Last summer, while conducting fieldwork in the village of Daping in northern Sichuan, I met 18 year-old Xie Hua. A native of Daping, Xie worked as a server in a restaurant in the Sichuan capital of Chengdu. She had returned to Daping for four days to attend her grandfather’s funeral. On the evening before she was to return to Chengdu, she began her goodbyes, often holding her mother and young cousin. If she could, she said, she would stay. “I know only a few people in the city. People there try to take advantage of me. But what can I do here? How can I make money?”
Xie is one of the 150 million villagers in China who have migrated to its cities for work. For over the past three decades, these migrants’ low-cost labor has provided the foundation for that country’s unprecedented economic ascendance, attracting heavyweight firms the world over and fueling China’s export manufacturing empire. They have built the nation’s extensive infrastructure and massive cities with breathtaking efficiency. From child care to auto repair, they have provided urban residents with an array of subsidized services.
The default assumption among observers has long been that China’s migrants are leaving their homes in the countryside because they are making a simple choice between two ways of life: difficult, dirty farm work and the amenities and comforts of the city. Who, the thinking goes, if given the choice would not prefer the latter? Urbanization, by extension, is assumed to be a natural component of economic development. As nations prosper and their cities expand and modernize, they will automatically attract the rural population.
But as Xie’s remarks indicate, the story of China’s migration is not so simple. A closer look at this phenomenon reveals a great deal about the fundamentals of China’s economic model, and why they are in great need of reform.
The Mao Era
Following the 1949 revolution, the Chinese Communist Party (CCP) sought to industrialize and militarize rapidly in the face of a number of existential threats. To do so, it implemented three policies: a compulsory agricultural produce procurement system, the rural collective system and hukou, a household registration system, amounting to an internal passport, designating one’s permanent residence and rural or non-rural status. During the Mao era, those who wished to travel beyond the administrative boundaries of their permanent residence had to receive official permission. Thus these policies gave the government control over farmers’ organization, movement and agricultural output, which could be procured at low, government-set prices, and then sold internationally at higher market prices.
The government then placed each locality in the country within a multi-tier administrative hierarchy based on population and industrial development. Power was concentrated at the central level, while capital was disproportionally channeled to higher-ranked localities.
The state assumed ownership of all urban land, while production teams and later collectives became the legal owners of the agricultural land.
A cadre management system was implemented to measure the performance of officials, with local government leaders evaluated and controlled by their supervisory units within the administrative hierarchy. The results determined promotions and bonuses. While the effects of this urban bias were somewhat mitigated by market limitations and central government controls, at the time of the start of Reform and Opening in 1978, urban consumption was almost three times that of rural areas.
The Post-Reform Era
By the late 1970s, the People’s Republic of China (PRC) was facing another legitimacy crisis, as the 10-year chaos of the Cultural Revolution and Mao’s death left its economy in shambles and ruling ideology deeply weakened. The central government implemented a number of reforms to stimulate China’s economy rapidly by invigorating competition and increasing manufacturing. Collectives and compulsory procurement were abandoned. Land was distributed equally among farm households, who were given land lease rights as well as the rights to largely grow what they wanted and keep the profits. However, state-led extraction of rural labor and goods intensified under new and less direct guises. To revive an economy that had long stagnated under Mao, the central government implemented a number of reforms to stimulate rapid growth by invigorating competition. The core of the CCP’s strategy involved enticing foreign direct investment (FDI), growing its export manufacturing sector, and low-cost infrastructure development. In order to achieve these goals the central government created a set of pressures and incentives to push local leaders to pursue these goals. This required not abandoning the Maoist era model, but rather adapting it.
A vast supply of cheap land and labor were essential to the process. To increase farm yields and decrease the need for farm workers, the government heavily produced and promoted the use of chemical fertilizers and pesticides. From the 1978 to 2007, nitrogen-based chemical fertilizer consumption increased from five million tons to 50 million tons, making China the largest consumer of chemical fertilizers in the world.
The state relaxed hukou rules, allowing for largely unrestricted migration. Social security and state subsidized public services such as access to education and healthcare, however, remained available only to those with “local” hukou status. This had the effect of keeping the cost of migration artificially low for urban governments, while amounting to a tax on migrants.
