How Does Resource Allocation Affect Rural Development in China
I. The Role of Rural Resource Allocation and the Rural Economy Are Out of Step
Resource allocation is extremely important for the development of any sector or any industry, and especially so for agriculture. It can be said that the earliest theories of resource allocation were basically all derived from agricultural economic theory. As for the state of resource allocation in Chinese agriculture, everyone may have their own view. One most basic view is that although it has been very difficult for Chinese agriculture to achieve the successes it has today, from the perspective of resource allocation it still has many prominent and acute contradictions. One most obvious fact is that in 2002, the share of value added created by China's primary industry in the national economy had already fallen to 14.5%, yet the labor force employed in the primary industry accounted for 50% of all employed persons in society. That 50% of the labor force in society created only 14.5% of GDP shows that such resource allocation is extremely irrational, and therefore Chinese agriculture's efficiency is low. Moreover, if 50% of the labor force is linked to only 14.5% of GDP, then the workers engaged in agriculture and their families are destined not to be well off. This is a typical feature of China's highly irrational resource allocation over a very long period when viewed from the standpoint of the whole country. Precisely because of this, agricultural development has lagged relatively behind, and farmers have remained relatively poor.
But this is only one aspect of the problem. If agriculture is analyzed from another angle, one will feel that Chinese agriculture and rural areas actually have very strong potential and great vitality. As mentioned above, agriculture's share of GDP has already fallen to 14.5%, and of course this share will continue to decline in the future. However, it can also be seen from statistical data that by the end of 2002, among the loan balances of all financial institutions in China, the agricultural sector accounted for only 5.24%. In other words, Chinese agriculture used only 5.24% of all loans in society to create 14.5% of society's wealth, which shows that this sector is full of vitality and potential. Of course, rural areas do not have only agriculture; this is a characteristic of rural China, and most of the wealth in rural China is in fact mainly created by township and village enterprises. China has more than 20 million township and village enterprises, with 130 million workers employed in them, and in 2002 the GDP they created accounted for 31.6% of the entire country's GDP. But by the end of 2002, all township and village enterprises together used only 5.19% of society's loan balances. In other words, township and village enterprises used 5.19% of all loans in society to create 31.6% of society's wealth. Therefore, if the whole rural sector, that is, agriculture and township and village enterprises together, is added up, one can see a rather astonishing phenomenon: in 2002, the value added created by rural areas accounted for 46.1% of China's total GDP, but the loans they enjoyed accounted for only 10.4% of total loans in society. So from this angle, rural areas and agriculture are sectors with enormous potential, and the key lies in how to understand them.
Thus, one perplexity is this: for a sector that used only 10.4% of credit yet created 46.1% of society's wealth, does the financial sector value it, does it think it has great potential? Of course, the creation of the other more than 50% of social wealth is also a remarkable thing, but after all it occupied nearly 90% of society's credit demand. Does the financial sector think that only these sectors deserve preference? By the end of 2002, China's total loan balance reached 13.2 trillion yuan, and the rural sector accounted for only 130 million yuan. Among this, the loan balance for agriculture was more than 688 billion yuan, and the loan balance for township and village enterprises was more than 681 billion yuan. In other words, sectors other than rural areas used nearly 12 trillion yuan in loans but created only about 6 trillion yuan in GDP; roughly, creating 1 yuan of GDP in sectors outside rural areas required occupying 2 yuan of loans. Why do financial institutions attach so much importance to such inefficient sectors, yet pay so little attention to the agricultural and rural sectors that have such great potential and can create enormous wealth? In China's resource allocation there truly exists this very peculiar phenomenon: everyone sees that agriculture's share of value added in GDP is declining, but the entire urban system is unwilling to see the fact that along with the decline in agriculture's share of GDP, labor and the rural population must also be transferred on a large scale, and everywhere obstacles are set up for farmers' migration and transfer. On the other hand, merely giving the rural sector so few loans has created so much wealth, yet the financial sector simply refuses to lend to agriculture and rural areas. This phenomenon is one of the biggest sources of efficiency loss in China's current economic activity. If this problem is not solved, then not only will the development of Chinese agriculture and rural areas lag for a long time, but the development of the entire national economy will also be very seriously affected.
