Cohen, Marc J.

Fan, Shenggen

English

Research Papers in Economics

CRITICAL CHOICES FOR CHINA'S 
AGRICULTURAL POLICY 
Shenggen Fan and Marc J.  Cohen 
2020 BRIEF 60  A 2020 Vision for Food, Agriculture, and the Environment  MAY 1999 
Economic  reforms  initiated  in  1978  brought  rapid  economic 
growth in China. Fundamental changes occurred in the national 
economic system. While the reforms were focused on  agricul-
ture,  as expected, the  role  of the  agricultural sector declined, 
and  the manufacturing  and  service sectors grew much  faster 
than the rest of the economy. Land, labor, and water shifted to 
nonagricultural  uses.  And  farmers'  incentives  for  agricultural 
production  deteriorated.  From  1990 to  1994, grain  production 
stagnated,  and  in  1995 China  had  to  import 20  million  metric 
tons  of grain.  This  threat  to  agriculture  and  food  production 
alarmed  the  country's  top  leaders.  New  policies  introduced 
since 1995 have succeeded in reversing declining food produc-
tion,  but at a huge financial  cost to  the government.  Is this a 
short-term phenomenon or the beginning of a long-term com-
mitment to  protection,  following  the  path  of many  developed 
countries? Critical choices lie ahead for China. 
REFORM OF AGRICULTURAL POLICY (1978-93) 
Before  1979,  Chinese agricultural  policy sought  rural  equity 
and the provision of  cheap food, capital, and labor for industrial 
development.  The  government tightly controlled  production, 
marketing, and trade, with  procurement prices generally held 
below international  prices.  Fearing anemic agriculture would 
retard industry, the government began implementing new poli-
cies in  1979. Initially, the government raised agricultural pro-
curement prices and allowed rural markets to reopen for farm-
ers to sell produce from private plots. In 1981, the government 
began  to  decentralize agricultural  production  from  the  com-
mune system to individual farm  households.  By  1984, more 
than 99 percent of production units had adopted the "House-
hold Production Responsibility System." In addition, the gov-
ernment gradually reduced the number of commodities sub-
ject to mandatory state procurement. 
The second phase of reforms aimed  mainly at liberalizing 
pricing and marketing. On the heels of a bumper crop in 1984, 
the  government replaced  mandatory  procurement with  vol-
untary  contracts  between  farmers  and  the  government.  In 
1993, the authorities further liberalized the grain  market and 
abolished the 40'year-old grain rationing system.  More than 
90  percent  of all  agricultural  produce  was  sold  at  market-
determined prices, a graphic indication of the transformation of 
Chinese agriculture from a command and control system to a 
largely free-market sector. 
NEW AGRICULTURAL POLICY (1994-PRESENT) 
However, as a result of pressure from high inflation, particularly 
from  rising grain prices and declining production, leading to in-
Production and net imports of grains in China 
Production  Imports 
(million metric tons)  (million metric tons) 
450 ,..-------------------.,.50 
- Production  It]  Net imports 
Source: USDA and State Statistical Bureau of China. 
creased  imports,  several  new policies  have  been  introduced 
since  1994.  The  central  government  boosted  procurement 
prices  above  world  prices,  offering  farmers  incentives to shift 
production away from cotton and oilseed crops. In 1997, China 
harvested record grain crops: wheat imports were the smallest 
since 1961  and rice exports were the largest since 1973. There 
was  another bumper  crop  in  1998,  and  stocks  remain  high. 
However, paying for these new policies has imposed a substan-
tial financial burden on the government and hindered reforms in 
other sectors, resulting in a net loss in social welfare. 
The "Governor's Grain Bag Responsibility System" was in-
troduced in 1995. This holds provincial governors responsible 
for balancing grain  supply and  demand and  stabilizing grain 
prices in their provinces. Nationally, this policy seems to have 
been  a success,  since  supplies  have increased  and  prices 
have  dropped  and  stabilized.  However,  the  record  varies 
sharply among the provinces,  particularly between richer and 
poorer provinces. If the policy remains, grain producers in rich 
coastal provinces could become more highly subsidized by lo-
cal  governments.  In  poorer surplus  regions,  producers could 
continue to be taxed. Such measures have a tendency to pro-
mote regional self-sufficiency, causing a net social welfare loss. 
Another new policy initiated in  1997 is called "Four Separa-
tions and One Perfection." In response to the inefficiency ofthe 
state  grain  bureaus  and  the  financial  burden  of government 
grain  policy,  the authorities separated  (1) the bureaus' policy 
functions from commercial functions,  (2) government-owned 
INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE  o  2033 K STREET, N.W.  •  WASHINGTON, D.C. 20006-1002 U.S.A. 
PHONE: 1-202-862-5600  •  FAX: 1-202-467-4439  •  E-MAIL:  ifpri@cgiar.org  •  WEB: www.ifpri.org 
~  IFPRI is pari of a global agricultural research network, the Consultative Group on International Agricultural Research (CGIAR). reserve stocks from commercial business,  (3) central  govern-
ment responsibilities from those of local governments, and (4) 
old from new bank debts. The "perfection" is a process to inte-
grate the government procurement prices with market prices. 
In  1998, the central  government announced that it would 
further decentralize grain  management responsibility to  pro-
vincial governments. In fact, however, the central government 
has reasserted monopoly control over grain procurement. This 
policy helps keep prices stable, but by restraining competition, 
it deters improvements in the efficiency of grain marketing. 
POLICY OPTIONS FOR THE FUTURE 
As China approaches the stage of development in  which the 
government shifts from taxing to  subsidizing agricultural pro-
duction,  policymakers  face  a  choice  among  competing  op-
tions.  The  first option  is  to follow the  Organisation  for  Eco-
nomic Co-operation and Development (OECD) countries and 
