Saturday, April 7, 2012

Grain Subsidy Criticism

When China joined the WTO, its leaders designed a "decoupled" grain subsidy policy. Because the subsidies are handed out on the basis of a fixed land-holding (in most cases) and theoretically do not "distort the market," WTO rules allow China to exclude these payments when they calculate how much government support they are giving to agriculture. While the government hails its policies for boosting grain production 8 years in a row, on the ground the payments are widely acknowledged as ineffectual and act as a tiny entitlement for the rural population. After nearly a decade the subsidies have some perverse outcomes.

In 2011, a Chinese researcher and commentator on rural affairs called for eliminating grain subsidies. His article, "Grain Subsidies Are Not as Good as Raising the Minimum Procurement Price," takes journalists to task for reporting marvelous benefits of subsidies when in fact they have virtually no impact on grain production or farmer income.

The author, Li Changping, is a researcher at a rural affairs research institute in Hebei Province but apparently lives in Beijing. He spent many years as a local official and says that he frequently meets rural officials for tea and visits no less than 100 villages each year.

Li begins his article by saying, "In all my contacts with first-level officials, they have virtually nothing good to say about the grain subsidy policy." In his visits to villages, he says, "What I hear from farmers is that they say the grain subsidy policy is corrupt and plays no role in grain production."

To make his case, Li provides three stories from his experience.

Story 1: Grain subsidies given to non-farmers

Li has a friend who is a university professor. The friend still holds rights to farmland in his home village although no one in his family has been engaged in farming for over 10 years. He rents the land to other village members who actually plant crops on it. The rent is 300 yuan per mu each year. The non-farming professor collects grain subsidies and 300 yuan in rent from each mu of land. The farmers who pay the rent in order to cultivate the land do not get any subsidies.

Story 2: Subsidies for not planting grain

In a district of southern China farmers used to grow two rice crops a year. Now they have converted about 80% of their land to fish ponds and non-grain crops but they still collect "grain subsidies." In fact, these farmers produce little grain and buy most of the rice they eat, but the government raises their subsidies every year.

Story 3: Local official eats subsidies

In Heilongjiang Province there is an official who retained control of 2000 mu of land that was not distributed to collective members. He rents it out to villagers for 300 yuan per mu. In addition, he collects various subsidies totaling 200,000 yuan each year. He claims the same thing happens all over the country and is not limited to grain subsidies. The same happens, Li says, with subsidies for forests, pigs, appliance purchases, and agricultural machinery purchases. The money subsidizes "those who have a head and a face."

Based on these anecdotes, says the author, we can see that subsidies "have no significance" for grain production. In fact, his stories sound a lot like U.S. farm subsidies which largely end up as subsidies to wealthy land-owners (including not a few American professors), not people who grow crops.

However, says Li, "We often hear TV reports about how good the grain subsidies are." But the subsidies actually end up far from the farmers. He describes the increase in grain subsidies as "purely a big fudge."

Li then attacks media reports about subsidies for irrigation. Li observes that farmers actually invest little in irrigation systems. Regulations prevent officials from assessing fees that would finance water projects and farmers seldom work on joint projects since there is no way to solve the "free rider" problem. Grain is not profitable enough to justify high costs of large irrigation projects for small farms, so only a few large farms make the investments.

Consequently, rural irrigation infrastructure deteriorates.  Li castigates frequent news media reports of "100 year droughts" causing disaster for farmers. Li asserts that the problem was not so much the dry conditions as the fact that farmers had no irrigation capability, leaving them "defenseless in years of drought."

Li says the basic problem for farmers is low grain prices which he claims are "deliberately suppressed." He says since 1990 grain prices have gone up at a much slower rate than government wages. That means farmers' earning and spending power has also risen slowly, a cause of weak internal demand. He argues that low grain prices are the root of the "China model" of reliance on exports, industry that consumes high volumes of raw materials, high pollution, and accumulation of foreign exchange. Low grain prices, he says, are also the cause of "imported inflation."

Li argues that it is necessary to focus on raising peasant incomes by raising grain prices as the solution to China's problems. He calls for eliminating the grain subsidy and using the funds to raise grain prices.

Li's recommendation is essentially a reversal of the subsidy program. In 2004 the direct payment to grain farmers was set up by taking money from provincial "grain risk funds" that had previously been used for procuring grain from farmers at "protection prices" and giving the money to farmers directly as a cash subsidy.

Li's analysis is fast and loose and his economics is not that good, but he incisively points out the perverse results that farm subsidies designed by clever bureaucrats and scholars produce nearly everywhere they are implemented. He also points out fog of misinformation spewed out by Chinese government and news media sources. He gets at the exploitation of peasants that is the dirty secret behind China's economic growth model, but the exploitation comes through depriving farm owners of property rights and financial repression rather than depressing farm prices.

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