Monday, September 2, 2013

Caution on China's Rural Land Privatization

Chinese authorities are reportedly debating the possibility of privatizing rural landholdings as  part of their broader program of moving into a new phase of development characterized by urbanization and a shift to commercialized agriculture. Giving rural people full ownership of their land and freedom to use it as they see fit seems like a logical path. However, digging deeper, one finds that land privatization is not a simple matter in the context of rural China's jury-rigged legal, political and social institutional set-up which is riddled with ambiguities and potential for exploitation and dangerous outcomes.

China has many experimental initiatives underway with mechanisms for trading the rights to use land and securitize those rights to grant credit to farmers. Many of these integrate land consolidation with credit programs that extend short-term production loans to farmers secured by land use rights.Several areas in some of China's poorer regions--Ningxia, Chongqing, and Jilin--have been designated as "comprehensive reform" pilot programs that test out mortgage lending secured by the rights to earn income from rural land.  A trust company in Beijing is ramping up a business that packages use rights for large tracts of rural land and securitizes them. None of these experiments have actually privatized the ownership of rural land, but they may be seen as tentative steps in that direction.

An August 4 essay by a blogger calling himself Qiu Lin writes that rural land privatization is being pushed by the World Bank but its acceptance by Chinese authorities is still uncertain. He describes rural land privatization as an opportunity for farmers. He speculates that privatizing land will attract investors from cities and give farmers a chance to profit from their land's value. This will maximize the value of land and lead to its more efficient utilization. Investment will create jobs, small towns will spring up, rural people will move to urban jobs, and the gulf in development between rural and urban areas will be narrowed.

Qiu Lin acknowledges that some commentators worry that the mistakes of "old china" will be repeated by creating a new generation of landlords and penniless poor people. He argues that privatization should be viewed as part of the long-term retreat of the State's role in agriculture--the next logical step after the move from public to collective ownership in 1978. The blogger asserts that reforms are entering "deep water" where addressing rural problems is more urgent. According to him, many Chinese economists favor land privatization based on the predominance of private ownership in the U.S. and Australia--two highly productive countries. Following Deng Xiaoping's precedent, Qiu Lin argues that it doesn't matter if privatization is socialist or capitalist--the key is whether it promotes agricultural productivity which is still low by international standards.

An argument against land privatization appeared in the communist party's Red Flag journal in 2009--shortly after the above-mentioned October 2008 communist party meeting on rural land issues. Wen Tiejun, a prominent agricultural economist, argued that land privatization and property rights are an invention of European colonial powers that has never worked in developing countries. Wen insisted that a small-farm structure is indigenous to Asian agriculture. He argued that rural people must be able to move back and forth between city and countryside, earning money from both agriculture and off-farm employment. When they move to cities they must preserve their link to their land as a safety net to fall back on. He touts the wisdom of China's current land system by citing its absence of widespread poverty in contrast to the crushing poverty, slums and landless laborers in Brazil, Mexico, and India.

Wen Tiejun worries that a flood of urban capital into the countryside will marginalize the peasantry. He calls for measures to slow the flow of capital and calls for forming large scale rural cooperatives that will give farmers stronger negotiation powers over land and capital investment. He cites the post-World War II experience of Japan, South Korea and Taiwan as a model. (He implies that this is an inherently Asian model but doesn't acknowledge that all three of these places were under American administration when these systems were set up.) His call for big cooperatives and farmer associations seems to be at odds with the communist party's fear that large rural associations could become a political movement that would threaten the communist party's control. Indeed, while Wen invented the "san nong" (three rural) idea, his ideas on cooperatives are outside the mainstream of current Chinese policy makers who have kept farmer cooperatives small, focused exclusively on farming business, and politically inert. A 2013 speech by Wen Tiejun posted on several communist party sites criticized the government's current "agricultural modernization" strategy and chided authorities for pursuing an "American dream" in agriculture.

Other recent articles are critical of the push for rural land consolidation. The examples they give show that large-scale farms are not a panacea for Chinese agriculture and reveal institutional amiguities and conflict among different interest groups that are likely to undermine the privatization of land.

Some Chinese news media argue that expectations that a transition to large farms will boost agriculture are unrealistic. An August 28 article in the news weekly Minsheng Zhoukan claimed that 95 percent of large-scale farms in Bozhou--a district of Anhui Province--were losing money and facing bankruptcy. The author cites the example of an area known for its chives where the local government promised support and loans to encourage farmers, entrepreneurs and companies to consolidate hundreds of mu of land. However, the district ended up with a glut of chives they couldn't sell. Farmers were unable to pay back the money they borrowed to finance inputs for their large farms. Creditors seized one farmer's house, four vehicles and greenhouse. Some farmers fled the district to escape their loans; others went to work in factories to pay off the debts; and one former "model worker" and cooperative head allegedly tried to commit suicide.

The Bozhou farmers said that officials pushed land transfer schemes with no careful planning. Officials brought the two parties together to sign a contract, held a ceremony and then neglected the project. The only farmers doing well were those getting subsidized as "models." According to the article some officials poured money into a single farm to create a  carefully-crafted model farm like a "bonsai tree" for other farmers to see. But the majority of farmers lost money without the generous subsidies.

