Capital deepening, land use policy, and self-sufficiency in China's grain sector

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  • aimed at securing arable land. Our simulation analysis reveals that the attainment of a 95%self-sufficiency rate would be quite challenging for China, unless the terms of trade in agriculture

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    China Economic Review 24 (2013) 95107

    Contents lists available at SciVerse ScienceDirect

    China Economic Reviewsufficiency rate for grain at the level of 95%, and complete self-sufficiency for food staples, even under the current circumstanceswhere the grain sector is barely able to sustain its international competitiveness.2

    When the land-using characteristics of grain production are taken into consideration, one of themost effectivemeasures to secureself-sufficiency, compatiblewith the international treaty, is to regulate the conversion of farmland for other uses, and then to enhanceland productivity. However, in order for the protected farmland not to be left fallow, a certain amount of resources, including farmlabor andmachinery, have to bemobilized forwork on the fields. Owing to considerable increase in the opportunity cost of farm laborin China for the past few decades, rural labor has significantly migrated out of agriculture. This necessitated the replacement ofdecreasing labor with capital-intensive technologies (Van den Berg et al., 2007). In fact, the past 20 years witnessed a rapid capitalspite of the fact that their comparativeCouncil of the People's Republic of Ch Corresponding author. Tel.: +81 75 753 6202; faxE-mail address: (J. Ito).

    1 China's AMS (Aggregate Measurement of Support)exceed the de minimis exemption for product-specicinput subsidies are imposed on Chinese agriculture (H2 China's soybean production has completely lost its

    from abroad. Production of maize, one of the most im

    1043-951X/$ see front matter 2012 Elsevier Inc. A in agriculture is on the verge of being eroded or has been lost entirely. The Stateiterated in 2008 that the government pursues a national goal of maintaining a self-1. Introduction

    All member countries of the Worinterventional and/or protectionist polproduction (Zhu, 2004).1 Meanwhile, timprove substantially in favor of producers. China's policy makers must therefore seriouslyreconsider whether adhering to the policy goal of grain self-sufficiency is worth the effort.

    2012 Elsevier Inc. All rights reserved.

    de Organization (WTO), including China, are restricted more or less to employingeasures, such as price support and subsidy payments, in boosting domestic agriculturalare many countries in the world that try to sustain or improve food self-sufficiency, inJEL classification:D24Q18Q24

    Keywords:Capital deepeningGrain self-sufficiencyProduction functionChinaChinese agriculture is caused by farmers' behavior in response to the government's directivesCapital deepening, land use policy, and self-sufciency in China's grain sector

    Junichi ITO a,, Jing NI b

    a Division of Natural Resource Economics, Graduate School of Agriculture, Kyoto University, Kitashirakawa Oiwake-cho, Sakyo-ku, Kyoto 606-8502, Japanb Basic Research Division, Japan-Cooperative General Research Institute, Japan

    a r t i c l e i n f o a b s t r a c t

    Article history:Received 5 June 2012Received in revised form 12 November 2012Accepted 18 November 2012Available online 27 November 2012

    The objectives of this paper are twofold. First, we aim to clarify the mechanism by which use offarmmachinery in Chinese agriculture has grown rapidly over the past decades, using a separateCobbDouglas (SCD) production function. Second, we determine under what condition willChina's grain self-sufficiency be secured in the next decade. Our empirical results reveal that thesupply and factor demand functions based on the SCD form can significantly explain the reality, inparticular, the capital demand function. This finding suggests that the recent capital deepening in: +81 75 753 6191.

    commitment is insignicant in theWTO Agreement on Agriculture. Thus, the government subsidies cannotsupport of 8.5% of the total value of farm product. Moreover, other stringent restrictions on investment anduang & Rozelle, 2008).international competitiveness recently, the consequence of which is a substantial increase in importationportant cereals in China, is also on the verge of losing its international competitiveness.

    ll rights reserved.

  • deepening in Chinese agriculture, and the speed with which farm machinery spread throughout the country during the period hasoutpaced that of other factor inputs.

    The objectives of this paper are twofold. First, we aim to clarify themechanism by which use of farmmachinery has grown rapidlyover the past decades, depending on the production function analysis. This paper, on this regard, hypothesizes that the recent capitaldeepening in grain production is caused by not so much a simple factor substitution induced by a rise in the wagerental ratio, butrather by farmers' behavior in response to the government's directives aimed at securing arable land. To verify the hypothesis, wespecify the production function in a separate CobbDouglas (SCD) form. Although it has rarely been used in empirical studies, ourresults show that the SCD outperforms the CD in terms of an explanatory power of the time-seriesmovement of farmmachinery input.

