particularly for phosphorus, potassium and some trace elements. MAAF estimates that half of nutrient offtake will come from organic sources by 2000. This is likely to be  optimistic if utilization patterns in China follow those in other countries as agriculture modernizes. 13. About 85%, or 13.8 million tons, of China's total consumption of chemical fertilizer is produced domestically in some 2,200 plants. Production is characterized by a small number of product types and low nutrient content. Recently China has developed the capacity to design and construct efficient. large-scale plants for the production of nitrogenous fertilizers, but the four plants expected to be operational by 1990 will increase total production by less than a million tons. For both potassium and phosphate production, achieving rapid growth will require an early commitment of funds and manpower co master new technologies in the design and construction of large plants. By the year 2000 MAAF expects consumption of chemical fertilizers to reach 30 million tons of nutrients or half of total fertilizer requirements. It assumes domestic produczion of 24 million tons, elimination of imports of L._trogenous fertilizers, but continued imports of phosphorus and potassium to meet large domestic shortfaLls. In recent years, fertilizer imports have averaged ten million product tons (2-3 million nutrient tons) at a foreign exchange cost of over US$ I billion p.a. 14. About 20% of domestic fertilizer production is distributed through the state system at centrally-estaolished prices. This system of allocating fertilizer has been used as a policy instrument to encourage production and marketing of key commodities. In the past it has tended to favor food crops relative to feed grains and pulses; the high, stable yield areas relative co lands of lower quality; irrigated areas relative to non-irrigated areas; and the state farms relative to the collective sector. This pattern of allocacion appears much less efficient today. At the new higher levels of application, marginal yield responses in the high yield localities are reportedly below marginal yield responses in the low yield areas. There is therefore reason to reallocate availabLe supplies, perhaps by allowing the market to play a large role. Important tasks for the Government are to improve the efficiency of distribution and strengthen fertilizer testing programs to guide production and utilization. 15. Seeds. Recognizing that high quaLity seeds in adequate quantity are critical inputs to increased crop yields, the Government since 1979 has given special support to strengthening China's seed industry. Now in place is a National Seed Corporation (NSC) under MAAF which functions as China's chief regulatory and policy/planning agency for seeds. There are also about 2,300 NSC-affiliated but locally-financed and administered seed companies which handle multiplication, processing, storage, certification and distribution of stock and certified seed. Breeder seed is supplied primarily by provincial agricultural research institutes. Multiplication of stock and certified seed is carried out by seed farms either managed by or under special contract to the local seed companies. The Central General Bureau of State Farmer (GBSF), also under MAAF, operates a parallel system of seed companies and farms. Though the basic mechanisms are in place, both processing facilities and qual- ity assurance procedures are inadequate. NSC and GBSF-affiliated companies supply about 40% of total national seed requirements (17 million tons), but less than 1% of this seed has been properly processed and certified using modern methods. As a result, farmers for the most part are forced to rely on  - xi - poor quality seed swhich translates into high seeding rates, high production costs, and less than optimuim vields. The Government's current program of seed industry devel-opment is aimed at modernizing over 300 seed production, processing and distribution centers by the year 2000. 16., The Policy Environment. introduction of the PBRS has siLgnificantly improved agricultural production incentives and can share credit with price reform for the outstanding growth rtzord of Chinese agriculture since 1979. Recent movement cowards an enlarged role for prices and market forces can be expected to enhance the climate for agricultural growth. There is a concern within the Covern-ment. however, that for a farm sector comprising a vast number of indeDendent decision makers, such moves would lead to imbalances in the quantities and mix ofl crops grown relative to national requirements. Quotas for sown area of grain thus reportedly have been retained in order to prevent farmers from shifting a large portion of land under their control from grain to more profitable industrial crops. Analysis of domestic procurement prices relative to border prices for major commodities suggests the need for continued adjustments as the basis for promoting growth and efficiency in the sector. A number of important commodities, including timber, fish, and pork, appear to be underpriced relative to international prices and in fact may be too low to stimulate expanded production. On the other hand, some products such as sugar crops, natural rubber and edible oils may be overpriced. With regard to production inputs, prices of chemical fertilizers appear to be near economic leveLs. Prices of electric power in rural areas are relatively cheap while some farm machinery remains costly by international standards. 17. A key question iZ whether over the next two decades productive investment in the sector will be adequate to sustain agricultural growth at rates needed to achieve national growth and income targets. State investment in agriculture, according to current Chinese estimates, is not expected to grow by more than Y 1-2 billion annually. Collective investment (excluding that in CBEs) may continue to decline. Therefore, the ability to effectively tap private savings for productive investment is likely to be a critical determinant of the adequacy of agriculturalA investment. Measures to attract private savings might include granting private use rights over collective or state property, making time deposits attractive through higher interest rates, instituting a tax on idle assets, and encouraging rural credit institutions to devote a larger proportion of credit to longer-term lending. '18. The Governmcat's investment priorities in agriculture appear to differ substantially from present subsectoral shares. The share of proposed investment which would benefit crop cultivation (about 30%) is less than half of the crop share in GVAOR (about 75%), whereas the other subsectors' shares are at least twice their present product shares. While these investment "iweights" are generally consistent with the structural change that the Govern- ment supports in agriculture, they may not be an effective means of achieving production and income objectives. More than half of total investment would be absorbed by dairy and forestry development. Given the current high costs of dairying operations, massive investment in dairy development appears difficult to justify on efficiency grounds. And, while forestry development in general warrants priority on need and environmental grounds, expenditure on afforesta- tion wilL add relatively little to annual product in the next few years because of the slow maturing nature of this type of investment.  - xiL - 19. Agriculture Support Services. aecause yield increases will be the source of most of China's agriculturaL growth, a strong research program aimed at improving production technology is of particular importance. Although it is difficult to prescribe an optimum level of investment in research, esti- mates elsewhere suggest that building an effective national research capa- bility requires an investment of up to 2Z of the annual value of agricultural output. For China, this would imply an annual expenditure of up to Y 4 bil- lion, considerably more than current levels. The bulk of agricultural research in China today is carried out by 390 research institutes at the pro- vincial level and above which operate under the general professional guidance of MAAF's Chinese Academy of Agricultural Sciences (CAAS). Research personnel in these institutes number about 18,800. Another 15,300 researchers work in 49 crop and livestock research institutes run by the provinces. Some research is also carried out in China's 8i agricultural colleges and universities. Despite some very notable research achievements, work at many research insti- tutes is hampered by inadequateLy qualified staff and poor research facili- ties. A large part of the inteLlectual leadership for agricultural research in China is provided by staff who are more than 60 years of age. 20. China has some 85 institutions of higher education in agriculture and related fields, with a student enrollment (1981/82) of about 100,000. This represents only 8% of those enrolled in institutions of higher learn- ing. Agriculture is generally not the first choice of candidates for college and those admitted into agricultural college and universities frequently have lower scores on admission tests. There is also a problem of retaining agri- cultural technicians in this sector after training is complete. SDecial quotas for admission of rural students to agricultural training institutions and additional salary incentives for those working in rural areas have been implemented to ease these problems. 21. The restoration of a farming system organized around individual households has placed new demands on agricultural extension services. Whereas previously the various levels of colLective organization could serve as major foci in the delivery of production inputs and technical assistance, now the extension organization must establish direct links to nearly 200 million pro- duction units which operate much as do small family managed farms elsewhere. In response to this requirement, the Government is in the process of consoli- dating previously separate locaL agricultural services, including seed production, fertilizer distribution, and soil analysis units, into a single, county-leveL agrotechnical extension center (ATEC). Efforts also are underway to link extension more closely with agricultural research and education. ATECs already in existence - about 300 out of a projected 2,300 - are working more closely with local research institutes and colleges in such areas as varietal testing, extension methodology, and training and upgrading of local farmers and technicians.  - xiii - 22. Provision of agricultural machine services has also been affected by development of the household farming system. Reductions in field size, as well as the farmer's desire to obtain maximum control over timing of farm operations and to minimize cash expenditures, have caused a decline in demand for large and medium-scale machinery, a corresponding rise in demand for draft animals, and continued strong demand for small-scale pedestrian tractors. About one third of all tractors in the colLective sector now are privately owned. The emerging organizational form for provision of machine services involves private or collective custom land preparation by specialized operators or teams whose earnings are supplemented by short-haul transport work. Successful deveLopment of custom hire machine services would help reduce grain and forage consumption by draft animals. 23. Efforts to restructure agriculture and increase specialization are constrained by the limited capacity of the rural transportation, processing, storage and distribution systems. Inland transport - especially the rural road svstem - and port facilities must be improved in order to handle the projected expansion in traded commodities. Relative neglect of transportation networks under past poLicies of local self-sufficiency has made rural trans- port a particularly acute problem. Solutions have been slow in coming in large part because of inadequate coordination between agricultural planning agencies and agencies responsible for transportation. Grain storage is becoming an increasingly serious problem largely because of inadequate investment in the past and the surge in production in recent years. Cold storage capacity for perishable fruits, vegetables and animal products will have to grow very rapidly if the changing pattern of consumer preferences is to be accommodated. Improved inland transportation and storage facilities in turn would provide a basis for agro-industriaL development which requires assured deliveries of high-quality, uniform raw materials. Prospects for Major Agricultural Products 24. Food Crops. The Planning Bureau within MAAF has targeted grain production to grow by about 2% annually from the average 1980-82 base while the area sown to grains would continue to decline marginally by about 0.1% p.a. The roughly 40% projected increase in rice production is expected to come entirely from higher yields. A major factor expected to contribute to increased yields is the projected expansion in area planted to hybrids from the 1983 level of nearly 6.8 million ha to 13.3 million ha by 2000. With a net yield advantage (taking into account the larger areas required for seed production) of about 20% over conventional varieties, an increase from current levels of the hybrid area by the implied 7.7 million ha, would generate nearly a third of the projected increment in rice production by 2000. Area expansion for hybrids would depend on successful introduction over the next few years of new early maturing varieties in double cropping systems. This seems feasible from technical and organizational viewpoints. With a yield advantage fer hybrids of 0.75-1.0 tons per ha, the incremental benefit-cost ratio of about 5:1 suggests that hybrid rice is economically attractive to producers. 25. Wheat is the second most important grain in China after rice and accounts for about 20% of grain production and 25% of the area sown to grain. MAAF's Planning Bureau projects both wheat and corn production to grow  - XLV - more rapidly (2.6Z p.a.) than other major grains. With an assumed smaLl decline in the sown area, this implies annual growth in wheat yields of 2.6Z p.a. to 3.3 tons per ha. This would require continued attention to wheat disease problems, good water control in irrigated areas, and a proper nutrient balance in fertilizer applications. 26. Corn production accounts for about three quarters of coarse grain output and 18Z of total grain output. Production since 1979 expanded at 3.2Z p.a., or about one-half as fast as wheat. The Government projects virtually no change in the cropped area to 2000. but yields are to grow by about 70Z, or 2.8% p.a., 1979-81 to 2000. China's corn yields (adjusted for likely under- reporting of the planted area) are slightly higher than average yields in developing countries, but less than half those in developed countries. Much the same pattern hoLds for other coarse grains. Factors restraining yields of coarse grains include poor seed quality, inadequate irrigation during times of moisture stress, low application of chemical fertilizer and Doorer cultural practices compared with e.g., wheat and rice. Growth of total coarse grai.n production at a substantially higher rate than the Government targec would be required to provide the feed grain necessary to meet output targets for livestock and poultry. 27. Industrial and Specialty Crops. With the significant exception of cotton, national average yieLds and per capita production of industrial crops (oilseeds, fibers, sugar crops, tobacco, tea) on the whole appear to be lower in China than in a number of comparator countries. The demand for these crops as well as for specialty crops such as fruits and vegetables is expected to grow rapidly as incomes rise. In the case of cotton, special encouragement given to production by price and procurement reforms and the planting of improved varieties stimulated a 22% expansion of cropped area and a 72X increase in yields during 1978-83. As a result of these area and yield gains, China has moved from being a large importer of cotton to basic self-suffi- ciency. Prospects seem good for further yield increases. 28. Production of oilseed crops (including rape seed, peanuts, sesame and sunflower seeds, but excluding soybeans and cottonseed) more than doubled during 1978-82 due to both increased area and yield. Soybean production has grown by about 5.2% p.a. since 1978, largely due to increased yields, but still is the only major crop grown in China in which the reported national average yield is less than that for developing countries as a whoLe. A steady increase in soybean yields will be required if China is to meet future needs for high quality protein meal for livestock feeding. Prospects for tea are clouded because of possible marketing constraints at home and abroad. Produc- tion of tobacco is likely to be increasingly influenced by the public percep- tion in China of the health dangers inherent in its use. Caution may be required also with other crops in this category - e.g., sugar cane and sugar beets - for which China may have little overall comparative advantage and domestic procurement prices exceed world prices by substantial margins. For these crops the primary emphasis probably should be to improve yieLds through better cultural practices, improved planting materials and careful choice of planting location.  - xv - 29. Forestry. Development plans call for the area under forest to increase from the present 13% of China's total land area to about 20% by the year 2000 to meet expected rapid growth in demand for forest products. Annual per capita wood consumption is about 0.05 cu m (excluding fuelh.-:od). compared to about 0.02 cu m in India and 1.5 cu m in the US. Reflecting iocal short- ages and increased demand from population and income growth, imporcs of forestry products rose from US$242 million in 1976 to peak figures of US$642 millLon in 1980 and about US$540 million in 1981. Major thrusts of future development include afforestation, increased exploitation of mature and over-mature forests, expansion of forest industries and strengthening of forest research, education and extension. Investment programs by the stace forest farms, of which there are some 3,900, have been hampered by the relatively Low price they receive for industrial round wood sold to the Government. Despite recent increases, state procurement prices for timber are only about one-half negotiated prices. 30. Livestock. By the year 2000, the share of the livestock seccor in GVAO Is projected by the Government to rise from the present 15Z to 25%, with meat consumption more than doubling. Achievement of targets will depend heavily on use of animals with higher genetic potencial, better production and management systems, improved veterinary services and the availability of much Larger supplies of grass, grain and protein suppLements. Low grain feeding systems and seriously inadequate levels of protein supplementation are major factors contributing to present technical inefficiencies in China's livestock sector. Solution of the toxicity problems in China's rape seed and cottonseed meals would greatly enlarge potential supplies of protein meal, although soybean meal is still the most appropriate meal for poultry and swine rations because of its amino acid balance. In the absence of adequate local supplies, the development of a capacity to produce synthetic amino acids warrants consideration. 31. China's extensive grazing areas of the North are viewed as a pocen- tial source of much of the large incremental supplies of beef, mutton and wool in future years. However, overgrazing problems in areas such as Nei Monggoi and northern Hebei have been exacerbated by policies since 1979 which have stressed expansion in herd numbers and the rapid introduction of the PRS. While the PRS has encouraged individual care of animals, with the result that mortality rates in some areas are down, it also appears to have destroyed the mechanism by which collectives formerly were able to control animal numbers and to implement pasture management systems. The combination of privately managed herds on a common grazing resource has added pressure to an already overburdened range land. The most important immediate requirement is to match livestock numbers with carrying capacity through herd reduction and improved range management. Although the focus of ruminant livestock development in China has been on the pastoral areas of the North and Northwest, more than 40% of the large animal population, including about half of China's cattle, is located in 12 southern provinces. While these areas may be technically suitable for pasture development, the financial and economic viability of ruminant development in South China also needs careful assessment. 32. Several different production systems are being tried in the live- stock subsector. Official policy increasingly favors animal production by  - xvi - specialized households (SH), although most of the dairy development heretofore has been on state-owned enterprises. The term SH refers to small-scale commercial animal farms, which differ from state or collective enterprises in their household management and/or ownership of animals and use of private funds and capital saving production techniques. A major problem faced by the SH system is ensuring adequate supplies of balanced feeds. In some areas, authorities have encouraged SH animal producers to subcontract their land to other farmers who serve as SH feed producers. This form of specialization avoids some of the costs of transporting feed grains, though it is not a fully reliable mechanism for providing adequate feed supplies. China also has a growing number of large-scaLe, commercialized pig and poultry operations, mostly in the suburbs of major cities, to serve urban or export markets. These operations employ confined feeding systems and modern production technology with varying degrees of success. Local management in some cases is inexperienced and a few joint ventures with overseas interests are being organized. 