Xiao Junyan

Research Report, No.93, 2000 (Total 1271)

I. Major Features in the New Stage of Rural Economic Development

The emergence of numerous new features in China’s rural economy at the turn of the century indicates that the economy has entered into a new stage of development. Its major features are as follows:

1. The functions of rural economy in the national economy have expanded from the original supply function of producing agricultural products and industrial products for daily use in the main to a demand function of providing a consumption market for agricultural and industrial products, while its original supply function is maintained.

 In the past twenty years of reform and opening, because the national economy as a whole started at a low level, the basic daily necessities such as clothing, food, housing and transportation were in severe shortage, the urban industry was in great need of capital accumulation and the consumption of urban residents was in urgent need of improvement, hence the function of rural economy was basically set at the level of supplying agricultural products and some industrial products for daily use, and the consumption of farmers was also set at the level of "food and clothing". With urban and township residents became better off, there emerged a relative surplus in the consumption of agricultural and industrial products. However, the production scale of agricultural and industrial products for consumption, instead of being decreased, had to maintain stable and increase slightly, owing to the pressure from the following two aspects. On the one hand, the basic demand for consumption among the middle and low income urban residents and the majority of the farmers was not satisfied, while such a demand was a result of the unbalanced economic development as well as that of the insufficient macro distribution of income. Therefore, the consumption capability of this group is desired to increase urgently. On the other hand, agricultural and industrial industries for consumption products need to maintain employment. And accumulation of capital is necessary for adjusting the product structures and quality. This means, the rural economy is required to perform a demand function to provide market. Although the increasing demand in rural market is merely potential today, it is of vital importance to the development of the national economy in the next new stage.

2. The balance between supply and demand, which used to be decided by the increase of total supply and the quantitative increase of supply, is now determined by the simultaneous increase of its the total supply and total demand and the match of the structures of supply and demand.

The supply of agricultural products in the past was in serious shortage, and the key element in the balance of supply and demand depended on whether the total supply could increase. Against the background that the supply of agricultural products can satisfy people’s demand for food and clothing of the whole nation, its continuously decreasing price and difficult in sales, demonstrate two possibilities. On the one hand, it might mean that the supplier is not able to meet the changing demand even though its supplying system (including price, variety, quality and quantity) has been adjusted. And on the other hand, it might mean that the total demand is not sufficient, or the structure of demand is not balanced. The supply and demand of agricultural products in China at present actually has problems in these two aspects.

Mechanism of supply aiming at eliminating shortage will inevitably lead to the pursuance of increasing output by stimulating the price step by step. In the course of gradually satisfying demand, the logical results include: the structure of quantity, variety and quality of the supply can not be adjusted to meet the demand, the increasing price has prevented the market from developing different consumption levels, thus limiting the market expansion. In terms of demand, it has been assumed for long that demand is always vigorous and shortage of supply is common. Therefore, the development of demand has been placed on secondary position. Although the target of total supply is usually calculated on the average figure per capita, which is not high, the total demand is in fact worked out based on the urban population only, which account for only 20-30% of the total population. This has led to two consequences. Firstly, the demand for food of the rural population, which account for the majority of the total population, can not increase in accordance with the growth of total supply, hence a notch in the demand has emerged. Secondly, the consumption of agricultural products of middle and low standard by farmers and a large number of urban residents with middle or low income have been checked, hence a gap in the demand has emerged. The deep rooted elements that lead to this situation are complicated and need to be discussed separately. However, it is no doubt that the time has passed when the balance between demand and supply was determined purely by supply, and the time has come when the demand and the supply should accommodate each other.

3. The allocation of production elements in the countryside will, on the one hand, move from agriculture and the countryside to merge into non-agricultural sectors and the urban areas, and on the other hand, high quality inputs of production elements will be needed.

It is the internal demand of the economy that production elements move to sectors and areas with higher performance. The production elements in the countryside used to be restrained within the agricultural sector before the reform and opening. Moreover, under the policy of "taking grain as the key", they were also constrained in the internal structural allocation. The structure of rural economy is being shifted to market economy after the reform and opening and the increase of free flow of rural labour, land and capital. However, the rural economy is still at such a stage that the primary objective is to provide people with enough food and that the non-agricultural sector almost doesn’t exist. The flow of production elements is mainly within the agricultural sector and the non-agricultural sector in the countryside. This flow has promoted the harmonious growth of the production of grain, cotton and other products as well as the development of rural industry, which is represented by township enterprises. At late 1990s, farmers were better fed and clothed, they had an urgent need for increasing incomes, while the development of the non-agricultural sector was constrained by local production elements and the higher marginal cost in expanding the market, hence resulting in the reallocation of large numbers of rural labour and capital out of the countryside for higher marginal efficiency. This has been evidenced by the fact that the number of rural labour flowing into the urban areas is on the increase, and that the township enterprises and private sectors are moving towards, and even entering into the urban areas.

In addition, high quality elements are required to be injected into the countryside so as to form a productivity that is more suitable for the market. It is necessary to input advanced technology, capital and agricultural production material if the agricultural growth is to be changed from quantitative growth to the growth in both quantity and quality. Although the non-agricultural products have accumulated assets on a great scale and have fairly flexible systems, the overall quality of the capital is not high. It is necessary to have a second round of undertaking reform as it happened in the 80s-90s, when technology, talents and capital were absorbed from the state-owned enterprise and foreign invested enterprises.

4. The stability and restructuring of the national economy will rely increasingly on the de-agriculturalization of surplus rural labour or large scale.

It is an inevitable trend to adjust the structure in the national economy. However, the adjustment is confronted with the serious problem of "gap in the changing demand". Demand is required to contribute to the national economy in two aspects. First is to consume the surplus industrial and agricultural products for daily use to maintain the stability of the economy. Second is to accumulate enough capital for investment and realize structural adjustment after the traditional industrial / agricultural products have obtained stable, or even increased market share. One of the key points in creating new demand is to increase the overall income of farmers and promote the capability of consumption by means of transferring the surplus rural labour on large scales. Judging from the current income and expenditure of urban residents, we can see the following: Firstly, the overall consumption level has entered the stage of low increase. International experience has shown that it will normally take over 10 years before obvious changes can be seen. Secondly, the current and expected expenditure on housing, medical care and education has increased. All these "over ten thousand yuan" expenses will certainly reduce the speed or delay the increase of other consumptions. Thirdly, the increase rate of urban income has dropped significantly. It is mainly because the national economy has entered a period of violent adjustment. International experience has shown that it will take 10 years or even longer to complete such adjustment. As a contrast, the rural income and consumption are only equivalent to the urban levels of the mid 80s. The key in rural consumption is to increase the quantity. Take grain alone for example, if each farmer increases the consumption of animal food and indirectly consumes an additional 50 kg of grain, the annual total consumption will be over 40 billion kg. That is nearly half of the 100 million tons of low quality grain.

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