II. The Deep-Seated Causes of Irrational Resource Allocation
Whenever the lagging development of agriculture and the rural economy is mentioned, people think of the urban-rural dual economic structure. The author has always believed that the urban-rural dual economic structure is not unique to China; it is a phenomenon difficult for any country to avoid at a certain stage of development. But the question is how to view the dual structure, and how the government and society should rely on their own efforts to gradually resolve and eliminate the dual structure; this is the key. We can now say that it was the planned economic system implemented during the 28 years before reform that created the present dual structure. But until now, that is, until today when reform has already lasted 25 years, if we still say that this dual structure was caused by the planned economic system, this seems somewhat far-fetched. We used 25 years to reform the institutional drawbacks brought about by those 28 years, but the results of reform have shown us that the gap between urban and rural areas is growing larger and larger. Therefore, it is truly necessary to carefully analyze and reflect on our series of economic policies. In the process of analysis and reflection, one can see that although the past planned economic system left us many obstacles that are difficult to overcome all at once, in the process of market-oriented reform, many departments and many people still allocate resources in ways tinged with the planned economy, or even in the very manner of the planned economy. If this problem cannot be solved, then the urban-rural dual structure can only be solidified, and will be very difficult to truly eliminate. One very striking fact is that in recent years the income gap between urban and rural residents has been widening. In 2002, the per capita income of urban residents was equivalent to 3.11 times the income of each farmer, and this figure is astonishing by world standards. What is even more astonishing is that this figure was only 2.57:1 at the beginning of reform in 1978. After 25 years of reform and development, the income gap between urban and rural residents has not narrowed but widened, which shows that there are still many problems in our system and policies, and also indicates that resource allocation is extremely irrational. On the one hand, we say we are developing a market economy; on the other hand, people often consider problems with the mindset of the planned economy. This is a barrier that our reform must break through.
Many comrades engaged in agricultural and rural economic research feel that Chinese farmers have made enormous contributions to China's development. These contributions are manifested in at least three aspects.
The first aspect is the price "scissors gap" between industrial and agricultural products. In the era of the planned economy, it was mainly through this method that farmers and rural areas contributed their own output to the country's industrialization and urbanization process. Many experts have made careful analyses of exactly how much capital was extracted from rural areas through the "scissors gap," with some estimating more than 600 billion yuan and others estimating more than 800 billion yuan. This method mainly occurred in the era of the planned economy.
The second aspect is the conversion of agricultural land into non-agricultural land. National law stipulates that any non-agricultural land used for construction must belong to the state. Therefore, any land, as long as it is designated as construction land, must legally have its ownership changed and be nationalized. In other words, the state must take land belonging to farmers' collective ownership from farmers' hands through expropriation. This process exists in many countries. But at present our country mainly has two very prominent problems: the first prominent problem is that after the government uses administrative power to compulsorily expropriate land from farmers, the compensation given is very low. According to the <<Land Administration Law>>, the compensation fee for expropriating farmers' land shall not be higher than 10 times the average annual output of this land in the three years before expropriation, and the compensation for farmers' resettlement fees shall not be higher than 6 times the average annual output value; adding the two together gives 16 times the annual land output. Later, when the Ministry of Land and Resources formulated the <<<Land Administration Law> Implementing Regulations>>, it took rural realities into account and raised the compensation standard so that the two compensation fees combined could not exceed 30 times the annual land output. A piece of the highest-quality land, if it can produce 1 ton of grain (such land is not plentiful in China), calculated at current grain market prices, yields an output of roughly only 1,000 yuan. If compensation is given to the expropriated farmers at the highest multiple, that is, 30 times, then only 30,000 yuan can be paid to the expropriated farmers. Moreover, of this 30,000 yuan, from the county government and township government to the village organization, by the time it finally reaches the hands of the expropriated farmers it often amounts to less than 10,000 yuan. What use can this 10,000 yuan serve? Central documents on the importance of rural land all state clearly,
At the present stage, land in China has two basic functions for farmers: first, land is the most basic means of production for farmers; second, land is the most basic guarantee of livelihood for farmers. Then, can this 10,000 yuan play a role in replacing these two basic functions? If it cannot play such a role, then what exactly are farmers to do about their future livelihoods? Yet agricultural land is precisely being converted on a large scale into non-agricultural construction land under such low-level valuation. It is understood that in 2001, state-owned land transfer fees collected by governments at all levels reached 120 billion yuan, in 2002 they reached 240 billion yuan, and by the end of September 2003 they had already reached 249 billion yuan. How much compensation did farmers actually receive from this?