33. China's dairy development policy is to promote production initially near large cities, stressing production by collectives and individual house- holds and using state farms as sources of improved animals and modern tech- nology. With high investment and operating costs, many of the larger dairy enterprises which are already operational do not appear to be financially viable, despite local prices for dairy products which exceed world prices by a substantiaL margin. Viability of some operations has been improved by integrating dairying with more profitable activities such as fish farming or fruit growing which use the manure as feed or fertilizer. But pig or poultry raising is likely to be a less costly source of nutrients for these opera- tions. The economics of large-scale dairy operations in suburban areas warrants careful study. Smaller production units owned by SH and located closer to cheap forage supplies may be preferable. For the inland areas, higher productivity from improved breeds and better pastures may establish the basis for economic expansion of dairy production. 34. Aquatic Products. China's aquatic products sector (marine and freshwater) accounts for only about 1.5% of GVAO. China's fisheries rank third internationally in total production, but one hundredth in per capita production. Production in 1983 totalled about 5.3 million tons, of which more than two-thirds was accounted for by marine capture fisheries. The Government plans to expand aquatic products output to 11 million tons by the year 2000 by emphasizing intensive fish cultivation, particularly in freshwater ponds. There is good potential to increase fish yields in many of the fish farming areas. Factors which have contributed to low yields include poorly designed pond layout, inappropriate breeds of fish or stocking rates and poor feeding systems. With regard to the marine resource, additional consideration should be given to the production of fish meal for the livestock and poultry industries by expanding the collection and processing of fish species now considered to have little economic value. Options and Issues 35. Between the present and the turn of the century, China's agriculture will be required to feed at better nutritional levels a population growing by  - xvii - at least 10 million per vear and to supply the raw materials to meet rapid growth in industrial demand. This will be a challenging task. At best, the land area under cuLtivation will not increase and the sown area is likely to remain at present levels as land reclamation and irrigation are approximately offset by lands converted to nonfarm uses. Competition for available water in some parts of China between agriculture, industry and human consumption will increase and make agricultural expansion more difficult. Most of the produc- tion gains will have to come from increased yields on presently cultivated land. The general direction of development is clear, viz., the shifting of more resources into activities (1) which are less constrained by fixed resources (land and water); (2) for which improvement of management and labor skills has a high nayoff (specialty crops, modernization of livestock and poultry production); and (3) for which the gap between existing and advanced technology is greatest (agro-industrial production). 36. It may be suggested that two decades (1980-2000) is too short a time to bring about major structural change in the sector, but examples exist and some lessons may be learned from them. Structural change in Korean and Japanese agriculture has been striking over a roughly similar period of time (1960-80) and began from levels of development in some respects comparable to China today. These structural shifts were not "tplanned," but were largely the response of agricultural sectors in those countries to high rates of indus- trial growth and the attraction of agricultural labor to nonfarm employment. The comparison clearly suggests that rapid growth of the nonfarm economy is a requisite to rapid structural change in agriculture. 37. Projections of Agricultural Growth. Preliminary pLanning by the Government calls for rapid growth in livestock, poultry and sideline produc- tion and a relative decline in the crop share of GVAO by 2000. The farm labor force would decline sharply, while the rural nonfarm work force would rise extremeLy rapidly. The area sown to grain would remain unchanged, although wheat and rice production would grow slightly less rapidly than coarse grains. No significant increases are planned for areas planted to nongrain crop, aLthough yields are expected to increase. 38. If the present generally favorable policies in agriculture continue, agricultural growth to the year 2000 is likely to be more rapid than long-run historical growth rates and structural change would be more rapid. However, this change may not be as rapid as indicated by Government supply targets or consumption demands under targeted income growth. Growth of crop production value is unlikely to greatly exceed the 3.7% p.a. achieved in 1965-83. Potential annual growth rates of grain production would be about 2.4% and nongrain crops 6.8%. Among grains, the MAAF target growth rates for fine grains seem feasible, but corn and soybean production would have to grow more rapidly to provide the feedstuff required to meet targets for the production of livestock and poultry. Nongrain crops would be required to grow at annual rates exceeding historical rates by 1-2 percentage points. Other components of GVAOR (excluding sidelines) are less subject to diminishing returns because of the land constraint and their growth rates will be determined more by the extent of Government and private investment, including that for agricultural support services.  - xviii - 39. Though a wide range of alternatives is possible, under one set of reasonable assumptions regarding technical progress, agricultural investment, use of industrial inputs and prices, GVAOR would expand by about 4.4Z per annum while NVAOR would increase at a rate of about 3.8Z yearly. If the farm Labor force expands by about 0.6Z p.a., these increases in output would translate into an approximate doubling of gross labor productivity in agriculture by the year 2000. The share of crops in GVAOR would decline by about eight percentage points and the livestock share would increase from 18% in 1980-82 to 24% by 2000. While this projection of potencial growth is slightly higher than the growth rate of total suppLy needed to satisfy consumption requirements in 2000, the structure of potential production is quite different from that projected for consumption. The value of potential crop production would significantly exceed consumption requirements (particularly of rice), whiLe that of livestock and fisheries would fall short of requirements. Faced with such potential imbalances, the options could include measures to (1) adjust price and area for the crops in surpLus, (2) encourage the production of feedgrains in the rice areas; (3) attempt to develop export markets for crops in surplus; (4) trade them for products in short supply (livestock products, forest products, etc.) or (5) import sizeable quantities of feedgrain and high protein meals to support livestock production. A challenge to Covernment policy would be to convert China's potential for rice and nongrain crop production into increased feed supply either through external trade or a major restructuring of domestic cropping patterns. 40. International Trade. Planning in China continues to be premissed on basic self-sufficiency in agriculture, although it is acknowledged that trade will continue to play a roLe in baLancing supply and demand for farm products and in generating foreign exchange. However, a seLf-sufficiency orientation may well conflict with satisfaction of future consumption patterns and raises the question of the extent to which international trade could balance supply and demand at lower cost to the economy. Global suppLy and demand considera- tions suggest that in the next decade overall world trade in grains is not Likely to grow as rapidly as in the 1970s. With generally abundant supplies, world prices for the major grains in real terms are expected to decline about 10% from 1976-82 levels. Because of the large volume of world trade in feed grains, it seems unlikeLy that a gradual increase in imports of these grains by China to support rapid growth of the livestock and poultry industries would have a significant effect on world prices. China's potential impact on the world rice market could be much larger because of the "thinness" of that market relative to the quantities which China could supply. The best export prospects in agriculture are likely to be for a wide variety of labor- intensive, high-value products for which international income elasticities of demand are high. But the successful production, processing and marketing of them in world markets would require strengthened support services in research, extension, market infrastructure and market development.  - xix - 41. Adjustments in Production. Reflecting expected changes in domestic consumption patterns and world markets, the needed adjustment in cropping patterns might involve some reduction in the area planted to rice and expan- sion of the area under crops such as corn and soybeans required by a much larger livestock program. This might well include conversion of some of the uplands of the south from the production of low-yielding rainfed rice to feedgrains and oilseeds. Such a shift would alLow peri-urban areas to plant higher value crops on lands now under grain and forage crops and provide a basis for more diversified production systems in the low income upland areas where rainfed rice is a major source of income. For the nongrain crops, bottlenecks in transport, storage and processing are major constraints to expanded production. For the oilseeds, the most urgent tasks, in addition to expanding production of high quality protein meals, are to improve varieties and processing technology so as to increase the suicabilitv of these meals (particularly from rapeseed and cottonseed) as Livestock and poultry feeds. China seems likely to maintain its position of basic self-sufficiency in cotton and may have supplies for export. Study is needed to compare the relative economic merits of further expansion of cotton for export or use of the land to, e.g., increase production of animal feedstuffs. For high value fruits and vegetables, the major challenges lie in expanding production to meet the expected sharp increase in domestic demand and exploiting possible export markecs. It is in the processing, packaging and marketing of semi- perishables such as these chat China's existing systems are most deficient. This appears to be an area where joint ventures with established foreign firms -iouLd be useful as a source of both technology and market access. 