The state also created a legal framework for government land takings. It formalized its right to “public interest” land acquisition and set basic compensation rates for affected farmers, with standards based on average annual yields. This effectively gave the government the power to take land at will and for a small fraction of its market value, land that could then be offered at a discount as a lure for investors or be sold at auction to developers for windfall profits.
The CCP then created series of levers to influence the behavior of local leaders. It implemented regional and fiscal decentralization, through which it ceased to guarantee budget allocations to meet local expenditures. Thus, local governments had to rely primarily on revenues created within their own jurisdictions to meet budget requirements and fund central mandates such as the one-child policy. The cadre management system was altered to place overwhelming priority on economic growth indicators, with local leaders needing show results within short service terms, typically two to three years.
The administrative hierarchy, meanwhile, provided a powerful incentive to agglomerate and industrialize, as localities that moved higher up on the hierarchical ladder continued to receive greater fiscal resources post-reform.
To further attract overseas investors, the government centralized manufacturing to take advantage of economies of scale, establishing 15 free trade zones primarily in China’s southeastern provinces. Further, the state reduced barriers to trade and implemented reliably low tariffs and basic mechanisms for converting currency.
Additionally, the central government instituted a number of land and property reforms. It redefined tax rights in 1994, taking control of the consumption tax and enterprise-retained profits, a key portion of the extrabudgetary revenues of the rural state enterprises that had become the driving force of the rural economy in the 1980s. In exchange, it gave local governments full control over land premiums. To increase real estate investment, the state relaxed property sales restrictions and decreased sales taxes.
Expanding the Rural-Urban Gap
These policies led to precipitous declines in relative rural incomes and livelihoods. As a result of the administrative hierarchy and decentralization described above, agricultural expenditure in China as a percentage of total government expenditure declined from 15 percent in 1980 to eight percent in 2006, averaging about 10 percent over that time. Villagers were also given less access to loans than urban enterprises. Between 1994 and 1999, agricultural loans averaged just 4.5 percent of the national total, while loans for state-owned, independently-financed enterprises represented an average of 70 percent over that time. From 1980 to 1998, the margin between peasant deposits and loans in rural credit co-operatives increased from 10.1 to 778.
Changes in tax policies had the effect of robbing local governments of the incentive of improving the efficiency of rural state enterprises, playing an important role in their demise. Overuse of chemical inputs has significantly deteriorated soil quality. China Daily reported in 2011 that the average level of organic matter in soil, crucial in determining crop output, now stands at one to five percent for arable land in northeast China, as compared with eight to 10 percent in 1950s.
A speculative property market, meanwhile, has helped to fuel inflation, with the consumer price index increasing 198 percent from 1990 and 2007, and the rural price index growing 140 percent between 1990 and 2009. The purchasing price index of raw material, fuel and power increased by 211 percent in that period, with the impact of fuel costs on farmers increased due to their increased dependence on petroleum-based inputs. The result was that while yields and incomes increased dramatically for farmers in the post-reform era, so did relative costs. In fact, while annual rural incomes increased from 133 yuan in 1978 to over 5,153 yuan in 2009, annual expenditures have taken a greater share of that income, increasing from 35 percent of annual income in 1978 to 68 percent in 2009.
All of this greatly exacerbated the urban-rural income gap. For example, the urban to rural disposable income ratio increased from 2.2 to 3.3 percent between 1990 and 2008, while the urban to rural household savings rate increased relatively from 15.3:14.8 to 28.6:22.5. By 2008, the urban-rural per capita income ratio stood at 3.33:1. However, if urban benefits such as subsidized education and medical care are factored in, the gap is likely greater than 4 to 1. Life expectancy in the large cities is now twelve years greater than the average in the countryside. The infant mortality rate is twice as great in the countryside as it is in the urban sector. Nationally, 51.2 percent of middle-school graduates continue to high school, yet the rate in the countryside is merely 7.1 percent; and the average figure for years of schooling in rural areas lags behind the urban figure by almost three years.