    Second, we determine under what condition China's grain self-sufficiency will be secured in the next decade, with a specialemphasis on the terms of trade in agriculture, land use policy, and technological progress. Analystswho tackle this important questionusually employ computable general equilibrium (CGE) models (e.g., Chen & Duncan, 2008; Felloni, Gilbert, Wahl, & Wandschneider,2003; Yang & Tyers, 1989). However, considering the fact that the large variations in projected supplydemand balance comeprimarily from the production side (Fan&Agcaoili-Sombilla, 1997), we shed light only on supply responses to price changes, land use,and technological change, relying on an outside source for the demand analysis. The major goal of this paper is not to predict theself-sufficiency rate accurately, but rather to identify the key factors that influence grain supply capacities. Our simulation analysisreveals that Chinawould find it very difficult tomaintain the grain sufficiency rate at the current level, even if the terms of trade in thenext decade follow a similar track in the past 20 years. Although it is possible that the more stringent regulations on farmlandconversion and accelerated productivity increase can help attain the policy goal, this is not likely to occur without a more seriouscommitment by the government to farmland preservation and intervention in grain market.

    The remainder of this paper is organized as follows. In Section 2, we provide relevant background information on grain

    96 J. Ito, J. Ni / China Economic Review 24 (2013) 95107production and land use policy in China. Section 3 contains a brief explanation of the empirical model. In Section 4, we estimatethe two types of production functions, the SCD and CD, and compare their explanatory powers for grain supply and factordemands. This section also shows the simulation results with respect to grain self-sufficiency. Finally, Section 5 concludes with abrief summary of our results and draws some policy implications.

    2. Grain production and land use policy

    2.1. Grain production

    Fig. 1 illustrates how the producer's price of grain, prices of fertilizer and farmmachinery, and the non-farmwage rate in rural areashave changed over the past two decades. We computed the Laspeyres index of grain price using FAOSTAT (Food and AgricultureOrganization Statistical Database) that provides data on domestic producer's prices of wheat, rice, maize, soybean, tubers (starchy roots)and others (barley, oats, and rye), and the corresponding output quantities. Data on factor input prices are obtained from the ChinaStatistical Yearbook (CSY) published by theNational Bureau of Statistics. The non-farmwage rate in rural areas ismeasured by rewards oftownship andvillage enterprise (TVE) employeesdivided by the total number of employees (thedata source is the Statistical Year BookofChina's TVEs). Over the past two decades, the prices of fertilizer and farmmachinerywere relatively stable, while that of grain fluctuatedsignificantly. The non-farm wage rate has consistently increased for the period 19912009 with an annual rate of more than 10%.

    The year 1991 is a turning point for China's agricultural price policy in the sense that the government introduced the price-supportprogram for the first time in the interest of farmers, putting an end to the scissors-form differential price system (or the below-marketprocurement pricing system) that had been in place. However, the reform, accompanied by a rapid rise in producer's prices and





















    1990 1995 2000 2005 2010

    Grain Fertilizer Machinery Rural wage (right axis)

    Fig. 1. Price indexes.Sources: China Statistical Yearbook (CSY), Statistical Year Book of China's Township and Village Enterprises (TVEs), and Food and Agriculture Organization StatisticalDatabase (FAOSTAT).

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    97J. Ito, J. Ni / China Economic Review 24 (2013) 95107overstocked inventory, created a huge financial burden, throughwhich the government reversed the pricing policy toward liberalizationbefore China acceded to the WTO in 2001. Thus, we can say that the wide variation in the grain price during the 1990s reflects thetransformation of the agricultural price policy fromprotectionist tomarket-oriented (Huang, Liu,Martin, & Rozelle, 2009;Martin, 2001).

    Fig. 2 shows the index of factor inputs that are used for grain production. Section 4 explains how the data are processed. Farmlabor has decreased over the years, declining more pronouncedly from the 2000s onward. An increase in the non-farm wage rate,shown in Fig. 1, is considered to be a major contributor to the migratory movement out of agriculture. While the consumption offertilizer stagnated from the mid-1990s to the outset of the 2000s, it increased thereafter. Although sown areas for grainproduction remained virtually unchanged during the 1990s, it decreased continuously until 2003, and then turned around in2004. The fluctuation of sown areas is discussed in more detail below in the context of land use policy.