42. Central planners have posed ambitious targets for meac, dairy and egg production. Beef, mutton and wool production from the northern grasslands are likely to grow no faster than in the recent past, and possibly slower, because of serious overgrazing and deterioration of range lands. Shortage of feed and forage are also likely to limit livestock production in the southern grasslands and the agricultural areas. A solid technological base Pxists to expand pork production, but the rate of growth will depend heavily on the adequacy of high quality energy feeds and protein. China's poultry industry should be accorded high priority because (1) poultry meat and eggs are pre- ferred products among Chinese consumers, (2) modern production systems are efficient converters of plant materials to animal protein, and (3) technology to substantially improve production efficiency is available internationally and readily transferable. In light of the high investment costs, the objec- tives and means in China's proposed dairy development program should be recon- sidered. Production by state enterprises in suburban areas is increasingly handicapped by high economic costs of land and scarcity of abundant forage. In the medium term, increased milk supplies for urban consumers might well be provided at lower economic costs through the importation and reconstitution of relatively low cost milk powder. Greater emphasis on specialized households and smaller-scale production units would be expected to improve efficiency in the dairy industry. This would require improved access by these groups to better milking stock, good veterinary services and high protein feed sources to supplement local feed supplies. The technology to double the output of aquatic products is available, particularly for freshwater fish cultivation, but realization of that target will depend heavily on whether adequate supplies of feeds (manure, grass, some grain) can be made available at suitable prices.  - xx - 43. Income Distribution. Recent rural reforms have significantly narrowed urban-rural income differentials, although in 1982 average per capita income in urban areas continued to be about twice that in rural areas. rn the 1978-82 period, interpersonal income differentials in the rural areas almost certainly increased as a consequence of policies to improve production incen- tives and foster entrepreneurship. Interregional income differences originate in differences in land and water availability, access to markets for inputs and outputs, and tax, procurement and price policies of the Government. In 1979-82, some of the poorest areas were among the first to introduce the BGDH system and consequently realized the earliest benefits from the reforms in crop production (e.g., Anhui, Sichuan, Guangxi and Guizhou). Some of the better endowed areas (e.g., parts of Jiangsu and Guangdong) benefitted from expanded production from sideline industries and access to free market and export prices. Relative poverty remains characteristic of much of the northwest and parts of the north and southwest - areas with poorer soiLs, little irrigation and difficult access to modern inputs such as fertilizers or to urban or export markets. Although one element of Government policy is to provide special assistance to the poorer areas, significant results may be difficult to achieve. The Central Government controls directly only about 20% of chemicaL fertilizer production and current plans for water resource devel- opment continue to emphasize the better endowed provinces. On the other hand, pricing poLicy for farm products and production inputs has tended to favor the poorer, more isoLated areas and criteria for assessing returns to irrigation in such areas are frequently less rigorous than elsewhere. The emphasis on dairy and poultry production around urban centers probably tends to widen interregional income differences, as does rural industrial development which is faster near major urban areas. 44. Policy options which would substantially change these general trends are difficult to identify. The areas of extreme poverty are typically resource poor; investments to substantially alleviate this situation may not be justified on economic grounds alone. In some of the poorest areas, outmigration is certain to be one of the required policy measures. Elsewhere, improved transport and access to markets for agricultural products and inputs are likeLy to be among the most important measures needed to address the relative poverty issue. But to be effective, these must be buttressed by stronger agricuLturaL research and extension oriented to difficult agro- climatic circumstances. Issues related to inter-regional income distribution are likely to remain important in China. 45. Prices. The budgetary cost of the continuing upward drift of average procurement prices has encouraged changes in the multi-tier pricing system. An approach, currently applied to oilseeds and cotton and soon to be introduced for grain, is a system whereby fixed proportions of farm sales receive quota and above quota prices. Marginal prices received by farmers for additional sales are reduced to a weighted average of quota and above quota prices, and state procurement agencies cease to serve as buyers of last resort. With this approach, incentives to sell to the state and to use pur- chased inputs might decline and budgetary costs would be little affected unless the system were applied to reduce average procurement prices as well. A preferable alternative might be to replace this system with a single market price structure, with government intervention as necessary to maintain price  - xxi - stability. The indirect tax resulting from low procurement prices could be replaced with direct taxes based on the productivity of Land and other resour- ces. Procurement agencies would purchase only the quantities needed to meet urban and rural resale requirements and to maintain emergency reserves and price buffer stocks. 46. Some changes in relative prices for specific farm products and inputs seem to be required in order to enhance incentives and encourage effi- ciency. Some of the required changes emerge from the fact that much larger output of, e.g., livestock products, requires new production technologies (e.g.. more intensive grain feeding) which are not profitable if grain is priced at current market (or marginal) prices. In pork production, for example, the policy has been to subsidize grain and other coscs for producers who use grain intensive systems. A more efficient alternative would be to allow both product and input prices to rise and employ direct taxes as necessary to meet efficiency and equity objectives. 47. To stimulate necessary investment, comprehensive price reforms in agriculture are likely to require price increases for livestock, forestry and fisheries relative to most crops. This selective increase in farm prices might permit an increase in incerest rates on agricultural loans and in the rates paid on deposits, thereby helping to mobilize more savings for produc- tive investment. While non-Government funds are likely to be the major source of investment in the sector, an increase in Government resources also wilL be required.  CHI'A AGRICULTURE TO THE YEAR 2000: PROSPECTS AND OPTIONS 1. Performance Since 1979 Introduction 1.01 China's agricultural sector has undergone substantial change since the visit of the World Bank's first Economic Mission in November 1980. The introduction of the "production responsibility system" (PRS), price reforms and other changes in the organization and management of production units and support services have had very positive effects on the performance of the sector in recent years. This chapter of the annex describes these changes in some detail and examines agriculture's performance since 1979. The second chapter explores future demands for food and other agricultural products, while the third and fourth chapters look at determinants of future growth and production prospects for major products, respectively. A concLuding chapter considers some of the issues and options which face the sector over the next 15-20 years. 1.02 The basic objective of this report is to bring tagether the material available to the Bank which bears most directly on future development of China's agriculture and, from that base, to discuss development prospects and options. The size and diversity of the agricultural sector makes this a formidable task. The work has been made somewhat easier by extensive discuss- ions with authorities in Beijing and through visits by the Economic Mission to Hubei, Jiangsu and Gansu Provinces during the first four months of 1984. The Bank's ongoing agricultural project work also has deepened our knowledge of the sector. The material which follows should be viewed as part of the World Bank's continuing effort to understand and assist an agricultural economy which provides basic sustenance to more than one billion people and liveli- hoods for some 800 million individuals. The Changing Policy Environment 1.03 Institutional Reforms. Beginning with the experimental abolition of collective farming in the more impoverished areas, the Chinese Government has moved swiftly since 1979 to implement a comprehensive restructuring of rural institutions. The reforms, a major feature of which is implementation of the PRS, were designed to improve incentives and management at all levels of the agricultural economy. By 1983 the farm household had become the fundamental unit of management and production in the agricultural sector, within a frame- work of collective or state ownership of land and major fixed assets. The continuing process of reform is directed at shoring up the new structure, dis- mantling redundant collective institutions, and facilitating a higher degree of commercialization and specialization.  1.04 The PRS is based on a system of contractual relationships which define the rights and responsibilities of owners (state, coLlective, or pri- vate) and managers of assets. The contract system is also applied to define vendor-consumer or supplier-procurer relationships. It is intended to provide scope for increased, albeit constrained, independence of decision making and encourage relationships based on negotiation rather than administrative fiat. A wide variety of contractual forms have been tried, and in agriculture one system has become nearly universal: bao gan dao hu (BGDH). This, loosely translated, means "contracting all actions to the household". 