Since Brad is away, we might as well try to figure out what we mean.

Re:
“Perhaps but I don’t see the real point. Since Chinese GDP is rapidly growing, I really don’t understand this fixation with increasing consumption growth and employment share. You increase GDP which increases investment which increases GDP which increases investment. Repeat for fifty years until you have a first world economy.

The whole reason that the PRC government is trying to increase GDP growth is that they want to avoid making decisions about how to cut the pie by making the pie bigger.”

If that is the case, then they have a problem because governments that ignore distribution tend to have not enough friends. Unless you believe that in China (with its high literacy, internet ccess etc) people will accept growth in income and wealth that does not give them anything except a national statistic without friction, I guess you are wrong.

States like China (benevolent, paternalistic authoritarian systems) depend on unopposed (and unopposed at low cost in terms of repression etc) single party government for their long term prosperity. I completely agree that China would not grow as fast if it had a vigorous “Asian” democracy and a highly disruptive civil society. I am not saying that growth is more important than democracy.

But the government has to make sure that people do not see it as something they learned in the 1950s: a class enemy..

Just kidding. But I still believe that income distribution is an issue that will grow in importance, especially when so much wealth is in the hands (but not their pocket yet, this is a civilization, not Russia, it takes more time) of SOE managers. Comrades as they used to be called.

In a command economy, the state can order changes in what workers get paid. The trouble is that without market information, they can’t get the right number and this causes problems. The other problem with command economies (which is usually insufficiently mentioned) is that if the state controls your employment, they pretty much control everything else in your life.

Huizer: I would not be surpised if the IMF would come up with policies that could have a higher employment share (the basis for a sustainable higher share of houshold consumption). Many ways to do that. Crude ones (minimum wage), market ones (labor deregulation, retail trade and zoning), politically incorrect ones like trade union deregultion and frameworks for collective bargaining.

Perhaps but I don’t see the real point. Since Chinese GDP is rapidly growing, I really don’t understand this fixation with increasing consumption growth and employment share. You increase GDP which increases investment which increases GDP which increases investment. Repeat for fifty years until you have a first world economy.

The whole reason that the PRC government is trying to increase GDP growth is that they want to avoid making decisions about how to cut the pie by making the pie bigger.

bill j: I’m assuming as well that there is a difference in the integration of farming into the market between the East and West, South and North, in the less developed parts of China, unless you can tell me different, I’m guessing that the proportion of a farmers output consumed by them, i.e. non-market production, will be higher than in the more advanced areas, more closely tied into production for the cities.

I’m sure there are regional differences, but I don’t know of any place except maybe in extremely isolated places in Western China, where the farmers aren’t very tightly integrated in the markets. Also what goes for “rural” in China is very different than in the US, since most “rural” areas in China have very high population densities.

bill j: And finally what about Hu Jintao’s proposed land reforms, not on the scale of Vietnam where outright privatisation is proposed or something pretty much like it, but enabling farmers to borrow against their holdings etc. Won’t that have the effect of consolidating land holdings, increasing class differentiation in the countryside, accelerating the separation of farmers from the land etc.?

Yes, which is why it is unlikely to happen especially after the recent financial meltdown.

Suppose a farmer borrows large sums of money against their land, and they can’t pay it back. What happens to the farmer, and what happens to the bank that loans money to the farmer, and were did the bank get the money to loan out in the first place?

I don’t see why it’s important to separate farmers from the land. I don’t know of any farmer that seriously thinks or wants their kids to do farming, and most of them seem to see their job as to accumulate enough capital so that their kids can to go high school and college and get office jobs.

If a farmer can do something more profitable than farming, then presumably they would be doing it. The fact that someone is farming means presumably that they can’t find something that will make more money.

OK; I see; you see institutional constraints & inertia thwarting any balanced growth initiatives
regardless of what might come from debate and analysis.
I think your observations are valid concerns.

Thanks for very informative posts on the economics of rural China. Probably many people thinking about development do not realize that the East Asian countries were not primitive subsistance farming communities but instead have had high levels of socialization for often longer than Western Europe. Also people miss that the gap between emerging Europe and “cruising” East Asia only opened up around the early 1800s (meaning for instance that Japan needed only a short spurt to industrialize in the late 1800s). If we look beyond the damage done by overpopulation (relative to farm technology), civil war, impacts of external war (Japan) and especially if we are aware of the rapid industrialization of Manchukuo in the 1930s, it becomes clear that the Chinese rural person was never a typical LDC person.

However, I spent some time thinking about your statement:

Raising the employment share seems like a “wish” and not a “policy.” Hu Jintao can’t just say “increase employment’s share of the GNP” and just have it happen. If you can think of something that Hu Jintao can write in a memo, then we can discuss that.

Also, this is an interesting irony I’ve noted. Hu Jintao can’t order employment share of GNP to be increased. Mao could, but that probably was a bad thing. So you have economists talk about how China should move to a market economy and rule of law, and then turn around and say “China must decrease investment” as if we were back in the command economy days.”

You make it look like Mao could have done something (and maybe he would have do the wrong thing?) and Hu cannot (but if he could he would do the right thing?)

Of course no one can manadate the employment share to go up, but there are many policies that would lead to that outcome and I would be surprised if they were out of reach for China’s state capacity.

In this respect I am curious as to what will be the outcome of the long-awaited IMF consultation annex country report (latest may 2006, and previously basically an annual event). I would not be surpised if the IMF would come up with policies that could have a higher employment share (the basis for a sustainable higher share of houshold consumption). Many ways to do that. Crude ones (minimum wage), market ones (labor deregulation, retail trade and zoning), politically incorrect ones like trade union deregultion and frameworks for collective bargaining.

