The economic costs of food self-sufficiency in China

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  • World Development Vol. 17, No. 2, pp. 237-2.53,1989. 0305-750X/89 $3.00 + 0.00 Printed in Great Britain. 0 1989 Pergamon Press plc

    The Economic Costs of Food Self-Sufficiency in

    China

    YONGZHENG YANG Australian National University, Canberra

    and

    RODNEY TYERS* The University of Adelaide, South Australia

    Summary. - Despite the surge in agricultural output since the late 1970s a comparison of Chinas resource endowments with those of its trading partners suggests that, with continued rapid income growth, food imports will again expand unless relative domestic prices are raised. Quantitative analysis of price policies which would achieve self-sufficiency in the 1990s indicates net economic costs ranging between 2-3% of GNP annually. These results are, however, particularly sensitive to the relatively undocumented changes taking place in the dependence of Chinas rapidly growing livestock sector on feed grains.

    1. INTRODUCTION

    Since the rural economic reform of late 1978, agricultural production in China has grown rap- idly, at a rate well above that before the reform. Rural income has risen, and living standards have improved. With this rapid growth in rural output, grain imports declined considerably in the mid- 1980s making total food self-sufficiency a seem- ingly attainable goal for China. But the removal of production controls and the increases in prices which accompanied the reform were one-off changes which led to a burst of production growth which may prove unsustainable. As overall income continues to expand in China, it is likely that demand will again overtake supply, especially in the markets for the more income- elastic livestock products and animal feeds. The attainment, and maintenance, of total food self- sufficiency could therefore require further sub- stantial changes in agricultural policy.

    What are the economic costs and benefits of food self-sufficiency? Alternatively, how much would China have to import, and what would be the composition of imports, in an economically efficient approach to production and trade? Should China follow other East Asian developing economies such as South Korea and Taiwan and begin to protect its farmers at this relatively early stage in its development? Does Chinas large

    share in global food output imply significant net economic gains from agricultural protection?

    These are among the trade policy issues exam- ined in this paper. Particular emphasis is placed on the economic costs of food self-sufficiency. An established model of world markets for grains, livestock products and sugar is used to analyze three policy scenarios. These are, first, a reference scenario in which it is assumed that trade policy distortions are held constant into the next decade; second, a scenario in which new policy changes are made sufficient for the attain- ment of self-sufficiency in grains, livestock prod- ucts and sugar through 1995; and third, the adoption by China of a policy similar to that of South Korea and Taiwan, wherein near self- sufficiency is maintained in some products, while livestock feeds are imported relatively free of distortion.

    The agricultural reform and the subsequent changes of policy in other sectors of the Chinese economy have initiated a process of expansion and structural change, the pace of which cannot

    *The authors are grateful for useful comments and suggestions from Kym Anderson and Helen Hughes. The research for this paper was funded by the National Centre for Development Studies of the Australian National University through a grant from the Austra- lian International Development Assistance Bureau.

    237

  • 238 WORLD DEVELOPMENT

    be accurately predicted using available models and economic data. While the reference scenario represents our best judgment as to the course of events in the next decade, our primary purpose is not to forecast economic events, but rather to illustrate the great sensitivity of Chinas net food trade position, and indeed the state of world food markets, to the level of protection of Chinas farmers, the pace of technological change in Chinas agricultural sector, and the dependence of Chinas livestock sector on grain for animal feed.

    Section 2 of this paper examines the deter- minants of comparative advantage in food pro- duction and their implications for Chinese self-sufficiency in the long run. Section 3 presents the model upon which the subsequent analysis is based, while Section 4 provides results from the analysis of alternative protection policies using the model. Section 5 examines the sensitivity of results to the pace of technical change and dependence on grains for animal feed and, finally, Section 6 summarizes the main findings.

