comparative advantage and food grain imports in china

Journal of International Development: Vol. 5, No. 3, 275-289 (1993)

COMPARATIVE ADVANTAGE AND FOOD GRAIN IMPORTS IN CHINA

LU FENG School oj’ Business and Economic Studies, Leeds University

Abstract: One of the significant features of Chinese economic development in the 1980s was that grain imports increased sharply, while the whole economy experienced rapid growth and reform. This paper attempts to measure the domestic resources costs (DRC) of rice and wheat production in China (two of the most important grains in the Chinese grain sector) during the period 1981-87 and to examine the questions of whether, or to what extent, the level of comparative advantage in grain production can explain the performance of China’s grain trade. Substantial comparative advantage in China’s rice production and considerable comparative disadvantage in wheat production have been found by the measurement. These preliminary results suggest that the relative costs incurred by China’s domestic grain sector were likely to have played some role in determining both the structure of its grain trade and its large scale of net wheat importation in the 1980s.

1 INTRODUCTION

One of the significant features of Chinese economic development in the 1980s was that food grain imports increased sharply, while the whole economy experienced rapid growth and reform. With exception of a short period of only 2 years, China has kept the position of a net importer of food grain since 1961. However during the period 1977-82 the annual net importation of food grain into China reached a new record each year for 6 years. The annual average net import of food grain in 1979-88 was 8.90 million tons, compared with 3.90 million tons in 1961-70 and 2.35 million tons in 1971-76. As far as the commodity structure of imported food grains is concerned, wheat predominated in this period, just as it did in the 1960s and the 1970s (Figure 1).

Obviously the data give rise to an important question: what are the causes of the increase of net imports of food grain in China? From the economic point of view the traditional theory of comparative cost may provide an analytical framework within which the causes of international trade can be explained. It has been argued that the trade trend in a region may be consistent with the theory of changing comparative advantage, despite the fact that numerous price and trade policies in various countries tend to distort the patterns of production from those that would emerge if free market prices operated (Anderson, 1986). It also has been suggested that as her overall economy expands, China’s comparative advantage in food production will decline,

0954- 1748/93/030275- 1 5$12.50 0 1993 by John Wiley & Sons, Ltd.

276 Lu Feng

-4 1080 1985 1970 1975 1980 1985

YEAR

Sources: ZGWMNJ (1 904- 1989)

Figure 1. China's grain trade (1960-88).

and this is likely to lead to an expansion in the net requirement of foreign exchange for food trade (Yang and Tyers, 1987: 14). Were these perspectives treated as hypotheses they may need to be tested against the empirical evidence. The proper way to conduct this kind of test would be systematic measurement of comparative advantage of grain sector in China by an appropriate technique on the one hand, and examination of the relation between the result of the measurement and Chinese grain trade performance on the other hand. However, because of lack of adequate data the measurement cannot be conducted systematically over a period of several decades. Instead, this paper uses data published in recent years to measure the comparative advantage of China's food grain production in selected years of the 1980s. Hopefully, the empirical evidence provided in this paper may shed some light on the question of whether, or to what extent, the levels of comparative advantage of China's food grain production can explain the performance of China's grain trade.

2 MEASUREMENT TECHNTQUE AND METHODOLOGY

The technique of measuring comparative cost in a specific activity which will be employed in this paper is called the domestic resources costs approach (referred to as DRC below). Generally speaking DRCj is a measure of the social opportunity cost of earning or saving a net marginal unit of foreign exchange in terms of the value of the domestic inputs employed by the jth activity.' DRCj can be calculated through

The concept of DRC used here is similar to that discussed in Pearson et al. (1976).

Comparative Advantage and Food Grain Imports 277

formula (1) below.

where: Fsj

Vs

Ej

Uj

= total quantity of the sth domestic input of production employed

= shadow price of the sth domestic input employed in the jth

= measure of the net external benefits or costs imparted by the j t h

= total value of the output of the jth activity at the parity price in the

The relation between DRCj and the degree of comparative advantage of the j th

by the jth activity.

activity in terms of domestic currency.

activity to the rest of the domestic economy.

world market in terms of foreign currency.

activity can be assessed by the criterion below:

Comparative advantage ( = ) DRCj < V

where V is the shadow price of foreign exchange. Alternatively, the ‘ V‘ may be incorporated into formula (1) to obtain formula (2).

To distinguish from ‘DRC’ in formula 1, we call the measurement in formula (2) the ‘DRC coefficient’.

