Public Disclosure Authorized
Report No7:
ARU 61
Rural Factor Markets in China
After the Household Responsibility System Reform
by
Justin Yifu Lin
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
DISCUSSION PAPER
Research Unit
Agriculture and Rural Development Department
Operational Policy Staff
World Bank
November 1986
The vLews presented here are those of the author(s), and they should not
be interpreted as reflecting those of the World Bank,
The author is a consultant of the World Bank. However,
the World Bank does not accept responsibility for the views expressed
herein which are those of the authors and should not be attributed to the
World Bank or to its -affiliated organizations.
The findings, interpretations, and conclusions are the results of research supported -in part by the
Bank; they do not necessarily represent official policy of the Bank.
The
designations employed and the presentation of material in this, document are
solely for the convenience of the reader and do not imply the expression of
any opinion whatsoever on the part of the World Bank or its affiliates
concerning the legal status of any country,
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affiliation.
RURAL FACTOR MARKETS IN CHINA
AFTER THE HOUSEHOLD RESPONSIBILITY
Justin Yifu Lin
Research Unit
Agriculture and Rural Development
Depart:- nt,
November,
the World Bank
1986
SYSTEM REFORM
I. INTRODUCTION
This paper is
China.
by
a preliminary study of rural factor markets in
Transactions
government
areas,
in
policies
however,
other
markets.
labor,
the
Asian
In
fact,
Chinese
peasants,
a
in
resources
factors to
like their
in
the
and
life again.
contemporaries
unfamiliar
with
complex
rural
Nevertheless,
19509,
made
forms in
collectivi4zed
market
exchanges
the
land,
in
labor,
interest
as a
and
were
and
land and labor
severely
Rent
land,
cooperative
Private credit exchanges
capitalist
factor
China before
between households impossible.
limited.
in rural
whole spectrum of market exchanges in
revolution. '
starting
not
severely constrained
Recent reforms
past.
were
existed
socialist
other
the
countries,
and credit
movement,
in
have brought exchanges in
Traditionally,
in
markets were
factor
taken
were also
as means of
exploitation and the labor force was not to be treated
commodity that
exchanges
between
could be
bought or sold; therefore,
collective
two
farming
units
market
were
also
prohibited.
Under
the
collective
system,
a
production team,
consisting of about 30 neighboring households,
basic unit
entitled
of production
to
exception
their
factors
all
allocated under
.and income
of
was gonerally the
distribution.
production.'
These
The team was
factors
time.
'See Wiens
were
the unified management of a team leader with the
of small private plots reserved for households
spare
usually
Peasants,
(1982)
working under
use in
the supervision o:i
for detailed discussions.
a
2
team leader,
they had
were credited with work points for a day's work that
done.
At
the end
of a year,
net team income was first
distributed among team members according to basic needs,
rest
was
distributed according
then the
to the work points that each one
had accumulated during the year.
This institution
very
work incentives to peasants in
inadequate
production team.
in
providing
was found to be
a
a
A new policy called the production responsibility system was
introduced
at
the end
reforms aiming
areas.'
At
at
of 1978
improving
first,
this
management
and incentive
developed
into
a
restored
was
problems
form
now
households
production and income distribution.
as
a
to
in
rural
improve the
team.
called.
the
a package of
production
designed
within,
that dissolved
individual
element of
agricultural
policy
specific
responsibility system"
as one
However,
"the
household
production
teams and
units
of
agricultural
The household responsibility
system evolved into the main feature of the recent reforms in
Chinese rural areas.
production team
Lin
in
productivity
the
agricultural
explained
2For
a detailed discussion of
production team, see Lin (1986).
3
finds
that
the
shL.ft
the
from a
system to the household responsibility system on
the average increased
.jump
(1986)
it
about
the
productivity
half
of
incentive
14%.
This
the growth in
problem
in
a
The other
reforms
included
diversification of the rural
economy, production specialization, crop selection in accordance
with regional
comparative advantages,
expansion of local fairs,
marked rises
in state
procurement prices,
and rapid growth in the
availability
and better allocation of chemical fertilizer.
3
agricultural
The
production between 1980 and 1983.
improvement
simultaneously
household
created
allocative
their
to its
land-person
In
ratio
cycle.
addition,
was introduced,
for the
was equalized
in
same production function,
this
in disparities
in
labor across households.'
allocative
the
a
the household
stages in
the
family labor.
An equal land-person
thus does
across households.
When
households in
after
abilities.
a team
have
land and other
Households are at different
households differ
may
to each household
They thus have different endowments of
land-labor ratio
represent an
inefficiencies.,
Therefore,
ratio
across households in
will' result
nevertheless,
most cases allotted
size.
responsibility reform.
life
system
a team were in
proportion
team,
incentive,
.responsibility
resources in
in
in
not fully equalize
If each household faces the
egalitarian
allocation
of land
the marginal products of land and
These differences
inefficiency.
in
marginal
products
Output can be increased if
resources are reallocated.
One possible way to take advantage of these opportunities
through
direct
among households.
government
intervention,
Nevertheless,
is
like land-reallocation
government
intervention
can be
4 In
addition
to the disparity in marginal products created
by
the
household
responsibility
system,
the
allocative
inefficiency has another source in China. Like any other country,
the endowment of land and other
resources
varies
greatly from
region to
region. Since
migration between rural areas failed to
exist at
any significant
level in
the past,
the difference in
land-person
ratio
as
well
as
land-labor
ratio
has long been
maintained. Therefore, marginal products in land and labor should
also be
different across regions. See the discussion in the next
section.
4
ruled out
as
household
responsibility
contracts in
an
alternative
in
near
was first
land was
future.
to be
next contract,
When the
introduced,
yearrs.
When
the land
an original
reassigned and adjusted according to
household size and labor endowment.
soon found
impractical.
This
practice was
As land might be assigned
away in
each household thus lacked incentives to invest in
land improvement
overcome
system
the
general ranged from 1 to 3
contract expired,
changes.:
for
this
and to maintain properly the soil
disincentive
maintenance,
the
Chinese
in
land
government
investment
to each
To
and
adopted
has
lengthening the contract of land usage
fertility.
land
a policy of
household for up
to 15 years or longer.
The other possibility
for improving allocative efficiency
through market transactions.
hired
labor
to
land
Market
tenancy
contracts involving several
Transactions
for
in
credit.
brought
discussed
transactions
factor
and
into
in
with incentive
is
developments
transactions
by
be
packaged in
in
and
different markets.
are
costless,
transactions.
Rosenzweig
rural areas are characterized
problems.
devoted
The
existence of
therefore,
to
complex
to demand
certain,
then marginal products will be
market
Binswanger
factor markets cannot,
paper
may
transactions
enforceable,
equality
by
or
range from
can
land and labor naturally will give rise
If
unconstrained,
transactions
is
be
examining
in rural factor markets in
(1986),
by risk
as
factor
and beset
well developed rural
taken
the
However,
for
extent
China.
granted.
and
This
possible
5
Before going into any
features
that
detailed discussions,
characterize
China's
three specific
rural factor markets need to
be mentioned:
a)
The rural reform in China has gone through a first
stage,
which featured the individual household responsibility system.
the end of 1983,
94.5% of rural households
this
(Editorial
new
1984,
system
66-67).
pp.
reform
in
1984.
transform
and
structure
in
household
were
The
by
areas
all
explicitly
credit
system
was
Council in
a
high
1981.
sentiment
5
is still
have
then
interest
rates
there have been
rate
credit market.
no
is
the 79th document
number
Document No.
been
(less
1,
longer
issued by
China in
China.
than
eight)
and.
were
issued by the Central
legalized.
deeply rooted in
the
hiring
Leasing out land to other farmers
Committee of the Communist Party of
markets
When
introduced,
interest
as usury in
also formally sanctioned in
-actor
first
Since
to
production
mechanisms.
change came to the
hiring workers within a limited
in
the
and lending money at high
The first
with
categorically classified
the State
market
reform is
commodity production
readjusting
prohibited.$
substantial changes.
Private
of
through
responsibility
subleasing land,
economy into a
way
had adopted
launched a second-stage
main theme of the second-stage
economy
rural
China
China Agriculture Yearbook
The Chinese government
a self-subsistence
exchange
labor,'
Board of
in
By
It
1984.
Transactions
However,
socialist
appears unlikely,
See
"Several
Issues
Concerning the Further Strengthening
and Perfecting
of
the
Agriculture
Production
Responsibility
System," in China Agriculture Yearbook.
1981 pp.409-411.
for
example,
that
the
evicted from his house if
repay his
loan.
