Growth of China's rural enterprises: Impacts on urban‐rural relations

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  • This article was downloaded by: [University of Strathclyde]On: 30 October 2014, At: 07:51Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number:1072954 Registered office: Mortimer House, 37-41 Mortimer Street,London W1T 3JH, UK

    The Journal ofDevelopment StudiesPublication details, including instructions forauthors and subscription information:http://www.tandfonline.com/loi/fjds20

    Growth of China's ruralenterprises: Impacts onurbanrural relationsZhang Xiaohe a , Christopher Findlay b &Andrew Watson ca Department of Economics, School ofBusiness , Hong Kong Baptist College ,b Associate Professor in the Department ofEconomics and coDirector of CERU ,c Professor of Asian Studies and coDirectorof CERU , University of Adelaide ,Published online: 23 Nov 2007.

    To cite this article: Zhang Xiaohe , Christopher Findlay & Andrew Watson(1995) Growth of China's rural enterprises: Impacts on urbanruralrelations, The Journal of Development Studies, 31:4, 567-584, DOI:10.1080/00220389508422378

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  • Growth of China's Rural Enterprises:Impacts on Urban-Rural Relations

    ZHANG XIAOHE, CHRISTOPHER FINDLAYand ANDREW WATSON

    China's rural enterprises are economic units established by localgovernment in the countryside or by the peasants and they oper-ate outside the planning system. Rural enterprises have growntwice as fast as the rest of the economy since 1984. The ruralenterprise sector has so far challenged the urban economy, inboth product markets and markets for raw materials. Whatare the prospects for their relationship - competition or co-operation? To answer the question, we develop a well-specifiedbut simple model of the rural and urban economies. The ruralenterprise boom was caused in this model by the presence ofbarriers to factor mobility within China, price distortions and thepool of available labour in the countryside. The origins of theboom imply that rural enterprise exports tend to be relativelylabour intensive. The complementarities between rural andurban enterprises are likely to dominate their future economicrelationship and lead to further growth in the rural enterprisesector.

    INTRODUCTION

    China's rural enterprises are economic units established by local gov-ernment in the countryside or by the peasants themselves. They operateoutside the planning system. Rural enterprise output and employmenthave grown rapidly in China. Estimates of the gross value of output of

    At the time of writing Zhang Xiaohe was a Ph.D. candidate in the Chinese EconomyResearch Unit (CERU), but is now at the Department of Economics, School of Business,Hong Kong Baptist College; Christopher Findlay is Associate Professor in the Departmentof Economics and co-Director of CERU; and Andrew Watson is Professor of AsianStudies and co-Director of CERU at the University of Adelaide.

    The Journal of Development Studies, Vol.31, No.4, April 1994, pp567-584PUBLISHED BY FRANK CASS, LONDON

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  • 568 THE JOURNAL OF DEVELOPMENT STUDIES

    rural enterprises indicate that since 1984, their growth has been twice asfast as the rest of the economy. Recent estimates also suggest that morepeople are now employed in rural enterprises than in the state-ownedindustry sector of the economy.

    The growth in rural enterprises has been well documented byobservers outside China [Byrd and Lin, 1990; Zweig, 1991; Findlay andWatson, 1992; Zhang, 1992a; 1992b; Naughton, 1992; Findlay, Watsonand Wu, 1994] and by many Chinese researchers. Those papers focus onvarious aspects of rural enterprise growth. In this article, we concentrateon the resource allocation implications of rural enterprise growth. Weask, what were the origins of rural enterprise growth? Our answerstresses the barriers to the mobility of the factors of production withinthe Chinese economy. We apply a simple test of this model by updatingprevious work on the likely comparative advantage of the rural enter-prise sector in China and its impact on the composition of China's inter-national trade. Our main focus here, however, is the question of whatfactors will influence the longer-run relationship between rural andurban industry in China. We use the same model applied to the questionof the origins of the rural industrial sector to explain why the futurerelationship is likely to involve a greater degree of complementarity andco-operation between rural and urban industry.

