Since December 2001 China has been part of the World Trade Organisation (WTO). The impact of the Chinese economy as a whole will be positive, but distribution of these benefits across regions and sectors of the economy is likely to be patchy. Sectors and areas engaged in agricultural and other production, where China does not have a comparative advantage, stand to gain very little or even lose. One area likely to be in this situation is western China, a region that accounts for more than 70 per cent of China's total poor. It is characterised by poor infrastructure and resources and is mainly an agricultural producer. The Chinese government has identified development of this region as a top medium- to long-term priority. With WTO accession, policymakers now need to re-evaluate current policies to ensure smallholders are not disadvantaged.
Agricultural growth is a key driver of poverty reduction. Policies need to cater for investment options that build infrastructure, strengthen outputs and address barriers that prevent smallholders gaining through increased productivity or migrating to non-farm sectors. (This project recognised that spending on infrastructure, education and health spending was low, entrenching many of the barriers to non-farm migration and current agricultural practices.) Without clear understanding of these impacts, WTO entry could aggravate the situation.
The project conducted research into future policy options, particularly public investment policies, to help western China achieve both economic growth and poverty reduction and buffer adverse shocks under WTO.
The study analysed various policy issues at different levels: a) county/regional level; b) township and village levels; c) farm household level. Different objectives and levels required varied approaches. The researchers paid particular attention to modelling inter-linkages among different levels. This approach enabled them to address policy issues and offer the government more realistic options at different levels - to achieve twin goals of growth and poverty reduction.
To capture these direct and indirect effects, the study adapted the methodology used by the previous ACIAR Project (ADP/1996/228). Rural poverty was modelled as a function of growth in agricultural production, changes in rural wages, growth in rural non-farm employment and changes in agricultural prices. Increases in agricultural production or wages should reduce poverty. Agricultural production was modelled as a function of conventional inputs (such as labour, land, fertiliser and machinery) and public investment variables (such as the use of high-yielding varieties, public irrigation, roads, electrification, and education). Rural wages and non-farm employment were modelled as functions of growth in agricultural production as well as public investment variables.
Estimates determined through the model were the basis for calculating the total effects of public investment variables on growth and poverty reduction, by totally differentiating the equations system with respect to each public investment variable.
The project began with a review of literature and secondary data to identify what would be useful for the project. The team collected the information on the county-level financing and spending data from 1980 to 2003. This information, compiled from different data sources and standardised, was used to analyse how public spending, its financing and governance have affected growth and distribution of income among smallholders in western China.
The team conducted numerous field trips in western China (Guizhou and Gansu - the two poorest western provinces) to investigate the major issues related to public policies and poverty reduction. Subsequently the team designed survey forms at the county, township and village levels to investigate the effects of public policies at the different government levels on rural poor and smallholders in Western China. The surveys forms were tested and refined after pre-tests in two provinces. Enumerators were then recruited and trained.
Surveys conducted in selected counties, townships, and villages of Guizhou and Gansu collated major social economic indicators for governance, public investment and provisions, resources endowments, income, inequality and poverty. In addition, a census-type household survey (encompassing all households in three villages) was conducted in Guizhou Province.
Based on the data collected, three levels of analyses were conducted: county, village and household. At the county level, the analysis focused on how decentralisation of fiscal system leads to different outcomes on growth and regional inequality, and how central government transfer affects inequality within-province and within the western poor region of China. The village-level study analysed how public provision, governance and resource endowments determine per capita income of smallholders.
China has a politically centralised government structure with strong top-down mandates. On the other hand, the country has a highly decentralised fiscal system. Local governments and communities are responsible for most local public goods and services. Large differences in economic structures and revenue bases exist, however, causing the implicit tax rate and fiscal burdens in support of local government functions to vary significantly across jurisdictions, particularly between coastal and western China. Coastal China, initially endowed with a broader non-farm tax base, does not need to rely heavily on new and existing firms to finance public goods provision, which creates a healthy investment environment in support of non-farm sector growth.
By contrast, local governments in western China, where smallholder agriculture is the major economic activity, spend the majority of their resources on their own operating costs, leaving little for public investment. Because of the relatively high transaction costs associated with collecting taxes from the agricultural sector, local governments tend to levy the non-farm sector heavily, thereby greatly inhibiting its growth. Due to lack of resources, local governments and communities cannot provide much-needed support for agricultural production (e.g. extension services often lack funds for travel, training, and purchase of improved seeds and breeds). As a result, regional differences in economic structures and fiscal-dependent burdens may translate into widening gaps in equality between western and coastal China.
The positive development is the rapid increase of private and farmer initiatives in bringing new technologies, practices and market information to individual smallholders. These initiatives are particularly active in the livestock sector.
In trying to narrow the regional development gaps and to help the smallholders in western China to increase their income, the government has introduced numerous policies - particularly through central government transfers. However, the country-level analysis shows that fiscal equalisation policies, though in favour of inland areas, did little to reduce the inland gap between poor and non-poor counties.
This has important policy implications. While the central transfer is important for narrowing the regional gap, the efficient use of these funds - particularly targeting public provisions for smallholders instead of covering local government operation - should be a precondition for future increase of the transfers. In particular, public provisions in infrastructure, education and health, and agricultural technology should be in the top priority list.
If various institutional and policy barriers that hinder the market integration between western and coastal China can be removed, enabling smallholders to either migrate to coastal areas or engage in non-farm activities in their own communities, then private investment will flow to western China. The rapid rise of coastal China also provides huge market opportunities, particularly for high-value produce, for western China's smallholders. Again, the central government transfer should be geared to reduce transaction costs for smallholders.
Links:
[1] http://www.aciar.gov.au/country/China
[2] http://www.aciar.gov.au/iarc/International Food Policy Research Institute
[3] http://www.aciar.gov.au/programarea/Agricultural Development Policy