Thursday, January 23, 2014

A Schizophrenic "No. 1 Document"

China's "Number 1 Document" on rural policy released this week is schizophrenic and filled with contradictions. The leadership vacillates between capitalism and central planning.

  • The document calls for market-guided resource allocation but it reels off ten pages of recommendations for government intervention in almost every aspect of the rural economy. 
  • It calls for establishing stable agricultural-trading relations with other countries but also calls for "plans" and "guidance" for imports, protecting "industry security," and keeping the country's rice bowl firmly in its own hands. 
  • It calls for adventurous reform, "exploration," and "liberated thinking," but it also cautions readers that reform must be incremental and based on Chinese distinctive features. It revives numerous relics from past decades like the supply and marketing cooperatives that were formed to serve communes, the "governor's grain bag responsibility system" set up in the early 1990s, and the "price formation" concept of cost-plus pricing held over from the planned economy era. 
  • The document says rural households should remain the primary farm operators, but offers numerous strategies for facilitating transfer of their land and creating new types of farm operations.
  • The first recommendation in a section calling for "establishing a grassroots democratic system" is to "consolidate and strengthen the [communist] party as the ruling foundation of the countryside" and "spread the party's mass-line education movements."  
Despite "market-based resource allocation" rhetoric, authorities are expanding their agricultural subsidy menu exponentially. The Number 1 document promises to continue existing subsidies, including the direct payment to grain producers, seed and animal breed subsidies, input subsidies, and machinery purchase subsidies.  It calls for pilot programs for "price insurance", marketing loans, and promises to begin pilot "target price" subsidy programs for cotton in Xinjiang Autonomous Region and for soybeans in northeastern provinces this year. The document includes a cryptic endorsement of "decoupled" subsidies but elsewhere urges officials to link subsidies to production. In addition, there are a whole series of subsidy payments for county governments in agricultural areas to encourage them to supply grain and pork to the rest of the country and compensate them for conservation and forest programs. 

It is widely recognized in China that price support programs are distorting markets, causing expensive stockpiling programs, making processors and livestock producers uncompetitive, and boosting reliance on imports. But the document says the price-support stockpiling programs will continue for rice, wheat, corn, rapeseed, and sugar. Cotton and soybean stockpiling programs were not mentioned, which presumably means they will be eliminated. The inclination to improve on market prices is reflected in another recommendation to stabilize prices by setting permissible bands within which prices will be allowed to fluctuate. A hog-price stabilization program was introduced in 2009 to accomplish a similar objective, but the document says the program needs to be "improved." 

The new leadership in China acknowledges that institutional rigidities hold back agriculture and they offer dozens of cosmetic reforms of rural land and financing mechanisms. The number 1 document devotes a lot of attention to ideas for facilitating the transfer of farmland without selling it, improving rural financial services, mortgaging the rights to use farmland, and enticing or cajoling companies and banks to invest in agriculture. However, it maintains the fundamental rigidities that discourage long-term investments. While authorities now say peasant land-holders' rights must be respected, the peasants still don't really own their land. Someone who leases land faces the risk that the lessor will demand it back or demand higher rent next year. The document calls for creating permanent farmland which is prohibited from conversion to other uses. 

The Chinese leadership acknowledges that the country cannot produce all the agricultural commodities it needs and endorses "appropriate imports." The document calls for exploring use of the international market and investment overseas to supplement domestic production. It urges development of stable trading relationships. However, it also calls for using imports and exports to control or adjust the market, for formulating "plans" for imports and preventing imports from threatening "industry security." This rhetoric implies that imports may be turned on and off like a spigot depending on whether the Chinese market is in short supply or if domestic sectors are threatened by imports. Thus, food safety standards or bans on GMOs, ractopamine, or supposed disease concerns may be ignored as long as the domestic market is in short supply, but suddenly enforced stringently when imports are no longer wanted. 

This erratic trading behavior undermines China's long-term food security. Agriculture is a slow industry where investments have long-term payoffs. If farmers overseas have firm expectations of stable sales to China they will invest in production capacity and grow crops or raise animals tailored to the Chinese market. But if access to the Chinese market is opened and closed in an unpredictable fashion, farmers will not make those investments. When China stopped buying grain in the 1990s American farmers started investing in ethanol plants. The frustration with China's sudden rejection of U.S. corn this year may similarly sour American farmers on producing for the Chinese market. When China needs that corn in the future it may not be there.

Schizophrenics like China have a hard time planning for the future.

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