Han Jun, Xie Yang, Xu Xiaoqing, Cui Chuanyi, Pan Yaoguo, Yu Baoping& Luo Dan

I. The Main Opportunities and Constraints for Agriculture and Rural Development during the 11th Five-Year Plan

1. The main opportunities for agriculture and rural development during the 11th Five-Year Plan

(1) Food demand will continue to grow. In the next decades, China’stotal grain demand will go up annually due to population growth, higher living standard and progress in urbanization. But the growth will visibly slow down. The per capita grain consumption of urban residents will be relatively stable, while that of rural residents will continue to decline. A look at the evolution of the relationship between income level and food consumption reveals that when income is at a relatively low level, grain is the main item of consumption because having enough food and clothing is a priority. After this period is over, livestock products will replace the reduced portion of cereals and tuber crops and hence the consumption of livestock products will go up. During the third period when the Engel coefficient is about 30 percent, the consumption of livestock products stabilizes, stagnates or declines. The Engel coefficient in 2003 was 37.1 percent for urban residents and 45.6 percent for rural residents. China’s food consumption is in the second period, namely a period during which food consumption highlighting livestock products increases thanks to income growth. In the future, the consumption of livestock products by urban residents will grow at a relatively slow pace, while the space for such consumption by rural residents is fairly large and such consumption will grow at a relatively fast pace.

(2) The accelerated development of industrialization and urbanization will bring about rare opportunities for solving the three agriculture-related problems. The next 20 years will be a period during which China’s urbanization will accelerate. An optimistic forecast indicates that based on the average annual growth rate of 1.4 percentage points of urbanization since 1995, the level of China’s urbanization will reach 50.6 percent in 2010 and 65 percent in 2020. A conservative forecast is that based on the average annual growth rate of 0.9 percentage points of urbanization since the 1980s, the level of China’s urbanization will be 46.3 percent in 2010 and 55.2 percent in 2020. In terms of employment structure, if the proportion of agricultural employment drops by 1 percentage point each year with the acceleration of economic development (over the two decades from 1981 to 2001, agriculture labor of total social labor fell 1.3 percentage points each year on average), the proportion of agricultural employment will decline from 50 percent to about 35 percent by the end of 2020. If proper development strategies and policies are selected, the acceleration of industrialization and urbanization over the next 20 years will bring about rare opportunities for China to solve the three agriculture-related problems.

(3) China has entered a development period in which industry counter-feeds agriculture, and has obtained the capacity and conditions to support and protect agriculture. The industry’s counter-feeding of agriculture is an act of government intervention in agriculture, and also a phenomenon when the economy develops to a certain stage. Internationally, many countries experienced a period in the course of industrialization, during which agriculture first provided accumulation for industrialization and then received protection. Before China began reform and opening up, industrial and farm products could not be traded on an equal footing due to the long-established state monopoly on the purchase and selling of farm products. Through the price scissors difference for industrial and farm products, the state obtained huge amounts of funds from the agricultural sector and seriously weakened agriculture’s status as the foundation of the national economy over a long period of time. The policy that favored industry was necessary and effective if looked at in an overall perspective. The problem is that this policy was enforced for too long a period. As a result, agriculture, which had already been backward, lost the ability for self-development because it failed to receive sufficient value compensation over a long period, and the material and technical conditions for agricultural production failed to receive due improvements. China was the only country in the world in which its agriculture provided such a huge amount of capital accumulation for such a long time. In recent years, the state clearly intensified its policy support for solving the three agriculture-related problems. As a result, agriculture and the rural economy have both posted significant improvements. However, agriculture is still in an unfavorable position in both resource allocation and the distribution of national income. In 2003, China’s per capita GDP at current exchange rates surpassed 1,000 U.S. dollars. While the ratio between the output values of agriculture and non-farm industry was about 15∶85, the ratio between the employment of agriculture and non-farm industries was about 50∶50. The level of urbanization was 40.5 percent. Based on the above four indicators, China has entered the middle period of industrialization, during which non-farm industries instead of agriculture have become the leading sector of the national economy and the main driving force for the growth of the national economy. International experience indicates that during this period, different countries adopted different measures in light of their national conditions to let industry counter-feed agriculture. In view of international experience, China in general has entered the development period during which industry should counter-feed agriculture and hence the policy to protect agriculture should replace the exploitation policy towards agriculture. In 2003, the national revenue from agricultural tax and surcharges totaled 46 billion yuan, and the proportion of agricultural tax in total national tax revenue dropped to 3.2 percent. Even though the majority of the Chinese population is living in the rural areas and China cannot give huge amounts of subsidies to increase the income of peasants as developed countries do, the country in general has already possessed the strength to counter-feed agriculture and support the rural areas.

2. The main contradictions and problems confronting agriculture and rural development during the 11th Five-Year Plan

(1) Agricultural production faces grave challenges such as continuous shrinking of farmland, overall worsening of the ecological environment and more serious shortage of water resources. The trend of "increased population, reduced farmland and reduced water" will continue and the constraint of resource conditions to agricultural development will become even more acute.

(2) Oversupply of rural labor and underemployment will continue to be major constraints to the growth of peasant income and the overall economic and social development. Based on the existing level of production, agriculture needs only about 180 million permanent workers. This means there is a surplus rural labor of 120 million people. In addition, technological advances in agriculture will release a considerable amount of labor.

(3) The contradiction between the supply and demand of rural capital will be acute. The Bank of Agriculture was required to operate on a commercial basis and has drastically reduced its outlets in the rural areas. While the poverty-reduction funds are not used in a way as desired, commercial finance is weakening its functions in the rural financial sector. The Agricultural Development Bank’s functions are monotonous and the functions of the rural policy-oriented finance are incomplete. As the leading commercial banks are leaving the rural area one after another, the rural credit cooperative has become the main channel to provide official agricultural loans. Even though the rural credit cooperative has an extensive network covering the vast rural areas, the amount of the loans received by peasants is still very limited. Unofficial lending is playing an enormous role, but has yet to be officially recognized. The rural outlets of the state-owned commercial banks in general only absorb deposits and do not issue loans. It is estimated that in 2002, the state-owned commercial banks attracted more than 300 billion yuan of deposits from the rural areas and the funds absorbed by postal savings also flew massively out of the countryside. In addition, the credit cooperative also saw about 200 billion yuan of funds flowing out of the rural areas each year on average through re-depositing funds in the central bank, purchasing national debts and financial bonds and other channels.

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*This report is one of a series of papers on "Guiding Principles for the 11th Five-Year Plan and the Long-Term Goals by 2020".