It
government
will
he uses it
aa collateral
force
e person
to be
and fails
to
is also unimaginable that public opinion will
sympathize with the lender in the case of a default.
b)
it
has
The cultivated
shrunk to
land per capita in
about
force which remains in
this
period.
operational
Under
agriculture,
in
non-agricultural
tendency.
activities.
in
the
the
current
rural
labor
there
to
force
Shanghai in
The
differences
similar in
other
induce
tendency
a
agricultural
in
general
in
nonf arm
income per worker
1981 was Y 441 for agriculture,
and
Y
1,625
This
the
income
for
industry
labor
differential
force
to
Y
(Shi
will thus
move
out of the
sector.
c) There is no landless class in
China's
The original production teams are still
entitled
of land after
Each household
implementing
the household
rural areas -today.
to the ownership
responsibility
system.
is assigned the use right of a piece of land for a
period of 15 years or more.
with a
a
incomes across sectors should also be
regions.
for
is
engage
A study shows that the average net
suburbs of
product of labor
is much lower than that
therefore.,
1,003 for sideline production,
1981).
system and the average
of marginal
cropping,
sectors;
the
the percentage of labor
price
the value
especially in
for
However,
rural areas has been about the same during
landholding,
in
1. 6 mu.
1949 was 2.7 mu and now
safe shelter.
This practice provides each household
Unless a household is
assured a nonfarm or
noncrop job that produces an expected income that is greater than
7
working on
its farm,
a household
practice also has impacts
will only
supply labor
on the
labor market.
land.
This
Farm households
to other farms when the opportunity cost
of not working on their
will be
will not leave its
own farms is
low,
i. e.,
constrained from the supply side,
the labor market
especially during peak
periods.
This paper is
markets,
and
organized
credit
following sections.
facts
of
the
markets
will
At the end
concerned
follows:
as
land
markets,
be discussed
in
labor
turn in
the
of
each
section,
markets
will
be summarized and their
some stylized
related hypotheses will be presented as well. The main
hypothesis
of this
II.
paper is presented at the last
LAND ALLOCATION
Marginal
section.
AND LAND MARKET
Products
of Land.
The differences
products of land and labor in China have
is the
differences
in
land endowment
one is the egalitarian distribution
responsibility
of
two major
sources.
land after
One
The other
the household
reform.
land-labor ratio possessed 39.6%
of
China
only
cultivated
the marginal
across regions.
Table IA shows that the eight provinces
in
in
1983;
however,
land.
On
possessed only
34. 1% of the total
the
10. 5% of
they
contrary,
the total
cultivated
land.
the
total
had
the
that have the lowest
labor
21.4%
9
of
force in
the total
land-rich provinces
labor force but were endowed
The
peasants
in land-rich
Helongjiang Province on the average had about 17 times
as much
TABLE
LAND ENDOWM'ENT
Province
(1)
Labor
Guizhou
10,087
Sichuan
38,712
Zhe.ijiang
14,030
Yunnian
12,808
Guangdfong
19,061
G3uangxi
13,963
7,083
Fujia.ng
Tibet
825
Hunan
20,239
Henan
25,370
2,071
Shanghai
Anhui
17,478
Jiangsu
20,068
24,988
Shandong
Hubei
14,572
Tianjing
1,391
Beijing
1,372
17,481
Hebei
9,305
Jiangxi
Shaanxi
9,124
Oinhai
1,104
Liaoning
6,4EJ8
Gansu
5,841
6,647
Shanxi
Ningxia
1,061
4,657
I.Mongolia
3,845
Jinin
Xingjiang
2,570
Hei-longjiang4,110
SOURCE:
(2)
Cult.
Land
28,450
98,1093
27,249
42,488
47,130
39,301
19,240
3,437
50,998
106,508
5,249
66,518
69,451
107,728
55,481
6,879
6,343
98,551
35,753
56,377
8,640
54,814
53,425
58,076
12,605
75,974
60,895
47,422
131,273
lA
IN EACH PROVINCE
(3)
LandLabor
Ratio
(4)
% of Area
Irrigated
(5)(6
Multiple
Cropping
Index
2.8
2.5
1.9
3.3
2.5
2.8
2.7
4.2
2.5
4.2
2.5
3.8
3.5
4.3
3.8
4.9
4.6
5.6
3.8
6.2
7.8
8.4
9.1
8.7
11.9
16.3
15.6
18.5
31.9
24
47
84
34
65
54
64
53
82
45
98
50
75
63
63
67
81
54
74
33
27
19
24
28
28
20
18
83
7
153
181
252,
140
200
177
189
93
218
160
218
177
184
146
200
133
151
131
229
127
87
102
98
107
101
91
100
932
98
China AgTriculture Yearbook
Effective
Land-Labor
Ratio
3.8
3.9
4.0
4.3
4.4
4.4
4.5
4.6
4.8
4.9
4.9
5.9
5.9
6.1
6.6
6.7
6.9
-7.3.
7.4
7.6
7.7
8.9
9.5
9.6
12.816.3
16.3
21.4
32.1
1984.
NOTE: (1)
Agricultural labor force excluding workers in villageworkers;
(2)
cultivated
land
unit
run industry, unit = 1,000
1,000 mu;
(3) col.2/col.1; (4) X of cultivated land irrigated; (5)
is
the
land-labor ratio
ratio
unit= %; (6) effective land-labor
for
irrigation
and
multiple cropping; its formula is:
adjusted
%
of area
x
(1
+
effective land-labor ratio= Land-labor ratio
(1 s+(
Multiple cropping
index- 100)/2). See A. M.
irrigated/4) x
of Agriculture in
Tang, An Analytical and
Empirical Inivestigation
Mainland China
1952-1980 (Seattle: UJniversity of Washington Press,
1984) for 'the rationale of for these adjustments.
TABLE 1B
LAND ENDOWMENT IN EACH PREFECTURE,
(1)
Prefecture Labor
Anqing
(2)
Cult.
Land
(3)
LandLabor
Ratio
(4)
% of Area
Irrigated
ANHUl
PROVINCE
(5)
Multiple
Cropping
Index
(6)
Effective
Land-Labor
Ratio
85
126
1.5
a8
705
2,094
124
697
215
2.9
1,192
4,859
297
1,736
1.7
2.3
2.4
2.5
76
66
95
77
248
211
200
224
3.5
4.2
4.5
4.7
297
756
2.5
Chaohu
Liuan
Fuyang
Xuancheng
93
1,527
2,004
4,263
764
225
4,355
6,706
16,915
2,246
5.0
2.9
3.3
3.9
2.9
80
68
24
65
Hefei
199
171
166
222
1,172
5.2
5.2
5.5
5.6
4,183
3.6
72
390
172
1,522
5.7
3.9
57
174
6.1
Huizho
Anqing
Tongling
Wuhu
Maanshan
Huainan
Suxian
1,669.
7,913
4.'7
Huaibei
Chuxian
Bangbu
29
416
1,297
844
158
2,208
6,250
4,542
6.5
5.3
4.8
5.4
11
68
47
160
165
162
7.1
7.4
7.9
SOURCE:
Statistical
Bureau,
Anhui Province.
NOTE: Definitions
and units are the
same as in Table 1A, except
labor force here includes workers in village-run industry. Data are
for 1983.
10
land as the peasants
in
land-poor Zheicjiang Province.
the distribution of cultivated
land unequal
it
province.
is
Anhui
also unequal
Province in
prefectures
within a
among provinces,
Table
force.
In
prefectures that had the lowest land-labor ratio
labor force but only 13.6% of
differences
within
among
substantial.
The
Anhui
the cultivated
Province
provinces,
the
peasants
in
reduce
quality)
after
and
temperature).
as the last
However,
columns
without empirical
land endowments differ
difference itself
inherited
tables
it is
across
can be
IA
land.
Although the
large
as
are
irrigation
as the
still
for
are still
and
in
quite
land-labor
(proxy
(proxy
1B
difficult
for land
climate
and
very substantial
suggest.
Although,
to say to what degree
neighboring
taken as
There is
production
a fact.
no a priori
average quality of the labor
both
different.'
the six
teams,
the
The distribution of
intelligence of a large population approaches normal in
any large sample.
which
for
cropping
studies,
nine
had 21.7% of the
The differences
the differences
of
contrast,
in
Huaibeishi have 3.6 time as much
adjusting
multiple
not
disparities
land as the peasants in Anqingshi.
ratio
are
but
1B shows that,
~31.8% of cultivated land located in
1983,
that had 22. 9% of labor
differences
Not only is
have
It
about
100
forces
reason to believe that the
in
workers,
two
would
thus should not be too unrealistic
neighboring teams,
be
significantly
to assume that
6Acquired
ability
through
education
will be
different
depending on the availability
and quality
of education.In this
respect,
the
labor
force
in
urban
areas
will have a higher
quality than in rural areas because, in general,
the education in
urban
areas
is
better
and. more accessible. However, within a
the quality of labor forces across teams and regions is the same.
Consequently,
represent
much
of
the
an allocative
dilferences
opposite reason.
team-owned
private
land
according
land in
7.1% in
Under the
Private
to its
private plots
size.
private plots
(Perkins
The
land
contracted
categories.
to
allotted
that
time to
to each household
The
5.7% in
and Yusuf 1984).
ration plot,
plot."
but it
welfare
average amount of
1978.
