Innovation and Economic Developmentin Rural China
Jikun Huang
China Center for Agricultural Policy and
School of Advanced Agricultural Sciences
Peking University
1. Introduction
China’s rural has changed dramatically since late 1970s, rural development is one of the miracle development stories in the world. Agriculture grew at 4.6 annually in the past three and half decades, which was much higher than 1% of annual population growth rate over the same period. While per capita water availabilityin China is only one fourth of world average and arable land accounts for only 8% of world total, China supported about 20% of the world's population with 96% of overall food self-sufficient in 2014. Agricultural growth has also been accompanied with significant structural change in agricultural production and food consumption. Growth in agricultural income and off-farm employment have stimulated overall of farmers’ income and rapid rural poverty reduction. The number of extreme poverty population fell from 250 million in 1978 to less than 15 million in 2007 in rural China, which reduced rural poverty rate from 32% to less than 3% over the same period. Even under the new poverty line (RMB 2300/day in 2010 price, or a slight more than $2/day in PPP), rural poverty population had also decreased from 165 million in 2010 to about 70 million in 2014 ((NSBC, 2015). China was the first developing country to meet the Millennium Development Goals (MDGs) target of reducing the population living in poverty by half ahead of the 2015 deadline.
While past accomplishments are impressive, there are still great challenges ahead. Natural resource scarcity, environmental degradation, rising wage and production costs, and increasing food demand, all these will challenge China’s food security, competitive of agricultural, and sustainable agricultural development (Huang, 2013). Meantime, accompanied with rapid economic growth and average income rise are the growing concerns on income disparity between rural and urban, among regions, and among households within the same region (NSBC, 2015).
To have a better understandingthe past experiences and lessons as well as the ways forward, there are a number of questions that are needed to be examined. For example, what are major innovations and experiences/lessons in China’s rural development? What have been their roles in improving China’s ability to meet its growing demand for food in the past? How have the rural innovations affected farmer’s income and rural poverty reduction? What are the main challenges which China’s agricultural and rural development are facing? How to formulate more innovated reforms and appropriate policies to facilitate the sustainable agricultural and rural development in the future?
Overall goals of this paperare to try to provide some insights on the development of agricultural and rural economy in the past with the special attention to the questions raised above, and provide policy implications for the innovated and sustainable agricultural and rural development in the future. To meet these goals, the rest of the paper is organized as follows. The next section describesChina’s agricultural development and experience with focused on institutional innovation, technological innovation, innovated market reform, and investment in rural. Section 3 presents rural transformation and its roles on raising farmer income and rural poverty reduction, and addresses the roles of innovated institutions, policies and investments (IPIs) and their sequence of IPIs to foster inclusive rural transformation. Section 4 discusses the current and future challenges of agricultural and rural development. The last section summarizes and concludes this paper with several policy recommendations.
2. China’s agricultural growth and major innovations
2.1 Major achievements
Compared to the early and mid- 1970s, when the value of gross domestic product of agriculture rose by 2.7% annually, the annual growth rate more than tripled to 7.1% during the initial reform period of 1979–1984 (Table 1). Although during the later reform periods (1985–1995 and 1996–2000) the annual growth rates slowed to around 4% in real terms, this is still extraordinarily high rates of agricultural growth over such a sustained period.
