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  1. China’s Rural Economy and the Path Towards a Modern Industrial State Scott Rozelle, UC Davis Jikun Huang, CCAP, Chinese Academy of Sciences

  2. Transformation Path Percent of Pop’n in Ag. Sector Income per Capita

  3. Overall Increase in Off-farm Work In 2000: 45% of rural labor force have jobs off the farm … more than 80% of households have at least 1 person working off the farm In 1980: only 4% worked full time off the farm

  4. Percent of Workforce Off-farm, by Age Range

  5. Comparison of Off-farm work, by age range Specialize in off farm work

  6. Change in Type of Off-Farm Work Migration TVEs Self employed

  7. Percent of Workforce Off-farm, by Age Range and Gender, poor areas

  8. Transformation Path China: with only about 30-40 percent of population in urban areas … if it is successful in developing … it will necessarily move along this rural-urban transformation path … clearly the progress during the reforms has been great … Percent of Pop’n in Ag. Sector Income per Capita

  9. Necessary but not Sufficient • Shifting labor to off farm sector / shifting population from rural to urban is necessary • But not sufficient … • Need to make sure those who are left behind are taken care of … • Need to make sure those who do not get jobs off the farm are being invested in … • So: process can continue … • And, so: there is stability …

  10. Role of Agriculture in Development[Johnston and Mellor, AER, 1960] • Provide Labor for Industry (it is happening) • Provide Inexpensive Food (does not need) • Provide Export Earnings (does not need) • Provide Other Commodities (does not need) • Provide Income • Demand for Domestic Markets • Maintain or Increase Rural Incomes • Poverty Alleviation

  11. Goal of Presentation • Understand how “healthy” is China’s agricultural sector … [Is it developing in a way that is going to facilitate the nation’s transformation into a modern economy?] • Can it provide rural population with the resources so the rural population has income: • In the present in order to: • Raise domestic demand • Maintain minimum standard of living • In the future in order to: • Invest in the move to the city • Invest in human capital of children

  12. Focus on Two Indicators 1. Rise in Productivity of Agriculture –Institutional Change and Technology (for rise in productivity) 2. Emergence of Commodity Markets – Domestic and International – and Rise in Specialization (for shifts to specialization and rises in allocative efficiency) • Illustrate how producers are doing: Case of Horticulture

  13. Transformation of Agriculture Stage 1: get incentives right (property rights) increase efficiency (new technology) get prices right (markets) -- Get incentives right (1978) Part 1. New Technology Increase output / unit of land Raise technical efficiency Part 2. Commodity Markets Increase specialization Raise allocative efficiency Stage 1

  14. Limitation of talk: focus on where China is – stage 1 Transformation of Agriculture Stage 2: allow for expansion of farm size replace labor with capital -- Get incentives right (1978) -- New Technology/Investment Increase output / unit of land Raise technical efficiency Mechanization Substitute for ag labor Raise labor productivity Cultivate Land Rental Mkts Increase land quantity Raise labor productivity -- Commodity Markets Increase specialization Raise allocative efficiency Stage 1 Stage 2

  15. Does China have the “technology tools”?Agricultural Productivity and the Technology that is Driving it

  16. Maize TFP for Wheat in China, 1979-95 Wheat Rice 17 year period: 3.5 - 4% annually Recent 10 years: 2% annually Growth of Wheat, Rice and Maize TFP in China, 1979 to 1997

  17. Contributions to Productivity • Before 1984: • ½ property rights reform • ½ technology • a bit to extension and education • After 1984 • ZERO to decollectivization • a bit to market emergence and education • none to extension • MOST to technology

  18. Question: Does China have to technological base to continue its record in TFP in future? Number of “Major” Varieties per Province by Year Average Number of Varieties per Province per Year Planted by Farmers, 1982-95

  19. Varietal Turnover in China’s Agriculture, 1983 to 1995 (proportion of area planted to new varieties) Average Variety Turnover All varieties turnover every 2 to 5 years!!!

