What is the economic logic of rural land rights?

The issue of land rights, especially the issue of rural land property rights, has become a hot topic of concern in current academic circles, government decision-making departments, and public opinion media. Behind this issue lies the debate about “where China's rural land system should go.” In this article, the author attempts to sort out the evolution of the rural land property rights system since the founding of the People's Republic of China, analyze the economic principles underlying land property rights, and thereby seek clues about “where China's rural land system should go.”

Should land belong to private individuals or to the collective? This is the most fundamental question about property rights, and it is also the focal point of debate between two competing ideologies——capitalism and socialism. The institutional choice of land ownership not only affects economic life but also has an important impact on other social institutional arrangements. Defenders of private property rights say that this institutional arrangement enhances individual freedom, political stability, and economic prosperity; for supporters of public ownership, private land ownership is the root of capitalist evil. It not only brings about inequality of wealth but also leads to social division, and more importantly, because individuals compete with every possible scheme, it creates a social environment in which people do not trust one another. A collective ownership system of shared land can avoid these drawbacks and create a world in which everyone is equal. Setting aside these ideological debates, from the perspective of economics, what kind of institutional arrangement is the most efficient? This is the main question we should consider. Next, we begin our analysis with the transformation of the rural land property rights system since the founding of the People's Republic of China.

I. Changes in the rural land property rights system since the founding of the People's Republic of China and their economic explanation

Over the past more than 60 years, the institutional changes in China's rural land property rights have roughly gone through four stages: private land ownership, cooperativization and the people's communes, the household contract responsibility system, and the land transfer period.

1. The period of farmers' private land ownership. In the process of the founding of New China, the Chinese Communist Party redistributed land through “land reform,” enabling landless or land-poor farmers to obtain private property rights to land and realize “land to the tiller,” and the government issued “land and house ownership certificates” to farmers who obtained land, which clearly stipulated that land was private property, and that farmers “had complete freedom to cultivate, reside on, mortgage, sell, transfer, gift, and rent out the land, and no one may infringe upon it.” Farmers' “land ownership” was also confirmed by the 1954 Constitution. At this time, farmers' rights of possession, use, income, and disposal over land were unified, which was a typical classical form of property rights. Farmers cultivated and operated their own land and maintained their livelihoods. This kind of private land right had advantages and disadvantages. Its advantages were mainly: first, private land rights were a concise and effective institutional arrangement that incentivized farmers to make the best investment in and use of the land they controlled. When a person owned land property rights, he could freely decide how to use this land, for example, which crop to plant, when to invest in soil and water conservation, and the construction of corresponding farmland water conservancy facilities. Second, the boundary supervision cost of private land ownership was relatively low. Compared with collective ownership, an individual landowner had more incentive than a member of a collective to supervise boundaries or undertake any other type of supervisory responsibility. Because a sole owner would bear all losses due to his negligence and oversight, while a member of a collective would bear only a very small part of the possible losses. Of course, private ownership of land property rights also had some disadvantages, for example, when there were many independent individual landowners, it was relatively difficult to determine land boundaries and identify and confirm landowners, which would consume relatively more costs. Another example is that when land expropriation or transactions were needed, it was necessary to negotiate one by one with individual landowners, which would inevitably increase new transaction costs. The main reason for institutional change at this stage was that the Chinese Communist Party, as the ruling party of the new regime, had to fulfill its promises, gain the people's trust, and achieve the goals of stabilizing the regime and restoring the rural economy. This was a typical mandatory institutional change, but this institutional arrangement of land property rights did indeed play a role in incentivizing farmers' enthusiasm at the time and promoted the rapid recovery of the rural economy.