    RURAL ENTERPRISE GROWTH

    Rural enterprises operate outside the state plan and are subject to 'hardbudget constraints' in that their owners (the peasants or the townships)do not have any guarantee of budget support from above. They buyinputs and sell outputs in free markets and do not have to fulfil planobligations to the state.1 Despite this market orientation, however, theirorigins in the collective system mean that they commonly have a stronglinkage with local governments [Findlay and Watson, 1992].

    A previously published collection of papers [Byrd and Lin, 1990]documents the development of the rural enterprise sector up to 1986.However, the major growth in the sector has occurred since that yearand in this section we report a series of indicators of the more rapidrural industrialisation into the early 1990s.

    After 1978, rural enterprises experienced an unprecedented phaseof rapid development. Some of the data available2 are reported in Table1. The total number of rural enterprises increased to over 20 millionin 1992, more than a threefold increase over 1984 (see Table 1). Their totallabour force by the end of 1992 was nearly 106 million, surpassing the totalemployment in state-owned enterprises {People's Daily, 13 Jan. 1993, p.2).

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  • GROWTH OF CHINA'S RURAL ENTERPRISES 569

    TABLE 1

    RURAL ENTERPRISES: NUMBERS AND WORKERS, 1978-92 (MILLION)

    Year

    19781979198019811982

    . 1983198419851986198719881989199019911992

    All Rural Enterprises

    Number ofEnterprises

    n.a.n.a.n.a.n.a.n.a.n.a.6.07

    12.2215.1517.4518.8818.6918.5019.0820.78

    Number ofWorkers

    n.a.n.a.n.a.n.a.n.a.n.a.

    52.0869.7979.3787.7696.4593.6792.6596.09

    105.81

    Township and VillageEnterprises

    Number ofEnterprises

    1.521.481.421.341.361.351.861.851.731.581.591.541.451.441.52

    Number ofWorkers

    28.2729.0929.9929.7031.1332.3538.4841.5243.9247.0248.9447.2045.9247.6751.49

    Note: *'n.a.': not availableSource: ZTN 1988, pp.287 and 292; ZTN 1990, pp.250, 309 and 395-401; ZTN 1991,

    p.65; ZTN 1992, p.392; ZXQN 1990, pp 72-7; ZXQGBQ 1988, p.656; ZXQTX1992, pp.1, 8 and 10; and SSB, A Statistical Survey of China 1993, p.67.

    While the number of township and village enterprises (those ownedcollectively) has remained about the same, employment in those typeshas' risen from 28 million in 1978 to 52 million by 1992. The townshipand village category accounted for 49 per cent of employment in thesector but only seven per cent of the number of enterprises.

    In 1984 the share of rural enterprises in the gross value of output wasalready 13 per cent of national output value and about one third of ruraloutput value. But these shares rose to 32 per cent and nearly 66 per centrespectively by 1992. Even by 1987 rural enterprises were more impor-tant in the rural economy than was agriculture [Rural EnterprisesBureau, 1992; Chen, Findlay, Watson and Zhang, 1994].

    Rural enterprises are spread across all the sectors of the economybut, in 1990,74 per cent of total output value of all rural enterprises (84per cent of township and village enterprise output value) came fromindustrial activities [Rural Enterprise Bureau, 1991]. Other activities arein the service sector and a small proportion (around two per cent) is

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  • 570 THE JOURNAL OF DEVELOPMENT STUDIES

    classified as agriculture, but this is usually intensive agricultural activi-ties like meat production.

    Rural enterprises now also account for significant shares of nationalexports. In 1990, it was reported, their export earnings made up some 25per cent of the national total.3 Estimates from other sources show alower figure (see Table 2). The data in Table 2 illustrate the rapid growthin rural enterprise exports, at least up to 1991. They rise from about$US1.3 billion in 1985 to over $US10 billion in 1991 according to thesource reported in the table. Other sources reported a much highervalues: US$13 billion in 1990, US$18 billion in 1991 and US$20 billionin 1992 (People's Daily, 12 Nov. 1992, p.l; 23 Jan. 1993, p.2).4 Also ofinterest in the debate about the impact of the 1989-90 austerity pro-gramme on rural enterprises is that in 1990 rural enterprise exports fellwhile national exports rose.