  20. Yield “Frontier” of Rice, Wheat, and Maize, Rise of “Yield Frontier” in China’s Experiment Stations for Rice, Wheat, and Maize Around 2 percent per year growth Sown area weighted of sample provinces

  21. Total—2003: $300+ million Plant biotech research expenditure(million yuan in 1999 price, 22 institutes) Total--1999: $100 million US 2003

  22. Performance of GM Rice in Field Trial • Reduce pesticide use: - 40-50% • Reduce labor input: - 6-9% • Impacts on yield: + 6-8%

  23. Scenario B: Bt cotton + GM riceImpacts on Welfare(EV, million US$) in 2010 Rice + Cotton Rice Cotton

  24. SummaryPart 1 of Stage 1(technology tools) • Technology has been there • Farmers have been using it • Efficiency has been increasing • Incomes certainly rising • Biotech: China trying to position itself so technology will be available in coming years

  25. Part 2 of Stage 1:“getting prices right”Improvements to Domestic and International Markets

  26. Domestic Markets

  27. Corn and Soybean Marketing Regions and Flows

  28. Changes in corn price across China as markets increase its distance from port, 2000

  29. Location of Major Corn Markets in Greater Mississippi Valley St. Louis Port—New Orleans

  30. US Corn Prices

  31. Percentage change in price for every 1000 kilometers of distance from port

  32. Guangzhou (Shekou Port) Dalian

  33. Soybean Market Integration between Regions Dicky-Fuller Test critical value rejecting null of no integration @ 5% (10%) level is -3.3 (-3.0)

  34. Integration in China’s Markets (percent of market pairs that have integrated price series)

  35. Conclusion: Interregionally China’s Agricultural Commodity Markets are Fairly Well Integrated! But: How about between the Regional Marketing Centers and China’s 800,000 villages? Yellow River Region NE Region Yangtse Region South China Region

  36. To larger market Road between countryside and market town (“Distance to paved road”) Regional Market Town (“Distance to Market Town”) Village

  37. Soybean, Maize and Rice Village Price Regression, 2000

  38. International Markets

  39. Nominal Protection Rates (%) Huang, 2001

  40. WTO commitments are “radical” • Aggressive tariff reductions on most commodities • Fairly sizeable TRQs and strict rules to make sure they operate on market principles • Low above-quota tariff bindings (around 60 to 70 percent … more like Australia and New Zealan than Japan, Korea, or the EU) • Strict rules against “dumping” • Liberalize many rules that are keeping inputs out

  41. Net exports Labor intensive crops Exports – fruits, meats, aquaculture Imports – soybeans, cotton, hides Land Intensive crops Agricultural Trade Balance by Factor Intensity, 1984 to 2002 (mil US$)

  42. SummaryPart 2 of Stage 1(getting prices right) • Domestic markets have improved remarkably • Price signals getting through to farmers • International markets also integrating with world … China beginning to trade (exports and imports) according to their comparative advantage • Increased in allocative efficiency and incomes • at least in theory … how about in practice?

  43. The Case of Horticulture • So how have producers inside China fared in this process? • Are they able to respond to the signals of the food economy that are being transmitted from the urban sector? • Who is benefiting? Is household welfare improving? • What types of households? Rich or poor? Those in the periphery or those in more remote areas?

  44. Rise of Supermarkets: Increasing Store Units Number of Stores 20 to 30 percent annual growth between 1998 and 2002

  45. And growing! Supermarket Sales $US Billions Around 40 percent annual growth between 1998 and 2002

  46. Share in National Retail Nearly 50% of urban food purchases Percent of Total National Retail Sales World Bank: “Retail Olympics”

  47. Summary of the Nature of Changes in China’s Demand for FN&Vs • Large increase in demand • incomes • falling prices • migration • Increase in access to export markets • Rise of Supermarkets

  48. Producer response: Increasing Sown Areas of Vegetablesin ChinaandCalifornia(1000 ha) China California Every 2 years, + 1 California

  49. Trends of Cultivated Areas of Fruits and Nuts inChina and California(1000 ha) China California Campaign to upgrade quality

  50. China has Higher Share of Land in Orchards than Most Other Countries In summary: at least at the aggregate level, there has been a huge rise in the production of horticulture crops – traditionally a crop that yields higher levels of profits (and/or return to hh labor)