XFsj Vs - Ej Uj V

DRCj coefficient =

Then:

Comparative advantage ( = ) DRCj coefficient < 1

It should be obvious that the basic point behind this measurement approach

(2)

is to compare domestic costs with foreign costs at which a given quantity of output may be provided. The value of the output at the parity price in the world market in foreign currency (the denominator in formula (1) above) or in domestic currency (the denominator in formula (2) above) is adopted as the approximate measurement of the foreign costs at which the output may be provided. The numerators of formula (1) and (2) represent domestic costs of the output. The case in which the domestic costs are less than the foreign costs would suggest some comparative advantage in domestic production of the output. To be more specific, comparative advantage in home production would exist if DRC is less than V(the shadow exchange rate) or the DRC coefficient is less than one. The more DRC is less than r! or the more the DRC coefficient is less than one, the stronger is a country’s comparative advantage in that commodity. In the opposite case, a DRC in excess of Vor the DRC coefficient in excess of unity would imply some comparative disadvantage in domestic production. The larger the margin by which the DRC exceeds r/: or the larger the margin by which the DRC coefficient exceeds unity, the larger the comparative disadvantage. The particular case in which the DRC is equal to r! or the DRC coefficient is equal to unity, suggests neither comparative advantage nor disadvantage in domestic production; for the sake of simplicity we will refer to this as the ‘break-even’ level of comparative advantage.

278 Lu Feng

In order to employ the DRC approach in the case study of China’s food grain production, several points need to be clarified with respect to the technique and methodology by which this technique will be applied.

It is unlikely that production of significant commodities such as food grain incurs only purely domestic costs. Usually the provision of food grain not only entails costs of domestically produced inputs, but also involves direct or indirect employment of inputs produced abroad. To use the DRC approach properly, it is necessary to divide the total costs of the jth activity into the costs of the non-tradable inputs which are produced domestically and those of the tradable inputs which are actually or possibly imported from abroad. As far as a certain productive activity is concerned, domestic costs can be reasonably compared with those in the rest of the world only if the costs of tradable inputs are subtracted from both domestic and foreign costs. Otherwise the DRC of foreign exchange earned or saved may not be measured at all, as domestic costs involve tradable inputs which are actually or possibly purchased with foreign exchange.

Secondly, it is very difficult to measure E, the net benefit or costs imparted by food grain production to the rest of the domestic economy, because some non-economic factors and even value judgements may be involved. In this paper only economic benefit and costs will be taken into account for the measurement. From society’s point of view the subsidy given to, and tax levied on, food grain production may be treated as cost and benefit imparted by food grain production respectively. So it is assumed that the value of E is equal to the balance of the tax levied on, and the subsidy given to, food grain production in China.

The last but one of the most difficult points for applying this formula in the case of China’s grain production comes from shadow prices of inputs involved. The shadow price of an input employed in a certain activity may be defined as the contribution that it would have made to economy had it not been used up in this activity. The major difficulty in estimating shadow price is that it depends not only on economic circumstances, but also on economic and social goal, for example, on what the planners want to achieve (Wood, 1984: 5). As far as traded goods are concerned, the general rule is that their shadow prices are the border prices (Little and Mirrlees, 1974: 161). This rule will be adopted in this paper. A problem remains for other inputs which include the primary factors and non-traded goods. The costs of the primary factors will be discussed and estimated later in the paper, and that for non-traded goods will be approximated by the relevant sample data.

With the above assumption and adjustment, now formulas (1) and (2) can be arranged into (3) and (4) respectively, which will be used in this paper to measure the comparative advantage of food grain production in China.

N + L + K + N T - T + S U - TR

DRC = ___

or

N + L+ K + N T - T + S

(V - TR) V DRC coefficient =

(3)

(4)

where: N L

= labour cost of the food grain production in domestic currency. = land cost of food grain production in domestic currency.


K = capital cost of food grain production in domestic currency. NT = costs of the other non-tradable inputs rather than the primary

T = tax levied on food grain production in terms of domestic currency. S = subsidy received by food grain production in terms of domestic

U = total value of the output of food grain produced domestically at

TR = tradable inputs costs of food grain production in terms of the

V = shadow price of foreign exchange.

factor costs ( N , L, K ) in domestic currency.

currency.

the parity price in terms of foreign currency (US dollar).

dollar.

