Lecture 06_07 the Organization of Rural China and the Reforms_updated_second Time_feb5

8/6/2019 Lecture 06_07 the Organization of Rural China and the Reforms_updated_second Time_feb5

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Institutions and the Organization

of Rural Production and theReforms

Lectures 6 and 7


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A framework is needed for studying developing countries (for individuals that live in certain types of environments with certain

types of preferences ):

There is a special environment in rural areas of developing countries:

a.) the environment in developing countries are unlike those in

traditional economics ... we have consider the specificcharacteristic of developing:

they are full of risks / information is costly agrarian economies which are spatially disperse, makingenforcement difficult, slowturn around and a place in which

people are poor and face high risks; b.) unlike traditional economies where there are good markets, in

developing economies, like that in rural China, markets areoften absent. Therefore things like labor markets and insurancemarkets do not exist.


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We assume that individuals in the economy have a certain set oreferences :

a.) ants to achieve high income and consumption

hile enjoying as much leisure as possible b.) ants to even out income and consumption over time, toavoid risk and disaster, and to make provisions fodealing ith the consequences of unavoidable risks.

c.) must face these simultaneously since insurance marketdo not necessarily all exist ...


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In this part of the lecture we want to set up a conceptualframework that is able to explain the institutions that affect

behavior of individuals in developing countries we want tounderstand institutions for several reasons in order to:

1.) understand how people organize production

2.) explain patterns of ownership 3.) exa ine the way in which people relate to eachother: e.g.: village leaders/villager townshipleader/factory anager etc.

Basic assumption : Institutions production relations /ownership / person-to-person relationships are jointlydeter ined by preferences and the environ ent within peoplelive and work


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Risk and Information Behavioral Determinants

A1 A2 A3 A4 A5 A6

Risk Costly Selfish Consump. Effort Risk nformation (+) (-) Averse

C1Assymetric nformation

C2ncentive Problems

(Moral Hazard and Adverse Selection)

C4 Demand for nsurance

Preferences, Environment and Behavior in Rural China

Environ ent:

Risk and costly poor infor ation Preferences


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Nature of the Environment in Rural China and Effect on Organization of Production

A7 A8 A9 A10 A11Spatial Transport Seasonality Risks YieldDispersion Cost -- yield (weather) Risk

High -- timing Covariance-- market-- life cycle

CTravel Time Intensive

A10SynchronousTiming

A11

High Cost C1 C2 A2 or A11Of InformationAcquisition No Banks in

Rural Areas

C10Absence of Crop Insurance

Because difficult /impossible to monitor : a.)Leads to no labor markets in agriculture / b.)

poor efficiency of collective farmingdominance of family farming

Travel time intensive : high information costs


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Us ing the Framework to Under s tandChina s Rural Organization and

Economic Performance

Lecture 7

Why Collectivization of Agriculture failed

Why Rural Reforms (Household

Responsibility System) worked so well


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Rest of Lecture 6Lets use our material and behavioral framework to explain the institutions that weobserve around us

Why is there polyandry in Tibet (and polegamy in W est Africa and Utah )

Why didnt parents allow kids to marry for love? W hy do cute riverside village girls always get married to strong mountain boys? Dowry: Do girls in China get shortchanged by not being included in the inheritance process

(fenjia)?

W hy do girls in South China command a high bride price; and girls in North China need ahefty dowry?

How does one explain the strange marriage forms in China like child brides / delayedmarriage

Why do those in England practice primogeniture and those in China practice multi-geniture?

How would a loving Mom and Dad ever send their child to a Sweat Shop? or aHouse of Prostitution?

Why did Chinese parents bind their children feet?

And more


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New ScheduleLast week Lecture 6 (given during Tuesday andThursday on developed a framework for:Understanding the material and behavioral determinantsof institutions in developing countries / China) weused this framework to explain many of the institutionsthat we observe in history and today Skip Lecture 9 (Gradualism as a Reform Strategy )New Schedule for this week we will continue to usethe framework to understand the choices andoutcomes that have driven the reforms in China Lecture 7 (TodayTuesday 2/5)

Motivate Gradualism Why collectivization did not work

Lecture 8 (Thursday 2/7)The Rise and Fall of TVEs a story of the ultimate victory of privatization

Quiz next Tuesday (2/12)


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Gradualism A Strategy that was

only a Strategy after the fact

Motivation: booming economies in the

rest of the world stagnation at homePLUS: need for openness with the W est,in order to counterbalance Soviet threat

Methodology: crossing the stream byfeeling the rocks


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Realization of Gradualism part I

Start with the unplanned part of the economy(Agriculturethis is what we will talk about today) Do not allow reforms to occur in industry in Chinas cities

during 1978-84, it is mostly business as usual

Decontrol the production and sales of secondarycommodities (fruits / vegetables / eggs / tofu) Keepcontrol of key commodities (grain / cotton / tobacco)

