Monday, October 8, 2012

All Policy is Local: Pigs in China

Is China a highly-efficient subsidizer of world-beating industry or a massively wasteful bureaucracy?

Western analysts get a misleading answer to this question when they assume that the Chinese government operates like a well-oiled machine in which decrees from Beijing authorities are carried out by a compliant government bureaucracy. The reality is that the bureaucracy--from the capital city down to the farm--is an active player in the policy process that seeks its own interests. Consequently, the outcomes of policies and industry plans are highly variable and considerable resources must be expended to induce officials to actually implement policies.

Officials at each level must expend resources and effort to carry out policies and they require inducements to do so. The policy implementation process includes constant bargaining and an ongoing cat-and-mouse game between officials at different levels of government. The active involvement of local officials in policy implementation is true in every country. But the influence is especially true in China where there is a centuries-old tradition of bureaucracy that exerted influence over Chinese society long before Mao Zedong installed a communist party hierarchy that extends from Beijing to the village.

Pork industry policies are a prominent example of this phenomenon. China's pork industry policy consists of a few small subsidy programs and general development strategies sent down to be implemented by provinces through five-year plans, "Number 1 documents," other obscure documents and instructions to communist party authorities. Provincial authorities are responsible for formulating plans that are then passed down to prefecture and county authorities. At the county level authorities then implement the plans by inducing township and village officials to carry out the measures. Policies have multiple targets besides farmers: local agriculture bureau offices, other government departments, banks, and companies.

Xuan'en County, a poor remote mountainous area in western Hubei Province has a plan to turn its pork sector into the county's first billion-yuan industry. Xuan'en County's pork industry plan is a component of its broader strategy of becoming a “National Organic Agriculture Demonstration Base County.” The county's plan reflects a Hubei Province plan to upgrade and transform the pork industry during the 12th five-year plan and instructs each locality to carry out a wide range of programs designed to shift from the traditional mode of scattered backyard to production to "standardized," "scale" production, with better disease control and less cyclical fluctuation in production.

In Xuan'en, the county's communist party committee conducted a survey of the hog industry and set up a county leadership group and issued a document describing objectives for pork industry development. Each township had to sign a responsibility document. There are carrots and sticks to induce local officials to comply with the plan. Success in pork industry development was included in the annual evaluations of local officials (stick) and a system of awards (carrot) was instituted for township officials. The county livestock and veterinary bureau set up a pork industry work office which published its own document on evaluating township veterinary offices' work in implementing the county's "4450" plan for pork industry development. This also included a system of awards, inspection visits and "responsibility evaluations."

The county set concrete objectives for setting up large- and medium-scale farms. One township was targeted to set up thirteen "big hog villages" raising 10,000 head each annually, including 45 farms raising 500 head or more. Plans call for building a 10,000-head hog farm, two 3000-head farms, forty-five 500-head farms, and thirteen 400-499 head farms. Two water treatment projects are now being built, each costing 800,000 yuan or more. The county also plans to build 82 village level animal disease control offices.

The county's plan features its "4450" model for hog raising which includes a "fermentation bed" technique that  breaks down hog waste through a biological process. The 4450 model was introduced in 2008 and aims to spread new pens of at least 40 square meters to farmers raising 4 sows and selling at least 50 pigs annually. County officials claim that the model produced sales of 1 million yuan during the first 5 months of 2012, reduced hog waste by 390 kg per head, and reduced waste water (by reducing water use to clean pens) by 4 metric tons.   The county plans to add a thousand "4450" farms during 2012, ultimately adding 10,000 farms by 2015. This strategy is described as a foundation for the county's "organic" strategy, although there is no mention of feeds, pharmaceuticals or other aspects of production that would make production "organic." (The processing company's web site reveals that some of its suppliers meet "pollution free" and green food standards--these fall short of organic production standards.)

In the pork industry, subsidies to incentivize local officials are arguably more important than subsidies to farmers. The local system of awards is an extension of the central government's program of giving awards to about 500 major pork-marketing counties. Funds of 2500-to-6000 yuan per farm are passed down to Xuan'en County townships for support of the "4450" program although it's not clear whether the funds actually are paid to the farmers. The county has given 5 million yuan (about $780,000) in subsidies for the 4450 program over the last 3 years. According to the Hubei Province plan, central government subsidies for operation of township veterinary stations are to be increased to 1200 yuan per employee per worker per year (from previous 1000 yuan).