1.05 In BGDH, management of collectively-owned land is contracted to households, usually in proportion to household size or Labor force. Other collective assets are divided up, sold or contracted to individuals or groups willing to manage them. The household is obligated to pay taxes, make contri- butions to collective welfare funds, provide its share of state procurement requirements, and contribute labor to maintain or construct public infrastruc- ture. All remaining output may be retained by the household. Food rations and the work point system are abolished. Under this system, teams of 20- 40 households function largely as administrative bodies, make periodic adjust- ments in the distribution of land and other assets, collect taxes, procure production quotas on behalf of the Government, and implement family planning activities. Teams may continue to promote the development of service or subsidiary production activities, but this is done usually through subcontrac- ting rather than direct management. 1.06 Some teams have retained less radical forms of the PRS and continue to play a major role in management or distribution. Usually these are teams in areas where extensive indivisible collective assets exist. The state farm system initially tied bonuses to contractual performance of individual workers on fixed basic wages, but has now begun to implement a scheme similar to BGDH. 1.07 As part cf the trend toward a reduced role for administrative bodies in economic management, higher level institutions are also undergoing restruc- turing. The commune is being transformed into the township (xiang) with its economic roLe confined largely to fostering commune and brigade enterprise (CBE) development. The brigade is being renamed the village (cun) and is los- ing much of its managerial and technical staff. The Supply and Marketing Cooperatives are being restored to their initial role as dividend-paying, shareholder-managed institutions owned largely by farm households. At higher levels, Jiangsu Province is experimenting with the integration of cities, towns and surrounding countryside into single administrative units in order to reduce administrative obstacles to commercial development. State farm reforms include the establishment at provincial level of semi-autonomous Agriculture, Industry and Trade Corporations which will be responsible for, inter alia, interprovincial and international trade in products from state farms. These corporations also will be permitted to engage in construction work outside of the state farm system. 1.08 BCDH has provided substantial rewards to those farmers who are able to increase production. Tax, welfare fund contributions, and quota procure- ment obligations have been fixed in absolute terms, rather than on a  - 3 - percentage basis, although amounts vary with the productivity of assigned land. The total obligation to the collective and the Government, counting the underpricing of yocurements, anpears to be in the range of 20-30% of gross value of output.- 1.09 A State Council regulation of early 1984 permits the transportation and marketing of most agricultural products by collectives and in2ividual producers after quota and above quota deliveries have been made.- After licensing by local commercial bureaus, producers may transport agricultural products, including livestock, aquatic products and processed foods, for sale across county and provincial lines. Similarly, private merchants in urban areas may cross jurisdictional boundaries to purchase eligible products directly from producers. Prices are to be established through negotiations and may vary within the bounds, if any, specified by local or national policy. In the case of inter-county or inter-provincial movements of goods, itineraries of transport vehicles must be approved by authorities at county level or above. 1.10 The shift in control over resources from collectives to individuals has created new policy issues, among them how to sustain a high rate of investment in the farm sector. Perhaps reflecting uncertainty over the dura- tion of the PRS policies, households were initially inclined to devote their new surpluses to housing construction and the accumulation of consumer durables or commodity stocks. The Government has responded with policy changes designed to encourage private investment, notably by lengthening land contracts to up to 15 years in the case of annual crops and 50 years for tree crops, machinery and equipment. Since the inception of the PRS some 1.2 mil- lion households have purchased pedestrian tractors. 1.11 Part of the new policy environment is to encourage specialization and commercialization, thereby reversing-the self-sufficiency orientation of Chinese coLlective agriculture. This requires better functioning markets in labor, purchased inputs, services and output. These have begun to deveLop with official sanction. A clear example relates to labor and land. It is widely held that about one-third of the rural labor force is not required in agricultural production with existing technology. To encourage more efficient use of rural labor, recent Government decisions have allowed farmers to hire labor at negotiated wage rates and to surrender or subcontract land use rights in order to engage in off-farm activities. 1/ Assuming that 50-60% of total sales are at quota prices and the "market equilibrium price" is perhaps 50% higher than the quota price. 2/ State Council, "Regulations Issued by the State Council Concerning the Transportation and Sale of Farm and Sideline Produce by Collective Com- mercial Units and Individuals," February 25, 1984 (World Bank translation of Xinhua release of March 8, 1984).  1.12 The growth of BGDE and the focus on farm households as production units has required new structures for agricultural extension and research. Here the Government is using new concepts such as the model farmer and is appLying the contractual features of the PRS to extension work by experiment- ing with a fee-for-service system to provide technical assistance to producers. The farm household is the new target for support services, and the "specialized household" (SH) is considered to be the major vehicle to demon- strate improved technology. Some 14Z of farm households now possess suffi- cient degrees of production specialization and/or comnercialization to be classified as SH. The SH at present is something of a hothouse product, nurtured with subsidies and often headed by individuals with some technical training. Government policy reflects an increased awareness of the need to establish an institutional framework for agriculture which provides a "complete service structure supporting commercial production, including such requirements as technical assistance, investment, marketing, storage. processing, transport, commercial credit, and management assistance."31 Achievements are encouraging, but much remains to be done in each of these areas. 1.13 Rural Reforms and Investment. Spread of the PRS appears to have been accompanied by a contraction in rural investment in production infra- structure. In the past, accumulation by collectives, together with investment in kind by collective labor, represented a major part of agricultural invest- ment. In recent years, in-kind investment by collective labor has become much less important, although this may have been offset to some extent by increased labor invescment by households on lands contracted to them. The transfer of control over resources from collectives to farm families has resulted in an increase in private rural savings which now are equal to about 20Z of annual income. Until recently, most of these savings had been funneled into housing construction or stock accumulation, possibly reflecting a reluctance to make long-term on-farm investments due to uncertainty about tenure arrangements or the permanence of reforms. In early 1984 the Government reacted to this pro- blem by issuing decrees to guarantee long tenure and to encourage private investment in productive activities. The rapid increase in crop marketing in 1983 suggests that on-farm stock accumulation may have reached its limits. 1.14 The collectives now appear to be handicapped by diminished income from agriculture and growing difficulties in drafting team labor for such works as irrigation, land improvement and local road projects. Compensation for labor on large projects must be paid in cash or kind, at rates which com- pete with the earnings possible from private farming and sideline activi- ties. However, an uncompensated "social labor obligation," perhaps averaging 20 work days per farmer per year, may be tapped to maintain infrastructure, construct small projects with Local benefits, and fight natural disasters. Costed at about Y 2 per day, this may amount to as much as Y 12 billion in potential rural gross investment per year. In addition, rural collectives 31 China Farmer's News 16 (February 1984), p. 1, describing the contents of the 1984 No. 1 Party Directive.  -5 - accounted for Y 13.1 billion of fixed investment in 1982, of which about 60% was derived from the net incomes of CBEs. 1.15 State investment has been adversely affected in recent years by increased budgetary stringency, designed to reduce the central Government deficit. Investment by the state in agriculture appears to have suffered more than some other sectors. The Y 3.0 billion budget in 1982 for fixed capital investment in agriculture (including forestry, water conservancy and meteoro- logy) represented a decline in this component to 9.7X of total Government investment in basic construction, compared to the 11-12% reached at the end of the 1970s (Table 1.1). Actual totaL investment in agriculture, including extra-budgetary funding by state-owned units at all levels, fell from 10.5X of the total during the Fifth Five-Year Plan to 5.8% in 1983. Much of this was absorbed by major projects receiving state support, e.g., Heilongjiang drain- age and land reclamation, Tianjin municipal water supply, and various projects in Guangdong, some of which appeared to be only indirectly related to agricul- ture. The source of financing of water conservancy projects has shifted away from state budgets to provincial and local funds. In 1983 only about a quar- ter of expenditure for this purpose originated in the state budget. 1.16 The agricultural credit system also may have been used to restrain investment. Available data suggest that increased rural deposits exceeded the net increase in rural lending in recent years (although more rapid loan repay- ment due to good harvests may account for this phenomenon). The portfolio of rural lending institutions also was undergoing restructuring, as individual farmers received a growing proportion of new loans and the financing of state farms shifted increasingly from central government grants to loans by the Agricultural Bank (Appendix Table A.1). 