    The national figures, however, disguise significant regional variations[Findlay and Watson, 1992]. The growth in the share of rural industriesin output was particularly marked in the coastal provinces with low percapita land ratios, dense populations, better infrastructure and thepotential for rural enterprises to build profitable links with existingindustries. The eastern provinces of China5 account for 65 to 70 per centof national gross income of rural enterprises [Ministry of Agriculture,1990]. This is subtantially higher than the shares of those provinces in

    TABLE 2RURAL ENTERPRISE SHARE OF CHINA'S NATIONAL EXPORTS 1985-91

    (BILLION YUAN)

    Year

    1985198619871988198919901991

    NationalExports

    (a)2735030 94039 4404752052 54062 06071910

    RuralEnterpriseExports

    (b)13252 6354 2907 9129 8399 640

    11173

    Rural Shareof National

    (b)l(a)(%)

    59

    1117191616

    Note: Sources: Editorial Committee of Zhongguo Duiwai Jingji Maoyi Nianjian,Zhongguo Duiwai Jingji Maoyi Nianjian [China Foreign Economic Relations andTrade Yearbook], 1988/90, p.299; ZTN 1991, pp.65, 97 and 101; ZNN 1990, p.5;ZXQN 1990, p.174; Jingji Xiaoxi Bao [Economic News], 1 Sept. 1990, p.3; andRenmin Ribao [People's Daily], 10 Jan. 1992, p.l and 22 Jan. 1992, p.2.

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  • GROWTH OF CHINA'S RURAL ENTERPRISES 571

    national population of 41 per cent and of rural gross output value of 59per cent in 1989 [SSB, 1990]. The four top provinces are Jiangsu,Shandong, Guangdong and Fujian.

    On average rural enterprises account for about 25 per cent of nationaloutput value and about the same proportion of national exports. Thusrural enterprises are at least as export orientated as the national aver-age. However, there is substantial regional variation in export orienta-tion. The Eastern region accounted for an even higher share of ruralenterprise exports than of output value over the second half of the1980s.

    In summary, rural enterprises have emerged over the second half ofthe 1980s as a major economic force within the Chinese economy. Theynow account for large shares of output, employment and exports. Thereare, however, significant regional differences in the importance of ruralenterprises.

    In the next section, we summarise some analyses of the origins ofrural enterprise growth. We stress the origins of rural enterprises in thesegmentation of the labour and capital markets in China. In followingsections, we apply that model to make predictions about (a) the charac-teristics of rural enterprises, (b) the composition of their exports and (c),in our concluding section, their likely future development, includingtheir relationship with enterprises in urban China. In another paper,Findlay and Watson [1992] stressed the challenge of the rural sector forthe urban economy and raised the prospect of how the cities might be'surrounded from the countryside' as the wave of reform overwhelmedthe urban enterprises. In this article, we suggest a manner in which thatconflict might be resolved.

    A THEORETICAL FRAMEWORK

    Method and Review of Previous WorkThe model which we use to discuss the origins of rural enterprise devel-opment highlights barriers to movements of labour and capital betweenthe rural and urban economies in China. We present the model in moredetail below. Since it is a model of the process of development of thissector, it inevitably abstracts from a number of complexities of thesituation in rural China. We comment on some of these below.

    Other attempts have been made to 'model' the rural industry sector.For example, Du [1990] identifies a number of factors that have con-tributed to rural enterprise development including a number of policyand economic variables. Svejnar and Woo [1990] also develop a series of'models' which stress in turn geography and history, human resources

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  • 572 THE JOURNAL OF DEVELOPMENT STUDIES

    and technology, access to capital and government policy. In contrast tothese approaches, we attempt to build a model which is one of thesimplest possible and which is consistent with the growth observed inthe rural enterprise sector. Before using the model to tackle the mainquestion of interest here, we also apply a simple test of its relevanceusing export data.

    Another group of models of rural enterprise behaviour is applied atthe firm level. For example, Byrd and Zhu [1990] offer some characteri-sations of patterns of competition and adjustment by the firm. Ouranalysis is applied at an aggregate or sectoral leve...

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