3 COSTS OF PRODUCTION

In China the term ‘grain’ or ‘cereal’ normally includes not only grain crops (rice, wheat, maize, sorghum and miscellaneous grains such as millet, barley, buckwheat, etc.) but also soybean and Chinese yam (DSRSE, 1988: 382). Rice and wheat-the two most important grains, are selected, of which the DRC will be measured. Costs of production will be calculated using data obtained from a number of different sources, especially two sample surveys of production costs of main crops in China. The first survey was conducted by the Office of Commodity Price subordinated to several State Ministries and Bureaus such as Ministries of Food, Commerce, Light Industry, Forest; and the General Bureau of Commodity Price (referred to as ‘survey A’, below). The second survey, which covers cost data in the period 1984-88 was supplied by the General Centre of Management and Administration of Agricultural Ministry of China (‘survey B’, below). The data for the 1980s provided by these two surveys are usually derived from sample sizes of over 10002 (production teams or individual farming households) taken from most of the provinces in China.

The Costs of Primary Factors: N, L, K

Data on costs of the primary factors are derived from the two sample surveys of the production costs of the main crops in China, which are reported in the China Agriculture Yearbook (Zhongguo Nongye Nianjian), 1986-89 and Handbook of Economics for Technology-Agriculture (Jishu Jingji Shouce-Nongye Juan). The original data refer to costs for cultivation of rice and wheat in terms of RMB (Chinese currency) per mu (the Chinese traditional measurement of a unit of area which equals 0.0667 hectare). The data in terms of RMB per tonne are calculated through dividing the yield in terms of tonnes per mu by the costs in terms of RMB per mu.

Firstly, costs of land are derived by calculating the weighted average profits generated from production of several selected crops. Selection of the crops and assignment of the related weights for the individual crops are made approximately in accordance with the general pattern of the actual composition of crop cultivation, though some flexibilities have been tolerated in order to get over the difficulties

’Though in 1981 rice = 984, wheat = 805; in 1982 wheat = 892.

280 Lu Feng

resulting from the lack of the profit data for certain crops. Roughly speaking, grain crops accounted for nearly 80 per cent of China’s total sown area in the 1980s; about 12-1 5 per cent of the sown area was used in cultivation of various cash crops of which cotton, oil-bearing crops and sugar crops are most important; the remaining areas were allocated to other crops such as vegetables and green manure crops. Because of a shortage of data the third category of crops could not be considered in this calculation, so land costs will be derived from profit levels of grain crops and cash crops which will be assigned 80 per cent and 20 per cent weights respectively. Among various grain crops, maize is selected for the calculation in view of the fact that it has been the largest crop in terms of sown area after rice and wheat, and its profitability was relatively high over the period concerned. As for cash crops, cotton with 10 per cent weight, and peanut and beet with 5 per cent weights, respectively, are used in calculation of land costs for wheat production; while for rice, beet is replaced by another sugar crop-sugarcane, which has been one of the crops competing with rice in southern China.

Secondly, K , the opportunity cost of capital, is assumed to be equal to 15 per cent of the value of total material inputs employed in wheat and rice production.

Finally, N , the cost of labour, also needs more discussion. The original data on labour cost in the sample are derived by multiplying the quantity of labour working day per unit of area by the average value of labour cost per day. The problem is likely to be with the estimations of average value of labour cost per day. The value for 1987 was calculated according to ‘the costs of reproduction of labour’ on a regional basis. Though the calculation is unlikely to be exactly equal to the shadow price of labour, in principle it may be treated as a close approximation of the latter. However, figures for other years, estimated by a different method from that for 1987, are poor estimations since they are even below the average income level earned by a rural labourer in the corresponding years. In view of the fact that the actual income level in rural areas is likely to have been reduced by some institutional factor^,^ it may be reasonably assumed that the shadow price of labour per day at least should not be lower than actual average income earned by rural labourers per day. Based on these considerations actual average income earned by a rural labourer per day, which is estimated in Table 1, will be used to calculate labour costs of rice and wheat production in Table 2 for the period 1981-86.

Costs of Tradable Inputs and Non-tradable Inputs: TR and N T

There are two ways by which tradable inputs may be defined. Firstly, all inputs, excluding labour, land and capital, may be treated as tradable inputs. Secondly inputs may be treated as tradable inputs only if they are actually imported from abroad. Basically the second approach will be adopted in this paper. Because of lack of adequate data it is not possible to measure the allocation of tradable and non- tradable input costs in each input. Considering the situation in China, chemical

For example, it is well known that agricultural products had been underpriced in the pre-reform period in order to transfer resources intersectorally from agriculture to industry via the price mechanism. Although state purchase prices of agricultural products have risen substantially since the end of the 1970s. agricultural prices were still relatively low in the 1980s (Lardy. 1983: 3).


Table 1. Estimates of average income earned by a rural labourer per day (1981-86).