    Of particular interest in Fig. 2 is the fact that farmmachinery inputmeasuredbyhorsepower kilowatt and thenumber of small tractorsgrewmore rapidly than fertilizer use from the late 1990s. The number of large tractors, although not shown in Fig. 2, has increasedmorequickly than small tractors since the turn of the century. Indeed, farmmechanization is relatively easier in grain production, compared toproduction of other cash crops, but this is somewhat surprisingwhenwe consider the situation in Chinawheremost farmers face severeliquidity constraints in the presence of credit market imperfection, and therefore cannot afford to purchase farmmachinery (Feder, Lau,Lin, & Luo, 1992). According to a household survey byXi and Chen (2007) conducted in Shanxi Province, 66% of the sampled farms do notown farm machinery, and 68% have no intention to purchase it in 1 or 2 years. This suggests that instead of purchasing machineryequipment on their own, they cultivate their farmland using machinery services provided by some specialized farm households and/or









    1990 1995 2000 2005 2010Fertilizer Machinery Small tractors Labor (right axis)Sown areas (right axis)

    Fig. 2. Factor input indexes.Sources: China Statistical Yearbook (CSY).organizations (Carter, Zhong, & Zhu, 2012; Ji, Yu, & Zhong, 2012). Anecdotal evidence also indicates that this is why credit constraintsassociatedwith imperfect capitalmarket do notmatter for Chinese farmer tomechanize the crop production process. Since the farm sizeof Chinese agriculture is quite smallwith around 0.6 ha per household, this type of farmmechanization is quite rational and economical.3

    2.2. Grain self-sufciency and land use policy

    Using the FAOSTAT, we computed the grain self-sufficiency rate, defined as production divided by domestic supply quantity, theresults of which are illustrated in Fig. 3. Grain includes wheat, rice, maize, soybean, tubers, and others. A caveat is needed to interpretthe figure, because it takes no account of the self-sufficiency rate of each crop and the changing composition of grain production andconsumption.We computed another indicator of grain self-sufficiency rate in terms of land use.4 Fig. 3 shows that the self-sufficiencyrate measured by land use is always lower than that in terms of weight, with growing discrepancies between the two indicators. Thisis due to the fact that soybean whose yield is far lower than that of other crops increased its import volume substantially in recentyears. Although the self-sufficiency rate in terms ofweight had never been less than 95% at least since the 1980s until 1999, it droppedsharply in 2000, and dipped slightly below 90% during 20012003. Although not shown in Fig. 3, grain production recorded thelowest level in 2003 over the past 20 years at 431 millionmetric tons.5Meanwhile, the ratio of sown areas for grain production to thetotal areaswas also on a downward trend in the 1990s, becomingmore pronounced during 19992003. The loss of cultivated land onthe whole has also significantly accelerated since the mid-1990s, especially during the first several years of the 2000s (Chen, 2007).

    3 Agricultural machinery stations and/or rural producer organization play an important role in providing farm households with farm machinery services.4 We estimate sown areas that are required for meeting the total consumption of grain with domestic supply, using data on the yield and consumption quantity

    of wheat, rice, maize, soybean, tubers, and others.5 Statistics from the CSY follow the rule that the output of tubers (sweet potatoes and potatoes, not including taros and cassava) are converted into that of grain

    at the ratio 5:1, that is, 5 kg of fresh tubers are equivalent to 1 kg of grain.

  • 98 J. Ito, J. Ni / China Economic Review 24 (2013) 95107However, the sown areas for grain production increased by 10.5 million hectares between 2003 and 2010 (or equivalently, a 10.5%increase for the period), while the quantity of grain production reached a record high of 546 million metric tons in 2010. As a result,both the self-sufficiency rate and the sown area ratio rebounded sharply from 2004.

    It is not surprising that the self-sufficiency rate fluctuated in tandem with the ratio of sown area, when the land-usingcharacteristics of grain production are taken into consideration; the sown areas are likely to directly affect the quantity of grainproduction, other things being equal. Yet, the reverse causality is also likely in the case of China. Policy makers who are deeplyconcerned about food s...


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