2. The period of cooperativization and the people's communes. At this stage, through the three interrelated and overlapping stages of mutual aid teams, elementary production cooperatives, and advanced production cooperatives, it finally reached the people's commune characterized by “large in scale and collective in nature.” Under the people's commune system, farmers' means of production were all turned over to the collective, let alone land, and farmers' land property rights changed from private to public. All property rights over farmland belonged to the collective, and farmers were merely members of the collective organization (members), passive laborers who could only obtain labor income according to the amount of labor. Although by 1962 the vast majority of people's communes had given farmers a certain amount of private plots and allowed them to operate household sidelines, the core farmland property rights system did not fundamentally change. The reasons behind the institutional change in this period were manifold. First, the private system of farmers' land rights formed by “land reform” was not the product of long-term spontaneous transactions in a property rights market, but the result of the state directly redistributing land through large-scale mass movements. The Party played a decisive role in organizing and leading farmers to divide land equally, and at the same time the result of equal land division was quickly legalized after being recognized by the state. Therefore, the Party that led the privatization movement of land reform integrated its own will into farmers' land property rights. When the interests of the Party and the state required changing the land property rights system, the land property rights system had to change accordingly. In other words, the private system of farmers' land rights formed in “land reform” already contained factors by which the state could once again change the land property rights system through policy adjustment. A fact pointed out by Professor Zhou Qiren supports this view. As early as the first half of the 1950s, when state decision-makers were debating at the upper level whether to continue implementing the New Democratic economic policy and whether to protect farmers' individual private ownership, farmers themselves had little right to speak before the decision and little right to choose after the decision. Second, the actual needs at the time were to solve problems such as the low production capacity of individual farmers, suppress new land concentration, and rapidly accumulate primitive capital for the country's industrialization. These factors together led to the deprivation of farmers' private land rights. However, under the state of collectively owned property rights, on the one hand, the collective's measurement and supervision of its members' labor in agricultural work was incomplete, resulting in insufficient incentives for its members' work enthusiasm; on the other hand, the incompleteness of the supervisor's property rights led to insufficient incentives for the supervisor. These two reasons led to the inefficiency of this land property rights system, which in the end could only end in failure.

3. The period of the household contract responsibility system. During this period, rural land property rights underwent differentiation: ownership and contracted management rights were separated. Land ownership still belonged to the rural collective, but contracted management rights belonged to farmer households. The contracting households first possessed all the fruits of labor, and then, according to state policy, after farmers completed the taxes submitted to the state, the fixed procurement tasks, and the collective's retained funds and overall planning, the production surplus all belonged to themselves. Its essence was to change rural production and distribution through the separation of ownership and use rights, making rural contracting households become producers and operators responsible for their own profits and losses. In this way, a relatively clear and relatively stable causal link was established between the possession and use of land and the output returns, greatly mobilizing farmers' production enthusiasm. In fact, this institutional arrangement was that farmers leased land whose ownership was held by the collective for cultivation and operation, and then possessed the surplus of agricultural labor. This formed a balance in the interest relationship among the state, the collective, and farming households, solved the problems of labor measurement, supervision, and incentives that existed during the period of cooperativization and the people's communes, and also solved farmers' problem of food and clothing. According to Professor Lin Yifu's empirical research, the transition from the collective ownership system (the production team system) to the household responsibility system was the main source of agricultural output growth from 1978 to 1984.

4. The land transfer stage. At this stage, rural land property rights underwent another differentiation: the separation of ownership, contracting rights, and management rights into three rights. That is, ownership still belonged to the rural village collective, contracting rights belonged to farmer households, and management rights were transferred to a third party (farmers' cooperatives, enterprises, large households, etc.). This differentiation of property rights received support at the national level, through amending the Constitution to allow land use rights to be transferred for compensation for a certain period under the premise of complying with national laws and policy provisions. The 2003 Rural Land Contracting Law legally protected farmers' management rights over contracted land, and legally obtained land contracting rights could be subcontracted, leased, exchanged, transferred, or circulated in other ways according to law. The new Land Administration Law also clearly stipulated: “The use rights of state-owned land and collectively owned land may be transferred according to law.” In practice, specific practices differed across regions. In some places, farmers' professional cooperatives first concentrated the land of scattered farmers, and then either rented it to others for cultivation or still had the original farmers cultivate it; in other places, enterprises or large households directly contacted scattered farmers. However, different forms all aimed to form large-scale agricultural operations. In this way, land could be transferred, creating conditions for the further industrialization and modernization of agriculture, promoting the specialized development of agriculture, forming a rural land market and land prices, and increasing farmers' income, mainly land rent.

