Wen Hai

　　1. China Agricultural Policies in the Past

NEC百萬象素手機1元拍 第39屆世界廣告大會 2004環球小姐總決賽 新浪招商引資征代理商

　　The development of China agricultural policy since 1949 can be dividedotnitwo stages based on their objectives. In the first stage, from early 1950s to late 1970s, the main objective of the agricultural policy was to support the industrialization. Inpuorgto maintain a low cost for urban industries, agriculture was heavily taxed and agricultural prices were centrally controlled at very low level. Consequently, China agriculture developed in a very slow pace and farmers' income was almost fixed for thirty years.

　　The second stage started from 1978 when economic reform began. As a result of thirty years of heavy taxation and ten years of the Cultural Revolution, China抯 agriculture was at the edge of crisis. Food supply in China was at a subsistent level. In all urban and rural areas, food were rationed. Changes in the Chinese agricultural policy was urgently needed. This was the main reason why the economic reforms started in the agricultural sector.

　　The main objective of the agricultural policy since 1978 is to increase food supply and ensure food security. Although food security is one of the objectives for most countries' agricultural policy, it is extremely important and sensitive in China. Food security is highly related to the political stability in China. Historically, China had several food shortage which resulted in either political turmoil or peasant uprising. By the end of the cultural revolution, Inpuorgto produce enough food, the government had a fundamental reform in the agricultural production system. The policy adjustment in this period included dismantling the Commune system and introducing the households responsibility system, reforming the procurement system, reducing agricultural taxation and other burden, and introducing market mechanism and relaxing the agricultural price control. As a result of series agricultural reform, the production has been substantially increased in past 17 years, in spite of a slowdown since late 1980s.

　　Policies in agricultural production and trade during this period have been subjected to the objective of sufficient food supply. Import or export of agricultural product are mainly used as a tool to balance the domestic supply and demand. The agricultural sector developed steadily and food supply maintained sufficiently until recent years when the agricultural prices increased rapidly and agricultural production stagnated . The recent changes in agricultural sector brought the Chinese agricultural policyotnia new stage. The Chinese agricultural policy is facing challenges and adjustment in a new situation.

　　2. Rises in China Relative Agricultural Prices and Net Agricultural Imports

　　Along with the rapid economic growth, the prices of agricultural product have also increased (see Table 1). The relative agricultural price, measured by the difference between rates of changes in agricultural price and industrial price, has been increased since the reform. The average annual relative agricultural prices increased 4.3% during the period of 1978 to 1994. The absolute prices of agricultural products, especially the prices of grain, have increased faster than the nation inflation rate (measured by national retail price or consumption price). In 1994, price of total agricultural products increased 39.9% from the previous year. Average prices of rice, wheat, corn, and soybean increased 40%, and cotton price increased 60% . By the end of 1994, prices of grain, including rice, wheat, corn, soybean, were higher than the international price level (Table 2). This was the first time that the Chinese agricultural prices reached or exceeded the international level.

　　As a result of rapid increases in agricultural price, China抯 agricultural imports increased more than 75 percent while exports fell 1.7 percent in 1995 . There was a sharp increase in the purchase of grains from the international market and a decrease in export of corn, rice and cotton. China became a net importer of grains and other land-intensive products.

　　Many policy-makers and economists in China explain the recent rapid increases in agricultural prices by looking at the underdevelopment of the agricultural market, increases in prices of agricultural input, temporary decline in grain production, or ineffective of agricultural management. It is true that these factors did contribute to the increase in agricultural price in China, but there are more fundamental reasons to explain the trend. It is not only a problem in a transition economy, but also related to the process of industrialization and rapid economic growth. As a country develops, capital accumulation and improvement of industrial productivity increase the opportunity cost of agricultural production. Increase in relative agriculture prices is an inevitable consequence of the rapid economic growth in a developing country with scarce land resources. In particular, it is caused by capital accumulation in an economy with labor intensive agriculture.

　　Recent literature in agricultural protection explored the relationship between economic development and agricultural comparative advantage . Theoretic analysis shows that the change of relative agricultural price, given all elasticities of input and factor distribution parameters, is determined by the changes in factor endowments and changes of the technologies on the supply side, and the change of population on the demand side. Since income is an endogenous variable, the effects of income change on the relative agricultural price are implicit.

　　Changes in the endowment and the productivity of land always have negative effects on the relative agricultural price. The effects of the changes in capital and labor on the relative agricultural price are different, depending on the structures of factor distribution among sectors. If the agricultural production is more labor intensive than the production of non-agricultural sector, an increase of capital endowment or an improvement of capital productivity in the non-agricultural sector raises the relative agricultural price.

　　Although all factor endowments may increase, a rise in the capital-labor ratio (capital deepening) is the main feature of the economic growth. Rapid increases in non-agricultural use of land during industrialization and urbanization actually reduced the land endowment for agricultural production. According to the Ministry of Agriculture of the P.R.C, the cultivable land for agriculture reduced 4.6% from 1979 to 1994. On the other hand, capital endowment (from both internal and external sources) has been increased rapidly in China since 1980s. In the case of China with labor-intensive agricultural production, a rapid growth of capital endowment has had an upward pressure on the relative agricultural price.