other newly developed economies, that is,  protect agriculture 
either through price supports or direct farm income payments. 
But agriculture still employs over 45 percent of China's labor, 
so  this  would  be  costly  for  industry.  Moreover,  as  OECD 
countries are finding, protecting agriculture is costly in absolute 
terms as well. And price subsidies may not be compatible with 
entry into the World Trade Organization (WTO). 
The second option is to use trade barriers to  insulate Chi-
na's agricultural production from  the international market.  In 
this case, domestic supply would meet domestic demand, and 
domestic consumers would implicitly subsidize domestic pro-
ducers. Considering China's rapid  economic growth and  the 
declining share of food in consumers' budgets, this option is 
attractive. But because prices and markets would be distorted, 
overall economic efficiency would decline. The size of the loss 
would depend on the difference between international and do-
mestic prices. Adoption of  this option might also create a prob-
lem for China's entry into the WTO. 
The  third  option  is  to  l.iberalize  agriculture  immediately. 
China would neither tax nor subsidize production, explicitly or 
implicitly.  China would  import or export agricultural products 
based on  comparative advantage.  Under this  scenario,  it  is 
likely that China would have to import large amounts of grain, 
but economic gains would  be  substantial.  China  could  gain 
US$4.5 to 7 billion in  2010 by abolishing its policy of 95 per-
cent grain self-sufficiency. The World Bank has estimated that 
China would gain $5 billion by 2020 if the current 95 percent 
grain  self-sufficiency  policy  were  abolished.  However,  be-
cause China is a large country, two problems could arise if it 
depends heavily on international grain markets. One relates to 
supply availability.  Australia,  Brazil,  Canada,  and  the  United 
States may have the potential to increase production. But how 
much they can supply is not clear, particularly when many gov-
ernments are under pressure to reduce support for agriculture. 
Agriculture is also subject to weather and other climatic condi-
tions.  A  production  shortfall  of 20  to  30  percent in  a  major 
grain-exporting country would affect international prices sub-
stantially,  considering the  thin international  market for many 
agricultural commodities. 
The fourth option is to continue to liberalize gradually, while 
increasing  investment in  rural  infrastructure,  agricultural  re-
search  and  extension,  and  irrigation.  This  option  would not 
only conform with WTO requirements but would also improve 
long-term food security and overall economic efficiency. 
Various studies have shown that increased investment in ag-
ricultural  research,  extension,  irrigation,  and  infrastructure  is 
one of the most efficient ways to improve China's food security 
in the long run. IFPRI projections suggest that if China increases 
its investment in agricultural research and irrigation by 4.5 per-
cent per year,  it will  become a net exporter of grains by 2020. 
With every 1 percent increase in agricultural research and irriga-
tion  investment,  China could  produce an  additional 21  million 
metric tons of grain in 2010 and 36 million metric tons in 2020. 
Each yuan invested in research and irrigation could yield returns 
between 3.6 and 4.8 yuan. 
However,  it  is  worrisome to observe that China's agricul-
tural investment, particularly its research investment, has fluc-
tuated  over time  and  has  stagnated  in  recent  years.  After 
1978, agricultural investment began to decline, bottoming out 
in 1987. Although it has recovered since, it was still32 percent 
below the 19781evel in 1994. In relative terms, the share of ag-
ricultural  investment  in  agricultural  GOP  began  to  decline 
sharply after 1978, from  18 percent to about 5 percent in re-
cent years. Investment in agriculture as a proportion of  total in-
vestment fell  drastically, from  20 percent in  1980 to only 2.4 
percent in  1994. 
Fluctuating and falling public investments in agriculture will 
impede long-term sustainable agricultural growth. For exam-
ple,  the decline in  public investment in  agricultural research 
and development led to  deterioration of the national agricul-
tural research system and a possible slowdown in the rate of 
release of new agricultural technologies. Also, the decline of 
investments in maintenance and repair of irrigation and drain-
age systems, rural roads, and soil improvement schemes has 
reduced the effectively irrigated area and increased the impact 
of recurring natural disasters such as floods and drought. 
Reversing the decline in agricultural investment would en-
hance the agricultural sector,  rural  well-being,  food  security, 
and  the  environment.  All  this,  in  turn,  would  foster China's 
broader economic development, and assure that the answer 
to the question, "Who will feed China?" is China. 
For more information, see Shenggen Fan and Francis Tuan, "Evolution of Chinese and OECD Agricultural Policy: Long-term Lessons for China," a paper pre-
sented at the International Seminar on WTO and  China's Agricultural Trade,  Beijing, September 21-22, 1998;  Shenggen  Fan, "Public Investment  in  Rural 
China:  Historical Trends and  Policy Issues," in Agricultural Policies in China (Paris: OECD,  1  997). 
Shenggen Fan is a senior research fellow and Marc J.  Cohen is a special assistant to the director general at the International Food Policy Research Institute. 
"A 2020 Vision for Food, Agriculture, and the Environment" is an initiative of the International Food Policy Re- · 
search Institute (IFPRI) to develop a shared vision and a consensus for action on  how to meet future world 
food needs while reducing poverty and protecting the environment. Through the 2020 Vision initiative, IFPRI 
is bringing together divergent schools of thought on these issues, generating research, and identifying recom-
mendations. The 2020 Briefs present information on various aspects of the issues. 

Critical choices for China's agricultural policy:

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