Thursday, November 13, 2014

Transfers Keep Rural Counties Afloat in China

When Chinese officials describe their grain subsidy programs, they say the policies motivate local (officials) and farmers, in that order. This rhetoric reflects the importance of transfer payments sent to rural counties to encourage local officials to support grain production, an activity that generates minimal GDP and virtually no tax revenue.

With private financing and services for farmers mostly nonexistent, China relies on local officials to provide needed investment and services for farm production. Yet officials are not inclined to give attention to farm production since it yields little GDP and virtually no tax revenue. China's major grain-producing counties have a very narrow tax base, with local tax revenues often just 15%-to-20% of financial expenditures. Thus, rural governments are financed with massive transfers from higher levels of government.

An October 2013 article in Economic Reference News, "Vicious Circle: The More Grain Produced, the More Backward the Economy," raised concern that "the rice bag can't compare with the money bag," and "central government supports agriculture, local government has little regard."

A recent article in the Government-run magazine Liaowang (Outlook) with a similar theme highlighted the problem of poor finances in grain-producing counties. It illustrated the problem with Jilin's Lishu County, the fifth-largest grain-producing county in China. The local government there collects essentially no tax revenue from grain production. Farmers were exempted from the "agricultural tax" about ten years ago. Sales and initial processing of grain and most other farm products is exempt from value-added tax. In 2013, Lishu County's tax revenue totaled 556 million yuan, but its financial expenditures were 2.94 billion yuan--more than five times tax collections.

In contrast, city governments raise vast sums of money by converting agricultural land to other uses, conjuring instant wealth out of thin air. Rural grain counties are pressured to protect cropland from development, thus denying local officials the road to riches traveled by their city-based comrades. Rural county officials say potential investors are scared off by rhetoric about "seizing grain" since it implies few development opportunities.

The financial shortfalls of rural counties prompted China's central government to start up a transfer payment "award" program for hundreds of major grain-producing counties in 2005. The counties are ranked based on a formula that weights grain production, area planted in grain, and the amount sold outside the county. Initially, the transfer awards were just to fill holes in rural county budgets and there were no strings attached to the funds. A "super grain county" gives additional cash to the best-performing counties. Oilseed counties and pork counties now get similar payments. These newer transfers must be used to support subisides, loans, and services to farmers.

The plan for raising production capacity 50 mmt during 2009-2020 identified 800 core grain-production counties (about a third of all counties in China).

Authorities have been distributing 2014 award funds in October and November.

Jiangxi Province received 1.1 billion yuan in award funds for 46 grain counties (about 25 million yuan each), plus the province got 200 million yuan for being a commercial grain-supplying province.

Jiangsu Province got 1.66 billion yuan for grain county awards. This included 1.18 billion yuan for regular grain county awards, 153 million yuan for "super grain county" awards, 78 million yuan for oilseed county awards, and 252 million yuan for being a grain-supplying province. The "super grain," oilseed, and grain-supply province funds are earmarked for activities to support production, especially a campaign to refurbish or build grain storage facilities.

Guangxi Province has installed an evaluation system for counties receiving grain county awards. The funds fill holes in county budgets and should be used for improving fields, building storage and processing facilities. The funds should not be used for buying cars, office buildings, "training centers," or "image projects."

Sihong County in northern Jiangsu Province got 34.6 million yuan in grain county award funds, plus 15.3 million yuan for being a super grain county. Sihong has protected farmland, introduced new varieties, improved fields, built water projects, and supported new-style large farms and cooperatives.

Minquan County in Henan Province got 39 million yuan for its grain county award in 2013, over ten times the amount received in 2005. Officials there say they have paid a lot of attention to grain production in recent years and have made progress in implementing the award fund assessment.

Jilin's Lishu county used to collect about 58 million yuan from farmers for the agricultural tax before it was eliminated in 2004. Its "award" for being a major grain county now is 124 million yuan. It also got 350 million yuan (about $130 per acre) to distribute to farmers as grain subsidies. The county spends about 20 million yuan on roads, 8 milloin yuan on agricultural insurance, and nearly 100 million yuan on water and irrigation projects.

To the extent that local governments devote personnel and material resources to grain production, the cost of producing grain exceeds costs reported by farmers. Thus, local officials complain that the price of grain sold to urban areas doesn't reflect the full cost of the grain.

The Liaowang article calls for setting up a system for transferring funds from wealthy grain-consuming localities to rural counties that supply grain. This idea has been pushed for a number of years but doesn't seem to have progressesd.

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