Open the Door but only the back door and keepthe rest of the doors to that room locked 4 Special Economic Zones W here? In the south (remember the geography lecture

isolated from the rest of China) Only let State agencies become engaged in import and export

Communist Party is in complete control


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GradualismPart IIMain strategy inch out from areas that were successful allow markets to

play a small role in periphery of many sectors

Within agriculture: More commodities (meats / soybeans) Partially allow sales of grains (after the quota is completed Allow free markets (once states share is completed)

From agriculture to the rest of the rural economy and beyond Township and Village Enterprise Reform (on Thurs.) run by leaders/ party

members Begin to let some reform of non-key commodity enterprises in urban areas

allow rural traders with food to enter urban areas (migration restrictionsrelaxed)

Open the door a bit wider: From 4 SEZs to 14 Open Coastal Cities Allow private firms to trade in non-central commodities (especially exports

e.g., textiles / toys / tools)

Communist Party is in complete control


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GradualismPart IIIVictim (beneficiary) of their own success

Small traders in agriculture more successful than state tradersstate traders in some areas outcompete state traders in others [lots of food everywhere] make state traders redundant moreprivate traders enter state traders lobby for reform entire statesector is not needed

Though keep control of grain until late 1990s and tobacco until nowTVEs / industry same story (Thurs) Put pressure on urban industries they lobby for reform decontrol

reform privatization [though keep control of oil and media andsteel and communications and ]

Trade / FDI In come 100000s of traders out-compete state trades soon any

one can get license [except in key sectors: like energy / minerals /airplanes]


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Us ing the Framework to Under s tandChina s Rural Organization and

Economic PerformanceLecture 7

Why Collectivization of Agriculture failed Why Rural Reforms (HouseholdResponsibility System) worked so well

Again: this is an illustration of two things:

a.) why material and behavioral factors determined whichinstitutions was best

b.) gradualism, step 1


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J ust a foreshadowing of the

consequences of the tradeoffs Yields/Production (1952-1978): >2% per

year Good but, population was rising at 2+% per

year

Productivity (TFP): ZEROIncome/capita: ZERO


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Maos promise: Improve Rural

Livelihoods (and Modernize)Give farmers land (from Maos point of viewthis was paying them off for their supportduring the Revolution and a way to raisetheir assets and incomes)

But, Mao believed that traditional agriculturewas backward, and lacked economies of scale this led to experimentation withcollectivization


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Increa s ed efficiency from collectivization

Food

Labor or Land

Source of efficiencygain s:

for a given amount of labor, if farmers sharetools and collaborate incertain tasks, such as

transplanting andharvesting, can get moreoutput for same amountof labor and/or land .or get same amount of


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But there i s a co s t to collectivization

Have to look at the decline in efficiency fromcollectivization

Then compare tradeoffs: gains fromeconomies of scale VS. costs from lower

incentives

How does collectivization affect incentives


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N on-economic concern s for collectivization

[another view: it did not matter gains to Maowere beyond economics

as claimed in the Mao Years, collectivizationwas also a way to help plan and control therural economy a way to simplify planning theunplanned economy and increase ability of

the State to extract resources and supportChinas number one goal of modernization, evenat the expense of rural welfare]


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Farming and return s by hou s ehold it s elf

Food Output -- kgs

W eeks of Labor

1 2 3 4 5 6 7 8

3000

540053005100

4800

4400

3800


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Economics of Farming as a Household

Each manweek is worth 300 RMB to the household (could produce that much in garden in private plot or that is how much leisure is valued)

Profits from Farming as a Household

Labor week

Output(kgs)

Marginalproduct

(kg)

Price for output

Marginalincrease invalue ( Y)

Marginalcost ( Y )

1 3000 3000 Y1/kg Y3000 Y300

2 3800 800 Y1/kg Y800 Y300

3 4400 600 Y1/kg Y600 Y300

4 4800 400 Y1/kg Y400 Y300

5 5100 300 Y1/kg Y300 Y300

6 5300 200 Y1/kg Y200 Y300

7 5400 100 Y1/kg Y100 Y300

8 5400 0 Y1/kg Y0 Y300

Point of profitmaximization:

marginalrevenue equalsto marginal cost therefore,when householdfarming by itself,

they will put in 5weeks of labor and produce5100 kgs of grain and earn:3600 yuan


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Farming and return s by 2-member collective

At end of s ea s on, sp lit return s ( and ) with your p artner

Food Output -- kgs

W eeks of Labor

1 2 3 4 5 6 7 8

1500

27002650 255024002200

1900

Returns toother household

Returns to

OW Nhousehold

1/2

1/2


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Each manweek is worth 300 RMB to the household (could produce that much in garden in private plot or that is how much leisure is valued)

Profits from Farming as a Household

Labor weeks

Output(kgs)

Marginalproduct

(kg)

Price for output

Marginalincrease invalue ( Y)