Table 1. Average annual growth rate (%) of agriculture and economy in China, 1980-2014.Pre-reform / Reform period
1970-78 / 1979-84 / 1985-95 / 1996-00 / 2001-05 / 2006-10 / 2011-2014 / 1978-2014
Average
GDP: / 4.9 / 9.2 / 9.7 / 8.2 / 9.9 / 11.1 / 8.0 / 9.4
Agriculture / 2.7 / 7.1 / 4.0 / 3.4 / 4.3 / 4.5 / 4.1 / 4.6
Industry / 6.8 / 8.2 / 12.8 / 9.6 / 11.4 / 11.9 / 8.5 / 10.8
Service / / / 11.6 / 9.7 / 8.3 / 10.1 / 11.9 / 8.4 / 10.0
Grain / 2.8 / 4.7 / 1.7 / -0.7 / 1.1 / 2.5 / 2.0 / 1.9
Cotton / -0.4 / 19.3 / -0.3 / -1.9 / 5.3 / -0.9 / -2.1 / 3.2
Edible oils / 2.1 / 8.9 / 17.2 / 8.0 / 2.0 / -2.7 / 9.8 / 8.8
Fruits / 6.6 / 8.0 / 12.5 / 8.2 / 29.2 / 6.0 / 12.8 / 12.6
Meat / 4.4 / 8.5 / 10.0 / 7.3 / 5.1 / -3.1 / 7.7 / 6.6
Fishery / 5 / 7.4 / 12.6 / 6.8 / 3.9 / 3.6 / 11.0 / 8.3
Population / 1.80 / 1.40 / 1.37 / 0.91 / 0.63 / 0.51 / 0.50 / 1.0
Per capita GDP / 3.1 / 7.4 / 8.3 / 7.2 / 9.0 / 10.6 / 7.5 / 8.3
Notes: Figure for GDP (in real terms) in 1970–78 is the growth rate of national income in real terms. Growth rates are computed using regression method. Trade growth is based on current value in US dollars. All original data are from NBSC, Statistical Yearbook of China, various issues
The growth in crop production has occurred in all commodities. Between 1978 and 2014, grain production increased by 1.9%, nearly double of population growth (Table 1). Far more fundamental than rises in grain production, China’s crop economy has steadily been remaking itself from a grain-first sector to one producing higher-valued cash crops and horticultural goods. The average annual growth rate for cotton, edible oils, and fruits reached 3.2%, 8.8% and 12.6%, respectively, in 1978-2014.
Livestock and aquaculture products have been growing even faster than the output growth in the crop sector. Livestock production rose by an average of 6.6% annually in 1978-2014 (Table 1). Fisheries subsector has also been one of the fastest-growing components of agriculture, rising more than 8% per year during 1978-2014.
Accompanied with agricultural growth is significant production structural change and therefore improvement of food consumption patterns in China. Economic growth, urbanization and market development have changed Chinese food consumption level and its structure, which has also resulted significant changes in agricultural production structure. Within crop sector, the area share of cash crops (or non-grain crops) increased from 20% in 1978 to 32% in 2014; Over the same period, the share of animal products (livestock and fishery) in total agricultural output values raised from 17% to 38% (NSBC, 2015).
2.2Major driving forces and innovations
Several factors have contributed to China’s agricultural growthin the past. Rural institutional innovation, science and technology innovations, innovated market reform and trade liberalization, and investment in agriculture and rural are four major driving factors that have facilitated China’s successful agricultural growth. These four driving forces are also major innovations in China’s agricultural development in the past three and half decades.
Institutional innovations
Rural economic reform was initiated in 1978 through implementation of the household responsibility system (HRS). This rural reform dismantled the People’s communes and contracted cultivated land to individual households in each village, mostly on the basis of number of people and/or labour in the household. Although the control and income rights after HRS belonged to individuals, the ownership of land remained collective. The first term of the land contract was arranged for 15 years and the other 30 years extension starting in the late 1990s.
The effects of HRS on agricultural productivity, the equitable distribution of land to farmers and rural poverty alleviation have been obvious and well documented. Most studied show that HRS accounted for about 40% to 50% of the total rise in output during in 1978-1984 (Fan, 1991; Lin, 1992; Huang and Rozelle, 1996). Researchers also have documented empirical impacts that go beyond output. McMillan et al. (1989) document that the early reforms in China also raised total factor productivity, accounting for 90 percent of the rise (23 percent) between 1978 and 1984. Jin et al. (2002) show that the reform had a large effect on productivity, contributing greatly to a rise in TFP that exceeds 7 percent annually.The significant positive impacts of HRS on agricultural production with the equitable distribution of land were major reasons for massive reduction of rural poverty in the early reform period.
The major policy efforts on land institutions have been made on stabilizing HRS and fascinating land consolidation since the late 1990s, including the recent proposed new land institutional arrangement, San-quan-fen-zhi(separating three rights: village collective land owner rights, individual household land contract rights, and land operational rights). Stabilizing HRS provides incentives for farmers to invest in agriculture and land, stimulates land transfer among farmers and raises farm size, and improves agricultural productivity and farmers’ income. Our recent survey shows that about one third of the households contracted land has been transferred among farmers (Huang and Ding, 2016). To further consolidate land, a new innovation in land institution is proposed by separating farmers’ contract rights from use rights so that the land use rights can be transferred through rental market and meantime the contract rights are held by the original contracted farmers. This is believed to be the other most important land institutional innovation in China because it can achieve both equity of land distribution and efficient use of the current cultivated land.