The second prominent problem in land expropriation is that the power of land expropriation is used too indiscriminately. The law stipulates that land may be expropriated for public welfare undertakings. But all non-agricultural construction land is acquired through expropriation. In other words, for commercial development and for the interests of real estate developers, the government is also expropriating land. Of this land that has been expropriated and for which farmers cannot receive adequate compensation, a fairly large portion is in fact not used for public welfare and not shared by all the people of society, but has brought enormous benefits to some land speculators and some real estate developers. Of course, a considerable portion has also been converted into fiscal revenue for governments at all levels.
For many years, especially since China's urbanization clearly accelerated from the late 1980s onward, exactly how great a contribution farmers have made to the country through land expropriation may still be impossible for anyone to calculate clearly. But the author estimates that farmers' contribution in this respect is at least above 2 trillion yuan.
The third aspect of contribution is migrant workers. At present, the total number of farmers who migrate to cities to work is around 100 million. Not to mention whether their wages are reasonable, at least one point is certain: because they are migrant workers, they encounter a whole series of problems. First, mayors of some large cities often say that the city is developing rapidly and per capita GDP has reached 3,000 US dollars or even 4,000 US dollars. But if one asks them whether the two or three million, or even three or four million, laborers working in their city are all included in the denominator when averaging, they have no answer. They do not count the migrant workers who come to the city and create wealth in per capita GDP. By the same logic, with so many migrant workers coming to the city, paying taxes locally, and creating wealth locally, the various public services provided by local finance include almost nothing for migrant workers. For example, social security. A large number of migrant workers have no social security. Some places compulsorily require enterprises to pay social security for migrant workers. At present, the social security established for each employee has a personal account and a pooled portion. In the places that do best, when an employee leaves, he can take away half of the personal account, and the other half cannot be taken away either. Therefore, the social security that large numbers of migrant workers currently pay in various places is actually mainly used for urban employees. In this one area alone, farmers lose at least two to three hundred billion yuan each year. So it can be said that in present-day China, urban prosperity relies to a certain extent on the unpaid appropriation of large amounts of farmers' wealth. This situation makes foreigners who come to China feel very strange; when they go to Beijing, Shanghai, Guangzhou, or Shenzhen, they simply cannot believe that this is a developing country, and simply cannot believe that there are still tens of millions of rural people here who have not solved the problem of food and clothing.
If the problems in the above three aspects are allowed to develop unchecked, then they will obviously be extremely unfavorable to agricultural development and rural development. The root causes of these problems are very clear: the rules guiding resource allocation have gone very wrong. In other words, in the process of advancing market economy institutional reform, the ways of thinking and behaving of the planned economy are still tenaciously at work, and therefore the gap between urban and rural areas is continuously widening. Then, how can this way of thinking and behaving be changed so that in the end a rational set of economic operating rules can be formed, so that resource allocation between urban and rural areas can tend toward rationality, and so that rural areas and farmers can have the right to obtain sufficient or necessary resources to drive their own growth? This is a very prominent major problem we now face.