Funds are targeted to villages with special designations as "poverty" regions and "old liberated" villages. The "old liberated" villages are rewarded for coming under communist control prior to 1949--sixty to seventy years ago. The hog project makes use of other programs such as the "sunshine project" for rural training and a related "rainfall" project for training large-scale farmers.

Another important aspect of Chinese agricultural policy is the bargain between companies and the communist party/government. Plans for the development pork industry incorporate meat, feed, breeding and veterinary drug companies that are designated as "dragon heads" that lead agriculture toward modernization and commercialization. In Xuan'en a centerpiece of the plan is its support of Hubei Dapai Meat Co., a company that sells pork, hams and sausages in a number of provinces. The county gave the company 1 million yuan this year for technology upgrades (presumably to buy processing, water treatment and/or laboratory equipment), 2 million yuan in financial aid, and a 10 million yuan revolving credit fund, plus access (presumably free) to 26 mu (about 3 acres) of land to expand its plant. These subsidies are modest in comparison to its 178 million yuan in annual sales but exceed its 2.9-million yuan profit reported for 2011. The company has reportedly paid 560,000 yuan in taxes in 2012.

According to the Dapai company's web site, it is a formerly state-owned company that has been privatized (the site gives no clue as to who owns it now). Dapai can slaughter 300,000 hogs annually, which exceeds the entire output of the county last year. It highlights two producer cooperatives that supply the company with 25,000 hogs. The company says it has begun procuring hogs in neighboring provinces to meet its requirements.

Hubei Province's plan calls for both fostering local entrepreneurs and attracting outside investment. A brief story on a new investment in a Xuan'en County hog farm gives some insight on how investment is attracted. On July 12, Li Family River Township Government signed an agreement with Hongkun Ecological Agriculture LLC to invest 10 million yuan in a hog farm that will hold 1000 sows and market 5000 finished hogs per year (presumably the farm will sell mostly feeder pigs). The investor was Qu Hongkun, a successful businessman who left the township as a migrant worker 25 years ago and likely still has ties to the area. The investment involves moving a hog farm from Fujian Province to Li Family River Township in Xuan'en County. The agreement was described as the township government's energetic work to attract investment to support the plan to develop large-scale farms following the county government's exhortation to local officials to offer a favorable investment environment for "scientific development" for the rapid development of the rural economy.  The project also seems to reflect the trend of pig farms from coastal areas--where they are viewed as a polluting nuisance--to poor western provinces that are still eager for any investment they can get.

Digging into the details of Chinese agricultural policies shows that there are many links in the policy chain between Beijing and the fields where production occurs. Each link involves multiple economic actors--human beings who are each allocating their own resources and attention among competing projects. Whether the outcome at the end of the chain reflects Beijing's intent depends on striking bargains and giving inducements and punishments to each player in the process. The impacts of policies varies widely and is virtually impossible to evaluate since officials have incentive to report dramatic results up the chain while minimizing efforts and collecting subsidies.

We don't know and Beijing doesn't know either whether its programs are implemented at the local level. All the documents cited above could be just plans that exist on paper and are not really implemented. (As a reflection of the verification problem, Hubei Province's sow subsidy system demands that statisticians verify sow numbers by "seeing pigs, seeing people" to forestall false reporting of sows to maximize subsidies.)  Implementation of policies varies from place to place depending on local officials' priorities and from year to year depending on what crisis has popped up recently and the amount of energy spent on inducing officials to implement policies.

Rarely is anyone satisfied with subsidies. A July 2012 assessment of a the "4450" hog farm project in Badong County (a neighbor of Xuan'en) concluded that there had been significant transformation of the industry, but worried that the government's support is uneven and does not meet the needs of producers. In particular, said the Badong reporter, many policies are aimed at large-scale farms and companies but there is little support for small-scale producers. Policies also come and go from year to year depending on government priorities and campaigns. The Badong assessment remarked that low-interest loans had been available in the past (probably referring to the panic during 2007-08 following the big price spike after the "blue ear" disease epidemic), but complained that no cheap loans were available in the past several years.

The chance of a policy being effective depends on its ability to pass through this chain of officials from Beijing to the local level. The receptiveness of the bureaucratic chain to a policy plays a role similar to the conductivity of material in a wire transmitting an electric current from the power plant to the electric socket in your home. Bureaucracy introduces resistance to the policy implementation process. Energy must be applied to each point in the chain in order to ensure its "conductivity." The resources expended on inducing the bureaucracy to carry out policies offset--and may even outweigh--the social benefits of the policies.

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