Is China in for trouble?

Okonomos

Last week, this column described a World Bank working paper that said that because of China's accession to the World Trade Organisation (WTO), it was likely that real farm wages and land rental rates would decline substantially and that there would be an increase in rural poverty.

In all, around 60 million farmers would get hurt. The way to soften the blow was for China to reform its hukou (urban residence permit) system, which imposes barriers on mobility from rural to urban sectors.

If this were done the surplus rural labour might find new jobs in urban areas. The wages of skilled workers and unskilled non-farm workers would rise in real terms and relative to farm incomes.

This week, another working paper* on the same topic is reviewed. The authors, Kym Anderson, Jikun Huang, and Elena Ianchovichina, have further examined the possibility that greater import competition in agricultural markets will impoverish its rural people.

They conclude, if it is any consolation, that "farm-nonfarm and western-eastern income inequality may well rise within China, but rural-urban income inequality need not." In other words, regional disparities are likely to worsen.

We in India are familiar with the reasons. One is simply that millions of farming households are unable to send household members to jobs in expanding industrial and service industries. Thus, they do not have relatives able to repatriate non-farm earnings to them.

Second, the areas they live in are too poorly served with infrastructure, which means that there is no increase in economic activity there.

Third, they are unable to diversify into producing farm goods whose relative price has risen. In other words, the further away a province is from the happening places, the worse off it likely to be as a result of the accession to the WTO.

The authors say that their results "underscore is that whether a particular group gains or loses from a shock such as WTO accession in the long run depends heavily on their sources of household income and their capacity to adapt to the changed economic circumstances."

Again, as was suggested by last week's paper, they say that there is a way of mitigating these effects, and that is by reform of the hukou system that allowed some members of those households to obtain higher-paying non-farm employment and repatriate earnings back to their farm family. But they concede that this would be at the expense of the richer non-farm workers.

But what if the hukou system cannot be reformed? Well, then, there is no alternative to "investments in rural human capital, rural infrastructure and R&D, improvements in the land tenure system and rural financial markets, reductions in informal taxes/levies on farmers by local governments, and changes in grain marketing." If the Chinese want advice, India should be able to offer lots. After all, it has been grappling with the problem of rural poverty for so long.

The one area where India's advice would be especially useful is in the way grain prices are determined. In China, the government compulsorily procures grain at less than market prices, which is sold to urban consumers at less than market prices. Since the farmers don't vote, it is easy to do this.

In India, where the farmers do vote, it is not. And if even all this fails, as it did in India, "producer price subsidies could be provided so as to boost their farm incomes without boosting farm output (in an equal but opposite way to that used to tax farmers.)"

Most of the paper discussed here is devoted to describing how China really has nothing to worry about if it gets its policies right and, equally importantly, if others like the Organisation for Economic Cooperation and Development (OECD) gets their policies right.

But just what incentive there is for the latter or, for that matter, even for the former is not discussed. This leaves out the mechanism that will trigger reform in the absence of political pressure.

Arguably, as we have seen in India, when incumbents seek to maintain the status quo, political pressure can, and does, work in the opposite direction as well. Its absence, however, does not mean that reforms will ensue forthwith.

The real value of the two papers reviewed last week and this lies not so much in the precision of their econometric efforts as in flagging an important issue, namely, that Chinese accession to the WTO might well be less beneficial than everyone thought. If so, it raises another disturbing question: if it works poorly for China, why should it work much better for economies with a similar structure?

*Long-Run Impacts of China's WTO Accession on Farm-Nonfarm Income Inequality and Rural Poverty, World Bank Policy Research Working Paper 3052, May 2003.