This broad gap in income and quality of life has fed rural out-migration. China’s de facto urban population nearly tripled between 1978 and 2007, but unincorporated migrants accounted for 12 percent of this population.
Thus, through 60 years of rural extraction, the Chinese government created a cheap migrant labor surplus in large part by reducing, if not eliminating, for many villagers the option of doing anything but migrating. Few would argue that farming is easy work. But even fewer could argue that life in rural areas needs to be this difficult.
The negative effects of these policies are not limited to incomes and investment. Hukou restrictions, including those restricting migrant children from attending public schools, have forced many parents to leave their children behind in the care of grandparents while they pursue work in distant cities. This has put tremendous strain on rural families. Recent studies have found that adolescents left behind in their villages were more likely to engage in risky behavior such as binge drinking, have increased thoughts of suicide, and are more likely to have learning disabilities and psychological problems. Suicide rates among elderly villagers have also risen dramatically in recent years.
Local governments – cash strapped, eager to report high GDP numbers and urbanize to climb the administrative hierarchy ladder – have expropriated rural land with impunity. Incidents of land conversion increased from 50,000 in 1993 to 250,000 in 2002. Local governments have become increasingly dependent on income derived from land takings, with land sales accounting for 26 percent of local government revenue in 2007.
Wang Qian, a 52-year old native of Tianzhong village in Fujian province, is among the victims of government land takings. In 2010, the county government expropriated half of her family’s six mu plot to build a school. This forced her family to decide between farming for income or subsistence, as they no longer had enough land to support both activities. Wang’s family received only 10,000 yuan (about $1,600) per mu from the government as compensation. “Everything is so expensive, how can that money help me?” she said. “It’s nothing. I can spend it like that,” she said, snapping her fingers.
The escalation of land takings has in turn resulted in increased forced urbanization and growing urban slum populations. Victims of government expropriation currently constitute over 20 percent of the people meeting the minimal standard of living in cities, and the number is even higher than 80 percent in some areas. Much of the blame for this lies with China’s compensation system. While victims of land expropriation often receive lump sum payments, urban hukou benefits and housing as a resettlement package, these fail to provide a means for long-term economic security.
The Widening Consequences of Extractive Policies
This economic model, however, is looking increasingly unsustainable. Rights and wage-conscious migrants are demanding better compensation, equal treatment and more choice. According to the government-supported China Academy of Social Sciences (CASS), the number of mass incidents – strikes, protests and violent clashes – rose from fewer than 10,000 in the mid-1990s to 180,000 in 2010, more than doubling between 2004 and 2010. Land-related grievances account for 65 percent of rural mass conflicts.
Many migrants are voting with their feet, refusing to undertake long migrations from China’s interior to its coastal manufacturing hubs, or work in factories where conditions and salaries are particularly poor. As a result, many manufacturers have been forced to move factories inland, raise wages and improve conditions, increasing costs and cutting into China’s competitive advantage in manufacturing.
Moreover, China’s pillar export manufacturing and property sectors are inherently prone to volatile cycles, dependent as they are on overseas demand and unstable real estate markets. The specter of millions of unemployed and adrift migrant workers puts additional pressure on the government to prop up these sectors through policy. Maintaining China’s competitive advantage in export manufacturing has required artificially suppressing the emergence of a more stable domestic consumer economy. Currency devaluation has been a key tool in keeping the cost of China’s exports low. The government accomplishes this by setting interest rates lower than the inflation rate, discouraging consumer spending and encouraging saving. It then draws on household savings to buy U.S. securities, inflating the value of the dollar and deflating the relative value of the yuan. This policy has amounted to a hidden tax on savers totaling billions of dollars over the past decade. As a result, China’s consumer spending has dropped in the last decade as a portion of the overall economy, from about 45 percent of gross domestic product to about 35 percent.
The participation of China’s banks in land financing schemes has resulted in massive amounts of debt. Local governments have leveraged future land sales to secure banks loans to finance infrastructure projects and attract greater investment. China’s banks – managed by ex-officials and encouraged to lend by centrally-set low interest rates – have been eager to lend to ostensibly safe local government financing platforms. As a result of this leveraged lending, local government debt burdens stood at 10.72 trillion yuan by the end of 2010.