    2. FOOD SELF-SUFFICIENCY AND TRENDS IN COMPARATIVE

    ADVANTAGE

    According to an extended Heckscher-Ohlin Samuelson model of international trade, a countrys comparative advantage is determined by its domestic resource endowment ratios rela- tive to those of the rest of the world. Poor countries with little capital relative to land and labor tend to export primary products in ex- change for manufactures. As capital (broadly defined to include human skills and technology) is accumulated or flows in from abroad, labor tends to be attracted to the urban sector and the share of agriculture in total output and employ- ment declines as manufacturing and service activities expand. If international prices remain unchanged, the countrys pattern of export specialization gradually shifts from agricultural and other primary products to manufactures.

    This transformation is likely to begin at a lower level of capital per worker the lower the countrys land endowment per worker. Con- versely, countries well endowed with agricultural land tend to retain the predominance of agricul- tural commodities in their exports for longer, and to a greater extent, than densely populated countries. The latter possibility is greater the more the country generates labor-saving tech- nologies capable of raising labor productivity faster in rural than in other production.

    To see this, it is necessary to examine first the

    resource endowment ratios of China as compared with the rest of the world. Crude proxies for these ratios are provided in Table 1 for China and some important trading partners. Gross national product (GNP) per capita is assumed to provide an index of the stock of broadly defined capital per worker, while land endowment per worker is assumed to be indicated by the area of land used for agricultural pursuits, again expressed on a per capita basis.

    China has relatively little pasture per capita, relative to the rest of the world, and especially relative to Australasia and the Americas. The Chinese endowments of land for short-cycle and tree crops are also small by world standards. This suggests a comparative disadvantage in crop and extensive livestock production. China would therefore be less competitive in these forms of food production than other countries with greater land endowments and similar levels of capital per worker.

    The land endowments of the neighboring East and some Southeast Asian economies are rela- tively small compared with those of China, however. Thus, while the share of food and raw materials in Chinas exports can be expected to decline in the long run, very resource-poor NICs may shore up the demand for these products from China and slow the process of specialization in manufacturing.

    Leaving aside the possibility that differential technical change will affect Chinas comparative advantage in food production relative to the rest of the world, the theory also suggests that the level and rate of change of agricultural compara- tive disadvantage is positively related to the current endowment of and rate of change in capital per worker, relative to the rest of the world. The final columns of Table 1 show that total economic output per capita in East and Southeast Asia, including China, has been grow- ing more rapidly by world standards. Insofar as this is an index of change in capital per worker, the contribution of the agricultural sector of these economies, along with their comparative advantage in food production, would be expected to decline more rapidly than the rest of the world.

    In China, land scarcity is exacerbated by water shortages, particularly in the northern and north- western provinces. Natural resource endowments vary considerably, between and within provinces, leading to considerable differences in production costs. Much room still remains to capture the economic benefits associated with greater re- gional specialization in accord with this pattern. This can be achieved not only through the removal of controls but also from the ongoing

  • FOOD SELF-SUFFICIENCY IN CHINA 239

    Table 1. Land resource endowments and GNP per capita, 1980

    Land availability, 1980 GNP per capita

    Pasture Short-cycle Tree 1980 Real growth crops crops 1960-80

    (hectares per 1000 people) (US$) (% per year)

    East Asia Japan South Korea Taiwan

    ASEAN

    5 37 5 9,890 7.1 0 55 4 1,520 7.0 0 52 0 2,250 n.a.

    Indonesia Malaysia Philippines Singapore Thailand

    81 97 2 74

    21 146

    36 430 4.0 243 1,620 4.3 59 690 2.8 3 4,430 7.5

    37 670 4.7 0 7

    1 350

    Other Australia Canada European Community-9 New Zealand United States Soviet Union

    China

    World

    31,166 998

    3,051 1,852

    178

    12 9,820 3 10,130

    18 n.a. 6 7,090 8 11,360

    18 4,550

    300

    2.7 3.3 n.a. 1.8 2.3 4.0

    5.0

    3.5

    158 4,290 132 1.043 829 1,408 855

    286 97

    702 306 21 n.a.

    Source: World Bank (1982) and FAO (1983)

    process of removing bottlenecks due to poor transportation, and investing in more education, research and extension. Nevertheless, in the long run, sustained growth in agriculture would re- quire considerable investment. Should the pri- orities in government policy in the next decade restrain public investment in agriculture, the retention of self-sufficiency in the long run will depend upon progressively raising producer prices.