　　Moreover, most of these accumulated capital were invested in non-agricultural sector. The common-property nature of the land and relative low profit rate discouraged private investment in agriculture, while government agricultural investment remained at low level. The government spending for development of agricultural technologies and science increased at a 10.79% average annual growth rate from 1978 to 1994. It was only 3.23% after adjusting the inflation rate. However, it was very low in an economy with average 10% GDP growth rate. Moreover, the size of government spending on the development of agricultural technologies was also very small. It was 110 million RMB Yuan in 1978 (0.7% of total government spending in agriculture and 0.09% of government budget), and 300 million Yuan in 1993 (0.68% of total government agricultural spending and 0.07% of government budget) . Thus, lack of investment in agriculture during economic growth made the Chinese agricultural sector even more labor intensive and less competitive.

　　Another factor which contributed to the rise of relative agricultural price in China is technological changes. Import of advanced technologies through trade, joint venture, and direct foreign investment made China manufacturing sector more productive, whereas the development of technologies in agricultural production are relatively slow.

　　It is important pay more attention to the trend of relative agricultural price. Economic theories indicated that the rise of relative agricultural price and loss of comparative advantage in agriculture is an inevitable result in a country with land scarcity and labor intensive agricultural production during the industrialization. Historically, European countries and Japan followed the trend in their industrialization process. South Korea and Taiwan had similar experiences in 1960s . The increases in agricultural prices in China is also the consequence of rapid economic growth and structure change. Understanding of the general trend of agricultural development is important for policy adjustment.

　　3. Effects of Trade Liberalization on the Chinese Agriculture and Returns to Farmers

　　Like most countries in their industrialization, China has gradually lost the comparative advantage in agriculture in past decades. The relative agricultural prices have increased and some grain prices have exceeded the international price level. What kind of agricultural policy should China choose? Should China adopt the free trade policy to be come a net grain importer, or should it follow the pattern of Japan, South Korea, or Taiwan to protect agriculture?

　　What will happened if China adopts a free trade policy in agriculture? One result will be an increase in import of grains and other land-intensive products, since China will eventually lose its comparative advantage in agriculture. The agricultural price will remain at the international levels and the agricultural sector will decline further and faster.

　　Unlike the situation in late 1970s, the current agricultural problem in China is not a shortage of food but an increase in relative agricultural prices. Not only food security, the returns to factors during economic growth is also a main concern of agricultural policy choice. As the income in non-agricultural sectors increases in industrialization, the income of farmers are partially been compensated by increase in agricultural prices. This trend continue in a closed economy or with agricultural trade protection. However, this trend will not continue in an economy with free trade in agriculture. When comparative advantage shifts away from the agricultural sector, returns to factors in agriculture decline under free trade. Although capital and labor in agriculture are able to move to other sectors, farmland as the specific factor is not. Therefore, the relative return to land will definitely decrease in an open economy that is growing. Farmers whose income are depended on the return to land will be worse off and income gap will be enlarged .

　　As an economy develops, improvement of income distribution become one of the main objectives in policy-making. The government policy is especially important for farmers' income because of the immobility of farmland. Most developed countries and newly industrialized nations choose to protect their agriculture although it is not an efficient economic policy. For government, there are many objectives other than economic efficiency. Despite that agricultural protection will result in inefficient use of agricultural resources, it will help improve income distribution among the factors and thus maintain social stability. Income equality and social stability are the main reasons why most developed countries and NICs adopted protectionist policies in agriculture after that sector has lost its comparative advantage.

　　China is now under the same political pressures to shift its agricultural policy from taxation to protection. In fact, many policy-makers and economists are discussing how to protect the agriculture, and some protectionist policy, such as support price, have been introduced. However, as a late comer, China does not have the same choices as what the EU, Japan, South Korea, and Taiwan had. The world trading system has been moving towards the direction of freer trade in agriculture. How can China adjust its agricultural policy to improve farmers' income at the process of trade liberalization?

　　4. WTO Rules, Improvement of Income Distribution, and China Agricultural Policy Adjustment

　　The Uruguay Round negotiations achieved significant agreements on agriculture. Besides the agreement on reducing export subsidies and improving market access, member countries committed themselves to a continue process of policy reform. Trade liberalization, including agriculture trade liberalization, is the general trend in the world economy.

　　Compared to European Community, Japan, and other newly industrialized economies, China agricultural sector can not be considered as being protected. Only in recent years, China has been losing comparative advantage in agriculture and the government has been adopting price support. On the other hand, China does not have free trade in agriculture either. All the import and export of grain and other agricultural products are controlled by the central government. The internal grain market is still not liberalized. To join the WTO, China has to implement the WTO rules on the agriculture sector.

　　The current WTO rules on agriculture requires significant reductions in export subsidies and modest cuts in domestic subsidies over six-year period, and transforms nontariff barriersotniequally restrictive but more transparent tariffs. The agreement of the GATT Uruguay Round on agriculture includes four parts: internal support, export subsidies, market access, and special safeguard mechanism.