Year Number of Average Number of Annual Income earned

surveyed per household per household per capita labourer a

households number of people labourers income Per

Annual Per day

1981 18,529 5.50 1982 22,775 5.46 1983 30,427 5.43 1984 31,375 5.37 1985 66,642 5.12 1986 66,836 5.07

2.53 223.44 484.86 1.4413 2.58 270.1 1 572.63 1.9087 2.84 309.77 591.66 1.9720 2.87 355.33 664.47 2.21 50 2.95 397.60 691.28 2.3060 2.95 423.76 728.86 2.4296

"Average annual income earned per labourer is derived by (1) multiplying annual income per capita by average population per household; (2) dividing the result by number of labourers per household. Income earned per labourer per day is calculated by dividing the average annual income earned per labourer by the average number of working days, which is estimated to be 300.

Data in this table are from DSRSE (1989: 223-224).

Table 2. Costs of the primary factors (RMB/ton, ton/mu). ~~ ~ ~ ~~ ~~~

Year" Rice Wheat

N' L* K Yield N L' K Yield

1981 178.9 92.1 21.3 0.2361 186.3 132.6 28.6 0.1578 1982 180.3 107.9 21.1 0.2689 188.5 158.1 26.2 0. I792 1983 165.5 97.5 20.1 0.2902 168.1 140.6 24.4 0.2007 1984 150.7 87.1 19.1 0.3115 147.6 123.0 22.5 0.2221 1985 151.5 154.4 20.5 0.2999 144.8 197.5 24.2 0.2198 1986 152.3 187.0 21.6 0.3094 152.3 263.3 23.9 0.2122 1987 189.8 202.1 23.9 0.3166 155.9 262.4 27.6 0.2189

a Data for 1983 are not available; the costs of labour, land and capital in 1983 have therefore been estimated as the average of those for 1982 and 1984.

Yield data in the sample surveys refer to paddy. To convert paddy into rice involves three calculations: the loss of weight in the course of the conversion; the processing fee which has to be treated as a cost; and the value of bran generated from the activity of the conversion. Usually the value of the bran is higher than the processing fee. I use a conversion ratio of paddy and rice of 0.77, which is about 5 per cent higher than the usual level. to allow for the balance between the value of bran and the processing cost.

Labour cost is derived by multiplying the survey figures regarding working days spent in rice and wheat cultivation activities by the average income earned by the rural labourers per day from Table 1.

As discussed above, costs of land are calculated as weighted average profits generated from production of several selected crops. The profits from such production in 1981 and 1982 are equal to the value of main product plus that of by-product minus total production costs.

fertilizer and pesticide will be regarded as tradable inputs as they are the two most important inputs used in China's food grain production which are partially imported from abroad. However, all chemical fertilizer and pesticide, rather than that portion which is imported, will be calculated as tradable inputs because the marginal unit of their provision is imported. Costs of non-tradable inputs are calculated in Table 5.

282 Lu Feng

Table 3. Tradable cost for rice production.

Year Cost of chemical cos t of Cost of tradable fertilizer a pesticide" inputsb

RMB/mu RMB/ton RMB/mu RMB/ton RMB/ton $/ton

198 1 7.48 31.68 1.96 8.31 39.98 23.38 1982 8.68 32.21 2.16 8.03 40.30 21.32 1983 8.74 30.11 2.16 7.44 37.55 18.96 1984 8.80 28.25 2.15 6.90 35.15 15.08 1985 8.80 29.34 1.95 6.50 35.84 12.19 1986 8.62 27.86 2.41 7.79 35.65 10.33 1981 10.4 1 32.88 3.3s 10.58 43.46 11.68

~~ ~~ ~ ~~ ~~~ ~ ~~

a Data on fertilizer and pesticide used in rice production, in terms of RMB per mu, are from the two sample surveys mentioned above. I t is assumed that half of the fertilizer used in rice production is chemical fertilizer. Data in terms of RMB per ton are derived through dividing the data in RMB per mu by that of yield in terms ofton per mu from Table 2. Data for 1983 are not available; tradable input costs for that year have been taken as the average of those for 1982 and 1984. bCosts of tradable inputs in RMB per ton are converted into those in dollar per ton at the official exchange rate. The official exchange rate data are from ZGWMNJ (1990/91: 838-839).

Table 4. Tradable cost for wheat production

Year Cost of chemical cost of Cost of tradable fertilizer pesticide inputs

RMB/mu RMB/ton RMB/mu RMB/ton RMB/'ton $/ton

1981 7.54 47.78 0.49 3.11 50.88 29.15 1982 7.16 43.3 1 0.52 2.90 46.21 24.45 1983 8.05 40.10 0.51 2.54 42.64 21.54 1984 8.33 37.50 0.62 2.79 40.29 17.29 1985 8.78 39.95 0.46 2.09 42.04 14.30 1986 7.94 31.42 0.56 2.64 40.06 11.61 1987 8.99 41.07 0.77 3.52 44.59 11.99

Sources and calculation method are the same as used in Table 2.