Technology innovations
China has a strong agricultural science & technology (S&T) innovation system. China’s agricultural research and development (R&D)system is the largest in terms of staff in the world and covers nearly every disciplines in agriculture and related fields. By 2010 we estimate that China had at least 68 thousands research staff working in the public agricultural R&D system. Despite of experienced a twisting path of reform in technology extension, China also has developed the largest agricultural extension system in the worldwith about 700 thousands staff members in recent years. The extension system is public dominated but decentralized at local level. While at one time China’s agricultural R&D was underfunded, investment has increased significantly since the late 1990s. In contrast, the private sector is much smaller, but growth rates of investment have been high in the past decade and has started to play increasing roles in agricultural technology innovations.
Science & technology innovation is a primary source of agricultural productivity growth in the long run. China was one of the first developing countries to develop and extend Green Revolution technology in rice in 1960s. Hybrid rice was developed by China’s scientists in the late 1970s.Technological innovations in wheat, maize, cash crops and animal have also been impressivesince 1990s. The empirical studies show that the average annual growth rates of total factor productivity (TFP) in grain sector increased from 1.5% in 1985 to 2.4% in 1995-2004; Annual growth rates of TFP in cash crops and livestock even exceeded 3.5% over the same periods (Table 2). Table 2 also shows that nearly all growths in TFP were from technological changes. Since the mid-1990s, China has also relied on innovation from plant biotechnology. Bt cotton is one of most successful stories in the use of genetically modified technologies in the developing world, a technological change that has benefited millions of farmers (Huang et al., 2002 and 2005).
Gradual market reform
China’s Gradual market reform is a unique and an innovated reform that has facilitated China’s smooth transformation from the previous planned economy to the market oriented economy. Unlike in the transitional economies in Europe, leaders in China did not move to dismantle the planned economy in the initial stages of reform in favor of liberalized markets. Market liberalization was started for the non-strategic products (e.g., vegetable and fruits) in the middle 1980s, then gradually moved to animal products (e.g., fish and meats), and finally the reform had been implemented for sugar crops, edible oils, cotton and grain – the strategically important products. Although grain market liberalization was start and stop due to the large fluctuations in grain production and price in different periods, by the late 1990s the government almost phased out its direct market intervention. However, the rising concerns on farmers’ income and national grain security have induced direct market interventions in rice, wheat, maize and cotton after the middle 2000s, which will be elaborated more later.
China’s trade liberalization has also started open door policy started much earlier and gradually implemented since early 1990s. The initial reform was through relaxing trade restrictions and market access, then followed by tariff reduction. Simple average import tariff for all agricultural products was reduced from 42.2% in 1992 to 23.6% in 1998, 21% in 2001 when China jointed WTO, and 17% in 2004. China also made significant commitments and major concessions in terms of domestic supports and export subsidies.
Table 2. Average annual growth rates of total factor productivity (TFP), technical efficient (TE) and technological change (TC) for major commodities in China, 1995-2004.Annual growth rate (%)
TFP / TE / TC
Major grains
Early indica rice / 2.82 / 0.00 / 2.82
Late indica rice / 2.92 / 0.21 / 2.71
Japonica rice / 2.52 / 0.15 / 2.37
Wheat / 2.16 / 1.06 / 1.10
Maize / 1.70 / -0.23 / 1.94
Soybean / 2.27 / -0.08 / 2.35
Some cash crops
Cotton / 4.16 / -3.47 / 7.63
Eggplant / 2.24 / -3.14 / 5.37
Cucumber / 5.15 / -1.27 / 6.42
Tomato / 3.23 / -0.50 / 3.73
Major livestock
Pig
Farm backyard / 3.72 / 1.01 / 2.72
Small-scale / 5.35 / -0.72 / 6.07
Large-scale / 4.40 / -0.38 / 4.78
Beef / 4.41 / 0.01 / 4.40
Dairy cow
Small scale / 0.48 / -6.09 / 6.58
Large scale / 1.31 / -3.26 / 4.57
Source: Jin, Ma, Huang and Rozelle (2008)
The roles of market reforms on resource allocation, agricultural production structure and farmers’ income have been well documented. Farmers have been gaining from increased allocative efficiency based on market prices (deBrauw et al., 2004; Huang and Rozelle, 1996). Regional market prices have been increasingly transmitted across space and over time. By the early 2000s, almost all markets (e.g., 92% for rice, 98% for soybean and 99% for maize) moved together in an integrated way (Table 3). China’s open door process is also a process of integrating China’s market price into international price. By the middle 2000s, most of agricultural commodity prices in China almost equalled to the import prices at the board. The export of labour-intensive products (e.g., horticulture) and the import of land-intensive commodities (e.g., soybeans, cotton, edible oil, and sugar) has been rising. In sum, market reforms have improved efficiency of farm resource allocation and production structural change based on China’s competitive advantage, reduced agricultural input prices, and increased farm-gate prices. All these stimulate agricultural growth and increase farmers’ income.