1.17 A rough estimate of the magnitude of rural gross capital formation in 1982 is about Y 65 billion (Table 1.2). Investment by the state appears to have accounted for only 5% of this total, but represents perhaps one-fourth of directly productive investment in agriculture (Y 3.4 billion of Y 14.5 bil- lion, the latter being the difference between the Y 26.5 billion in "other use"' and the Y 12 billion for uncompensated labor). About one-half of collec- tive investment was directed to CBE expansion from CBE profits, which also provided more than one-quarter of the financing for other collective invest- ments (excluding "social labor"). The value of net increases in pedestrian tractors, draft animals, and pigs alone, presumably components of private investment, totalled nearly as much as state investment in agriculture. 1.18 The estimates in Table 1.2, notwithstanding their imprecision, suggest that by 1982 only a limited proportion of rural savings was being directed into investments which would contribute directly to agricultural productivity. A sizeable proportion of this investment undoubtedly was used to replace aging infrastructure or was offset by abandonment of collective assets such as large-scale farm machinery. On the ocher hand, the estimates suggest that private rural savings are large enough to be a major source of finance for rural development, if the savings can be mobilized without under- mining the newly-established production incentives.  - 6 - ' Table 1.1: AMRICULTURE IN THE STATE BUDGET (Y billion) /a 1957 1965 1975 1978 1979 1980 1981 1982 Total budgetary allocations /b 30.4 46.6 82.1 111.1 127.4 121.3 111.5 115.3 Of which: Basic construction investment /c 12.4 15.9 32.7 45.2 51.5 41.9 33.1 30.9 Budgetary allocation for agri- culture, forestry, water conser- vancy and meteorology /c Basic construction investment 1.1 2.4 3.6 5.1 6.2 4.9 2.5 3.0/d Administrative expenditure 0.9 1.7 3.3 6.1 7.9 7.0 6.5 6.2 Working capital expenditure U.1 0.3 0.3 0.8 0.5 0.4 0.2 0.2 Subsidies to communes - 0.1 0.9 1.6 1.1 1.2 0.9 1.0 Rural relief assistance 0.3 0.7 0.7 0.7 1.0 0.7 0.7 0.9 Total 2.4 5.1 8.9 14.3 16.8 14.2 10.8 11.3 Allocation for basic construc- tion in agriculture as Z of: Total budget 3.6 5.0 4.3 4.6 4.9 4.0 2.2 2.6 Total basic construction 8.8 14.8 10.9 11.3 12.1 11.6 7.4 9.7 Budget allocation for agriculture as x of total budget allocation 7.9 10.9 10.8 12.9 13.2 11.7 9.7 9.8 /a Relates to magnitudes in the unified national development plan and therefore includes those allocations by the central, provincial and local governments which are normally included in the national plan. lb From 1982 China Statistical Yearbook, p. 449. Refers to budgeted expenditure. /c From 1982 Yearbook, pp. 452-53. /d Actual expenditure, which was probably higher than budgeted expenditure.  Table 1.2: ESTINATES OF RURAL GROSS CAPITAL FORMATION, 1982 Amount Percentage (Y billion) (x) By origin: State /a 3.4 5 Collectives lb 13.1 20 Private /c 48.5 75 (of which uncompensated labor) (12.0) (19) Total 65.0 100 By use: Commune & brigade enterprise /d 6.8 10 Private housing /c 15.7 24 Stock accumulation /e 16.0 25 Other uses 26.5 41 Total 65.0 100 /a From Table 1.1. Includes investment by state-owned enterprises and farms outside the state budget. /b Report in State Statistical Bureau, Outline of Chinese Statistics, 1983 (Beijing, 1983), p.57. {c The sum of estimated components, including investments in private housing and other buildings (Y 16.9 billion, from source in note b), stock accuu- lation (Y 16 billion, based on difference between income and consumption in kind as reported in rural income surveys), net investments in produc- tive assets except buildings (Y 3.5 billion, net of transfers from collec- tive to private ownership). The increased numbers of pedestrian tractors, draft animals, and pigs alone would account for Y3.1 billion, and uncompensated "social labor" (assumed to average 20 workdays per year at Y 2/day for each of some 300 million farm workers) would have a value of about Y 12 billion. /d The portion of retained earnings of commune and brigade enterprises which was not distributed or used to support agriculture. Includes Y 4.7 billion reinvested in CBE expansion and Y 2.1 billion for "other uses," primarily infrastructure such as roads, bridges, and housing related to CBE production as well as some "administrative expenses". As reported by the CBE Bureau, MAAF. /e Accumulation of grain stocks and other agricultural commodities, including private working capital.  - 8 - 1.19 Price Reforms. The Chinese government in 1979 made major adjust- ments in the Level and structure of farm prices because of concern that the existing structure did not provide sufficient income and incentives for the crop mix which the Government wished to encourage. Because these reforms forced sharply higher budgetary costs for consumer subsidies, the Government has indicated its unwillingness to consider further significant increases in the farm price level over the medium term. However, as seen below, this pricing system guarantees an upward drift in the weighted average price received by farmers as long as production and procurement continue to grow. 1.20 Prior to further reforms announced in Late 1984, the farm price structure encompassed four distinct prices: (a) quota; (b) above quota; (c) negotiated prices; and (d) free market prices. Quota prices applied to crops sold in fulfillment of procurement quotas; above quota prices were paid for that part of crop sales in excess of quotas. Quantities to be delivered to the state at quota and above quota prices were stipulated for each producer. After fulfiLling these two obligations, producers could sell remaining supplies at negotiated or free market prices. Ratios of above quota prices to quota procurement prices, which were 30% for grain prior to 1979, were increased to 50% for grains and oilseeds, 20% for bast fibers, and 30% for cotton (which previously had no above quota price premium). Procurement prices for soybeans were increased 15% in 1979 and 50% in 1981. Quantity narms or obligations for sales at above quota prices have been typically determined for a three-year period, but no penalty is attached to underful- fillment, as currently there is little differential between above-quota and free market prices. The number of agricultural commodities with state- established prices is declining and the pricing structure is being simplified. In Gansu Province, for example, the number of agricultural and sideline prices controlled by the price bureau declined from more than 100 to about 40 by early 1984 (of which 30 were for medicinal herbs). Beginning with the 1984 crop, all cotton in China was to be procured without regard to quota fulfillment under a one-price system in which a weighted average of quota and above-quota prices will apply, with weights varying by region but not over time. It is expected that a similar system would be applied to grains beginning in 1985. 1.21 Negotiated prices fluctuate at approximate parity with free market prices. They apply to sales to the state by individual farmers for production which may be legally sold on the free market. In 1980, negotiated prices were 10-20% higher than above quota prices, reflecting procurement shortages and high free market prices. Recently, negotiated prices for some grains have fallen in some areas to less than above-quota prices, reflecting bumper har- vests. Overall, in 1979 the average procurement prices (each type of price weighted by the share of sales transacted at that price) rose about 25% for grains, 40% for oilseeds, 17% for cotton and 37% for pigs. 1.22 Procurement quotas for the two major commodity groups, grain and cotton, were last fixed in the early 1970s and have remained substantially unchanged. Quotas for other crops such as oilseeds varied from year to year. If no quota existed for a product, the above quota or-negotiated price normally applied. As a result, increased procurements have generally taken place at higher than average prices and imparted an uptrend to the weighted average price, even with an unchanged price structure. The effect can be  - 9- sizeable. Of the total value of net procurement of agriculture and sideline output in 1983, 48Z was at quota prices, 28Z at above quota prices, and 13X at negotiated or market prices. Just under 11Z represented free market sales to the nonfarm population. The increased volume of sales in 1983 over 1981 at quota prices was only 9%, but was 49-78% for each of the other three categories. As a result, ave-'age weighted prices in agriculture appear to have continued to grow in recent years at about 5% p.a (Appendix Table A.2). Reforms announced in late 1984 are expected to effectively abolish procurement quotas for most agricultural commodities. Under the new system Government procurement would be limited largely to contracted amounts needed for urban consumers. Excess production is to be retained by the farmer or marketed by :he farmer on the free market. 1.23 Price reforms of recent years were designed to improve levels of living for farmers and to correct incentive imbalances among crops. However, there has been little public information on how these objectives were transLated into specific prices. Some inferences can be drawn from post- reform surveys of farm production costs (Table 1.3). It appears that quota prices were set at leveLs which roughly equalized the net return (wages, rent, nrofit) per labor day for different crops (with the exception of sugar, where the intent apparently was to provide an incentive for expanded production), with the value of rural consumption per labor day which has been reported at about Y 1.40. This leads to significant differences among crops per sown ha, although these differences are greatly narrowed if cropping systems are con- sidered which would typically occupy land for an entire year (e.g., rice, corn or soybeans combined with wheat or rape, and compared with crops such as cotton, jute, tobacco or sugar cane where only a single crop per year is possible). 