Whether resource allocation is rational depends first on several questions. In 2001, the China Economic Fifty People Forum! held a seminar titled <<A Comparison of the Wenzhou Model and the Southern Jiangsu Model>>. This seems very strange; by the 21st century, people were still discussing the Wenzhou model and the Southern Jiangsu model, but the author finds it very interesting. Of course, compared with the 1980s, both the Southern Jiangsu model and the Wenzhou model have changed enormously, but from past comparisons of these two models there are at least three points that are very worth pondering. Comparing these two models in terms of growth mode and growth structure, the first difference is who allocates resources. In Southern Jiangsu in the 1980s, resources were basically all in the hands of the government and quasi-government bodies; the government goes without saying, and quasi-government meant rural collective ownership economic organizations. Individual farming households could not control resources. Looking at Wenzhou's situation at the time, an important reason why such vibrant economic activity could emerge was that farming households could, through their own imagination and their own efforts, control resources, start businesses, and develop. Because of this difference, in the 1980s, when going to Wenzhou, people could feel that almost everyone wanted to be a boss; when going to Southern Jiangsu, people could feel that almost everyone hoped the village party secretary could be as clever and capable as Wu Renbao. Therefore, who controls resources determines whether the economy of this region and this country is vibrant. The second difference is who accumulates wealth. By the same logic, in Southern Jiangsu it was the collective that accumulated wealth and the government that accumulated wealth; in Wenzhou it was not like this, but rather one vigorous and dynamic enterprise after another accumulated wealth. Then, although wealth was accumulated at the same speed and on the same scale, because the mechanisms for controlling and allocating this wealth were different, the efficiency of using this wealth was also clearly different. The third difference is what the government does. In Wenzhou, everyone recognized the government was a small government! and the government was also very clear that it existed to create the environment, create the conditions, and provide services. In many other places, however, the government took over the functions of entrepreneurs and forgot the functions of government. The functions of government, just as proposed in the decision of the Third Plenary Session of the Sixteenth Central Committee, are mainly to carry out economic regulation, market supervision, social management, and the provision of public services. Then, these misplacements in several respects are a very important reason for the incoordination in China's overall resource allocation. Specifically, the government and officials are allocating resources, the government and departments are accumulating wealth, and the government is everywhere looking for projects and seeking investment. It is precisely this kind of misplacement that has led to the irrationality of the entire resource allocation.
III. The Realities of the Chinese Economy Urgently Demand a Change in Growth Mode
In recent years China's economic development has indeed been very impressive. From 1978 to 2002, China's GDP maintained an average annual growth rate of 9.4% over 24 years, which should be called a very proud achievement. But it must be seen that this high growth has indeed concealed a series of contradictions and problems. For example, the ever-widening gap between urban and rural areas mentioned above is a major contradiction that one day simply cannot be avoided. At the same time, we must also see what this high growth level actually relies on. Economic growth mainly relies on two factors: one is having sufficient market capacity to absorb the wealth created; the other is having sufficient resources to support such a high growth rate. Whether China has both factors, and whether it can have them for the long term, is something that needs serious consideration. In the summer of 2003, probably all of China's economically developed regions faced a huge difficulty of power shortages. This reminds us that after such high-speed growth, China's energy has already shown very big problems. China now imports 70 to 80 million tons of oil each year; coal output in 2003 may exceed 1.6 billion tons. If the Chinese economy is to grow at a faster rate, and if it is to continue such energy consumption, then whether energy in domestic and international markets can provide sufficient support for us may be a very realistic problem. China's steel consumption is also growing very rapidly. Although it still needs imports, the growth of its own steel output is very astonishing. However, domestic iron ore resources are continuously decreasing. Now, several major Chinese steel enterprises all use imported iron ore. Therefore, without changing the growth mode, high-speed economic growth will be very difficult to sustain.
From the market perspective, after the 1997 Asian financial crisis, it should be said that China's economic growth was still very remarkable. But the structure of this growth actually has very big problems. Because after 1998 China's economic growth was mainly driven by investment and mainly driven by foreign trade, while the role of genuine domestic demand in driving economic growth was very limited. In other words, China is now consuming large amounts of extremely precious energy and resources, and pushing the products it produces mainly into the international market. Because of the enormous force of export growth, China has more and more various contradictions and frictions with many countries in foreign trade. Of course, the author does not deny that efforts should be made to expand exports. But everyone is optimistic about investment in China mainly because China has such a large market of 1.3 billion people. However, a careful analysis shows that among these 1.3 billion people, only three or four hundred million urban residents have relatively strong purchasing power, while nearly one billion farmers have little purchasing power. Why is domestic demand always unable to become vigorous? A very important reason is that farmers' incomes cannot rise, and the rural market cannot become vigorous. If most people have no purchasing power, then no matter how large the population is, this market will not become vigorous.