    The experience of agriculture since the rural reform has borne this out. Although the agricul- tural boom in the last few years is the result of a general liberalization and decentralization of agriculture and the economy as a whole, in- creases in relative agricultural prices and the removal of quantity controls have played an important role. It has been well argued that a large part of output growth in the last seven years can be explained by the increase in relative agricultural prices and the effect that has had on encouraging greater use of yield improving inputs (An, 1985 and Lardy, 1985).

    Thus, in the long run, China is unlikely to maintain the growth momentum of the last few years unless considerable agricultural investment is undertaken, and/or agricultural prices continue

    to rise. Limited natural resources and rising real wages would tend to lead to more rapidly growing food production costs than is the case in the relatively resource-rich countries of the Americas and Australasia. The tendency toward food deficits will be strengthened by the dietary changes and expanded food demand which will accompany continued rapid income growth. Hence, domestic food prices would tend to increase if demand were to be met solely from domestic production.

    The concern of the Chinese government with food self-sufficiency stems from the ideology that dependence on imports of essential commodities, such as food, is politically undesirable (Zhang, 1985). As Vice-Premier Tian Jiyun (1986, p. 2) put it: It is unimaginable for the one billion population of our country to solve the food problem by relying on grain imports. Another Vice-Premier, Yao Yilin (1986, p. 2), stated the self-sufficiency policy more explicitly:

    In order to maintain food self-sufficiency of our country through the end of this century, grain production needs to be increased to a higher level - from the present output of 400 million tons to about 500 million tons by the end of this century, or an annual increase of more than 5 million tons-so

  • 240 WORLD DEVELOPMENT

    that per capita grain availability can be maintained at the present level of 400 kilograms or slightly higher.

    In the remaining sections of the paper, the policies which would be necessary to achieve and sustain food self-sufficiency are examined quanti- tatively.

    3. A MODEL FOR SIMULATING CHINESE AND INTERNATIONAL FOOD MARKETS

    To analyze the issues introduced above, the established grain, livestock products and sugar (GLS) model developed by Tyers (1984 and 1985), and extended by Tyers and Anderson (1986 and forthcoming), is applied.4 The GLS model simulates the international markets for seven commodity groups: rice, wheat, coarse grains, sugar, meats of ruminants (cattle and sheep), meats of nonruminants (pigs and poultry) and dairy products. The world is disaggregated into 30 countries or country groups, each of which has econometrically based behavioral equations for production, consumption and stocks. In this paper we use a medium-run static equilibrium version of the model, in which consumption and production behavior in each country is assumed to be characterized by con- stant elasticities of demand and supply. Target levels of closing stocks are set for each com- modity at a fixed proportion of trend consump- tion in importing countries and of trend produc- tion in exporting countries.

    In this version, short-run dynamics, such as the dependence of stocks on expected prices, are omitted. However, the determinants of under- lying market trends, such as population and income growth and technological change, are included, and these drive the model between three successive equilibria for 1987, 1990 and 1995. The structure of the model is further detailed in the appendix to this paper.

    The welfare impacts of policy changes are evaluated in four components: the benefits to consumers are the expected Hicksian equivalent variations in income; the benefits to producers are the expected change in producer surplus; government revenue benefits are the expected net budgetary effects of producer, consumer and trade taxes and subsidies; and the storage benefits are the expected increase in profit from stockholding, after physical and opportunity costs of stocks are deducted.

    The parameters in the equations of the model are based on econometric analysis by Tyers and Anderson for the period 196(b83. In the case of China, major changes of policy away from direct

    quantity controls make some estimates from time-series data nonrepresentative of China in the 1980s. Hence, estimates are occasionally based on data for other Asian countries in comparable periods of development, and some are judgmental. The principal parameters in the model and the exogenous income and population growth assumptions upon which our analysis is based are listed in the appendix.h

    Among the parameters underlying our analy- sis, of particular importance are the levels at which output would be expected to increase if all relati...