Microsoft Word EcRefChina Oct06. doc

both
infrastructure 
and 
human capital has significantly 
raised the return to farmers’ investment in physical assets (other factors held constant). Fan et al. (2004) present 
empirical evidence to the effect that investment in agricultural research, and extensions of the results of such 
research, has a particularly high return in poor rural areas in the north and the east. Lin (2003) reports additional 
empirical evidence along the same lines. 
107
On the basis of a computable general equilibrium (CGE) model, Whalley and Zhang (2004) find non-
trivial redistibutional effects of this type as a result of an assumed removal of the 
hukou
. 
108
Au and Henderson (2006) have made an attempt to calculate the efficiency gains through higher labor 
mobility across sectors and firms 
within
rural and urban area. 
109
Already full transferability of land-lease contracts would, to some extent, facilitate such consolidation. In an 
empirical study of China, Deininger (2003) concludes that the transferability of contracts is particularly 
important for economic efficiency, relative to other aspects of land-lease contracts. Wan and Cheng (2001, 
p.191) estimate that a consolidation of fragmented patches of land would increase labor productivity by as 
much as 12-17 percent, depending of the types of crops. 

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Thus, there may be a conflict between socialist ideology with respect to land ownership, 
on one hand, and concern for long-term efficiency and higher per capita factor income in 
agriculture, on the other. Deng Xiaoping is famous for the metaphor that the color of the 
cat does not matter as long as it can catch mice. But when it comes to the ownership 
structure in agriculture, the “color” of the land still matters. However, “political 
economy” mechanisms also help explain the resistance among powerful interest groups to 
the privatization of land. After all, as mentioned above, local politicians and public-sector 
administrators have a strong vested interest in government ownership of land – in terms of 
powers as well as financial rewards (including corruption).
There may also be more pragmatic, and respectable, arguments behind the reluctance of 
the Chinese authorities to privatize agricultural land. One might be that the distribution of 
wealth could gradually become more uneven 
within
the agricultural population, since 
some farmers are more able than others to consolidate their land holdings. (However, the 
distribution of income and wealth among the Chinese population as a whole may very 
well, as earlier indicated, become more even.) Another reason for the apparent reluctance 
to privatize agriculture land might be that an ensuing consolidation of land holdings may 
reduce the possibilities for migrants to urban areas to return to agriculture, after having 
failed in the cities: there would simply be fewer family farms to return to. This 
disadvantage would, however, be mitigated by the fact that private ownership of land 
would make it possible for elderly farmers to transform their land into cash, which would 
help them to financially assist family members who have not “made it” in the cities.
Moreover, like a removal of the 
hukou
, a shift to private ownership of farmland would 
further boost the supply of unskilled labor in urban areas, because farming would be more 
rapidly rationalized. This further strengthens the case for a shift to a more labor-intensive 
growth strategy outside agriculture. 
Some of these policies to influence the level and distribution of factor income are already 
underway in China. The most obvious examples are the continuation of privatization of 
SOEs and the gradual liberalization, and in some (mainly coastal) areas even the removal, 
of the 
hukou
system. It is also possible that the discrimination of private firms in financial 
markets is receding. There are also recent government proposals of targeted interventions 