It
rose to
the collectively farmed lan.d
households
in
two
different
The difference between these two kinds of
fund,
and
collectively
in
owned
land.
proportion
into
account
However,
other
duties
to
As for the private plot,
also waived. Two different
household.
for
tax on
the food
also had to pay the public accumulation fund,
responsibility plots.
one took
allotted
After the introduction of
plots was that a household had to pay only state
*strictly
be
One was the "food ration plot. " The other one was the
"responsibility
public
farmed plots and
could
time.
nationally was
individual
would arise
production team system, the
were
the household responsibility system,
was
however,
into collectively
plots
varied from
1980
within a team,
was divided
plots.
the land-labor ratio
inefficiency.
Allocative inefficiency
from an
in
practices were
The
first
its
team
the state
used to
on the
tax was
contract the
practice contracted the land
to the size of each
household.
The second
both the size and the labor force of each
the results
of these two practices may not be
rural area,
the quality
and availability
of education faced by
each team can be assumed to be roughly identical.
12
very different.
found that
A survey of a production team in
the household
0.16 mu per capita
household with
with the
more than
the smallest
weight was
1984).
given to
Therefore,
across
can
households
in
the
team
is
land was
first
received
a
household
in
graded according
piece
of
land
China after
owns more than 10 strips
different
stages
labor endowments.
experience,
and
land-person
ratio
potential
a team is
that the
Not
of
They also
other
(Hu
et al.
ratio
7
life
the quantity of
but the quality of land
quality,
each
This
is
because
then each person
grade.
Therefore,
each
household reform often
Households
in
a
team are at
cycles and thus have different
have different
abilities.
across
allocative
to its
from
their
70% of
land-person
also the same.
land,
though
only is
the individual
of
0.078 mu per
the contracts
capita equal across households,
owned by each person in
even
and the
roughly equal no matter what
practice has actually been adopted.
land per
team,
had only
team,
be assumed
a
of the
labor force
the labor force in
it
Province
largest labor force only had
the average
capita less than the average of
Guangxi
As
households
inefficiency.
level of education,
a consequence,
in
a
team
the equal
generates
A survey of 235 households
a
in
a village in
Sichuan Province found that 25% of households with a
rich
endowment
labor
did
not
have enough land to farm; 6% of
households did not have enough labor to work
on their
land;
and
'The
government
has encouraged
households
in
a team
to
exchange their
land in
order to
reduce the
fragmentation of land
holding. However,
a household
still
owns more than five pieces of
land, in general (Editorial
Boaxd
of China
Agriculture Yearbook
1985, p.285).
13
4.7% of
want
households were
to
work
on
good at
their
Prefectural Government,
other trades,
land
(Research
Sichuan Province,
Land Transactions.
so they did not
Unit
of
Nan
Chong
1985).
Land transactions in China's rural areas
after the household responsibility reform are restricted in
their
form
of
lease.
The
government
has
encouraged the households
specialized in farming to consolidate their landholding.
summarizes
several
studies
concerning
transactions in certain regions in
China.
the
extent
Rows 1-3
Table 2
of
land
are based on
the surveys done at the end of 1983 and rows 4-5 are based
on the
data collected at the end of 1984.
households in
Column 2 is
the percentage of
an area that either leased out their land to other
households or returned their land to their production
land returned
households.
was
to a
teams.
production team may be recontracted to other
Column 3 shows the percentage of land in an area that
involved
in
land
transactions.
The
percentage
of
involved is le.>s thar. the percentage of households involved.
is
due
to
The
the
returned their
fact
that
most
land
This
households only leased out or
responsibility plots
and kept
their food ration
plots and private plots.
All
active in
city in
these
studies
found
areas closer to cities.
China.
But even by the
that land transactions were more
Tianjin is
end
the third
of 1984,
largest
only 8.3% of land
°Selling or leasing of
farm land
to industries has been
found to be very profitable in the suburbs
of big cities (Shi
1981), although they are repeatedly prohibited by the government.
These transactions are out of the scope of this study. This paper
only looks at land transactions within agricultural sectors.
14
Table 2
SCOPE OF LAND TRANSACTIONS
Household involved
IN SOME AREAS
(%)
Land involved
Xiapu County
Fujiang Provinces
4
2.6
Ezhoushi
5
3
Hubei
(e)
Provinceb
Huangni Township
Chuzhou, Anhui Provincec
12.2
Zhongwei County
Ningxia Provinced
3.3
0.058
0.025
Tiani in*
SOURCE:
8. 3
a: Fan, Genxing.
Recontracting
46.
b:
Wang,
"A Survey of the Approaches Used in
Land,"
Fujiang
luntan.
7
(1984):
Xinglong.
Recontracting in
1
'On Current
Stage
45-
of Land
Rural Areas, * Honaqi. 8
(1984):
74-
28.
c:
Hou, Changmin and Dou, Tanghou. 'Permitting Land
Transfers Is
Necessary for the Development of
Productivity in Rural Areas, " Jianghuai luntan, 4
(1984):
5-10.
d:
Wei,
Nong. " A Survey of the Concentration of Land to
the Farming Expert in Zhongwei County," Ningxia
shehuikexue.
1 ( 1985):
84-86.
e:
Agricultural
Departrnmant, Communist Party of China,
Tianjin. "A Survey of the Situation in the
Cor.centration of
Land, ' China Agriculture Yearbook,
1985 : 409-11.
15
was transacted in Tian.jin;
therefore,
land
transactions in
China
as a whole must have existed with only a very limited scope up to
now.
These .studies also found
thatleased
out
households"
repairing,
returned
that engaged in
food
and pig-raising.
out or
or
that
their
other
Only a very small
From the supply side,
majority
land
noncrop jobs,
processing,
returned their
the
were
"specialized
such as transportation,
services,
or fish-,
portion of
land because
of households
poultry-,
households leased
of lack of labor endowment.
we find that the scope of land transactions
crucially depends on the job opportunities outside cropping.
Although the
the forms
it
into
basic
two
extent of
takes
land transactions
are more
forms:
extensive.
(a)
without
They
is
very limited,
can be classified
compensation
or
(b)
with
compensation.
In
the first
production teams
In
case,
households either give their
or give it
either situation,
households
the use right to the land.
they desire.
later)..
to their
relatives
Rent over use right is
Households voluntarily
or close friends.
still maintain
They can take it
land back to
their
back in
positive
claim over
the future if
(see the discussion
give up the rent entitled
to them.
This fact
implies that
(1)
not have
existed,
the households that want to migrate out of
agriculture
that the
so
the land market
in
could not find other households
labor market
or the
these
to lease
places
it
must
and
credit market had also failed,
the households could not find workers to farm
their
land
(2)
so
or did
16
not have enough cash to hire workers.
For
the
varieties:
(1)
in FuJian
In
cases
with
rental and
compensation,
(2)
sharecrop.
right
to
purchase
government procurement
price
was
lower
a
price.
than
market price at the local fair,
between these two prices became
rent paid
in
other case,
of free
way was
grain,
another case,
these
output.
ranging
between 200-300
Fan
was
rent was paid in
cases the
about
for
the
were
sold for
Y 320
Y
60
per
of the
land
of 5.2
For the
to the government.
equally shared
by the
the
given amount
Fan found
mu.
In
still
In
gross value of
A bee-raising
mu and
lent Y
The
required quota,
1900
This money was paid
back to the landholder .for the Y 300 loan. The rest
jin were
In
cost of seeds and fertilizer.
renter harvested 5,600 din of rice.
jin
found that
of grain.
a case of sharecropping.
300
renter
jin
about 30%
leased out its
the
with a
the
cash at also about Y 60 per mu.
rent was
also reported
Fan
equivalent to Y 64.86 per mu.
specialized household
to
rent.
the households were compensated
that the market value of it
all
land were guaranteed
the government procurement
difference
this
main
amount of food grain at the
Because
the
two
which rent was paid.
leased out
certain
are
Fan (1984) reported that
-Province there were three ways in
one case the households that
th,e
there
landholder and
of
the 5, 600
the renter.
The
rent amounted to Y 129.27 per mu according to the market value of
rice
at
the
local
ZheJiang Province,
paid in
two ways.
fair.
In
Zhou and Du
the
(1984)
other
study of a county in
found that
fixed rent was
The rent was equivalent to Y 57.7 per mu when a
17
household was guaranteed the right to
purchUse a
of grain at the government procurement price4
per mu at the local fair price for
free grain..
output.
The rent
was also
Zhou and Du found that
rent in the fixed amount
It was about Y 52. 5
rent in
the fixed
about 30%
there was
of free grain.
mu for
amount of
of the gross value of
a tendency
to use the
They also recorded a case
that a household hired casual wQrkers to farm
income per
certain amount
its land.
The net
the landholder in this case was Y 77.97.
That
was about 30% higher than the prevailing rent.
There are several interesting relations in these cases:
a)
Rent in
cash was a
little bit
lower than
rent in kind.
This may be explained by the facts that cash is preferred because
of its general purchasing power and that the
local fairs may fluctuate,
price for
grain at
so there is some risk inherent in rent
in kind.
b) Among the rent in kind,
by a
fixed amount
of free
the rent was lower if it was paid
grain than if
amount of grain at the government
may be
due to
the fact
that the
it
was paid by a fixed
procurement
price.
This again
landholder has to face larger
risk because of the possibility of price fluctuation at the local
fair.
c) The
return to
hired workers to farm it
explained by
the fact
land was
higher
instead
that a
of
for a landholder if he
leasing
landholder has
it.