4 CALCULATION OF OTHER ITEMS

Subsidy for and Tax on Rice and Wheat Production: S and T

The Chinese government began to subsidize agricultural activity by providing a subsidy for diesel oil used in the agricultural sector in the early 1960s. The subsidies received by the agricultural sector increased substantially in the 1970s. In addition to diesel oil, other inputs used in agricultural activity, such as chemical fertilizer, pesticide, agricultural machinery, plastic sheeting, electricity etc., received various degrees of government subsidy by the end of the 1970s. The total amount of subsidy to


Table 5. Costs of non-tradable inputs.

Year

1981 1982 1983 1984 1985 1986 1987

Cost for rice

Total inputs Non-tradable inputs,

RMB/mu RMB/ton RMB/ton

33.5 141.89 101.91 37.3 138.71 98.41 38.5 132.67 95.12 39.7 127.45 92.30 40.9 136.51 100.67 44.6 144.15 108.50 50.3 158.88 11 5.42

~~

Cost for wheat

Total inputs Non-tradable

RMB/mu RMB/ton

30.1 190.74 31.4 175.22 32.4 162.43 33.3 149.93 35.4 161.19 33.9 159.75 40.2 183.65

inputs, RM Blton

139.86 129.01 119.79 109.64 119.15 119.69 139.06

~~

Data on the total input costs in terms of RMB per mu are those of material inputs from the two sample surveys mentioned above. The data on total input costs in RMB per ton are derived through dividing the data in RMB per mu by the data of yield in terms of ton per mu in Table 2. Non-tradable costs are obtained by subtracting the tradable costs in Tables 3 and 4 from total input costs. Data on total input costs in 1983 are not available; it is assumed that total input cost in 1983 is the average of that in 1982 and 1984.

agriculture rose from 350 million R M B in 1970 to 2391 million R M B in 1978. However, the scale of the subsidy declined in the 1980s, partly because the Chinese government raised the procurement and purchase prices of agricultural products paid to farmers several times in the period (Qiao, 1989: 41-43). To calculate the subsidy received by rice and wheat production respectively, the assumption has been made that the total subsidy is allocated equally to each unit of total crop area sown. Thus the subsidy for rice and wheat production in terms of R M B per ton may be calculated using data on total subsidy, total crop area sown, rice and wheat area sown, yield of rice and wheat in R M B per ton in Table 6. Tax on rice and wheat production is calculated in Table 7.

Table 6. Subsidy for rice and wheat production (m = million).

Year (1)" (ab (3Ib (4) Subsidy" Total Total Rice and wheat Percentage subsidy sown area sown area of Rice and RMB/ton (m./RMB) (m.mu) (m.mu) (3) to (2) wheat

(RMB/mu) Rice Wheat

1981 2174 21 77.36 924.02 42.43 0.998 4.22 6.32 1982 2135 2171.32 910.00 41.91 0.983 3.66 5.49 1983 1346 21 59.90 932.80 43.19 0.623 2.15 3.10 1984 815 2163.32 941.33 43.51 0.377 1.21 1.70 1985 696 2154.39 919.32 42.67 0.316 1.05 1.44 1986 975 2163.06 928.23 42.91 0.45 1 1.46 2.13 1987 1057 21 74.35 914.86 42.08 0.486 1.54 2.22

"Data on the total subsidy are from ZGTJNJ (1989: 673). bData on the sown area are from ZGTJNJ (1988: 42). 'The subsidy for rice and wheat production in terms of RMB per mu is calculated by the following formula: the total subsidy x rice and wheat sown area as the percentage of the total area/the rice and wheat sown area. The subsidy for rice and wheat in RMB per ton is derived through dividing that in terms of RMB per mu by the yield in ton per mu in Table 2.

284 Lu Feng

Table 7. Tax on rice and wheat production. ~

Year Rice Wheat

Tax Yield Tax Tax Yield Tax RMBfmu tonlmu RMBfton RMBfmu tonfmu RMBfton

1981 3.12 0.2361 13.21 2.14 0.1578 13.56 1982 3.04 0.2689 11.31 2.31 0.1792 12.89 1983 3.17 0.2802 11.31 2.37 0.1904 12.44 1984 13.07 13.78 1985 4.30 0.2902 14.82 3.00 0.1985 15.11 1986 4.35 0.2974 14.63 3.08 0.2078 14.82 1987 4.92 0.2904 16.94 3.37 0.2031 16.59

Data for 1981 and 1982 are from sample survey ‘A’. Data for other years are from China Rural Area Sfafisfical Yearbook (Zhongguo Nonycun Tongji Nianjian) (1985-89). As data for 1984 are not available the tax on rice and wheat production in 1984 has been calculated as the average of that in 1983 and 1985. The output of paddy is converted into rice at the ratio of 0.77, which is about 5 per cent higher than the usual figure; for explanation of this arrangement, see note (b) below Table 2.

