Wednesday, November 6, 2013

Thoughts on Chinese Land Reform

After reading The Economist's story about Chinese land reform, I became very interested with the land certificates (dipiao) program being launched in Chongqing and Chengdu as an experimental land reform policy. The goal of the land certificates is to improve land utilization so that China can urbanize faster while simultaneously maintain the net farmland in the country.

From what I understand of the land certificates, land developers pay to have residential rural land to be converted into farmland. By converting residential land to farmland, developers now have a certificate that allows them to build on an equivalent piece of farmland elsewhere. The land certificates will allow land developers to shift farming land toward areas that are less valuable for urban development. In theory, the land certificates sound like an ingenuous way to improve land utilization in China. The program will help China to make better used of rural land abandoned by rural emigrants (slides 9-11). The ideal scenario is that rural land being converted will belong to individuals who have already emigrated to urban areas. However, rural residents needing new housing as a result of the land conversion would likely need some form of subsidized urban housing.

The need for subsidized urban housing for rural emigrants highlights an important obstacle to any land reform designed to increase urbanization within China. Rural residents are given less generous welfare/social benefits compared to urban residents. Urban immigrants from rural areas are often treated as second class citizens forced to work less desirable (and lower paying) jobs. The current land system essentially provides a social safety net for rural residents. The rural land gives residents a guaranteed source of income and subsistence during old age and unemployment. Many rural residents are hesitant to partake in urbanization because there is not an adequate social safety net in place. The Economist reports that 85% of the land certificate value will go to rural residents, which is a good financial incentives grounded in the socioeconomic reality of China's rural population. However, the actual payment to rural residents is likely to be lower given the rampant corruption that is common during land exchanges.

Another important aspect to consider is the impact on agricultural yields of the land certificates program. The impact of the program on agricultural yields will depend on the definition of an "equivalent" piece of rural land and the geographic boundaries of the program. It may be the case that, in many situations, rural land that formerly contained residential property is less fertile and will yield lower output. Therefore, the definition of an "equivalent" piece of farmland might need to factor in the fertility and productivity of the land in order to avoid declines in farming output. It is also unclear how these land certificates would work on a national scale. The land certificates would likely only transfer within a province or county but a full scale national certificates transfer might lead to biases in the allocation of urban vs. farmland within China.

The program sounds like a very clever way to improve land use in China but its success will depend on a collection of reforms to the treatment of rural residents and the crackdown on government corruption. The land certificates must be implemented carefully and comprehensively if it is to be a revolutionary change intended to improve economic growth.

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