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to boost productivity and factor income in poor geographical areas, although it is 
impossible to predict the future energy of the government authorities in this endeavor.
Are there then any important lessons from today’s developed countries about alternative 
methods of redistributing factor income through policy measures? There is general 
agreement that improvements of sanitation, basic health care, and elementary education 
among low-income groups were conducive to raise factor income for these groups of 
citizens in today’s developed countries some 100 years ago. During the course of the 19
th
century, a number of governments in today’s developed countries have also tried to use 
price regulations to redistribute factor income to low-income groups. However, these 
policies have been much less successful.
There is no doubt that it is possible to boost the income of tenants, at least temporarily, by 
rent control that keeps rents below market equilibrium. The disadvantages of such 
policies, however, are well known from a number of developed countries – excess 
demand for housing (“housing shortage”), black markets for rental contracts, deterioration 
in the quality of the housing stock, and a fall in housing construction (which has often 
induced governments to start subsidizing housing construction). After a while, such 
policies also have problematic distributional consequences. Individuals who happen to 
have direct contracts with landlords are favored at the expense of new entrants into urban 
housing markets. Indeed, in rent-controlled markets, personal contacts and black-market 
transactions tend to be the basic mechanisms for getting an apartment. Since both contacts 
and wealth are often even more unevenly distributed than income, rent control may very 
well create more problems for low-income groups than for high-income groups. Obvious 
losers are the young, individuals who have recently broken up from marriage or 
cohabitation, migrants to cities, etc. The result is a pronounced insider-outsider division 
also in the housing market, in addition to the insider-outsider character of the labor 
market. China has to some extent avoided these problems by turning a large fraction of 
the stock of rented apartments into condominiums with free price formation, although as 
earlier mentioned this transition seems initially to have favored, in particular, high-income 
groups. It seems, however, that rents often continue to be regulated in the remaining 
housing stock of publicly owned apartments.

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Agricultural price regulations have also been used extensively in many countries to 
redistribute and stabilize factor income. While developing countries have often used such 
regulation to keep down the prices of agricultural products, primarily to favor urban 
consumers at the expense of farmers, most developed countries have done just the 
opposite. There is no doubt that such policies have boosted revenues for the agricultural 
population, at least initially. But there are also serious problems inherent in such policies. 
For instance, inefficient farms will survive more easily, thereby retarding the 
consolidation of land holdings, and hence rationalization in the agricultural sector. There 
are also well-known distributional problems associated with agricultural protectionism. 
Since higher prices of farm products are capitalized in land prices, it becomes more 
expensive to acquire farmland. As a result, 
new
farmers may not gain much from 
protectionist measures (after deductions for capital costs). Another distributional 
complication is that price supports boost factor incomes not only for poor farmers with 
small holdings but also – indeed in particular – for affluent farmers with large holdings 
(since, in contrast to small farms, they sell rather than consume most of their output). 
Perhaps an even more important aspect is that the redistribution of factor income in favor 
of the farm sector largely operates at the expense of low-income consumers outside 
agriculture.
Several such undesired side effects of agricultural protectionism (price support) in 
developed countries would, of course, emerge if similar policies were applied in China. In 
one important respect the effects would, however, be different: there are no market-
determined land prices onto which higher agricultural prices would be capitalized. But the 
privilege of obtaining such a contract from the authorities would increase, with stronger 
temptations for village administrators and politicians to engage in rent seeking and related 
corruption when land-lease contracts are allocated. 
Some undesired effects of agricultural protectionism, in particular distorted prices for 
consumers, could be avoided if additional support to farmers took the form of subsidies or 
tax concessions rather than tariffs, as was the case in the United Kingdom before it joined 
the EU – a so-called “low-price approach” to agricultural support. Indeed, it would seem 
that China at the present time is heading in this direction. In particular, farm prices have 
during the last decade or two increasingly converged to international levels – by contrast 
to several other countries in East Asia, such as Taiwan/China, Korea and Japan. 

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Moreover, in recent years the central authorities have abolished or reduced a number of 
local fees and taxes on farmers, and have also introduced explicit production subsidies, as 
in the case of grain production (from 2004).
110
It is not clear, however, if the basic 
purpose of the reductions of local taxes is to support farmers without raising food prices 
for consumers, or if the purpose is instead to “starve” local authorities on tax revenues, in 
order to force them to cut the often very high administrative costs in local 
administration.
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Clearly, if China contemplates relying on price regulations in housing and agriculture in 
the future as tools of distribution policy, the experiences in developed countries are worth 
taking into consideration. This point is strengthened by the observation that it has 
frequently turned out to be politically difficult to remove such price controls after they 
have been in force for some time – even when overwhelming evidence of harmful 
economic and social consequences has accumulated. The political cost of removing a 
privilege for a specific group of citizens is often higher than the political costs of not 
introducing such a privilege in the first place. 
Naturally, not only the level but also the