Policy Brief No.9: Agricultural Liberalization in China: Curbing the State and Creating Cheap Labor

by Maximilian Eisenburger and Raj Patel


Food First/Institute for Food and Development Policy
September 2003

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EXECUTIVE SUMMARY¹

Trade liberalization in China has been a continuous process, slow and halting at times but steady in its direction, ever since Deng
Xiaoping opened the economy in 1978 with the slogan “to get
rich is glorious”. Liberalization in China has been something
of a unique process, and one in which the state has played a central
role. This is a far cry from the radical and instantaneous economic
opening experienced by many developing countries and the former
Soviet bloc. With relative freedom from crushing foreign debt, and
sufficient international clout to be able to influence the terms of
its engagement with the international economy, China’s leaders
were able to liberalize domestically without being held hostage by
international interests. This meant that they were able to heed
domestic development objectives, halting or even backtracking
whenever it produced undesired effects. Through careful direct and
indirect controls on imports and support for key industries and
agriculture, the government increased trade from practically zero to
hundreds of billions of dollars while simultaneously raising
standards of living for many of its citizens. But not all. With
China’s efforts to join, and subsequent entry into, the WTO,
the government has bucked its trend of careful liberalization. It
has accelerated market deregulation and exposed areas of the economy
that were previously deemed too sensitive – including, and
especially, agriculture – to unregulated market forces.

The process of agricultural liberalization has had a high human cost. We examine trends in rural and urban poverty, and Chinese agricultural output to tell a story that is rarely told outside China. While we often hear about cheap and abundant labor in China, we less often hear about appalling conditions under which these workers labor. Less often yet do we stop to ask the provenance of these laborers - too easily is it assumed that the people in the largest country on earth were merely waiting for the opportunity to work in low-tech
manufacturing industry. Yet the origins of this large labor force is
in the countryside. The transformation of the agricultural peasantry
into a rural and urban labor force has been one of the most rapid and
large-scale in human history, effectively beginning in 1978. This
paper examines this process of agricultural transformation, and the
continuing difficulties that those who once worked on the land now
face.

The scale and speed of trade liberalization following WTO membership has transformed the pace of Chinese economic opening, and the balance of power within it. Scholars have noted that the “cuts... appear far greater, and faster, than any other developing country was required to commit to in the Uruguay Round Agreement on Agriculture”. One might ask quite what China received in exchange for such a radical opening of its agriculture sector. Then-US Secretary of Agriculture Dan Glickman offered this candid response: “Absolutely nothing”. Every member of the WTO save the United States had granted China permanent Most Favored Nation (MFN) status - the biggest benefit of WTO membership - before it had even joined. In addition, the United States had granted China renewable MFN status on a yearly basis for more than 15 consecutive years despite periodic Congressional threats to rescind the trade privilege.

While the Chinese government was clearly keen to join the WTO, the reasons for the precise timing and conditions of China’s entry into the WTO had little to do with the lofty concerns of international trade theory, or indeed, the glory of getting rich quick. Instead, the
political goals of uniting Taiwan and China, along with the economic
goal of eliminating state enterprise inefficiencies, were factors
that more centrally influenced China’s acceptance of less-than-favorable terms of accession. The government and Central
Party both place the highest priority on Taiwan’s political
integration with mainland China, and they were likely willing to make
more trade concessions to maintain the possibility of that priority.
At the same time, government officials hoped that greater foreign
competition brought on by the WTO agreement would stimulate
state-owned enterprises to undertake reforms that had been delayed
for years.

The period immediately prior to China’s WTO accession saw a decisive policy shift in favor of less government intervention in agriculture and, with it, a consolidation of a shift in power to an urban elite largely unconcerned either with agricultural issues or with the rural communities dependent on agriculture. While grain trading was partially deregulated, the government removed itself completely from management of “non-strategic” agricultural products such as vegetables, fruits, seafood and livestock. With sales from producers’ surplus grain added in, the share of retail agricultural commodities sold at market prices increased from 4% in 1978 to 83% in 1999 with the lion’s share of reductions in subsidies and price supports occurring in the late 1990s and thereafter. In addition to a steep drop in soybean import tariffs, the government also eliminated protective prices for certain “unmarketable” varieties of rice and wheat at the beginning of 2000. In 2001, markets in the principal grain-consuming coastal regions were liberalized. To the extent that they increased the real incomes of those in rural areas, these policies are to be commended. But it is not clear that the benefits of increased incomes are going to China’s small-scale farmers. Consonant with the policies of a country pursuing an agenda of market liberalization, the Chinese government now emphasizes the development of local comparative advantage, encouraging coastal areas to decrease grain production and invest in technology, high-value horticulture and fish, increasing capitalization and scale of farming, while reducing labor requirements. In addition, strict new regulations on health and quality to put China on par with international standards, as well as talk among Party officials of more competitive agro-industries that would “organize tens of thousands of farmers in massive production”, make it clear that the government intends to reshape agriculture in the 21^st century along export-oriented agri-business lines. In other words, the economic players who increasingly profit from this liberalization are large corporations, not traditional farmers.