This
to face the risks
arising from production and market fluctuations and that
contributes his entrepreneurship to production.
can be
he also
:1)The
land market
case of sharecropping,
is ti.ed
credit market in the
with the
as reported above. The return from leasing
rate is
to the landholder depends on how the interest
In Chinese rural areas
private
higher.
credit.
ranges
paid,
after
rate is
between
Because the interest of the
explicitly
rate,
It
the interest
deducting
4%-10%
calculated.
extremely high for
per
month or even
the renter
loan to
was not
the implicit market interest
the rent for the sharecropping case was
not as
high as it
appeared to be.
In the
Chinese rural
advanced payment of the
right of
land for
present value
15 years
a long
land market,
of all
term lease with
rent for
has not been found.
For a household
leaving agriculture to establish a nonfarm business,
transaction should
be attractive.
the possible cash constraint
It is
for starting
the use
this kind of
a good way to overcome
a business.
Why this
kind of transaction was not observed needs to be investigated.
Stylized facts and related hypotheses:
Fact 1: Land transactions are more active in areas closer to
big cities. The majority of households that leased out their
land
were "specialized
households" that engaged in nonfarm or noncrop
activities.
Hypothesis: A household
will not
lease out its
land unless it engages in nonfarm or noncrop activities
that produce an expected i,naome higher
than the income
from cropping.
There are more profitable nonfarm and
noncrop
job opportunities
in areas
closer to
big
cities.
Rent is
collected annually.' No long term lease for
Fact 2:
the use right of
land with
an advanced payment of the present
value of all rents was observed.
not
Such kind of, contract is
Hypothesis
1:
protected by government. The renting household may be
forced
to
return
the
land if the leasing households
fails its
nonfarm business and tries
to take
its land
back.
Hypothesis 2:
The household
wishing to rent land
in such a contract faces
a cash constraint because
rural. credit
markets are poorly developed, credit is
very expensive and/ or because land so rented cannot be
used as collateral to raise cash;
III.
RURAL LABOR MARKETS
Transactions
in
labor
are
differences in marginal products
Labor-hiring was
equality.
workers
be
can
way
across regions
to
another
However,
migration
way
to
between teams
bring
equalize
and households.
prohibited before the recent reform.
transactions are prohibited,
regions
another
When labor
and across
marginal products into
as rent was suppressed in a collective system,
were compensated with the average net product instead of
the marginal product.
actually was
rent.
Consequently,
a
portion
of
their income
Workers in a team with a lower average income
certainly have the incentives to migrate to a team with
average income.
They would
be able
to receive
a higher
the same higher
average income as the original members in the h.'gher-income team.
Nevertheless,
the
workers
in
a
higher-income
team
would be
reluctant to accept migrants from other teams for fear that their
rent would
be shared
of marginal product
by the newcomers.9
to
workers
was
Therefore,
prohibited,
when payment
the migration
9A
worker
will
be accepted
only
if his value of marginal
product is
greater
than the
value of
the
average
product.
Therefore, if
any rent
exists, the size of a collective team will
be smaller than the size of
a capitalist
team because the latter
only has
to pay the new worker his value of marginal product (see
Ward 1958).
20
between
production
teams
or
across
regions;
was
virtually
nonexistent.
When
the
introduced,
of
Board
household
hired
China
labor
responsibility
was
Agriculture
explicitly
system
was
prohibited
Yearbook 1981,
first
(Editorial
pp. 409-411)
on the
grounds that exploitation of the surplus value was not allcwed to
be
restored.
profitable
Nevertheless,
for
both
the
underlying incentives,
more and more cases
realized labor
whole,
employers
it
and
is difficult
of hired
was
limit of eight workers
to
be
mnutually
emplQ2rees.
labor appeared
revised
limited to
can
With such
to enforce the decree.
transactions were beneficial
the policy
household is
labor-hiring
allow
and the government
for the economy
hiring
labor.
as a
Yet a
hiring not more than eight workers.
is
chosen
because
As
once
Marx
wrote
The
in
Capital that a person who hired less than eight workers could not
be classified
as a capitalist,
physical
work
himself.
strictly
abided by.
The
as he still
arbitrarily
Some households
more than 100 permanent workers. "
workers
is
still
seem to enforce
officially
it.
t
had to
attend to the
set limit has never been
in
While
maintained.,
rural
areas
have hired
the upper limit of eight
the
government
does not
t
t eZhang
Songmao(1985)
reported in
his paper that a household
hired 102 workers for manufacturing electric
applicants and
made Y
200,000 profit
in 1984.
*1 This
"close one
eye'
policy is viividly reflected by the
attitude
of a party
leader.
Having
been brief ed
on
a trip
to
Hainan,
Guangdong
Province,
that
a
person
r ented
a sugarcane
plantation from a collective and hired 20 wcr:kers; to run it with a
certain degree
of success, he responded, that (a) this
story should
21
Table 3
LABOR-HIRING IN WU COUNTY AND YANGSHI COUNTY
No. of household
No.
of workers hired
Wu CountyL
Total
356
Civil engineering
145
Manufacturing
112
2073
(100)
Retailing
Stock-raising
52
8
or farming
Transportation,
fish-raising, and others
Yanqshi
39
842
(40.6)
651
(31.4)
303
(14.6)
52
(2.5)
225
(10.9)
Countyb
Total
105
970
(100)
Civil Engineering
Manufacturing
Retailing
5
27
6
Farming
48
Transportation
19
SOURCE:
277
(29.9)
143
(14.7)
19
(2)
439
(46)
92
(18)
a: Zhang, Songmao. "A Study of Labor-hiring in Rural
Areas," Jianqhai xuekan. 5(1985): 42-44.
b: Gao,
Xuechen and Lu, Guozhi. "Adhering to the
Orientation of Socialist, Cooperative Economy and
Actively Guiding
A Healthy Development of All Formis of
Economies," Nongye jinqcji (Shenyang) 5 (1985):
15-20.
not be carried in the newspapers; b) this person's business should
not be
stopped (Zhou
1984). There are some
indications that the
limitation on the number hired may be lifted soon.
22
The opening
marginal
of
products
labor
across
markets
households
transactions.
What
difference .in
marginal products
labor-hiring
(1985)
in
found
that more
labor
manufacturing.
Yangshi
finding
the
the
equalization of
possible
by way of labor
to
is
has been
Jiangsu
narrowed.
were
hired
shows
for
differences
in
Wu
(1985)
demand for
amount of
(a)
within the nonof
or vegetable
land;
on narrowing
labor
jobs is
not necessarily
endowment.
three kinds
specializing
cultivation;
(b)
in
However,
labor-hiring
in
The first
households
agricultural
have
the
coming
from the
of households may
stock-raising,
households
renting
(c) households keeping some of their
labor force out of agriculture.
entrepreneurship
Non-farm jobs
from the supply side,
at homes for farming but having shifted the
that the
labor hired
of labor-hiring
workers,
households
Wu
has the same
hence,
more
agricultural
hire workers:
raising,
with
in
productivity across households is
special talents;
households
or
Liaoning Province
labor working for non-agricultural
:,rom
Cou'nty the
labor marke-ts
ambiguous for the workers hired for non-farm jobs.
often require
A survey of
engineering
job opportunities
The impact
marginal
the
Zhang Songmao
in
civil
Qf opening
Shenyangshi,
(see table 3).
by
that
Another survey by Gao and Lu
County,
extent
of the labor hired was used in
3
The major impact
what
Province,
Table
thus the increase in
farm sector.
in
interest
than 50%
work.
of
County is
of
Wu County,
nonagricultural
majority
is
makes
two categories
productions.
large
labor force
major part
superior
fish-
of their
indicate
technology or
The
last
one
23
indicates that the remaining labor endowments in the labor-hiring
households
must
demand side,
be
less
transactions
than the average. Therefore,
in
labor
market
tend
to
from the
reduce the
differences in marginal products across households.
The first
two categories of households usually hire workers
on a monthly or yearly basis. Zhang Songmao(1985) reported that a
household in
Wu County
rented 430
mu of
land from its own and
neighboring counties and employed 18 workers for producing grain,
watermelon,
soybeans,
and so on.
It
also raised 550 chickens and
ducks. The head of this household was formerly
leader.
Zhou
Province,
workers to
(1984) found
rented
a
run it.
thcat a household in Hainan, Guangdong
300-mu
suLgarcane
plantation
hir-ed 20
or day
rate.
The
wage rate
permanently hired worker was about Y 1000 per year in both
Zhang's and Zhou's studies.
For the
(1984) found that the wage rate
Zhejiang Province.
Shi
casual workers,
was about Y 5 per day
period and about Y 4 per day in
(1981)
the off-peak
found that
rice-seedlings.
