Transforming the Dualism World of China
From Observer, page 45
Translated by Lam Li
The Chinese planned economy has two legacies – one is the state-owned-enterprise (SOE), a hybrid of politics and business without a clear division of assets; the other is the dualistic structure (二元), which divides urban and rural production and resource mobility. These were two pillars once supporting the survival of the planned economy.
The dualistic, urban-rural structure has been in existence since the Song dynasty and dates back more than 1,000 years. The structure was not actually institutionalized until the 1950s though, when the planned economy called for separate household-registry (户籍) accounts for urban and rural residents.
From that day on, the urban and the rural have become two separate entities inaccessible to each other, as the institution of dualism places strict limitations on the mobility and flow of resources. It binds farmers to their farmland and traps them in rural areas, which keeps things in place for the benefit of the planned economy.
China’s economic reform in fact started in these rural areas with the introduction of Household Contract Responsibility System* (农村家庭承包制) among farming families.
(*Editor’s note: Under the system, farmland is still public-owned but farmers can use the land through long-term contracts; and they are allowed to plan their farm production, management and sales independently. They are also encouraged to diversify their production models by venturing into businesses)
The contract system has motivated farmers’ initiative in becoming more productive and given rise to rural-run factories and township enterprises. The system may have removed the legacy of the planned economy and the people’s commune (人民公社制度), but it has not disposed of the mechanisms that maintain the urban-rural dualism--they remain intact.
In China’s rural areas, farmers have rights to land where they can build upon. The land doubles as rural residents' production resource and insurance for their livelihoods. This is the major difference between the lives of urbanites and villagers under the dualism structure.
Since 1984, the core of reforms has shifted from the rural areas to the cities. From 1985 to now, state-owned enterprises (SOE) have been under constant reorganization and yielded great improvements. Yet, more remains to be done, such as reforming monopolized sectors and accelerating the creation of a budgetary mechanism for managing state assets.
While the first pillar of the planned economy has been dealt with over the years, the second pillar – the dualism mechanism, has remained untouched. Thus, to truly end the planned economy era and realize a genuine market economy, China must reform the dualism mechanism.
The distinct household-registry for urbanites and rural residents is its main feature. However, the unification of an urban and rural household registry alone will not remove all the barriers that restricted farmers’ mobility into the cities, nor will it accelerate the urbanization process of rural areas. The key issue here is the land that is tied to the rural household-registry. In other words, the contract land and rural housing system must undergo reform promptly.
Allow Land Use Rights Transfer
The Household Contract Responsibility System was the most important reform in the early days of China’s economic transition. It deserves much credit for raising the living standards of Chinese farmers over the past 20 over years. However, the system also has many limitations, which are becoming more glaring as years pass.
At present, it is virtually impossible to abolish the system without triggering upheavals in the countryside. In the absence of a replacement mechanism, removing the system hastily will only lead to social instability.
An alternative solution is to allow farmers to transfer the rights of using their land under the system. In other words, the system stays but farmers – on a voluntary basis – have the option to transfer, sub-contract, lease out, and share the land use rights with others. This will pave the way for scaled management and the development of professional farmers’ organization to commercialize the agricultural sector.
Another proposal is to set up a “Land Bank”, in which the farmers can leave their contract land in the care of a rural trust committee if they leave for cities in search of jobs. They can then earn annual interest rates from their land deposits.
If the land use rights could be transferred, many limitations under the current system would be overcome and accelerate the urbanization process. The unification of urban-rural household registry will eventually come around when the urban areas’ capacity – namely the supporting hardware and infrastructure – to absorb rural population is enlarged.
In the process, the software – namely the rural population – would not become a burden as they enjoy better income, not only from their urban employment but also from rural assets, such as rental of property, interest from land deposits, and returns from holding shares on pieces of land.
Allow House-site Conversion
Another constraint under the current system is the “collective ownership” of house-site land. Rural populations apply for such land from a collective entity, upon approval they receive the rights to use the land for free. However, the term “collective ownership” is not clearly defined, and ironically, houses built on such land are considered personal property.
When we push for reform in the dualism mechanism, how do we deal with house-site land belonging to farmers who have left for urban jobs? At present, house-site land is nationalized and local governments would pay farmers a sum of compensation to acquire such land.
In reality, many farmers are dissatisfied with such an arrangement. Here, I would like to explore three possibilities for dealing with the matter:
Under the current circumstances, the third option – house-site conversion – appears to be the most appealing one.
Allow Mortgage of Rural Land
As contract and house-site land are both “collectively owned”, farmers are only entitled to the land use rights. The law forbids them from mortgaging neither the land nor the structures on it. In transforming the dualism mechanism, such legal barrier should be removed. Credits can be channeled into agriculture development and enhanced productivity, thus improving the incomes of rural population; it can also help to finance the relocation of rural population into the cities and promote urbanization.
The crucial question here is to whom they could mortgage their assets? If they opted for an individual, be it a fellow villager or otherwise, there may be risk of encouraging “loan shark” businesses or lead to disputes. Similarly, mortgaging the assets to an enterprise may open room for abusive land acquisition.
As such, a better solution is to set up a “Land Bank”, which functions like a rural financial institution. Alternatively, let those better managed rural trust fund organization or township banks handle the mortgage of rural contract and house-site land along with property built on them.
The mortgage problem should be viewed as a priority task. We have to understand that rural population looking for jobs or relocation in the cities, they are facing urgent need of money to realize the move, and very often, they face problems in sourcing credits.
By mortgaging their rural assets, they can afford to fund their needs in the cities, such as buying or renting accommodations, or to set up small businesses, all of which can ensure the stability of their livelihood.
For those who choose to remain in the countryside, the mortgage can be channeled to purchasing new equipment for farming, or building new facilities for their crops or animal farms. It will help them to improve productions and efficiency, thus, leading to better incomes to repay installment fees and lead them to live better lives.
Once the land mortgage guidelines are laid down and rural insurance policies are strengthened, the rural economy will be looking up. This will benefit not only those opting for a life in the cities, but will also help those who choose to stay behind. In fact, even the urban residents are beneficiaries because when the incomes of rural populations improve, itwill also enhance rural-urban economic ties.
Reforms Stimulate Domestic Demand
In conclusion, reforms of the dualism mechanism – namely allowing transfer, sales, conversion and mortgage of rural land – will stimulate development in the agricultural sector, increase farmers’ incomes and accelerate urbanization. Consequently, that will narrow the income gap between the rural and urban populations. This will be a great step forward to developing China’s sustainable economy.
Today’s economy is largely supported by investment, with domestic consumptions trailing behind. Expanding our domestic demands is the way forward. The key to this is to improve the incomes of farmers, change their lifestyles and consumption patterns. If we managed to put in place a system that guarantees farmers’ basic livelihood, then the lower income group will be less hesitant in spending. This will immensely expand domestic demands.
Where is the biggest market in the world waiting to be explored? It is in China’s countryside, where enormous numbers of Chinese farmers are waiting to be rich. Once they move on to becoming the middle class, the impact on China’s and the world’s economy will be mammoth.
All the reforms stated above need to be institutionalized by law. To avoid acting hastily, the government can carry out pilot projects in selected regions. Later, based on experience and improvisation, the best suited model can be gradually extended and implemented nationwide.
No doubt that many laws at present contradict the above reforms, yet, if that was indeed the right path to follow, laws can be amended or new ones drawn up to accommodate change. As we look back at the 30 years of reform and opening up, we have indeed come a long way by taking one step at a time.