A February 2013 article, "Land Transfer Chaos", by a scholar in Wuhan sounded similar themes, also citing examples from Anhui Province. This author doesn't address privatization directly, but argues that giant, company-operated farms are undermined by hired workers who have little incentive to work hard and he reveals the clash of interests at the village level in land transfer schemes.

Like Wen Tiejun, the "land transfer chaos" author worries about a flood of urban capital into the countryside. The author claims nearly all the large farms are in fact commercial enterprises, mostly engaged in agricultural processing, sale of farm machinery and inputs. He cited a Xinhua News Service article reporting that companies had acquired 25 million mu of rural land by June 2012, an 84-percent increase from the previous year. According to the article, Han Jun of the State Council's Development Research Center says 20 percent of land transfers are made to companies.

The "land transfer chaos" author says operators of large farms expecting to reap huge profits have instead encountered losses and debt. He cites one farmer who rented 1100 mu (180 acres) and reasoned, "If [small] farmers earn 500 yuan from one mu, then I can earn 110,000 yuan if I can net 100 yuan per mu." However, several years later, this farmer had actually lost 1 million yuan.

According to the article, these giant farms face a principal-agent problem because they have to rely on hired workers who have no direct interest in the success of the farm. The workers' shirking results in lower yields per unit of land and high costs. The 1100-mu farmer cited above reportedly gets rice yields of 300 kg/mu compared with 500 kg/mu obtained by small-scale farms because the land is not managed as intensively. His crop failed on several hundred mu one year. One cadre told the author that village accountants calculated that the aggregate yield on 12,000 mu of land had fallen by 2.5 million kilograms after the land had been contracted out to large farms. The author presented these examples to demonstrate the superiority of the "family farm" model--farms of about 200 mu (30+ acres) that don't have to rely on hired labor.

This author revealed that there is conflict over land transfer schemes among groups with differing interests, and land rentals not always a voluntary transaction. Descriptions of land-rental always describe them as "voluntary" and "respecting the wishes of farmers." In practice, the "land transfer chaos" author discovered that village cadres go door to door convincing each family to rent out their land in a big land-consolidation scheme. Some farmers say they signed contracts to rent out their land after aggressive prodding from officials determined not to lose face. While the land transfer was "voluntary" on paper because they signed a contract, in actuality it was coerced. One farmer compared the recent mass consolidation of land in his village to the "Great Leap Forward" in 1958. Many farmers say they later had regrets and are waiting out the 7-year contracts to get their land back.

Officials present a different perspective. They are under pressure from higher-level officials to carry out land-consolidation programs and have to work morning to night trying to convince obstinate farmers to participate. Officials reveal that villagers are not a unified bloc. Many village residents have left to work elsewhere and have no interest in farming their land. Elderly people who have stayed home often cultivate the land of neighbors and relatives with no rent. By tending small plots of land and collecting remittances from relatives, these elderly people are able to live comfortably in the village. These are the ones who oppose land-consolidation programs since they are comfortable with the status quo. The migrants support the land-rental programs since they can collect rent from their land.

Both the Minsheng Zhoukan and "land transfer chaos" articles reported claims that officials never came through with promised subsidies and support for farms that consolidated land. When one indebted farmer in Bozhou asked the government for help, officials replied that the government is not a charity. Farmers in Bozhou complained that they paid crop insurance premiums but got no compensation when there were droughts and floods. The "land transfer chaos" article reported that Anhui farmers never got promised "awards" for consolidating farmland.

Experiments with land mortgages also point to the ambiguities in law that are likely to undermine the development of well-functioning real estate and credit markets. Following a 2008 communist party meeting on land policy (the third plenum of the 17th party congress), central communist party leaders were still saying that mortgaging land rights was still forbidden. However, within months land-mortgage experiments began to pop up in various places and the mayor of one Shandong prefecture endorsed mortgages of land-use rights in the news media. Less than five years later, mortgage experiments are proliferating and are praised in official news media. In short, this shows that the legal environment is uncertain and determined by the whim of Chinese leaders. What's illegal today may very likely be legal tomorrow and vice-versa. It's good to be flexible and pragmatic, but laws need to be firm and set by known processes in order to give investors and lenders confidence to make long-term contracts--critical to assets like land that yield returns to investors over 30 to 50 years or more.

These latter articles do not deal specifically with privatization, but they reveal that expectations are often unrealistic and rural China lacks a solid legal foundation to engage in smooth exchange of long-lived assets and associated long-term financing. In the "Asian model" touted by Wen Tiejun, the individual's interests are trumped by those of the wiser leader/elder. Thus, individual rights are seldom secure and transactions are often orchestrated by leaders and elders. Farmer "cooperatives" that appear to be egalitarian aggregations of small farmers are often in fact ruled by the interests of dominant village officials or agribusiness companies. As different factions form with clashing interests and grievances bubble, the reform of rural property in China looks like a dangerous game with no clear end game. Reform is complex and risky, but the longer the status quo of ambiguous "collective" ownership is maintained, the harder it is to reform it.

The bottom line is that the uncertainty created the ever-changing legal environment breeds the "get-rich-quick" mentality that pervades the Chinese economy. This is especially problematic for agriculture, an industry based on lumpy, long-term investment with returns that are recouped over decades, not months.

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