Table 3. Market integration (Dickey-Fuller test): percentage of market pairs that have integrated price series, 1989-2003.1989–1995 / 1996–2000 / 2001-2003
Maize / 28 / 89 / 99
Soybean / 28 / 95 / 98
Japonica rice / 25 / 60 / 92
Source: Huang, Rozelle and Chang, 2004; and Huang and Rozelle (2006).
Investing in agriculture
Increasing investment in agriculture has established a fundamental base for steady growth of China’s agriculture in the past. China is one of a few large countries that have continued to increase its investment by the state in agriculture in recent decades. Most significant investment has been occurred in water control (e.g., irrigation and flood control), road and rural market infrastructure, land improvement, and agricultural technology. Now, more than half of cultivated land is irrigated. Massive investment into rural road and agricultural wholesale markets fosters integrated market that links hundreds of million small farms with retails and consumers. Investment in the low-middle yield crop land to improve soil quality has also significantly raised aggregate agricultural production capacity. Investing in agricultural R&D, as we mentioned early, is the most successful story of investing in agriculture.
3. China’s inclusive rural transformation and innovations
3.1 Paths of rural transformation: China and other developing countries in Asia
China has experienced more rapid rural transformation (RT) than many developing countries in Asia (Figure 1). Such rural transformation was started with the adoption of new crop varieties and increasing access to water and modern inputs such as chemical fertilizer and pesticides in crop production, with particularly focused on grain or staple food (Stage 1 of RT, Table 4). Increases in grain production and improving household food security were due to agricultural productivity growth, which was, in turn, led by the emergence of the production of higher-valued and labour-intensive cash crops, livestock and fishery products, or agricultural diversification (Stage 2 of RT, Table 4).
A rapid rural transformation was also observed in off-farm employment in China (State 3, Table 4). While nearly all village labours worked in farming in the late 1970s, nowmore than 70% of rural labour had off-farm employment in China. By 2014, it is reported that there were 294 million rural labours (or about 51% of rural labour forces) who worked more 6 months in off-farm employment (NSBC, 2015). Off-farm employment has also expanded in many Asian countries. But except for Vietnam, speed of expansion is much slower than that in China (Huang, 2016) because China’s economy has relatively higher ability to absorb rural surplus labours during its industrialization.
Figure 1. Share of gross value of non-cereal products (%) by country in 1980-2010
Bangladesh (BGD), China (CHN), India (IND), Indonesia (IDN), Cambodia (KHM), Philippines (PHL), Vietnam (VNM), Laos (LAO) and Pakistan (PAK).
Source: FAO database, 2015.
3.2 Rural transformation and poverty reduction
It is interesting to note that the speed of rural transformation is positively correlated with the extent of rural poverty reduction. Here we use “average annual change in the share of gross value of non-cereal products in agriculture” as an indicator for the speed of rural transformation. A slope downward fitting line shows that more rapid RT is associated with more reduction of rural poverty rate (Figure 2). China, Vietnam, and Indonesia located in the fourth quadrant with coordinated point (0.30, -1.90) are the countries that had experienced fast RT and also fast rural poverty reduction. On the contrary, the Philippines, Pakistan and Bangladesh are the countries that had both slow RT and slow poverty reduction rate. India and Laos with moderate RT and moderate rural poverty reduction are in-between the above two groups of countries. Cambodia with adverse RT but fast (or moderate) rural poverty reduction is a case that that needs further investigation. However, the relatively large poverty reduction in Cambodia may be largely due to its fast structural transformation in the whole economy (Huang, 2016).