Subsidies for Rural Governments

According to a preliminary announcement from China's Ministry of Finance, government spending on rural affairs will exceed 1 trillion yuan ($156 billion) for the first time next year.

Only 140 billion yuan ($22 billion) of the total is for subsidies to farmers. The article says grain subsidies are now 100 yuan per mu (about $38.50 per acre) and it is estimated that costs of inputs (fertilizer, pesticide, plastic sheeting, fuel, etc.) are about 300 yuan. So, the article says, the government pays about one-third of the production cost. (This doesn't include the cost of labor and land.)

This year the rhetoric has shifted from subsidies to farmers to subsidies to local governments and water projects.  Chinese authorities have recognized that local officials also need incentives to implement central government policies. The operative term appearing in the Chinese literature this year is "dual incentives" (两个积极性）for local government officials and for farmers.

This year, nearly all official speeches and articles about grain subsidies include a phrase about subsidies "mobilizing the enthusiasm of local government and farmers" (in that order). This year, "awards" to major grain- and oilseed-producing counties (transfer payments) are to be increased to 22.5 billion yuan ($3.5 billion). On top of this, the central government will take over the province's contribution to "grain risk funds" that finance grain subsidies and policy purchases of grain. The new grain risk fund contribution totals 24.9 billion yuan ($3.9 billion) of central government funds.

An article, "Problems and Countermeasures for Raising Grain ProductionCapacity in Production Areas," published in the Chinese journal Macroeconomics published earlier this year seems to be part of a big propaganda campaign to push the new federalism strategy (causing one to question the value of academic journals in China, but that's another story). The article explains that local governments in rural areas are not inclined to make investments in agriculture since the returns are small and long-term in nature. Instead, they prefer to put money into high-profile factories or urban development projects, which leaves agricultural infrastructure neglected and deteriorating. A more fundamental problem is that rural governments are broke. They have a thin tax base to start with and the elimination of the "agricultural tax" narrowed the tax base even further.

One of the big concerns is that reservoirs and irrigation networks built in the 1950s and '60s have deteriorated and are no longer functional or are even dangerous. This reduces the ability to avert or cope with floods and droughts. Another big problem is the lack of safe drinking water in many rural communities.

The "grain risk fund" is said to be a burden on local governments. Rural governments complain that they are expected to sink funds into money-losing grain-procurement enterprises. In some cases local governments don't have enough funds to pay grain subsidies (half of "grain risk funds" must be used for subsidies to farmers).

The new federalism aims to take funds from rich coastal and urban regions and transfer them to poor rural regions. Presumably, tax funds collected from industrialized regions finance the central government "awards" and grain risk fund contributions.

The new federalism is included as a component of the big Henan development scheme. Perhaps not coincidentally, the author of the article explaining the concept is from a teachers' university in Nanyang, a small city in Henan.

Also as part of the big campaign, the local statistical bureau in Zhoukou, another agricultural region in Henan, also released a report on the topic this month reciting virtually all the same points as the article above but decorated with statistics from Zhoukou. (This article demonstrates that China's statistical system still exists to validate government policies, not to provide objective information). The Zhoukou report complained that cost of production surveys show that farmers still make little profit from planting grain despite subsidies of 80 yuan per mu. It cites weak infrastructure and lack of insurance that led to big losses from natural disasters in recent years. Elimination of the agricultural tax has tightened finances in Zhoukou. In 2003, Zhoukou got 48% of its tax revenue from the agricultural tax (compared with 0.21% in Guangzhou). Zhoukou's grain output is 13% of the province's total, but its financial revenue is only 2% of the provincial total. Its budget is half of the average for prefectures in Henan and only 2% of the average nationwide. The report helpfully recites a list of ideas for funneling more money into regions like Zhoukou.

China's new federalism reflects another interesting and difficult modernization for China. We tend to think of China as a single nation but it is going through a transition similar to that of 19th century Europe. The lack of integration has resulted in huge gaps in wealth and development. China's leaders are trying to mold a vast collection of more or less autonomous city-states into an integrated nation-state. Part of that way is struggling to find ways to funnel the riches from coastal provinces into the poor, broke hinterland.

Interesting that this is happening at the same time Europe is struggling to keep its continent-wide agglomeration together.