Apple Association Illustrates China's Growth Model

The founding of the China Apple Industry Association was celebrated in Beijing on January 8. This  boring and seemingly innocuous news item and others from Shanxi and Gansu Provinces illustrate the government-industry partnership and technology-import strategies that are behind the Chinese "socialist market economy" growth model.

China produces half of the world's apples, has accounted for all recent growth in world apple output, and its apple juice concentrate industry dominates the world market. The apple industry association was set up to facilitate the transformation from a big producer of apples to a strong apple industry. Re-molding a nation of subsistence farmers into an "industry" entails moving from localized varieties, entrenched habits and minimum investment to planting standardized improved varieties, profit maximization and investment in fixed assets. In turn, this implies moving from a web of farmers to an "industry chain" that includes downstream traders, processors and marketing.

The apple industry association looks a lot like American industry associations which are also a government-industry partnership. There's a good reason for that: Chinese industry associations were inspired by American models. In particular, Chinese officials see the U.S. soybean industry association as particularly effective in promoting soybean exports to China. A Chinese soybean association was set up several years ago.

The Chinese apple industry association's stated purpose is to "elevate fruit farmers, serve as a bridge between government and companies and link the domestic industry with the world." Let's pick this apart.

The industry-government bridge is at the core of the association's purpose. While American associations reflect a similar industry-government partnership, the government plays the dominant role in the Chinese association. The apple association's chairman is a Ministry of Agriculture (MOA) official and the honorary head is the vice minister. Another MOA official is the association's communist party secretary. Provincial agriculture department officials from Shanxi and Gansu are vice-chairmen. The first role of the association is to "aid the government in implementing industry development plans."

In China, industry--even when privately owned--depends on government connections to succeed. Many of the functions to be carried out by the association are "public goods"--collecting and publishing market information, forming and disseminating standards and technology--but government dominance of these activities makes it necessary to have good government connections for a company to succeed. Nearly all agricultural research in China is conducted by government institutes and universities, and companies need connections to these institutions or the officials that oversee them in order to get access to improved cultivars, organic and other techniques, related certifications, processing technologies, and experts who put on training programs for farmers. Officials also can introduce companies to customers, ease customs inspections, waive fees or taxes, and send people on overseas trips.

The goal of linking the Chinese industry with the world is reflected by the central role of the MOA's foreign economic cooperation office. This suggests the association is part of the "going out" strategy that encourages Chinese companies to market products overseas and make strategic alliances that give China access to foreign advanced technology. The association's duties include choosing members for participation in domestic and overseas trade shows, establishing good relationships with foreign governments, technology organizations, and associations; organize overseas study tours for members. The association will promote "bringing in" (of technology) and push "going out." Chinese agricultural officials and companies focus on short-cuts and short-term profits from importing foreign technology instead of engaging in real innovation that is risky and requires long-term investment.

This is an industry association, not a farmers association. In China, "farmer" is still synonymous with "peasant," and farmers are viewed as helpless peasants who need to be "pulled along" (带动) by companies and government working hand in hand. The vice minister's speech urged the industry to unite (团结) and lead/guide (带领) the association's whole membership.

Farmer associations or cooperatives are kept intentionally small and localized with usually just a few hundred members in a few villages. Tight control of farmer associations reflects China's history of rural uprisings and the complicated history of farmer associations in China. (T.H. Shen's book Agricultural Resources of China described 1940s-era farmer associations as tools of political parties that did little or nothing for farmers' welfare.) Careful reading of today's Chinese government strategy for cooperatives shows that they view cooperatives as a network for administering the countryside and providing services the government can't deliver to the far-flung villages.

Some farmer cooperatives are members of the apple association, but in many of these "cooperatives" farmers have only a peripheral role. Most are dominated by a few leaders/stockholders. China has some bona fide cooperatives, but most cooperatives are formed by local party officials to fulfill a quota, shell cooperatives set up to get government subsidies, set up by a company to organize its raw material suppliers, or set up by extension stations to disseminate their fruit or vegetable cultivars.

Like companies, farmer cooperatives generally need the government's help to gain access to loans, academic and technical institutions, and marketing channels. A Gansu cooperative featured as a member of the new association was set up as a model cooperative with substantial government support. The cooperative sells its products to outlets in Beijing, Tianjin, Hohhot through the "farmer-supermarket" direct purchase program, a feat that could not be achieved without substantial government aid.

Another plum available from the government is status as a "model" (示范) county or village which comes with earmarked loans, hook-ups with companies, and other largesse. Tianshui City's (Gansu Province) commerce bureau reports that the region's apple industry has been selected as one of the second batch of upgraded foreign trade bases. Apple growers in Tianshui supply three companies that exported $36 million of apple juice concentrate in 2011. One company is a national-level "dragon head enterprise" and two are provincial-level dragon heads.

The apple industry illustrates China's a two-tiered "socialist market economy." A lower tier is comprised of millions of microenterprises--farmers, traders, workshops and vendors--pursuing profit in a laissez faire manner but mostly treading water. Everyone aspires to the upper tier--big companies that have world-class facilities, technology and access to high-end markets--but to access that tier you need a big company with good government connections. Agriculture itself has two tiers composed of "model" villages/counties and vast numbers of individual farmers. The "models" perform OK as long as resources are poured in, but they come to a screeching halt when officials lose interest. The broad population of farmers lack access to resources that support the "models."

Chinese development strategies are focused on fostering the upper tier while the lower tier treads water. This strategy can achieve big results in a short amount of time with tight control, but it keeps economic actors focused on cultivating government ties instead of pursuing innovation.

Perhaps the similarity of the Chinese industry-government partnership to American agricultural industry associations merits reflection on how the U.S. growth model has evolved. Is the U.S. economic model all that different from China's "socialist market economy"?