All of this has led to a dangerous economic imbalance. Investment and exports as a percent share of GDP increased 12 percent to 52.6 in 2010, while consumption decreased 10 percent over that time to 33.8 percent. Construction occupied a 13 percent share of GDP.
The financial crisis of 2008 laid bare many of the frailties of China’s economic model. When declining overseas demand led to dramatic factory slowdowns and millions of migrants lost their jobs, 30 million migrants returned to their land in the countryside. Beijing reinvigorated the economy with a massive 628 billion dollar capital injection. Banks in turn lent to state-owned enterprises, local governments and their financing platforms. Migrants returned to work in factories and on construction sites, funded by volatile overseas demand, debt and speculation.
China’s economic model has also taken a tremendous, well-documented toll on its environment. Evidence of the consequences of overuse of chemical farm inputs alone is compelling. Of the 26 lakes and reservoirs under monitoring last year by the Ministry of Environmental Protection, 42.3 percent are “eutrophicated,” a process that can lead to a proliferation of plant life caused by excessive levels of phosphorous and nitrogen. Forty-seven percent of area-sourced pollutants in China come from agriculture. Farm fields are now a greater source of water pollution in China than factories.
In his seminal 1977 work Why Poor People Stay Poor: Urban Bias and World Development, economist Michael Lipton warned that this kind of urban and industrial-biased development model was fundamentally unsustainable. Rapid industrialization policies that rely on and broaden sectoral gaps and exploitation are, he wrote, “doomed to self-strangulation.”
State Efforts to Rebalance the Economy
The Chinese government appears increasingly aware of the need to reform and rebalance this system. Overall government investment in rural areas has risen from 1.339 billion yuan in 2000 to 8.3 billion yuan in 2009. This includes a proposed 12.8 percent in rural outlays in the 2010 budget. For seven consecutive years through 2010 the Party’s No. 1 Document, which provides policy blueprint for the year to come, targeted primarily rural issues. The 2006 11th Five-Year Plan included trillions of yuan invested into rural education, medical services and infrastructure construction.
In response to this year’s financial crisis, central leaders have called for increasing rural investments and changing key policies. For example, at the annual parliamentary session earlier this year, Premier Wen Jiabao promised to “vigorously adjust income distribution, increase the incomes of low and middle-income groups, and enhance people’s ability to consume.” In a recent interview, Central Rural Work Leading Group Deputy Chief Chen Xiwen suggested that China reform the hukou system to provide migrants with a path to obtaining social security and public services equal to those of urban “residents.” Further, he suggested that public services in the countryside such as education and health need to be equalized with those in urban areas: “This would give migrant workers the opportunity to make their own choices, but would also give the government time to transition.”
However, state spending on rural areas as a percentage of overall government investment has decreased in the past 20 years, declining from 11 percent in 1991 to 8 percent in 2006, averaging 9.3 percent over that time. According to Urban Development and Environmental Research Institute Deputy Director Wei Houkai, in 2010 the government invested 87 percent of fixed assets in urban areas and big cities.
Moreover, much of the central government’s rural investment has been targeted at initiatives that have aggravated income disparity within the countryside and promoted unsustainable development. The PRC is expanding rural land registration initiatives as well as experimenting with allowing farmers to mortgage their land, paving the way for the removal of longstanding legal restraints on the transfer, sale or mortgage of agricultural land. This despite the unreformed and undeveloped state of institutions that could protect farmers’ interests from predatory lenders and speculators, such as the legal and banking systems, compensation and resettlement provisions, and consumer protection agencies.
Further, the Ministry of Agriculture’s five-year plan emphasizes land consolidation and expanding agricultural mechanization, including the promotion of genetically-modified seeds. Based on the experience of multiple international development contexts similarly lacking in institutional supports, when combined with the ability to mortgage or sell land, growers’ dependence on such expensive inputs frequently leads to rising rates of landlessness.