It
was equivalent
As discussed before,
it was uncommon
Zhou and Du
in the peak
period in
1983 in
the piece rate in the
suburbs of Shanghai in 1979 was Y 15 to Y 17 for
mu of
and
The last category of households usually hire
casual workers either by piece rate
for a
a production team
to Y
transplanting a
2.5 to Y 2.8 per
day.
to be
the
willing to
other
legalized.
regions
accept a
before
Therefore,
for a
production team
migrant from the other teams or from
the
another
transactions
natural
in
labor
were
impact of opening labor
24
markets was the migration of labor across regions.
that
by
1984
A study found
1,000 workers had been employed permanently
over
from other provinces to work in the suburbs of Shanghai.
them worked in the village-run industries. However,
portion of them worked
chicken-raising.
workers in
brigade
1984, it
migrant workers
brigade by 1985
Labor
A
in vegetable
had planned
markets
in
areas
actually
characteristics of
households
market
with
found to have hired 85 migrant
to hir.e
50 more
in 1985. The
only a
in
'rural
areas
portion of
are
still
very
labor hired in rural
agricultural
work.
From
the
households that hire workers for agricultural
the
transactions.
endowment do
China's
engaged
discussed in
as
duck-raising and
(Peng and Zhang 1985).
Furthermore,
work,
a substantial
of 56% of the labor force in this
would consist
limited. 1 2
is
was
gardening,
Some of
not hire
page 23,
least
Why
we find
family
households
that none
labor
with
of them are
endowment before any
the
least
labor
workers for agricultural work needs to be
investigated.
Stylized fact and related hypotheses:
Fact: It was not observed that
households with the least
family labor endowment hired workers for agricultural work.
Hypothesis 1:
Labor-hiring requires cash. Because
credit markets are not well developed,
households with
the
least
family
labor endowment cannot overcome the
cash constraint. Therefore,
they refrain from hiring
labor and engage in direct labor exchanges with friends
"2 For
example,
only 0.6%
of
agricultural
households in
Shenyangshi (one of the largest cities in China), Liaoning Province
hired workers in 1984. The hired workers consisted of 1.8% of .total
labor force in Shenyangshi ( Gao and Lu 1985).
25
or relatives.
Hypothesis
2:
Households with
the least labor
endowment grow crops with different harvest per-iods in
order to even out labor requirements over time.
IV.
RURAL CREDIT MARKET
In
the
above
two
sections,
it is found that the limited
extent of rural lanld and labor markets may be closely
the
limited
rural
credit
markets.
related to
The subsequent discussions
focus on the extent and constraints of credit
markets in
Chinese
rural areas.
In a
the
socialist society, there is a strong sentiment against
taking
of
interest.
capitalist society
value between
is a
In
Marx's
teaching,
interest
in a
redistribution of the exploited surplus
financial capitalists
and industrial capitalists.
However, the seasonality of agricultural production gives rise to
seasonal needs for funds
to
bridge
gaps
between
receipts and
expenditures.
Both
formal and informal credit markets existed in
rural
areas
even
before
reform
(see the discussions followed).
the
household
responsibility system
There are no private financial institutions in China. Formal
credits are provided by the Chinese Agricultural Bank
cooperatives.
The
Chinese Agr~icultural
has branches in every
owned
past,
by
in
commune
reality,
many areas,
commune. Credit
members.
Bank is a state
and credit
bank.
It
cooperatives are formally
However, credit cooperatives in the
acted as branches of the
Agricultural Bank.
In
the Agricultural Bank and credit cooperatives shared
26
the same offices and
provided at
had
the
staff.
same
subsidized interest
13
The
rates in the past. The interest
rate charged for a loan was 0.25% per month until
interest rate
the average
government in
million for
1980 alone
Shanxi
for deposit
Province
thus
1981. However,
was 0.312%
had
to
in 1980. The
subsidize
Y 11.5
Bank and the czredit cooperatives in
the Agriculture
(Qin 1982),
credits were
Not only were the interest rates charged
X4
low, but loans were often provided without consideration of their
prospects of recovery.
84.6%
of
loans
For
between
1981). The situation
was
example,
1976
not
and
in
Shanxi
1979
better
in
Province, only
were paid back (Huang
the
other provinces.
According to national statistics, Y 4 billion of bad agricultural
loans were cancelled in 1961 and another Y 8 billion of bad loans
were
accumulated
between
1962
availability of credit was thus
several
counties
in
Henan
and
severely
Province
recovery, each county had only about Y 2
although each
of them
1980
were officially
(Zhao
limited.
found
1983).
A
that,
The
survey of
due to poor
millions for
new loans
allotted more
than Y 10
1
3 There have been some attempts to increase
the independence
of
credit
cooperatives from
the Agricultural Bank. However, a
credit cooperative in a township or even in a county iz too small
to overcome
the problems of synchronic timing in deposit and
withdrawal, as well as of covariance of defaults risk due to the
covariance of
yield
risk
in a small
area
(Binswanger
and
Rosenzweig 1986).
1 4
The interest
rates charged for loans
were raised
to 0.36%0.72%
in
1981
depending on
the type of
loan
(see Zhonqguo
nonqminbao, March 8, 1981)
27
millions for agricultural loans.'
The results of
repayment are
care.
low
3
interest
rates
not hard to figure out.
For example,
of agricultural
in Linfen county,
and
low
pressure for
Credits were not used with
Shanxi Province,
Y 140,000
loans from credit cooperatives before 1978
were
not used properly. Among these loans of Y 140,000, Y 100, 000 were
used on construction that had never been completed; Y 20,000 were
expended on unusable
administrative
expenditures
credit rationing.
repayment
were
not
for
credits.
strong,
to
credits
zero
was
and
(Qin
As interest
credits were close
demand
materials;
Y
1982).
rates were
real
or
even
thus not
The
were
wasted on
other
result is
low and
opportunity
negative.
definitely
The market could
20,000
higher
pressures for
costs for using
Therefore, the
than the supply of
possibly be
cleared without
non-market measures. The criterion for rationing varie'd from time
to time.
Sometimes the priority was to help poor teams.
times the
priority was
for the funds
county
given to rich teams that had better uses
(Huang 1981).
leaders
given a loan.1
used
However,
ad-hoc
it was
often found
that a
criteria in deciding who should be
-
The availability
accumulation of
At other
of formal
bad debts
1
credit declined
and because
because of the
of the unwillingness for
5See
'Current
Situations
and
Problems of Agricultural
Production Fund" in Noncqye lingji congkan 1 (1980): 19-20.
''Same as footnote 15.
28
people to
for
deposit in
credits
example,
increased
total
and 1979,
credit cooperatives.
agricultural
.yet production
expenditures consisted
39.2% in
1979.
Statistics
The
provided by
1980,
the
on
required working funds.
the production
of gross
in
the
a
many
production
team
interest
teams
some areas.
Henan
in
some
engaged
in
One
such case
and September
deficit
Province.
1979,
was no better.
teams
showed
in
was
Seventy
26
that in
that about
40% of
the
need for working
regions as
informal
credit
The
study
much as
cred.it
were
found
The
70% of the
markets. 1 8
extremely
The
high in
a study of Dancheng
that
the
combined
was Y 21.76 million between January
yet the expenditure was Y 36.33 million.
Half
financed by loans from the Agricultural
Bank
and credit cooperatives.
sources.
increased to
had only 15% of the
was recorded in
revenues fco,r production teams
of the
1956,
China did not have any working funds at
rates paid for private
County,
In
1956
production tearns had to rely on private credits.
same report showed that
production
it
Bank,
Another survey showed
teams in
278%.
production
Agricultural
as an
107% between
income,
Since formal credits could not satisfy
funds,
Province
other provirnces
million
3.6
average
Gansu
expenditures increased
of 21%
involving
Taking
How'ever, the demand
income increased
situation
provinces,
all.
sharply.
1 7
The other half was borrowed form private
percent
of
the
credit borrowed from private
T7Deposits in many credit
cooperatives
were
unable
to be
cashed because of the accumulation of bad loans (Chen 1980).
the
(1981).
t9All
in
Sun
surveys and statistics
mentioned here were reported
29
sources was used to purchase
livestock,
the
remaining
fertilizer,
10%
20%
paid
was
was
for
used
administrative
expenditures. The interest rates ranged from 3% per
per month.
On the
in another study,
between
ranged
average,.it was 10% per month. 1
however,
2-5%
per
showed that
month.
provided by members in the borrowing
256 people
le-nding money
to a
9
Zhang (1980)
credits
rates only
were mainly
production team.
Among the
production team in Miluo County,
Hunan Province, Zhang (1980) found that 235 were
team,
month to 30%
the interest
Private
to buy
18 were cadres and government staff
members of this
(not team members),
and
3 were urban residents.
Before the household responsibility reform,
credits from
the Agricultural
given to production
County,
Guizhou
teams.
A
survey
Province, found
team
or
majority of
Bank and credit cooperatives were
of
commune,
Xiazi
that only
were given to individual households.
production
the
4% of formal credits
The other 96% were loaned to
village-run industry (Duan 1981).
Borrowing
and lending between individual households were also rare.
Y
3.03
million
Province,
private
credit
in
January through May 1980,
and production
Zunyi
Xingmin
County,
1.3% was between
Of the
Liaoning
state firms
teams, 3.3% was among different production teams,
93. 7% was between production teams and individual households,
only 1.7% was among different individual households
The
individual
household
responsibility
dramatic changes in rural credit markets.