1.24 Average quota procurement prices appear to bear a reasonable rela- tionship to historical production costs for the "average" region or situa- tion. However, the new price structure is based on past levels of input use which, in turn, were influenced by the previous price structure. Thus, price adjustments which restored profitability relative to past production costs tend to perpetuate any inefficiencies existing in the previous price struc- ture. Further, average cost-price relationships mask regional variations in subsistence costs, land quality, the extent of multiple cropping, etc. Some local observers regard the new level of quota prices as too low to promote increased production and biased against grain production. However, agricul- ture's good performance since the 1979 price adjustments does not provide support for these assertions. Some anomalies, such as the low return per ha for soybeans (which are single cropped in the main producing region), have been corrected through subsequent price or quota adjustments. Growth and Productivity 1.25 The period since the 1979 reforms has been characterized by excep- tionally good performance of the agricultural sector. The gross value of agricultural output (GVAO) in 1983 grew by 9.5% folLowing growth of 11.1% in 1982, 6.6% in 1981, and 3.9% in 1980. Since 1978, GVAO has grown at an annual average exceeding 7X, or more than twice the rate achieved over the previous two decades. Weather during much of this period was normal, but unusually good growing conditions in 1982 and 1983 made important contributions to high  - 10 - Table 1.3: EFFECTS OF PRICE REFORM ON RETURNS TO CROP CULTIVATION /a Net return per Net return Rate of return Crop labor day /b per ha /b on cost /c Rice 1.56 782* 47 Wheat 1.13 411* 19 Corn 1.31 500* 33 Soybean 1.37 352 39 Cotton 1.34 1,087 40 Rapeseed 1.17 491* 25 Peanuts 1.27 570* 45 Jute 1.39 l,289 42 Tobacco 1.36 1,540 36 Sugarcane 1.98 1,769 66 Sugar beet 3.37 810 106 /a Computed from survey data covering over 800 production teams and reported in the Handbook of Agrotechnical Economics (Beijing, 1983), pp. 642-57. Data refer to prices and costs which prevailed after the 1979 reforms. /b Net return defined as gross value of main product at quota prices less material costs (net of value of byproduct); that is, rent + wages + pro- fit. Refers to crop area, not cultivated area. An asterisk designates crops which frequently occupy land in one of two crop seasons per year. /c Net returns exclusive of "wages," valued at Y 0.80/labor day (an account- ing wage used in cost surveys since the 1950s); as a percentage of mater- ial costs + "wages."  - 11 - growth in those years. During the 1979-83 period, China's cropped area declined by 3.0%. The area sown to grains fell by more than 4%, while the area under non-grains rose by 20%. 1.26 Grain production in 1983 reached a record 387.3 million tons, some 17% higher than in 1979 (Table 1.4). Grain production in 1979-83 increased at an annual average rate of 3.9Z, as the steady decline in sown area was more than offset by a remarkable 22% increase in average yields. Factors contri- buting to yield gains included more rational selection of areas planted to grains, improved production incentives and greater use of purchased inputs. The largest production gains have been centered on the fine grains. Compared with 1979, wheat production in 1983 was up by 30%, rice output was some 17% greater, but output of coarse grains increased by only 9%. An important con- tributor to grain production was hybrid rice, which now accounts for about 26% of China's rice production and has a yield advantage over conventional varie- ties of 15-20%. 1.27 Oilseed production in 1983 (excluding soybeans and cottonseed) totalled 10.6 million tons, down 10.7% from 1982 but 66Z more than production in 1979. In contrast to grains, the area planted to oilseeds increased stea- dily until recently, with most of the increase coming in rapeseed- The area planted to rapeseed was cut in 1983 in response to market surpluses and state prices were reduced slightly. Good harvests permitted steady gains in per capita availabilities of edible oils to about 4 kg per annum, thereby helping to alleviate scarcities of this important food item. Soybean production in 1979-83 varied markedly from year to year in response to weather conditicns, but trended upward. Imports of soybeans for crushing declined while soybean exports for food use have moved up slightly. Production in 1983 was 9.8 mil- lion tons, up 7.7% from the 1982 crop. 1.28 China's cotton crop more than doubled in 1979-83, reflecting both higher yields (up 56%) and larger planted area (up 36%). The 1983 crop was up more than 28% from the 1982 level. The rapid growth in production is due in large part to specialization incentives and the introduction of new varieties. These incentives are encouraging expansion in the traditional areas well- suited to production in North China, while the planted area declined in less well-adapted areas where production had been encouraged by previous policies. The planted area in 1983 in Shandong Province, the largest producer, was 40% greater than it was in 1981, while the cotton area in Sichuan Province was down about 50% from 1981 levels. Cotton imports continued to decline and in 1983 were only about lOZ of levels in the peak years of 1979 and 1980. Stocks of cotton in early 1984 Y!ere about 1.6 million tons, equivalent to nearly half a year's consumption requirements, and export markets were being sought. Rationing of cotton textiles ended in 1983 in conjunction with a price adjust- ment (cotton _ip 20%; synthetic textile prices down 30X) designed to balance supply ard demand and pass on increases in raw material prices. 1.29 Sugar production increased by 52% in 1978-82, in response to attrac- tive price incentives. Despite these gains, sugar imports continue to increase rapidly as part of the Government's efforts to improve per capita consumption levels of key commodities. Annual per capita consumption of sugar of 4.5 kg remains low by international standards (e.g. 20 kg in Thailand). In the 1979-83 period, tobacco production rose by 43%, tea by 45%, and silk cocoons by 26%.  - 12 - Table 1.4: PRODUCTION CHANGES, 1979-83 % annual Percent growth change rates Production Unit 1979 1983 1983/1979 1983/1979 Rice (Paddy) Sown area mln ha 33.9 33.1 -2 Yield tons/ha 4.3 5.1 +20 Output mln tons 143.8 168.9 +17 4.1 Wheat Sown area mln ha 29.4 29.1 -1 Yield tons/ha - 2.1 2.8 +31 Output mln tons 62.7 81.4 +30 6.7 Corn Sown area mln ha 20.1 18.8 -6 Yield tons/ha 3.0 3.6 +20 Output mln tons 60.0 68.2 +14 3.3 Others /a Sown area mln ha 35.9 33.0 -8 Yield tons/ha 1.8 2.1 +15 output mln tons 65.6 68.8 +5 1.2 Total Grain Sown area mln ha 119.3 114.0 -4 Yield ton/ha 2.8 3.4 +22 Output mln tons 332.1 387.3 +17 3.9 Cotton Sown area mln ha 4.5 6.1 +36 Yield kg/ha 88 763 +56 Output mln tons 2.2 4.6 +109 20.2 (ginned weight) Oilseeds /b Sown area mln ha 7.1 8.4 +18 Yield kg/ha 913 1,260 +38 Output mln tons 6.4 10.6 +66 13.4 Sugar (refined) mln tons 2.5 3.8 +52 11.0 Tea '000 tons 277 401 +45 9.7 Meat /c mln tons 10.6 14.0 +32 7.2 Tobacco (cured) '000 tons 806 1,151 +43 9.3 /a Soybeans, pulses, sorghum, millet, barley, oats, tubers, miscellaneous grains. /b Excludes soybeans and cottonseed. /c Pork, beef, and mutton only. Source: State Statistical Bureau.  - 13 - 1.30 Meat production (pork, beef, mutton) in 1983 was 32Z greater than in 1979, with most of the gains coming in pork production. Per capita availabi- lity of meat in 1983 reached 13.7 kg. Cattle numbers have increased sharply in recent years, partly in response to the PRS which now permics farm house- holds to own draft animals. The PRS in the grazing areas also is providing strong incentives to increase animal numbers, but thereby exacerbating the problem of overgrazing. Milk production is in the range of 1.8 million tons annually, but consumption remains low by international standards (about 1.7 kg per capita in China; 10 kg in Malaysia; 103 kg in the United States). The Government has just begun to collect statistics on poultry production. House- hold surveys suggest that per capita egg consumption has grown by nearly 50% since 1978. Modern enterprises for the production of eggs and poultry meat are being established near some of the larger coastal cities and are providing larger shares of total broiler and egg production. 1.31 Output of aquatic products in 1983 totalled nearLy 5.5 million tons, of which the marine catch was 3.6-million tons and fresh water production 1.8 million tons. Output of fisheries products, after a decline in the late 1970s; has begun to expand as rapidly as most other subsectors of agricul- ture. Total fisheries production in 1983 was about 27% greater than the 1979 level. Sluggish growth of salt water fisheries is attributed to over-fishing of the marine resource. In contrast, fresh water fish culture has grown by 64% since 1979 and now accounts for about a quarter of total production. 1.32 Output from sideline activities (gross value of hunting and gathering and industries run by brigades and teams) increased by 110% since 1979 and 20X in 1983 alone. Sample surveys of househoLds indicated that in 1983, 36% of farmers' net incomes came from private household activities. The comparable figure for 1978 was 27%. Output of commune-run industries (which are not included in GVAO) in 1983 was 87% higher than in 1978. Appendix A, Table A.3 notes the continued decline in the relative importance of crop pro- duction, the marked increase in sideline production and more modest relative gains in livestock. Chinese agriculture continues to be heavily crop orien- ted, with a crop:livestock ratio of about 92:8 (net value added) as compared with 52:48 in the United States and 83:17 in India. Incomes and Consumption 1.33 Recently published household survey data provide some measure of the extent of income and consumption gains in rural China (Table 1.5). In nominal terms, per capita incomes of farmers in 1983 were 2.3 times those of 1979. Incomes of employees in state enterprises (mostly urban dwellers) rose by 66% during this period and were nominally 70% higher than rural incomes in 1983. In real terms, rural incomes may have increased by 70% while urban incomes were up by about 40%; however, the urban/rural income ratio in real terms is still well over 2:1. Consumption gains have been substantial. Between 1979 and 1983 annual per capita consumption of grain in rural China increased by only 1% while per capita consumption of vegetable oils rose by more than 48%. Consumption of red meat (excluding poultry) on a per head basis was up bv more than 53%. Consumption patterns in China's rural areas continue to differ markedly from those in urban areas with rural residents consuming  - 14 - Table 1.5: COMPOSITION OF RURAL INCOME AND EXPENDITTURE, 1979-83 Percent increase, 1979 1983 1979-83 Rural net income (Y/capita) 160.2 309.8 93 Composition (%): Collective income 64 55 Private income 27 36 of which from: Crops 10 12/a Livestock 12 13/a Other private 6 13/a Remittances & other 9 9 Rural consumption expenditure (Y/capita) 134.5 248.3 85 Composition (%): Food 64 59 Clothing 13 11 Fuel 6 5 Housing 6 11 Other commodities 8 11 Services 3 2 Consumption of (kg/capita): Grain (unprocessed) 256.5 260.0 1 Edible vegetable oils 2.4 3.5 46 Red meat 6.5 10.0 54 Poultry 0.3 0.8 159 Fish and shrimp 0.7 1.6 128 /a 1982 figures; 1983 not yet available. Source: State Statistical Bureau. Commodity income in 1979 valued at 1978 quota-procurement prices; in 1983 at 1983 procurement prices.  - 15 - substantially more grain and less meat on a per capita basis, but the patterns have been converging. 1.34 It would be natural to expect that the PRS and associated reforms provided the incentives to accelerate agricultural growth but, in doing 4o, may have increased the inequality of income distribution in the sector.