Table 8. Values of rice and wheat at parity prices (dollar per ton).

1981 1982 1983 1984 1985 1986 1987

Rice 394.6 382.0 303.6 240.4 222.1 194.1 184.5 Wheat 172.7 161.5 146.2 149.6 134.8 111.9 95.5

The figures for 1982-87 are derived by dividing China’s total value of rice exports and wheat imports in US dollars by total volumes of rice exports and wheat imports respectively. Original data are from ZGWMNJ (1984-88). However, data on export and import values for 1981 available are only in terms ol RMB (ZGTJNJ, 1983). It has been observed that the RMB cost ofearning 1 US dollar by rice exportation in 1982 was very close to the official exchange rate, while the RMB cost of 1 dollar equivalent wheat importation in 1982 was nearly 30 per cent higher than the 1982 official exchange rate. So the official exchange rate in 1981 has been used to convert the rice export value in RMB into dollar value; for wheat the adjusted exchange rate. which is set to he approximately 25 per cent higher than the official exchange rate, has been applied to convert its import value in RMB into dollar value.

Value of Rice and Wheat at Parity Prices

The parity price of a given product depends on the position of the product in the context of foreign trade, i.e. whether it is a net importable or exportable good. In China, rice is historically a net exportable good, whereas wheat is a net importable good. The relevant parity price for rice should be the export parity while that for wheat is the import parity. So export prices for rice and import prices for wheat from the Chinese sources are adopted in this study for calculation of the values of rice and wheat at parity price^.^

Strictly speaking, parity price of a product also depends on location of the product inside the country and the related internal transportation costs. For the export parity prices the costs incurred through the internal transportation of the goods between the place of their origin and the border of the country in question should be deducted from the export prices; while for the import parity prices the internal transportation costs between the border and final destination of consumption inside the country should be added to the import prices. The possible internal transportation costs could not have been taken into consideration in this calculation because of lack of data. Consequently the parity price for rice may have been slightly overestimated, and that for wheat may have been marginally underestimated.

Comparative Advantage and Food Grain imports 285

5 MEASUREMENT AND ASSESSMENT OF PRELIMINARY FINDINGS

Tables 9 and 10 give preliminary results of measurement of DRCs for rice and wheat production in China during the period 1981-87. It has been explained that there will be comparative advantage or disadvantage in individual productive activities when the DRC is less or larger than the shadow exchange rate for the country in question. To judge whether there is comparative advantage in rice or wheat production in China by the above measurements of results, we need to know the shadow exchange rates in China. Though data on Chinese official exchange rates are available, it may not be valid to assume they are equal to shadow exchange rates. The fact is that, parallel to the official exchange rate, there were other exchange rates functioning throughout the 1980s in China, such as ‘internal settlement rate’, ‘foreign exchange adjustment rate^',^ etc. Table 11 suggests that Chinese domestic currency (RMB) was very likely to have been overvalued under the official exchange rates since official exchange rates in terms of units of RMB per 1 US dollar were lower, to different

Table 9. DRC of rice production in China.

1981 1982 1983 1984 1985 1986 1987

N (RMB/ton) L (RMB/ton) K (RMB/ton) NT (RMB/ton) S (RMB/ton) T (RMB/ton) U ($/ton) TR ($/ton) DRC

178.9 180.3 165.5 150.7 151.5 152.3 189.8 92.1 107.9 97.5 87.1 154.4 187.0 202.1 21.3 21.1 20.1 19.1 20.5 21.6 23.9

101.9 98.4 95.1 92.3 100.7 108.5 11 5.4 4.2 3.7 2.2 1.2 1.1 1.5 1.5

13.2 11.3 11.3 13.1 14.8 14.6 16.9 394.6 382.0 303.6 240.4 222.1 194.1 184.5 23.4 21.3 19.0 15.1 12.2 10.3 11.7

1.04 1.11 1.30 1.50 1.97 2.48 2.98

Table 10. DRC of wheat production in China.