1 9
Same as
footnote
15.
In the
and
(Qin 1981).
reform
brought
production team
30
system,
an
individual
household
would
not
production purposes.
If
consumption,
marriage, and so forth,
health,
a
household
had
need
emergency
team
to
individual
not required
households
to
were
able
do
so.
to be
income distribution.
insurance provided
by
the
became the
and
markets.
informal
credit
Agricultural Bank
loaned
to
and credit
individual
Only
as
the
team
were.
until the
basic
4%
households
68% after
(Duan
unit of
system. Therefore,
of
1981).
both in formal
credit
cooperatives in
as mentioned
reform
paid back
primary actors
responsibility reform,
the
general,
It also eliminated the group
production
individual households
in
from a
The household responsibility
systerm restored the individual household
production and
needs for
The loans
househLlds,
interest free and were
for
its production team
was more or less obliged to take care of them.
production
credit
the
Xiazi Commune was
before
the
before; the
Most
from
household
figure rose to
loans
to individual
households were used for purchasing chemical fertilizer and draft
animals,
and for expanding sideline production.
a whole,
For the nation as
among the Y 16.6 billion loans from credit cooperatives
in 1983, 46% were given to individual households.
only 19.6%
it
1980
(Statistic Yearbook
The figure was
of China 1984, p. 423).
The actual new credits to individual households should
than
this
figure
suggests
because
many
of
be higher
the loans to the
collectives were old loans that had not been repaid.
The other new feature
household responsibility
in
rural
reform is
credit
markets
after the
the sharp rise of the amount
31
of cash in circulation.
rise.for
government-purchased agricultural
partly because of
feature
credit
This is partly because of a
is
remarkable
reflected
in
cooperatives.
output
the
The
marked price
products in 1979 and
growth
since
1978.
dramatic increase in deposits in
deposits
in
credit
cooperatives by
individual households were Y 7.8 billion at the end of 1979.
figure rose to Y 32.0 billion
at the
increased deposits
were redeposited
reserve.
1978
Between
This
and
1983.
end of
Most
This
of the
in the Agricultural Bank as
1983,
deposits
in
the
credit
cooperatives increased by Y 6.46 billion annually,
however,
loans
from credit cooperatives increased only by Y 2.42
billion.
It is
suggested (Lu
1984) that
than deposits was due
However,
It
may be
the fact
to
the
that loans increased by less
inertia
of
credit cooperatives.
due to the fact that a local rural financial
institution has to keep a high reserve ratio in order
illiquidity.
Which
reason
is
correct
can
only
to prevent
be judged by
further investigation.
As
production
responsibility
reform,
increased sharply.
Village,
expanded
Ningdu
after
the
demand
A survey-of 21
County,
the
individual
for
working
households located
Jiangxi
Province,
209.66
in
1983.
Meanwhile,
sample was Y 415 in 1978 and
Y
funds
also
at Xiachai
carried out by Mei
(1985) found that per capita cash income was Y 59.25
Y
household
in 1978 and
the total money borrowed in the
3,870
in
1983.
The
weight of
borrowed cash in total cash income was 7.4% in 1978 compared with
20.5% in
1983.
As the availability of formal
credit was limited,
32
private
credit
was
the
source
major
of
rural
credits.
Mei
reported that in Ganzhou Prefecture and Jiujiang Prefecture, both
of Jiangxi
Province,
private
credit was two time as much as the
credit from the Agricultural Bank and
Zhiping
(1985),
making
another
credit cooperatives.
Zhang
survey of 20 households in two
counties in Helongjiang Province, had the
same findings. Zhang's
survey is summarized in Table 4.
Table 4
A SURVEY OF CASH EXPENDITURE AND TYPES OF CREDIT
County
Households
Cash Expenditure
Surveyed
on Inputs (Yuan) Bank and Credit
Cooperative
Credit
Private
Niujia
10
8,367
2,056
2,880
Chonghe
10
5,241
35
2,050
SOURCE: Zhang Zhiping, "A Survey of the Rural Private Credits in
Wuchang County, Heilongjiang Province," Jinoji wenti
tansuo 7 (1985): 40-42.
Zhang Zhiping
credit
was
fertilizer,
used
and
(1985) also
to
buy
and
about
10%
consumption.
did not
1 year.
friends;
draft
pesticides for
used for expanding cash
was
crops,
used
found that
for
about 40% of private
animals,
tractors,
grain production;
husbandry,
repaying
chemical
about 50% was
and other production;
matured
loans and for
The terms of credit for grain production
in general
exceed 10 months and for other production did not exceed
Private credit was obtained
(b)
from
neighbors
in
(a) from
the
relatives or close
same village directly or
33
through middlemen;
and
(c)
from
residents
in
other counties
through middlemen. All private credits in rural areas depended on
oral agreements.
no
collateral
charged
No explicit contracts were written.
was
depended
lenders,
found
ar
in private credit.
the
relationship
creditworthiness
of
expected returns of investment.
for
loaAs
others.
between
Mei
close
(1985),
however,
was about
and
found
borrowers
and middlemen,
The rate
friends
The interest rates
between
borrowers
Furthermore,
about
that
and
and the
3% per month
5% per month for
in
some
cases the
interest rates were as high as 10% or even 15% per month.
While a 3%-5% of interest rate per month for private, shortterm agricultural
production
developing countries
rural areas
(Wiens
loans
and also
1982),
4%-10X per
not
before the
uncommon
in other
revolution in China's
the interest rates were much higher for
other types of private credit.
the interest
is
rates faced
month; some
Liu and Liang (1985) reported that
by private
enterprises ranged between
were even as high as 20% per month.
society where high interest
rates
have
been
condemned
In a
for so
long, it is an interesting phenomenon that private interest rates
could be so high.
interest rates
Besides,
in informal
for loans to agricultural
it deserves further
credit markets
production
and
investigation why
are, in
higher
China,
for
lower
loans to
private nonfarm business.
A
feature
that
merits
special
collateral is found in private lending
rural area.
attention
and borrowing
is
that
no
in China's
While the use of collateral is also not very often in
34
informal rural credit markets in other
developing countries,
nonexistence of
unusual.
used,
of
collateral at
the interest rate charged will be smaller
default
lack of
declines
market
from
default.
However,
other things,
expected
high
the interest
gain
for
the
investment
returns.2°
areas,
is a
may
go
extent of the
of
and the
down
the
risk of
function of,
among
loan size.
The
as the interest rate
a borrower
is willing
to pay
interest
the market may also disappear because
rate
is,
that
the
have
harder
high
it is to find
enough
expected
loan sizes are large it would be beneficial for
there
is
to
no
utilize
lack
theoretically be used as collateral.
owned.
The
he may not be able to find someone to borrow
both borrowers and lenders
rural
of default
even though
opportunities
Where
because
rate charged
From the demand side,
higher
limit the
interest
lenders
high interest rates,
because the risk
supply side and the demand side.
the
the risk
increases. Therefore,
from.
also severely
both
Lenders have to charge
If collateral is
the value of collateral increases.
as
collateral will
credit
the
all is
the
of
collaterals.
In China's
private property that can
Houses
are always privately
After implementing the individual household responsibility
system,
tractors,
livestock
are
pumps,
also
mills,
all
owned
trucks,
by
dcraft
individual
animals,
and
households.
Furthermore,
the use right of land that lasts 15 years or more is
a
that
property
could
be
traded
and
therefore
serve
as a
"For the i.mpacts of collateral on the interest
rate and on
the
scope of
the credit market,
see Binswanger and Rosenzweig
(1986).
35
collateral. Why, then,
is collateral
not
used
in
rural China?
This issue deserves more investigation.
Because of
the lack
tied contracts appear
of use of collateral,
in
rural
suitable collateral do not exist.
to his tenant at a very low
contract,
China,
as
in
several forms of
countries where
A landholder may provide credit
intere.st
rate
as
part
of
a land
as mentioned in the discussion of land markets. A third
party guarantee is also often seen when borrowers and lenders are
not
relatives
or
close
friends.
It
is
also found that some
private enterprises require new employees to invest in
as a
precondition for
hiring
(Liu and Liang 1985).
most powerfu' guarantee for a lender
be
the
threat
of
relatively
immobile.
transmitted quickly to all
is absent
However, the
rural areas may
losing future borrowing opportunities when a
borrower does not repay the loan.
is
in China's
the firms
The rural
Information
population in China
on
potential lenders.
default
will
be
Because insurance
in rural areas, access to credit provides an important
substitute for insurance.
Therefore, the loss of future borrowing
opportunities is a very high cost for any borrower.
Stylized facts and related hypotheses
Fact
1:
Most
of
the increased
deposits in credit
cooperatives in recent years were redeposited in the Agricultural
Bank.
Hypothesis:
Because
the
seasonality
of
agricultural production
which leads
to the synchronic
timing of deposits and withdrawals, and the covariance
of yields that leads to the risk of covariant default,
it is necessary for a local rural financial institution
to maintain a high reserve ratio
in order
to prevent
illiquidity.