- The rationale behind this expectation is that ability and ambition are unequally distributed in the population and the earlier rural distribution system rewarded neither. Indeed, it put a "cap" on distributed income whenever abil- ity, effort and access to unusually productive agricultural resources would have led naturally to increased income differentials. Initial analysis of data through 1982 on the distribution of rural income suggests that the PRS in fact may not have increased the concentration of rural incomes (Appendix Table A.4). Rural income surveys suggest that between 1979 and 1 82 poorer house- holds shared more than equally in the benefits of the PRS._5 A possible explanation for these results is that the PRS, and in particular the BGDH ver- sion, was extended first to the poorest teams and most backward areas which therefore realized the earliest income benefits from the reforms. Only in 1982 and 1983 did the wealthiest teams and areas adopt BGDH. Improved incen- tives for growing cotton in the relatively poor North China Plain and sugar- cane in the poorer areas of South China may also have narrowed regional dif- ferences. Moreover, BGDH was initially applied to crop production, and was of greatest benefit to families or areas with few non-crop activities. Recent reforms (1983-84) promote development of commercial sideline and CBEs, and will be of most benefit in wealthy areas. In short, the geographical reduc- tion in inequality through 1982 may have "swamped" the effect of reforms on inter-family income differentials. On this rg7soning, the full effects of BGDH on the richer areas have yet to be felt.- 41 Egalitarianism has been officially discredited. A recent article in the Beijing Review stated: "For more than two decades after the cooperative movement, China has tried to bridge the income gaps between the peasants with large-scale egalitarian collective management and egalitarian methods of distribution. By arbitrarily equalizing peasants' income, these methods only crippled the peasants' enthusiasm for work and held back the growth of agricultural production which even came to a standstill in some places". (September 19, 1983). 5/ The Gini coefficient estimated from these data declined from 0.257 in 1979 to 0.225 in 1982. 6/ A factor complicating the interpretation of these results is that size of the sample surveys more than doubled between 1978 and 1982 and composi- tion also may have changed. Other statistical phenomena which would influence the computed coefficients include: (a) family divisions which would increase the weight of particular income groups seem more likely to occur among middle income families, rather than the poorest (who lack savings) or the richest groups (comprised mostly of young, nuclear families); and (b) migration out of the rural areas - and the rural statistics - may be highest among the poorest groups.  - 16 - 1.35 While the full imlpact of rural reforms on income growth and distri- bution remains to be seen, the rapid income gains of all groups clearly reduced 17 solute poverty. Various estimates document the decline in absolute poverty.- In the 1977-79 period, about 200 counties were designated as poor. By 1982 only 42 counties were classified as in poverty. Measured somewhat differently, Appendix Table A.4 shows that families with yearly per capita incomes of less th n Y 100 dropped from about 20% of the total in 1979 to less than 3% in 1982.8 2. FUTURE DEMANDS ON THE SECTOR 2.01 Consumption of agricultural products in China will be strongLy influenced by future trends in growth of per capita income and population. At the same time, consumption will be affected by policy measures intended to balance supply and demand. At any level of per capita income and popuLation size, different price structures, rationing, or foreign trade patterns can be used to achieve balance at quite different levels and structures of food con- sumptian. The projections of consumption made below are of potential demand in the particular situation where relative commodity prices are similar to those in other Asian countries at comparable income levels. 2.02 Peculiarities of the present Chinese consumption pattern, involving relatively high per capita levels of direct grain consumption, suggest that higher incomes would bring about a substantial re0ructuring of the Chinese food consumption pattern over the coming decades.- The directions and magni- tude of this restructuring are accepted in China as long-term economic goals. Broadly speaking, it involves a substantial reduction in direct per capita consumption of grain and correspending increase in consumption of 71 A commune (township) is officially designated as poor if its per capita distributed collective income for three successive years is no higher than Y 50. Since the standard is not adjusted for price changes, use in intertemporal comparisons is misleading. 8/ Part of this change may reflect changes in accounting practices. In poor teams or areas, most of the distributed income is in kind. Official sta- tistics on distributed incoce are very sensitive to changes in accounting prices. In 1981-82 distributed commodities were revalued upward in income surveys by about 30%. Presumably, officially-reported distributed income was similarly revalued. This may suggest that a substantial num- ber of previously poor teams were pushed above the poverty line artifi- cially by this change in accounting prices. 9/ Direct consumption of grain refers to consumption by humans of processed rice, wheat, corn, other minor grains and tubers (at one-fifth fresh -weight). Consumption of soybeans and other pulses is excluded from this definition. Indirect consumption of grains would be grain consumed by livestock and poultry, the products of which are then eaten by man.  - 17 - animal products, along with other forms of dietary diversification. This restructuring of consumption would require changes in the composition of domestic production, including its regional dimensions, and perhaps increased foreign trade in agricultural products. Present Consumption Levels 2.03 After severe reversals and famine in 1960-61, China has made substantial progress in improving average per capita levels of available energy and protein. By 1982 the average Chinese consumed (directly) about 205 kg of cereals, 12.8 kg of red meat (pork, mutton, beef) and 4.2 kg of vegetable oil. This average diet on a daily basis provided over 2,700 kCal of food energy, 68 g of protein, and 38 g of fat (Appendix Table A.6: Food Balance Sheet, 1982). These availabilities exceed estimated requirements of food energy by 24% and of safe minimum levels of protein intake by 87Z. Declines in per capita availabilities were registered in the late 1950s, the 1966-69 period, and again in the early 1970s. Generally rapid increases have occurred since the 1978 reforms. 2.04 These national average figures do not mean that nutritional levels throughout China are fully satisfactory. Interregional Ui LtLL=LC= lit Y=f capita nutrient availability exist, although they are not well documented, and malnutrition is undoubtedly present in some localities from time to time. But China's food procurement and distribution system has been successful in provi- ding basic food nutrients to most of the population most of the time. Because interprovincial shipments of food are relatively small, data on provincial meat and grain production provide crude measures of differences in per capita nutrier.t availabilities. These data suggest that in 1981 per capita produc- tion of grain varied from 202 kg (Guizhou) to 420 kg (Jiangsu), while in 1980 average per capita availability of protein ranged from about 38 g (Guizhou) to more than 100 g (Heilongjiang). Average per capita meat production in 1981-82 ranged from 19.3 kg in Sichuan to 5.4 kg in Ningxia. 2.05 Survey data for 1979 suggested that in most relatively high-income locations such as urban Beijing, there was virtually no malnutrition among children. Rural-urban differences were substantial, although somewhat less so in weight-for-age than in height-for-age. The data indicated that more than a third of 7-year old boys in Sichuan were stunted, as compared witr. less than 4% in Tianjin. The rural-urban gap in per capita energy and protein levels may have narrowed by 1982. Urban residents generally have access co more animal protein, edible oils, fruits and vegetables, whereas rural residents consume considerably more grain per capita. 2.06 At the national level, average per capita consumption levels markedly exceed those of other low income countries, but in China an unusually high proportion of calories comes from grain. Average availability of energy in China on a daily per capita basis in 1980-82 (2,580 kCal) exceeds the 1975- 77 average for middle income countries (2,560 kCal) and the world (2,570 kCal). Protein availability of 66 g exceeds the average for all developing countries (57 g) and approaches the world average (69 g). However, in China only about 10% of protein intake is from animal sources, as compared to a world average cf 35% and 21% for developing countries. Similarly, the  - 18 - availability of animal and vegetable fat in 1980-82 was 5Z below the average in deveLoping countries and more than 40Z under the world average. Direct per capita consumption of grain (about 209 kg p.a. in 1980-82) is among the world's highest and exceeds that in India by 60X and in Indonesia by more than 3OZ. In sumnary, by consuming relatively more grain and less animal products per capita, China achieves a diet substantially higher in energy and total protein content than that of countries with comparable inoeme levels (Appendix Table A.7: Per Capita Food and Nutrient Availability in China and Other Countries). Projections of Consumption to 2000 2.07 Assumptions. The projections of consumption discussed below assume that relative commodity prices would be similcr to levels elsewhere in Asia with sizeable Chinese populations, and examine the implications of changes in real per capita incomes for future consumption patterns. Three scenarios are examined: (a) a "target growth" case, wherein present Covernment targets tor increased per capita GNP and population growth are achieved (requiring an average annual growth of 5.5t in per capita GNP and 1% in population); (b) a "low growth" case, where annual per capita GNP growth is only 3.5Z and the Covernment's population growth target of 1% p.a. is met; and (c) a "high growth" case, in which the Government's targeted per capita GNP growth is com- bined with population reaching 1.3 billion in the year 2000 (1.4% p.a. growth in 1980-2000). 2.08 Ideally, future changes in consumption resulting from these proj- ected growth rates of per capita income could be estimated from income elasti- cities of demand derived from Chinese household consumption data. At present, the only_Iata available permitting such estimates are for Beijing con- sumers.