1981 1982 1983 1984 1985 1986 1987

N (RMB/ton) L (RMB/ton) K (RMB/ton) N T(RMB/ton) S (RMB/ton) T (RMB/ton) U (%/ton) TR ($/ton) DRC

186.3 132.6 28.6

139.9 6.3

13.6 172.7 29.8

3.36

188.5 168.1 147.6 158.1 140.6 123.0 26.2 24.4 22.5

129.0 119.8 109.6 5.5 3.1 1.7

12.9 12.4 13.8 161.5 146.2 149.6 24.5 21.5 17.3

3.61 3.56 2.95

144.8 197.5 24.2

119.2 1.4

15.1 134.8

14.3 3.92

152.3 155.9 263.3 262.4 23.9 27.6

119.7 139.1 2.1 2.2

14.8 16.6 111.9 95.5

11.6 12.0 5.45 6.83

5China adopted a two-tier exchange rate system in the period 1981-84. Over the period, apart from the official exchange rates which applied to non-trade foreign exchange transactions, there was the internal settlement rate which was used in firms’ business accounting and the trade settlement between the state and the enterprises (Zhang, 1987: 233). Over recent years many Foreign Exchange Adjustment Centres have been set up to allow enterprises to buy and sell foreign currencies. As a result a limited foreign exchange market began to emerge, in which the volume of foreign currencies transaction reached 6.264 and 8.566 billion US dollars in 1988 and 1989 respectively (ZGJRNJ, 1990: 305).

286 Lu Feng

Table 1 1 . Various exchange rates and average domestic costs of earning 1 US dollar.

Year Official Internal Adjustment Average cost exchange settlement cent re's of earning rate rate rate 1 US dollar

1981 1.71 2.80 2.61 1982 1.89 2.80 2.86 1983 1.98 2.80 3.22 1984 2.33 2.80 1985 2.94 4.00 1988 (Dec.) 3.12 6.70 1989 (Jan. - June) 3.72 6.40-6.95' (Dec.) 4.24 5.38-6.02"

"These rates are quoted from Shanghai's Foreign Exchange Adjustment Centre, which is one of the biggest of this type of adjustment centres.

The official exchange rates are from ZGWMNJ (1990/91: 838-839). Data on internal settlement rate and average costs of earning 1 US dollar are from Lok-sang (1989: 470). Data for adjustment centre's rates are from Xiao (1989) and ZGJRNJ (1990: 306).

extents, than other exchange rates and average costs in RMB of earning 1 US dollar. As a result, a discrepancy may be expected between official exchange rates and shadow exchange rates. Thus, data on shadow exchange rates for China are required for the interpretation of the above result in terms of the level of comparative advantage or disadvantage for rice and wheat production.

The shadow exchange rate is an important but controversial concept.6 Theoreti- cally it may be broadly defined as social costs forgone or social value gained in terms of units of domestic currency by the additional increment of one unit of foreign exchange. However, in order to make the concept operative for an empirical study or a project appraisal, several specific definitions have been developed, which reflect different assumptions about the economic environment that the case study or the project is related with and (or) different approaches of calculating the shadow exchange rates (Bacha and Taylor, 1971; Ward et al., 1991: 36). Application of either of these approaches in the case of calculation of the shadow exchange rate for China would encounter enormous difficulties both from the general nature of this type of calculation and the special features of Chinese economy in which, as is well known, various institutional factors and other policy considerations have played significant roles in price formation. For example, among major methods of the calculation of shadow exchange rates, the so-called United Nations approach is relatively less difficult to use because it is 'based on actual and projected trade policies, not on optimal policies' (United Nations, 1972: 217). Using this method the shadow exchange rate may be calculated mainly as a weighted average of the ratios of market- clearing price to official c.i.f. prices, with weights reflecting the content of the marginal

The shadow price of foreign exchange has &en referred to as 'an extremely slippery concept as well as an operationally difficult number to generate' (Lal, 1980: 57-58).


import bill.’ However, even this relatively simple method presupposes that the domestic market clearing prices reflect marginal willingness to pay (United Nations, 1972: 230). In other words it is assumed that consumer sovereignty prevails in the economy and there are no rationing and other non-market techniques of distribution of imports. Obviously this assumption is far from the case for China. Considering the immense difficulties in calculating the shadow exchange rate in China, which are beyond the scope of this paper, I am using the official exchange rate as the standard against which comparative advantage in rice and wheat production in China is going to be assessed. Though this arrangement may affect the accuracy of the measurement, the result may still shed some light on the question of our current interest in two respects. Firstly, the possible discrepancy between the official exchange rate and shadow exchange rate in China, if it did exist, can only affect the measurement of comparative advantage for rice and wheat productions in the same direction, and to a similar extent, and is unlikely to have changed the relative levels of comparative advantages between these two activities. Thus, the preliminary result of the measurement should reveal the relative levels of comparative advantages between rice and wheat production, which are two most significant activities in the grain sector in China. Secondly, under certain circumstances it may help at least to determine whether there is comparative advantage in rice and wheat production in China. For example, if the result of measurement under the official exchange rate shows that there is comparative advantage in rice or wheat production in China, then the factor of discrepancy between the official exchange rates and shadow exchange rates can only strengthen this same affirmative result, though the precise value of DRC measurement will still be unknown. By the same token, if the provisional result indicates ‘break- even’ level of comparative advantage, then the actual value of DRC measurement is likely to be some positive degree of comparative advantage.