⟦NL> From the above process of land property rights evolution, whether property rights are state-owned, collectively owned, or privately owned is not the essence and key of the issue. The core of the issue lies in the implementation capacity of property rights, and in the realization of use rights, disposal rights, and income rights separated from ownership. If you hold the implementation capacity of property rights in your hands, can decide how land is used, can freely dispose of land, and can obtain income from land, then it does not matter to whom ownership belongs. Is it not evident that the emergence of “holdout households” is precisely because they hold a certain implementation capacity of property rights in their hands? In addition, there are many factors affecting the implementation capacity of property rights. National laws, policies, traditional customs, public consciousness, and so on are all extremely important, but perhaps the most important is the degree of differentiation of property rights. The differentiation of property rights means that the various property rights of a specific asset can belong to different subjects. For example, the rights of attribution (ownership in the narrow sense), possession, use, income, and disposal over land can be decomposed and belong to different subjects. The differentiation of property rights depends on actual social and economic conditions, but fundamentally depends on the contradictory pair of productive forces and relations of production. Specifically for the actual rights holders, the differentiation of property rights depends on the owner's weighing of the gains and losses between exercising multiple capacities himself and having other subjects exercise some of the capacities. For example, when he is capable of exercising multiple capacities himself, he needs to choose between leisure and work; when he has other work to do, he needs to choose among different jobs. Because opportunity costs differ and personal preferences differ, specific choices may vary. From the overall trend, as the degree of socialization of production increases, property rights develop from unity to dispersion, which is the concrete manifestation of the development of social division of labor in the exercise of property rights capacities. The essence of property rights differentiation is the division of labor in the exercise of property rights capacities. This division of labor obviously improves the operational efficiency of property rights, and therefore it is one of the signs of social progress. Although modern society is not lacking in facts of unified property rights, from the overall trend of the evolution of property rights relations in human society, development from unified property rights to differentiated property rights, with differentiation becoming increasingly refined, is the general trend.

By reviewing the history of the evolution of the rural land property rights system since the founding of the People's Republic of China, it can be seen that the process of institutional change in land property rights was, to a large extent, also a process of differentiation of land property rights, although in the early period after the founding of the People's Republic of China rural land property rights experienced a period of classical property rights form. In the process of institutional change in China's rural land property rights after reform and opening up, the constitutional provision of collective ownership of rural land was not touched, but the implementation capacity of rural land property rights was greatly improved. Specifically, this was the distribution of various specific rights and capacities centered on land use rights———the collective held land ownership, farmers held land contracting rights, and third parties held land use rights. Different rights holders possessed limited land property rights and could implement the property rights they held according to their own chosen methods, achieving the maximization of land use efficiency. In fact, in our country's history there already existed a rural land property rights system with property rights differentiation and property rights transactions. From the mid-to-late Qing Dynasty to the early Republic of China, according to differences in property rights attribution, rural land at that time was divided into three categories: Qingtian, Mintian, and Ketian. In Qingtian, ownership and use rights were unified; Mintian, also called Dapitian, was not possessed by the owner, so there was ownership but no use right; Ketian, also called Xiaopitian, was possessed and cultivated, but there was no ownership. The property rights of these three types of land could all be freely traded and circulated at prices agreed upon by both parties, whether through sale, mortgage, or tenancy and other different forms. Mintian could be bought and sold, but the rights of Ketian, that is, the cultivator's right as possessor, could not be deprived. This was the permanent tenancy system. Although the landlord held ownership of the land, its use right was already quite independent. Permanent tenancy meant that the land user could freely transfer his land use right without being constrained by the landowner. However, due to the limitations of the objective social conditions at the time, especially the backwardness of technical conditions and increasing population pressure, such an institutional arrangement did not make farmers wealthy, and farmers still struggled on the subsistence line.

The differentiation of property rights conforms to the logic of economics. Through transactions among rights holders, it reallocates the attribution of property rights. This is both a process of market transactions in property rights and a process of optimizing the allocation of property rights. The differentiation of rural land property rights is the result of farmers pursuing the maximization of their own interests under specific environmental constraints. Under the premise that property rights are clearly defined and transactions are voluntary, the situation of all parties to the transaction can be improved. Under conditions of equal transactions in property rights, land gradually concentrates in the hands of contracting households with higher efficiency, and the various rights over land gradually form the best matching combination with rural operators. Land use efficiency is improved, and ultimately the optimal allocation of rural land resources is realized. Therefore, from the perspective of economic efficiency, the process of autonomous transactions in rural land property rights is the process of self-optimizing allocation of land resources.

As for what is the most efficient land property rights system, perhaps there is no universally applicable land property rights system, but only a land property rights system that is suitable for the time and place, that is, relatively efficient under certain constraints. The evolution of our country's rural land property rights system is the result of evolution toward efficiency under the constraints of our country's social environment.