The U.S. Department of Agriculture forecasts that U.S. farm exports to China will rise $2 billion per year over the current average. Using several different scenarios, scholars suggest that grain imports will increase anywhere from 160% to 200% after the 5-year WTO transition period ends. As imports surge, a reduction in producer prices and supply will be almost inevitable. Estimates suggest that the rise in imports will reduce domestic production of bulk commodities between 2.5% and 7.7%. Though this is a relatively small percentage, it represents a large loss to peasant families, particularly those who depend most heavily on agriculture. Besides
being more affected by heavier agricultural competition, households
that are more reliant on farm income also tend to be poorer in
general. For these people, who number about 311.5 million, a few
yuan lost to a small surge in imports could mean the difference
between getting by and starvation. In 2000, the rural per-capita
income was 2253 yuan after taxes, while average living expenditure
was 1670 yuan, leaving just 583 yuan in disposable income (compared
to an urban disposable income of 1282 yuan, or more than double).
Those figures include wealthier farming households and non-farming
households in addition to poor agricultural households, so we can
safely assume that disposable income is even less for the latter
group. Faced with declining income, poor peasant households may give
up farming altogether and search for non-agricultural employment, as
many millions already have. They are likely, however, to encounter a
number of barriers along the way.

One immediate consequence of migration is that families lose a form of social security when they leave the land. It provides basic subsistence and at least some guaranteed income, and many families stay on their land hoping that the government may eventually grant them formal landownership. The land also cannot be sold, only subcontracted, so farmers would not even have the necessary collateral to buy an urban residence. Rural migrants also lack access to the same social entitlements that urban residents enjoy -- such as subsidized food, health care, education and housing -- thanks to the continuing rigidity of the hukou system and local regulations in many cities. Subtract rural family support networks as well, and the opportunity cost in terms of social security poses a major hurdle to off-farm migration. More than 25.5 million state enterprise workers were laid off between 1998 and 2001 alone, following Zhu Rongji’s public promise to solve the problem of declining state enterprise profitability in three years.

More than mere statistics, the results are evident in labor protests and complaints that have become increasingly commonplace and, in the cases of some public immolations, spectacularly desperate. Between January and June of 1999, 55,244 labor disputes involving a total of more than 230,000 workers were reported, up from just 7,905 disputes in 1994. In one instance, layoffs at PetroChina, located in
Heilongjiang province and among the country’s largest state
owned enterprises, led to one of the biggest protests in years as
roughly 50,000 unemployed workers protested for almost two consecutive weeks in spring of 2002. The layoffs were enacted, in part, under investor pressure to boost productivity in order to remain competitive after joining the WTO. In April of 2002, it announced a predicted trebling of unemployment in the next four years; a result, according to the State Council, of China’s post-WTO restructuring. If this prediction is born out, the result will be a virtually unbroken rise in unemployment since approximately 1993.

The longer term future for Chinese agriculture is uncertain. Clearly, those destined to feel the affects most acutely are those in already vulnerable positions. They are faced with difficult choices, either to exploit themselves further in rural areas, or to migrate to urban areas, where jobs are increasingly scarce. The Chinese government has, however, felt able to reverse its policies when faced with overwhelming evidence of social harm. Membership of the WTO makes
this considerably harder to do in agriculture, at least in the short
term. Yet, with increasing levels of social protest, and increasing
evidence of the failure of urban-growth policies, and with a newfound
voice at the WTO, there is some small hope that the Chinese government may yet intervene to support the livelihoods of the largest sector of its population. The appointment of President Hu Jintao to succeed Jiang Zemin earlier in 2003 may yet signal a sea-change in Chinese multilateral economic policy. China’s recent membership of the G21 group of countries, who opposed the joint EU/U.S. proposals on agriculture with their demands that the EU and U.S. slash their effective farm export subsidies at the WTO’s Cancún Ministerial, suggests that China is finding a voice on the international stage. Such a position bends slightly away from the post-1978 pro-market trajectory, but given that the G21’s agricultural policies remain export oriented, differing from the EU and U.S. only in terms of who should open markets and reduce subsidies first, we may yet want to be suspicious of the governments commitment to its rural communities.