The results of the DRC coefficients are presented in Table 12. Though no general conclusion could be drawn from the results, the measurements are suggestive at least in three aspects. Firstly, DRC coefficients for rice production which range from 0.59 to 0.80 indicate a substantial comparative advantage in rice production. This result is

Table 12. DRC coefficient of rice and wheat production under official exchange rate.

Year DRC Official DRC coefficient exchange

Rice Wheat rate (%/RMB) Rice Wheat

1981 1982 1983 1984 1985 1986 1987

1.04 3.36 1.71 0.61 1.96 1.11 3.61 1.89 0.59 1.91 1.30 3.56 1.98 0.66 1.80 1.50 2.95 2.33 0.64 1.27 1.97 3.92 2.94 0.67 1.33 2.48 5.45 3.45 0.72 1.58 2.98 6.83 3.72 0.80 1.84

Official exchange rate data are from Table 11.

’It is worth noting that enhanced earning of foreign exchange might relieve the pressure to export. Then the reduction in export in response to earnings of foreign exchange which is usually quite weak may be treated as increase in imports (United Nations, 1972: 216).

288 Lu Feng

Table 13. DRC coefficient of wheat production under the adjusted exchange rate.

Year Adjusted DRC exchange rate coefficient

______~ ~

1981 2.138-2.223 1.51-1.57

1983 2.475-2.574 1.38-1.44

1985 3.675-3.822 1.03-1.07 1986 4.31 3-4.485 1.22-1.26 1987 4.650-4.836 1.41 - 1.47

1982 2.363-2.457 1.47-1.53

1984 2.91 3-3.029 097-1.01

coincident with China’s grain exporting performance. Rice remained one of China’s most important food grains exported over the period concerned, though its share in the total export of food grains declined. Secondly, the DRC coefficients for wheat are much higher than that for rice. The highest and lowest differences between these two measurements are found in 1982 and 1984 respectively, in which the DRC coefficients for wheat exceeded that for rice by 224 per cent and 98 per cent. From the point of view that trade direction can be explained by relative costs, the substantial difference in terms of DRC measurement between rice and wheat production in China may be interpreted as the crucial explanatory factor, in the relative sense, for two important features of Chinese grain trade structure-net exportation of rice and large scale of net importation of wheat. Finally, as far as the DRC coefficients for wheat itself are concerned, their values range from 1.96 in 1981 to 1.27 in 1984, with 1.67 as the average, which implies significant comparative disadvantage. It may be argued that the relative costs incurred by China’s wheat production could have been exaggerated under the official exchange rate in which RMB was very likely to have been overvalued. However, the average level of measurement tends to show some comparative disadvantage in wheat production even if the discrepancy between the official exchange rates and the shadow exchange rates were taken into account. For example, based on information in Table 11 it may be assumed that the gap between the two exchange rates was 25-30 per cent; so the alternative exchange rates may be derived by multiplying the official exchange rates by the figure of 1.25-1.30. The alternative measurements of DRC coefficients for China’s wheat production under the adjusted exchange rates are shown in Table 13. Though DRC coefficient for 1984 is very close to unity, which indicates the ‘break-even’ level of comparative advantage, the average level of the measurement is 1.28- 1.34, which obviously implies considerable comparative disadvantage. Considering that wheat import was responsible for an overwhelm- ing proportion of the total imports of food grains into China over the period concerned, this preliminary result tends to suggest that the level of comparative disadvantage in domestic grain production was likely to have played some role in determining China’s large scale of net grain importation in the 1980s.

ACKNOWLEDGEMENTS

This paper would not have been written without enthusiastic encouragement and advice from Dr M. Messkoub and Dr D. Davin. I am grateful to Professor A. Wood and Dr E. B. Vermeer for their comments


on early drafts of the paper. I also benefited from the comments made by the referee recommended by the editors of this journal.

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comparative advantage and food grain imports in china

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