China: The Next Economic Miracle

China Economic Quarterly

When China entered the World Trade Organisation, it was widely predicted that its farmers would suffer most, as the nation's primitive, outmoded agricultural system fell victim to a flood of cheap imports from more-efficient producers such as the United States.

This forecast appeared to come true last month when Beijing reported a US$3.7 billion agricultural trade deficit in the first half of the year, China's first such deficit in more than 20 years.

But all is not as it seems. In fact, what is going on is a restructuring of China's agricultural economy that may be as important, in its way, as the industrial restructuring of the 1990s that enabled the nation to become the "workshop of the world". Producers of manufactured goods around the world today find that they must adapt to low Chinese prices to survive. The same may soon be true of agricultural products.

This agricultural restructuring is described in an authoritative new book, Roots of Competitiveness, by Scott Rozelle, a leading authority on Chinese agriculture, Huang Jikun, a key agricultural policymaker in Beijing, and Daniel Rosen, a well-known analyst of the Chinese economy.

The basic trend they describe is that Chinese farmers are moving decisively away from land-intensive crops, such as grain, towards labour-intensive crops, such as fruits and vegetables. This makes perfect sense. China has 20 per cent of the world's population, but only seven per cent of the world's arable land. From an economic standpoint, therefore, its agricultural comparative advantage lies in labour-intensive crops. It should export those, and import the grain that it does not have the room to grow.

Historically, Beijing has been reluctant to embrace this proposition, because its bureaucrats remained mesmerised by the chimera of "grain security". The basic job of farmers, in this view, was simply to provide the cities with grain. Importing grain was unthinkable because it would put China's basic food supply at the mercy of foreigners. This view originated in the traditional Imperial grain-based economy and tax system, and was reinforced by the shortage-economy ethos of Maoism. The first thing that economic reformers did in the late 1970s and 1980s was to give farmers control of their land and freedom to grow non-grain crops. This resulted in a boom in farm incomes in the 1980s.

A surge in grain imports in the mid-1990s set the grain-security alarm bells ringing, and farmers were encouraged, with the promises of vast subsidies, to switch back to grain. They did so, with the twin effect of creating oversupply, which sent market prices through the floor, and landing Beijing with a huge subsidy bill which it could not pay. The net result was the stagnation in farm incomes which has been so widely reported.

This disaster seems to have taught policymakers a lesson. Since 1999, farmers have steadily been shifting from grain to cash crops, and the bureaucratic grain-security lobby, although still vocal, is in retreat.

A close look at the agricultural trade figures for the first half of this year vindicates this. The major deficit items were grain and other land-intensive products. Net grain trade slipped from a surplus of 7.5 million tonnes in the first half of last year to a deficit of nearly one million tonnes. Meanwhile, China ran a surplus of US$2.1 billion in fruits and vegetables, a substantial rise on the previous year.

Chinese prices for these products are generally below world prices, but China's exports are constrained by the high barriers to agricultural trade maintained by most countries. Lowering those barriers - a key item on the agenda of the current round of WTO talks - would result in big increases in Chinese farm exports and incomes. This is why China has emerged as a low-key but persistent advocate of agricultural trade liberalisation in the WTO.

(Originally appeared in the September 6, 2004 issue of South China Morning Post in Hong Kong, reproduced here with permission.)