It is precisely from these angles that China should seriously think about the specific way to continue growing, and should consider how to truly expand domestic demand; otherwise, foreign trade frictions will increase and resource constraints will become tighter and tighter. It is precisely from this angle that the author believes that seriously studying the problems of China's agriculture, rural areas, and farmers has reached a point where no delay is permissible.
IV. Eliminating the Factors Hindering Rural Resource Allocation
From the rural perspective, at present agriculture's share of value added in GDP has already fallen to 14.5%, while the annual growth rate of agricultural value added is roughly less than 3%, and the agricultural tax plus the agricultural special product tax amounts to only 60 billion yuan a year. These three indicators are completely out of line with the current assessment indicators for local governments. Local governments and local officials largely pursue GDP growth and fiscal revenue growth, while agriculture's GDP growth itself is so low and its share is so small, so officials in many local governments believe that if so much energy and so much financial resources are invested in agriculture, how much can agriculture contribute to local GDP growth? And how much can it contribute to local fiscal revenue growth? Looking only at GDP and fiscal revenue, agriculture is indeed negligible, so many places are neglecting it and unwilling to strengthen it, and it is becoming harder and harder for agriculture to obtain the resources it needs, so it is not surprising that problems arise in agriculture and rural areas. Therefore, from the perspective of concepts, if this strange phenomenon of "GDP fetishism" is not eliminated, Chinese agriculture cannot be strengthened.
When it comes to investment and financing, whether many current specific policies and specific operating rules are reasonable deserves careful analysis. For example, from the mid-1990s onward, the central government called for the form of "company plus farmer households," requiring leading enterprises with driving capacity to expand their bases and drive farmers to develop agricultural production. Practice has proved that this is a very good form. But many large leading enterprises face many problems. For example, if a livestock enterprise in Heilongjiang or Inner Mongolia wants to build a base in the northwest, then where should the project be reported? Should it be reported to the planning department of its own province or to the province where the investment is made? If the enterprise is registered in one place in its own province, while the base and processing plant are built in another place in another province, then where should it apply for loans? Where should it open a bank account? Under market economy conditions, such questions should not be questions at all; wherever there is business activity, the local government there should provide such services. But up to now we still draw boundaries everywhere and confine ourselves. Only when an enterprise operates within the administrative region where it is registered can it receive relatively good protection from the local government; once it leaves the place of registration, it is very likely to encounter various kinds of squeezing and obstruction. Then, how can this business model advocated by the central government continue to develop?
For another example, it is especially difficult for rural areas, and especially farmers, to obtain credit funds. The results of actual surveys are that among China's 240 million farmer households, only about 15% have ever obtained loans from formal financial institutions, and about 85% of farmers who need loans basically rely on informal credit to solve the problem. This shows that China's financial system actually provides very insufficient services to rural areas. There are many and varied reasons for this. As mentioned above, many people have not seen, and people especially engaged in finance have also not seen, that under the premises of the market and technological progress, agriculture is actually an industry with a very high rate of return. This is one aspect. Another aspect is related to China's system, institutions, policies, and laws. For example, financial institutions believe that lending to farming households is very risky because farming households have no collateral. Saying that farmers have no collateral seems somewhat absurd. As farmers, they should at the most basic level have land. Land should be said to be a very important resource and a very important factor of production, and using it as collateral is the most natural thing in the world. Do not urban real estate developers rely on a land certificate to borrow from banks? But when this method reaches farmers, it no longer works, because the <<Guaranty Law>> stipulates that cultivated land cannot be used for mortgage. Farmers have land use rights, but land use rights cannot be used for mortgage. Then farmers have almost no other means of production to use as collateral. Of course, farmers also have houses, and using real estate as collateral is a common practice in the global financial world, but for Chinese farmers it also does not work. Because although farmers' housing is built with their own money, there is no property ownership certificate, and without a property ownership certificate it cannot be used for mortgage. Therefore, for a farming household, the only two things of value are both legally prohibited from being used as collateral. Then, if one goes on to blame the lack of collateral for loans to farming households, whom exactly should one blame? Therefore, under such circumstances farmers' ability to obtain credit can be well imagined.