　　(1) Internal Support

　　A result of the Uruguay Round was the adoption of the Aggregate Measure of Support (AMS) as the benchmark for liberalization commitments. Members of WTO should reduce their AMS by 20 percent over six years. However, many specific domestic subsidies, including research and extension services, are excluded from the AMS. For developing countries, specified agriculture input subsidies are excluded from AMS.

　　Since China has not directly subsidized specific agricultural production, no policy adjustments are required. China may still support its agriculture without violating the AMS regulation. Instead of direct production subsidies, the Chinese government should increase investment and subsidies in the areas which may increase the comparative advantage such research, irrigation, pest and disease control, inspection service, environmental and conservation program, crop insurance, regional aids, and structural investment aid.

　　(2) Export Subsidies

　　The WTO requires to reduce export subsidies by 36 percent over six years. For developing countries, the percentage cuts are 24 over 10 years.

　　Unlike United States and European Community, China does not have much subsidies in agricultural export. However, due to the government procurement of major agricultural products and monopoly in agricultural trade, there have been implicit export subsidy. The China Food Import and Export Company is able to purchase agricultural products at low price and sell to the world market at international price. The main purpose of agricultural export subsidies in China are not for protecting agriculture. In fact, this is a part of government policy to collect tax indirectly paid by farmers. For both objectives of trade liberalization and protecting farmers income, this implicit export subsidies must be abolished.

　　(3) Market Access

　　On market access it was agreed that all existing non-tariff barriers are convertedotnitariffs, and total import tariffs are cut by an unweighted average of 36 percent in equal installations over six years. Countries also agreed to establish 搈inimum access" import quotas for products or product grouperehwimports have faced prohibitive trade barriers, equal to three percent of domestic consumption and rising to five percent at the end of the sixth year.

　　To meet the requirement of market access, China has to remove the current quantitative restriction in agricultural trade. In particular, the government needs to abolish the state monopoly in grain trade.

　　(4) Safeguard Mechanism

　　With one-fifth of the world population, policy-makers in China believe that no other countries are able to feed China. They often concern the food security when economists talk about free trade in agricultural products. There are certain misunderstanding of the WTO rules. In fact, special safeguard mechanisms are available to protect domestic producers if imports exceed specific trigger quantities or are priced below trigger price levels. The trade liberalization does not necessary mean a trade dependence. To ensure the food security and protect domestic farmers, a committee on agricultural safeguard is needed.

　　(5) Other Policy Adjustment

　　The general direction of policy adjustment is to liberalize trade in agriculture. However, the policy adjustment should be active rather than passive. To satisfy the WTO regulation at the same time to improve domestic income distribution, the Chinese government should make a series policy adjustment to increase the agricultural productivity and maintain the agricultural comparative advantage. Several long run agricultural policies are recommended:

　　a. Increase agricultural investment and change the factor structure of agricultural production

　　The theoretic analysis shows that a country will lose comparative advantage in agriculture if the agricultural production is labor-intensive. This also indicates that the trend may be reversed if agricultural production is capital intensive. One way to improve the agricultural competitiveness in rapid economic growth is to change the factor structure of agricultural production by increase the investment in agriculture.

　　The Chinese government should encourage private investment in agriculture. To attract private investment, a reform in land ownership is necessarily needed.

　　b. Increase investment in research, technologies, and infrastructure

　　To reverse the capital-labor ratio in the economy, a large amount of capital investment in agriculture alone is not enough. It also requires the development of labor-saving and land-saving technologies in agricultural production and the reduction of agricultural employment. With higher productivity of labor and land in a capital intensive agricultural sector, an increase in the capital endowment through economic growth increase the agricultural comparative advantage.

　　c. Diversify farmer income

　　Another policy adjustment of protecting agriculture with trade liberalization is to diversify farmers' income. If farmers income are less depended on the price of agricultural products, the protectionist pressure will be reduced. Inpuorgto shift out the rural labor forces, the labor market should be freed up and reform of the resident registration system is required.

　　5. Conclusion Remarks

　　China is facing policy important challenges in agriculture. On the one hand, rapid economic growth in past 18 years reduced the agricultural comparative advantage. Both relative and absolute agricultural prices have reached or surpassed the international level. There will be some short term fluctuation, but the general trend of losing comparative advantage in agriculture will not reverse as long as China remains as a fast growing economy with labor intensive agriculture. Inpuorgto improve the income distribution among agriculture and non-agricultural sectors, government might adopt protectionist agricultural trade policy.

　　On the other hand, China is in the process of joining the World Trade Organization (WTO). An increase in agricultural protection would conflict with the principles of WTO. To be a member of the WTO, China has to follow the WTO rules and regulation, and to reduce trade barriers in agricultural sector.

　　To improve the income distribution without violating the principle of trade liberalization, the Chinese government should make a series of policy adjustments. The most important policy is to increase the comparative and competitive advantage in the agricultural sector rather than to protect it from the international competition. Besides the adjustment for the WTO rules, increase the agricultural productivity through increasing agricultural investment and changing the factor structure of agricultural production should be the main agricultural policy adjustment in trade liberalization.