Fact 2:
In informal
credit markets,
interest rate charged
per month, however,
between 3%-5%
for agricultural loans ranged
per month for loans to private nonfarm
it ranged
between 4%-10%
enterprises.
agricultural production
Hypothesis: The loans for
are, in
general, small,
and between households in the
same village. The loans for private enterprises are, in
general, larger,
and may be between households without
risk for
thus
face
greater
close relations. Lenders
therefore, they have to
loans to
private enterprises;
charge higher interest rate.
depended on oral
Fact 3: All private credits in rural areas
agreements and
no collateral was u:;ed in informal credit
rharkets
in China.
Hypothesis: Lenders' right is
not protected. They
may
subject
to
the
risks of interest earnings being
even being
persecuted if
there is any
confiscated or
political movement
in the
future. The government also
will not help a lender repossess
the collateral assets
in the
case of
default. Therefore,
only those people
who are willing to bear this
political risk
will lend
out
money.
The
supply
of
credit
is, thus, sharply
constrained.
As
a
consequence,
lenders
limit their
credit
only
to
high
quality borrowers and/ or limit
loan
sizes
to
so
small
amounts
that
repayment
incentives are
high even without written contracts and
collaterals. 2a
2
"This hypothesis is supported
by the
observation that the
majority of recent increases in cash in rural areas were invested
in private housing. The sharp rises
of
the
amount
of
cash in
circulation were
reflected in
the dramatic increase in deposits
.n credit
cooperatives. The
deposits in
credit cooperatives by
individual households
were Y
7.8 billion at the end of 1978. It
rose to Y 32.0
billion at
the end
of 1983.
(State Statistical
Bureau 1984,
p.423). However,
if the estimate by Mei (1985) was
correct, the private credit in rural China was only about
Y 15.0
billion in
1983. Nevertheless,
rural private housing investment
was Y
21.4 billion
in the
same year
(State Statistical Bureau
1984, p.
299). These
facts seem to indicate that credit markets
are constrained from the
supply side
not because
funds are not
available but because most people are reluctant to lend out their
money.
37
V. CONCLUDING REMARKS
The household responsibility reform
has resulted
in China's
in remarkable growth in agriculture.
the rural reform prompted
the
Chinese
much more complicated.
the second-stage.
Any policy,
itself in a short period.
even
cause
whether
great
the
market-oriented
the rural reform.
by
the
efficiency.
and
credit
in
Meanwhile,
the rural
The uirban
in
the
short
run.
in
urban
areas
a
coming
Factor markets,
markets
are
Therefore,
will
be
again depend on the performance of
responsibility
the
economy is
will not manifest
The gain in incentive efficiency
The potential for
agriculture
push the
good or bad,
reform
out may
household
exhausted.
to
A policy essential for the long run may
difficulties
persistently carried
The success c,f
government
market-oriented reform to its urban economy.
reform has also reached
rural areas
reform
sustained
brought about
should
high
have
growth
been
rate in
decade lies in improving allocative
namely,
land markets,
important
labor markets,
institutions
for improving
market transactions
which existed
resource allocation.
Most barriers for factor
before
cleared.
for
the
household
responsibility
system
Land can be leased out for rent.
credit.
Labor
can
be
land,
labor,
are
very
limited
of
a
have been
Interest can be charged
hired with a limitation that is
enforced. However,
still
reform
not
and credit markets in rural China
extent.
The main reason may be
formulated as the following hypothesis:
The extent
of land
markets and labor markets in
China's rural
areas depend on the quantities available
and
the interest rates
charged
in credit markets.
Institutional credit is limited. Private credit is also
constrained from supply side. due to
the fact that
private
lenders'
right
is
not
protected
by
the
government. Private lenders have to charge high premium
for
political
risks while they limit credit to only
very few high quality borrowers or limit loan
sizes to
small amounts
in order to reduce the risks of default.
As a consequence,
credit
markets,
land
markets, and
labor markets can only exist in a very limit extent.
On the
areas,
one hand,
in general,
the average
will not produce
income from other sectors.
On
the other
an income
Therefore,
for a household to shA.ft out
cropping.
landholding in China's rural
there is a general tendency
of agricultural
hand,
the
comparable to the
sector,
especially
egalitarian allotment of land
after the household responsibility reform provides a safe shelter
for every
household.
Unless
a household
is secured
that produces an income higher than cropping,
its land
to the
other households.
labor surplus in urban areas,
labor to
areas.
a rural
find jobs
state
Because there
is almost
will not render
also exists a
impossible for rural
or collective enterprises
in
urban
Outmigration from cropping sector will be possible only if
household starts
fish-raising,
finds a
in
it
it
with a job
or nonfarm
its
own non-cropping business,
business,
such
as
such as
transportation,
or
job in rural private enterprises that have emerged after
recent reforms.
Limited credit at very
greatly reduc?
the possibility
high interest
rates will
of profitable private businesses
for households with a relatively poor
cash endowment.
Therefore,
a limited credit market may result in a limited outmigration from
cropping -and, therefore,
a limited
land supply.
Labor markets
3q
may
.depend
markets.
do not
on
credit
almost
The average landholding
have enough
rents in additional
or has
markets
land
to
is very
farm.
Therefore,
Most households
unless a household
-moving out
of cropping
labor force moving out of cropping,
not hire workers for agricultural work.
be thin
the same way as land
small.
land from households
its own major
is hired
in
for agriculture
Hence,
no matter if labor
or non-agriculture,
if nonfarm and noncrop
it will
labor markets
job opportunities
will
are limited
by
credit markets.
Whether
the
above
hypotheses
answered by more studies.
markets
as
increased
as
well
by
the
lenders' right.
however,
land
is true,
markets
in
changes
correct
the extent
and
the
labor
government
may
also
have
of
a
protected
by
the
right of a
piece of land for 15 years could
The
landless
population.
government,
existence of
is
the present
lost,
value of its
it could not
(Binswanger
and
Rosenzweig
of access to land,
households
be
value of
income
tolerate
lenders'
1986).
again
the
right
things,
the
is
use
right greater
Therefore,
with
use right
once land
borrowed funds
Since foreclosure implies loss
protection of lenders'
At
on
become acceptable as
this use
stream.
can be.
lending out
collateral value for the
purchased
becoming landless.
of credit
In order to do
to
then among other
of land would make the present
than
If
be
position
in
rates charged will be lowered.
the
only
markets
government's
emergence
collateral.
can
If lenders feel no political risks
money, the interest
so,
If it
are
present,
rights may lead to some
the government
does not
40
seem
to be willing
However,
to
r-ent,
policy
to undertake a
hired
makers
a
Therefore,
it
government
may change
is
labor,
few
policy
and interest
years
ago;
not unimaginable.that
its
position
with
such consequences.
were
all
they
in
are
a few
on enforcing
not
acceptable
all
years
legal
now.
the Chinese
lenders'
rights.
41
REFERENCE
Agricultural Department, Communist Party
of China,
Tianjing. "A
Survey of the Situation in the Concentration of Land. " China
Agriculture Yearbook (1985):
409-411.
Binswanger,
Hans
P.
and
Mark
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Xuechen
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Healthy
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of
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Forms
of
Economies," Nongye
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necessary
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5-10.
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44
DISCUSSION PAPERS
AGR/Research Unit
Report No.: ARUJ 1
Agricultural Mechanization: A Comparative Historical Perspective
by Hans P. Binswanger, October 30, 1982.
Report No.: ARU 2
The Acquisition of Information and the Adoption of New Technology
by Gershon Feder and Roger Slade, September 1982.
Report No.: ARU 3
Selecting Contact Farmers for Agricultural Extension:
Visit System in Haryana, rndia
By Gershon Feder and Roger Slade, August 1982.
The Training and
Report No.: ARU 4
The Impact of Attitudes Toward Risk on Agricultural Decisions in Rural
India
by Hans P. Binswanger, Dayanatha Jha, T. Balaramaiah and Donald A.
Sillers, May 1982.
Report No.: ARU 5
Behavior and Material Determinants of Production Relations in Agriculture
by Hans P. Binswanger and Mark R. Rosenzweig, June 1982
(Revised July 22, 1985).
Report No.: ARU 6
The Demand for Food and Foodgrain Quality in India
by Hans P. Binswanger, Jaime B. Quizon and Gurushri Swamy, November
1982.
Report No.: ARU 7
Policy Implications of Research on Energy Intake and Activity Levels with
Reference to the Debate of the Energy Adequacy of Existing Diets in
Developing Countries
by Shlomo Reutlinger, May 1983.
Report No.: ARU 8
More Effective Aid to the World's Poor and Hungry: A Fresh Look at
United States Public Law 480, Title II Food Aid
by Shlomo Reutlinger, June 1983.
Report No.: ARU 9
Factor Gains and Losses in the Indian Semi-Arid Tropics: A Didactic
Approach to Modeling the Agricultural Sector
by Jaime B. Quizon and Hans P. Binswanger, September 1983
(Revised May 1984),
Report No.: ARU 10
The Distribution of Income in India's Northern Wheat Region
By Jaime B. Quizon, Hans P. Binswanger and Devendra Gupta,
(Revised June 1984).