State efforts to develop rural tourism have likewise often reproduced China’s wealth gaps on a village level. Zhao Lin is a resident of a picturesque Tibetan village in western Sichuan. At the turn of the last century the local government proposed building a road into the village to develop its tourism potential. Leaders promised that locals to be employed in the building effort, 50 percent of gate revenues were to be shared with residents, and a second road through the other half of the village would soon follow. Zhao’s son participated in the road construction. At the urging of local officials, Zhao borrowed 30,000 yuan (currently $4,700) to convert her home into a guest house. Ten years later, her son had yet to be paid for his work, residents had received only 10 percent of gate revenues, and there were no plans to build a second road. The vast majority of visitors remained at or near the road, while Zhao – whose home was 1.5 miles away from the road – estimated that she received two to three guests a year, while her debt remains unpaid.
Many of the steps the state has taken to aid its rural poor have been beneficial only in the abstract, and in practice may have exacerbated existing issues. The government has, for example, significantly strengthened villagers’ property rights through the creation of an extensive legal framework over the past 30 years. Yet that legislation has resulted in no discernible improvement in villagers’ land tenure security, coinciding as it has with skyrocketing government land expropriation rates.
Other steps address only the negative externalities of China’s economic model, rather than the root causes. A revised Land Management Law, likely to be released early next year, will reportedly call for significant increases in compensation rates for government land takings. While a positive step, higher compensation rates will not only be difficult to enforce given the budget constraints facing many local governments; they will not solve the issue of providing long-term assistance to victims of government land takings.
The central government has responded to this year’s dramatic economic slowing and layoffs in factories and at construction sites by taking steps to bolster its key industries, sharply cutting interest rates, reducing reserve ratios and devaluing the yuan to boost its export manufacturing and construction sectors. Another stimulus package – albeit far smaller in scale to that of 2008-2009 – appears to be in the offing.
More recently, the CCP has increasingly supported initiatives linked to the practices espoused by China’s growing New Rural Reconstruction (NRR) adherents. NRR is an alternative development movement of Chinese academics, volunteers, activists and social workers that has gained strength over the past ten years. While NRR organizations and projects may share no formal connections, they are devoted the goal of reversing the urban-rural flow of resources and creating sustainable, self-sufficient communities through community strengthening, cooperation and skill sharing among villager households, and a return to traditional farming practices.
Recent CCP five-year plans call for investment and training for farmers focusing on traditional agricultural practices, seed development, production, storage, branding, and marketing, allowing farmers to reduce their costs and improve soil and product quality while taking control of the supply from middlemen. The Ministries of Agriculture and Land and Resources have recently shown interest in agricultural cooperatives, organic farming and the use of less harmful pesticides. Tourism schemes that emphasize preservation, ecology and revenue sharing are also gaining some support.
Co-ops that register with the government can operate tax free and gain easier access to low interest rate loans. However, these initiatives – with their emphasis on ending or reversing the flow of agricultural labor, long-term investment and farmland preservation – continue to run in direct opposition to the powerful imperatives of the local government incentive structure. Further, the community development and solidarity so essential to rural co-op sustainability constitutes a threat to local government power. As a result, cadres have little incentive to support NRR initiatives, and may be inclined to suppress them. It remains to be seen whether such initiatives can succeed in providing villagers with greater economic opportunities. To date, however, there is little evidence to suggest that market-oriented co-ops in China have achieved anything more than isolated success.
Ultimately, perhaps nothing short of reforming structural policies – the cadre management system, the hukou system and the administrative hierarchy – can allow for genuine balance and sustained opportunity in China’s countryside and economy as a whole.
Nonetheless, the NRR movement and the government’s partial support of it are signs of hope that a consensus is growing regarding the root causes of China’s economic and social challenges and the dramatic and innovative solutions urgently needed to solve them. Politicians, scholars and activists are realizing that the key to long-term stability is creating the conditions that allow for genuine choice of livelihoods for villagers and migrants like Xie Hua.
For now, Xie can look forward to her limited opportunities to reunite with her family. “I will see them again in five months for Spring Festival,” she said. “That’s just the way it is.”
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 (mu = 1/6 acres, 1/15 hectares)
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