Wednesday, November 20, 2013

"Third Plenum": Where's the Agriculture?

The documents from this month's "third plenum" of China's 18th communist party central committee included many adventurous reforms. Chinese leaders propose to finally dismantle 1950's-era economic barriers between rural and urban sectors and give rural people stronger property rights. The document seems to lay out a vision for clearing small-holders off the land and facilitating their entry to urban life, with a new generation of larger-scale farmers filling the vacuum. However, the documents don't offer much detail on how this might be carried out. The character "农" appears 51 times in one section of the 20,000-character "decision" on the third plenum. The plenum's focus on cities and companies echoes the 1990s "Shanghai" leadership of Zhu Rongji and Jiang Zemin which gifted urban citizens with real estate wealth, reformed State-owned enterprises and gained WTO accession.

The third plenum prominently features the principle of market-directed resource allocation. But will officials find market-directed resource allocations in agriculture acceptable? When farmers have to pay high market prices that are needed to ration scarce resources like land and water, the farmers are likely to use those resources for activities that produce high value. The tendency for large-scale farmers who pay high rents to shift land into nongrain crops like vegetables and fish ponds is already a frequently-cited phenomenon. Moreover, the high cash expenses incurred by the new cadre of "professional" farmers makes it hard for them to earn a profit and creates a pressing need for production credit. Until now, small-scale Chinese farmers produced crops on a shoestring with minimal cash expenses for land and labor.

The third plenum amplifies themes that were set forth in the last "third plenum" in 2008--encouraging the formation of "family farms," large farms, cooperatives, and enterprises by creating open land markets. There has been much progress in promoting land markets since 2008 with Ministry of Agriculture statistics indicating that the share of cropland subleased or rented rising from 7 percent to over 25 23 percent since 2008 in 2013. While the 2013 third plenum emphasizes giving farmers stronger property rights, it does not appear willing to give farmers actual ownership of their land. This means sticking with the convoluted approach of separating land ownership rights from the rights to use land and reap its products. Land is still owned by an ill-defined "collective" while the rights to use it can be traded, rented, or leased. It seems unrealistic to expect a fairly sophisticated derivative market for land use rights to succeed in the barely-literate Chinese countryside.

The third plenum proposes to address the shortage of credit in rural China by allowing land-holders to use land-use rights as collateral for mortgage loans. The immediate question is whether a banker would accept temporary rights to products from small plots of land in some remote gulch as security for a loan. If the borrower defaults--quite common when prices of many commodities fluctuate wildly--and the banker takes possession of these rights, what will he do with them (assuming he can even find the plots of land)?

While rights to land may be traded and marketized, officials still have tremendous power over the determination of land values because rural land is carved up into different designated uses: cropland, housing, construction and forest land. Maintaining the "cropland" designation depresses its value. Conversely, requisitioning "cropland" and redesignating it creates massive increases in wealth. There is still huge incentive for land grabs.

The mortgage proposal also is emblematic of the weakness in the legal system that undermines long-term investment. Mortgaging rural land is actually illegal, according to China's land contracting law and its property law. In 2009, China's Bank Regulatory Commission initiated some rural land-mortgaging experiments even though they were illegal. One central government official warned publicly that mortgaging was illegal but the experiments continued anyway. The same official warned earlier this year that mortgaging programs were experimental and not official policy. Now mortgages are a featured measure in a major policy document. This demonstrates that what is legal depends upon the opinions and whims of those in charge, regardless of the "law." And what officials give, they can also take away. Without the long-term legal protections of ownership, why would anyone make long-term investments that raise the productivity of land?

Investment and a growing stock of fixed assets are the key to higher agricultural productivity. To achieve sustained investment, individuals have to make the investments on their own volition based on the expectation of future returns. Rural Chinese people have capital but they invest it primarily in rebuilding their houses, starting nonfarm businesses or investing in get-rich-quick schemes. Since the people who "own" the land are not inclined to invest in it, the third plenum advocates "encouraging" and "guiding" entrepreneurs and companies from cities to invest in agriculture--people who don't have a clue about how to grow crops or raise animals. 

Finally, the third plenum also portrays a new seriousness about an "ecological civilization" and environmental protection. This is overdue, but it may be a rude awakening for China's livestock sector which has prospered by moving from animals scattered in backyards to giant CAFO operations. Manure that once was spread on fields now washes into waterways, creating a nation of bright-green rivers and lakes choked with algae nurtured on massive amounts of nitrogen. If regulations are enforced on locating livestock farms away from human habitations, roads, other farms and markets, they will be forced far into the hinterland. It will be hard to find space for 400 million pigs. If farms have to treat their manure and bury their dead animals properly they will face higher costs.

The third plenum reforms look good on the drawing board, but it's not clear that China's new leadership really appreciates what lies ahead. Agriculture is a complex biological, physical and social process that can't be easily drawn out on a whiteboard in Beijing.

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