August 1983
45
Discussion Papers
(continued)
Report No.: ARU 11
Population Density, Farming Intensity, Patterns of Labor-Use and
Mechanization
.by Prabhu L. Pingali and Hans P. Binswanger, September 1983.
Report No.: ARU 12
The Nutritional Impact of Food Aid: Critria for the Selection of CostEf f ective Foods
by Shlomo Reutlinger and Judith Katona-Apte, September,1983.
Report No.: ARU 13
Project Food Aid and Equitable Growth:
by Shlomo Reutlinger, August 1983.
Income-Transfer Efficiency First!
Report No.: ARU 14
Nutritional Impact of Agricultural Projects: A Conceptual Frameworlk for
Modifying the Design and Implementation of Projects
by Shlomo Reutlinger, August 2, 1983.
Report No.: ARU 15
Patte.rns of Agricultural Projection
by Hans P. Binswanger and Pasquale L. Scandizzo, November 15, 1983.
Report No.: ARU 16
Factor Costs, Income and Supply Shares in Indian Agriculture
by Ranjan Pal and Jaime Quizon, December 1983.
Re2ort No.: ARU 17
Behavioral and Material Determinants of Production Relations in Land
Abundant Tropical Agriculture
by Hans P. Binswanger and John McIntire, January 1984.
Report No.: ARU 18
The Relation Between Farm Size and Farm Productivity:
by Gershon.Feder, December 1983.
The Role of Family
Report No.: ARU 19
A Comparative Analysis of Some Aspects of the Training and Visit System
of Agricultural Extension in India
by Gershon Feder and Roger Slade, February 1984.
Report No.: ARU 20
Distributional Consequences of Alternative Food Policies in India
by Hans P. Binswanger and Jaime B. Quizon, August 31, 1984.
Report No.: ARU 21
Income Distribution in India: The Impact of Policies and Growth in the
Agricultural Sector
by Jaime B. Quizon and Hans P. Binswanger, November 1984
(Revised October 1985).
Discussion Papers
(continued)
Report No.: ARU 22
Population Density and Agricultural Intensification:
A Study of the
Evolution of Technologies in Tropical Agriculture
by Prabhu L. Pingali and Hans P. Binswanger, October 17, 1984..
Report No.: ARU 23
The Evolution of Farming Systems in Agricultural Technology in
Sub-Saharan Africa
by Hans P. Binswanger and Prabhu L. Pingali, October 1984.
Report No.: ARU 24
Population Density and Farming Systems - The Changing Locus of
Innovations and Technical Change
by Prahbu Le Pingali and Hans P. Binswanger, October 1984.
Report No.: ARU 25
The Training and Visit Extension System: An Analysis of Operations and
Effects
by G. Feder, R. H. Slade and A. K. Sundaram, November 1984.
Report No.: ARU 26
The Role of Public Policy in the Diffusion of New Agricultural Technology
by Gershon Feder and Roger Slade, October 1984.
No.: aeport
ARU 27
Fertilizer Subsidies: A Review of Policy Issues with Special Emphasi.s
on Western Africa
by Haim Shalit and Hans P. Binswanger, November 1984
(Revised November 1985).
From Land-Abundance to Land Scarcity: The Effects of Population Growth
on Production Relations in Agrarian Economies
by Mark R. Rosenzweig, Hans P. Binswanger and John McIntire,
November 1984.
Report No,: ARU 29
The Impact of Rural Electrification and Infrastructure on Agricultural
Changes in India, 1966-1980
by Douglas F. Barnes and Hans P. Binswanger, December 1984.
Report No.: ARU 30
Public Tractor Hire and Equipment Hire Schemes in Developing Countries
(with special emphasis on Africa). A study prepared by the Overseas
Division, National Institute of Agricultural Engineering (OD/NIAE)
by P. J. Seager and R. S. Fieldson, November 1984.
Report No.: ARU 31
Evaluating Research System Performance and Targeting Research in Land
Abundant Areas of Sub-Saharan Africa
by Hans P. Binswanger, January 1985.
-46
47
Discussion Papers
(continued)
Report No.: ARU 32
On the Provision of Extension Services in Third World Agriculture
by Alastair J. Fischer (Consultant), January 1985.
Report No.: ARU 33
An Economic Appraisal of Withdrawing Fertilizer Subsidies in India
by Jaime B. Quizon, April 1985 (Revised August 1985),
Report No.: ARU 34
The Impact of Agricultural Extension: A Case Study of the Training and
Visit Method (T&V) in Haryana
by Gershon Feder, Lawrence J. Lau and Roger H. Slade, March 1985.
Report No,: ARU 35
Managing Water Managers:
Deterring Expropriation,
Mechanism
by Robert Wade, April 1985
or Equity as a Control
Report No.: ARU 36
Common Property Resource Management in South Indian Villages
by Robert Wade, April 1985.
Report No.: ARU 37
On the Sociology of Irrigation:
Performance?
by Robert Wade, May 1985.
How do we Know the Truth about Canal
Report No.: ARU 38
Some Organizations Concerned with Animal Traction Research and
Development in Sub-Saharan Africa
by Paul Starkey, April 1985,
Report No.: ARU 39
The Economic Consequences of an Open Trade Policy for Rice in India
by Jaime B. Quizon and James Barbieri, June 1985.
Report No.: ARU 40
Agricultural Mechanization and the Evolution of Farming Systems in
Sub-Saharan Africa
by Prabhu L. Pingali, Yves Bigot and Hans P. Binswanger, May 1985.
Report No.: ARU 41
Eastiasian Financial Systems as a Challange to Economics:.
of "Rigidity," with particular reference to Taiwan
by Rober Wade, June 1985.
The Adventures
Report No,: ARU 42
Education, Experience and Imperfect Processing of Information in the
'Adoption of Innovations
by Alastair J. Fischer, June 1985.
Report No.: ARU 43
A Review of the Literature on Land Tenure Systems in Sub-Saharan Africa
by Raymond Noronha, July 1985,
48
Discussion Paoers
(continued)
Report No.:. ARU 44
Policy Options for Food Security.
by Shlomo Rauclinger, July 1985.
Credit Markets in Rural South India: Theoretical Issues and Empirical
Analysis.
by H. 8inswanger, T. Balaramaiah, V. Bashkar Rao, N.J. Bhende
and
K.V. Kashirsagar, July 1985.
Re.2ort No.: ARUJ 46
The Impact of Agricultural Extension: The Training and Visit System
in
India.
by Gershon Feder and Roger Slade, June 1985.
Report No.: ARU 47
Methodological Issues in the Evaluation of Extension Impact.
by Gershon Feder and Roger Slade, July 1985.
Report No.:
Estimation
by Hans
August
ARU 48
of Aggregate Agricultural Supply Response.
Binswanger, Yair Mundlak, Maw-Cheng Yang and Alan Bowers
1985 (Revised October 1985).
ReDort No.: ARU 49
Land Values and Land Title Security in Rural-Thailand.
by Yongyuth Chalamworg and Gershon Feder, June 1985 (Revised October
1985).
Reoort No.: ARU 50
Land Ownership Security and Capital Formation in Rural Thailand.
by Gershon Feder and Tongroj Onchan, December 1985 (Revised February
1986).
Report No.: A.RU 51
Land Ownership Security and Farm Productivity in Rural Thailand.
by Gershon Feder, April 1986.
Reoort No.:
ARU 52
Social and Cultural Aspects of Land Inheritance and Transactions
in
Rural Thailand.
by Charles B. Mell, June 1986.
49
Discussion Papers
(continued)
Report No.:. ARUI 53
Land Ownership Security and Access to Credit in Rural Thailand.
by Gershon Feder, Tongroj Onchan and Tdjaswi Raparla, April 1986.
Report No.: ARU 54
The Management of Common Property Resourcas: Collective Action as an
Alternative to Privatization or State Regulation.
by Robert Wade, May 1986.
Report No.: ARU 55
Land Policies and Farm Productivity in Thailand's Forest Reserve Areas
by Gershon Feder, Tongroj Onchan and Yongyuth Chalamwong, August 1986
Report No.: ARU 56
On the Determinants of Cross-Country Aggregate Agricultural Supply
by Hans Binswanger, Yair Mundlak, Maw-Cheng Yang and Alan Bowers,
September 1986.
Report No.: ARU 57
What Can Agriculture Do for the Poorest Rural Groups? by Hans P. Binswanger,
and Jaime B. Quizon, September 1986.
Report No.: 'ARU 58
Population Density, Market Access and Farmer-Generated Technical Change
in Sub-Saharan Africa by Prabhu L. Pingali and Hans P. Binswanger,
September 1986.
Report No.: ARU 59
Credit Markets, Wealth and Endowments in Rural South India by Hans P.
Binswanger and Mark R. Rosenzweig, December 1-5, 1986.
Report No.: ARU 60
Resource Endowments, Farming Systems and Technology Priorities for
Sub-Saharan Africa by Hans P. Binswanger and Prabhu Pingali, November
1986.
Report No,: ARU 61
Rural Factor Markets in China After the HOusehold Responsibility System
Report by Justin Yifu Lin, November 1986.