Marginalcost ( Y )

M arginalp roduct(kg)

M arginalincrea s ein value(Y)

1 3000 3000Y1/kg Y3000 Y300

1500 Y1500

2 3800 800 Y1/kg Y800 Y300 400 Y400

3 4400 600 Y1/kg Y600 Y300 300 Y300

4 4800 400 Y1/kg Y400 Y300 200 Y200

5 5100 300 Y1/kg Y300 Y300 150 Y150

6 5300 200 Y1/kg Y200 Y300 100 Y100

7 5400 100 Y1/kg Y100 Y300 50 Y50

8 5400 0 Y1/kg Y0 Y300 0 Y0

Farming a s a 2p er s on collective

Economic s of Farming a s a Collective : N ote reduction in effort (from 5week s of work to 3 week s becau s e only get p art of return!


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Farming and return s by hou s ehold it s elf

Food Output -- kgs

W eeks of Labor

1 2 3 4 5 6 7 8

3000

540053005100

4800

4400

3800


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Farming and return s by 2-member collective

At end of s ea s on, sp lit return s ( and ) with your p artner

Food Output -- kgs

W eeks of Labor

1 2 3 4 5 6 7 8

1500

27002650 255024002200

1900

Returns toother household

Returns to

OW Nhousehold

1/2

1/2


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Incentive problems with collectives

Because they get only part of the return, they willnaturally reduce their effort

But, remember, there is a collective manager (the commune leader) and a party secretary They will monitor effort They will use normative incentives (fly flags; play

music; shout slogans; recite Maos Red Book)

[W ill this solve the effort problem and inducefarmers to put out more effort?Think of farmer preferences and environment]


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Risk and Information Behavioral Determinants

A1 A2 A3 A4 A5 A6

Risk Costly Selfish Consump. Effort Risk

nformation (+) (-) Averse

C1Assymetric nformation

C2ncentive Problems

(Moral Hazard and Adverse Selection)

C4 Demand for nsurance

Preferences, Environment and Behavior in Rural China

Environ ent:Risk and costly

poor infor ation Preferences


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Failure of Collectives and Inabilityto Benefit from Economies of Scale

Therefore: Poor incentives Inability to monitor

Leads to reduced efficiency people workless and inefficiently

And then need to compare: reduction fromincentives VS. gains from economies of scale


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N et change in efficiency from collectivization :

+ gain s from economie s of s cale

lo ss e s from incentive sFood

Labor or Land

Reduction ineffort frompoor incentives

Reduction in

efficiencyfrom poor monitoring

Gains from economies of scale

Net loss fromcollectivization


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Implementation of HRSVillage allocates plots of land to the farmersFarmers have to paytaxes and deliver quota(part of their crop atbelow market prices)Farmers get to makecultivation decisions(control rights)Households gets to keep

ALL residual output they earn 100% of profits 0

1020

30

40

50

60

70

80

90

100

1978 1980 1982 1984

Percent of villages adopting HRS

Rapid adoption of HRSNOTE: land still belongs to

collective restrictions on rental and sometimes on uses


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Out p ut s and In p ut s of Soybean sin China, 1979-95

5

1

15

1979 19 1

Ou put I ndex I nput I ndex

O utputgrowth: +7%fro 1980 to

1985

InputGrowth: < 0

Result of HRS:

Corn Production, 1979 to 1995


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T FP for Wheat in China, 1979-95

50

80

1979 1981 1983

17 year period: 3.5 - 4%annually

Recent 10 years: 2% annually

G rowth of Wheat, Rice and Maize Productivity in China,1979 to 1997 (shifting UP of the production function)

Rice

Wheat

Maize


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Per ca p ita income in ruralAverage :330%; Bottom 10% :180%; T o p

10% :407%

-500

500

1500

2500

3500

4500

5500

6500

7500

1980 1985 1990 1995 2001

Average

-500

500

1500

2500

3500

4500

5500

6500

7500

1980 1985 1990 1995 2001

Botton 10% Top 10%


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Other reforms

Raised prices (administratively)Lift trading restrictions (locally)

Allowed selling sidelines in local markets and inthe cities

Allowed crop choice / sideline activitiesTVEs and off farm work ( Thursay )

Fiscal reform (hardened budget constraints, andgave local leaders incentive to raise revenues you get to keep and spend what you raise)


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Gradualism!Did not allow interprovincial trading (1985 or so)Did not allow migration to cities without permission (late1980s)Did not allow private enterprises (late 1980s)Still rationed food in the cities at low price (until 1992)Did not get rid of quotas or governments role inmarketing (2000)Did not allow private sector to import/export grain ( W TO

in 2001)Right to Rent Land without Permission (2004)STILL TODA Y: Do not allow permanent move to cities Purchase / sell land (still belongs to village)

Documents

Lecture 06_07 the Organization of Rural China and the Reforms_updated_second Time_feb5