On the other hand, with 240 million farming households, each household planting only a few mu of land, such clients entering the financial system indeed make many large banks feel that costs are very high; even if the loans can be recovered, the costs are still very high. Therefore, many experts suggested that because capital use efficiency is very high for farming households and they can accept higher loan interest rates, the financial authorities also agreed that when credit cooperatives issue loans to farmers, the loan interest rate could be doubled from the original benchmark rate. In fact, for farmers, the interest rate is not the most important thing; whether they can get the money is the key. Doubling the annual interest rate is only just over ten point something percent. It is understood that many farmers say that as long as their project is right and funds are insufficient, they are willing to accept even a 25% interest rate. Therefore, when funds are in short supply, can the interest rate be allowed to float further upward? The authorities say no, because that might cause unfair competition. So we ourselves set up cage after cage to bind ourselves: farmers have property but are not allowed to mortgage it, and the financial sector still says there is no collateral; farmers can accept higher interest rates, but the financial sector says no further upward floating is allowed, yet it would rather lend at very low interest rates to those inefficient enterprises, ultimately creating non-performing loans, while setting up these very irrational systems on the farmers' side. Of course, this sounds very simple, but in fact there are complex factors behind it. It is not that if the law is changed and it is said that land and real estate can be mortgaged, farmers will definitely be able to obtain loans. Someone will certainly ask: if a farmer's investment fails and both land and real estate are gone, then will the farmer not become even poorer? Therefore, from this perspective, many things here need to be considered in a coordinated way. But on the whole we must see this most basic phenomenon, namely that for rural areas, the most prominent problem in resource allocation is that "people cannot get out, and money cannot get down." Therefore, for agriculture and the rural economy, if efficiency is to be raised, ways must be found to let farmers transfer out more and faster, and to let agricultural credit funds and agricultural investment funds that can create social wealth with high efficiency enter rural areas more. This is a problem that urgently needs to be solved at present.
In financial services to rural areas, there are many irrational phenomena. For example, an analysis of the agricultural credit structure shows that among agricultural credit funds there is almost no long-term lending. There are almost no loans for farmers to carry out infrastructure construction or for large-scale modern facility construction, only working capital. In cities, large numbers of enterprises, including many state-owned enterprises, are difficult to call enterprises precisely because they have no capital of their own and rely entirely on bank loans for investment and construction. This is how bank funds come to be occupied by large numbers of enterprises with no capital; even if the enterprise succeeds in starting up, its efficiency is very low. Because all funds come from the bank, the enterprise is in fact "working for" the bank. Moreover, once such an enterprise runs into risk, the danger of creating non-performing loans is very great. Then how exactly can rural areas obtain funds that can be used for long-term construction? Relying entirely on the government obviously will not work. Although there is no rule saying that financial credit funds cannot be used to support long-term construction investment in rural areas, in practice neither the state nor the banks do it. This has created a very big problem. For rural areas, it is often said that the agricultural sector cannot produce good loan projects, but in fact, if long-term loans are not issued to agriculture and rural areas, where will good projects come from? At the same time, agricultural insurance is continuously shrinking. Now, aside from some agricultural insurance in the Shanghai suburbs and the Xinjiang Production and Construction Corps, it no longer exists elsewhere. Without insurance, the risks to banks are increased. Therefore, the fact that the entire financial system is not coordinated and the financial services provided to rural areas are unsound is a fatal reason why it is very difficult for agriculture to obtain the factor of capital.
Of course, China's agricultural and rural problems are very large problems, and there are many problems floating on the surface, such as slow growth of farmers' incomes, the widening urban-rural income gap, and lagging rural social undertakings. But what truly needs to be solved at the root is how to transfer out the excessive rural labor force, and how to guide more of the investment and financing that in cities is spent without efficiency or even turned into non-performing assets back into rural areas. This is the main problem to be solved at present. For China, solving the agricultural and rural problems means solving at least more than half of China's problems.