With an economy where FDIs produce and consume 50-60% of imports and exports whilst employing only 3% of the labor force there seems to be considerable scope for social policy without ruining international competitiveness.
THis could be done without liberalizing the external account (no doubt one of the bones of contention with the IMF) and might start locally, thanks to the hukou system.

Plenty of options but no desire or need?

I think one could argue that the same thing was happening in China in the 19th and early 20th century. However, what you ended up with was a lot of angry peasants and a communist revolution.

bill j: Certainly as you point out the transition towards market relations from the 1970s onwards, enabling farmers to retain a proportion of their earnings massively increased output and living standards compared with what had gone before.

But it’s important here to point out exactly what did happen before. In the 1950’s and 1960’s, the government got this idea of turning farms into agricultural factories, where farmers would be scientifically managed workers. By combining plots into communes, you could then get productivity increases by mechanization and low level industrialization.

It turned out to be a total disaster that left about 50 million people dead. In 1978, the government instituted the household responsibility system, which caused productivity to dramatically increase.

bill j: And as you say the ability of farmers to return to the land and subsist off their output is a massive safety net.

But the important thing here is that I don’t think that farmers in China could be “subsistence farmers” in the way that you use the term. Chinese agriculture is extremely dependent on modern technology in which farmers need cash to buy seed, fertilizer, and pesticide. There’s no way that I can see that a Chinese farmer could detach himself from the markets and survive.

Chinese agriculture is extremely intensive because you are trying to support a population of 1.2 billion people off a tiny amount of arable land. I don’t see how you can get to that level of intensity without some sort of extensive social network whether market based or administrative.

bill j: A good friend of mine is the daughter of some Ethiopian susbsistence farmers, who she said, sold on average $2 a month of onions at the local market, everything else they consumed, housing, clothes, food, furniture etc. they produced themselves.

And China hasn’t been like that for several hundred years. This may be one big reason (and perhaps the big reason) that Walmart is importing stuff from China and not Ethiopia.

One thing that I’ve noted is that people tend to lump all societies together as “developing economies” and the more I learn about economies, the less I think that’s a good idea. What works in China may not work in Ethiopia and vice versa.

One big difference between China and other places, is that Chinese agriculture has always relied very heavily on irrigation and flood control systems which in turn rely very heavily on a state bureaucracy. That’s why China exists in the first place.

bill j: While the situation is very different in China, the ability of farmers to opt out of market relations limits the ability of the economy to absorb the massive amounts of capital produced by it.

I don’t think that farmers in China can opt out of market relations even if they wanted to. In the end, they have to buy fertilizer and pesticide.

I think the main barriers to capital absorption are institutional. If you show up at a bank with $1 trillion dollars, it’s very, very difficult to make sure that this money would actually be used to do something useful rather in some banker’s pocket.

Look at Russia or most African countries. Massive amounts of wealth being generated and squandered. Or the United States. Getting back to the original point, I do think that all that Chinese money could have been used for something more useful than real estate projects.

When people actually tried to pump money into rural areas in the 1980’s what you ended up as a massive credit boom/credit bust that still hasn’t been totally fixed.

All Chinese rural dwellers, and most city dwellers don’t pay rent or mortgages. In the case of people in the countryside, all dwellings and land are owned by the state, and rural dwellers get their houses and land rent-free. In the case of urban dwellers, most people got their own housing when the SOE’s were closed. Migrants from the interior typically live in company provided housing.

I don’t think that accurately describes Chinese agriculture. Chinese farmers specialize in a few crops, and while they consume some of that crop, most of the gets sold in the market through cash transactions. I grow rice, you raise pigs, I sell my rice and buy pork from you.

Also the term “peasant” gives you this mistaken impression of unsophisticated rustics, when every Chinese farmer that I’ve ever met has been using chemical fertilizer and pesticides and have a wealth of information about irrigation techniques, crop strains, market prices. Most of them have cell phones, DVD players, and television sets. When the price of oil rises or falls then everything changes.

bill j: Obviously as agricultural productivity increases the size of the surplus rises and so does the integration of farmers into the circuit of capital, as indeed does the social differentiation of the countryside with relatively richer capitalist farmers employing rural workers.

That’s not how Chinese agriculture works. If you have residency in a rural area, then by law you are entitled to a plot of land that you can farm, so it make no sense to be employed by someone else if you can get your own land for free from the state. Once you get that plot of land from the state, you get to decide what to plant and what to farm, and this effectively makes farmers entrepreneurs. This system has proved wildly successful in many ways, and it’s an example of using socialism to promote capitalism.

Also the problem with increasing productivity is demand. Basically the amount of demand for agricultural products is capped, and since the supply of labor is large, the market pushes things toward low-productivity/high-labor solutions rather than high-productivity/high-capital solutions.

bill j: The point about the development of capitalism in China is that through separating farmers from the soil they create a consumer who is completely dependent for the market for all their needs and through transforming them into workers from farmers their level of productivity is radically increased.

Two problems:

1) What happens if the market fails? The really good thing about the Chinese system of agriculture is that it provides a social safety net. The worst case scenario is that you end up back on the farm, farming the plot of land that the state gives you. If you don’t have that as a backup, you end up with huge numbers of farmers in the cities with nothing better to do that to riot.

Also by having a social baseline, it allows farmers to take financial risks. While one person is in the fields farming, someone else is starting a beauty salon, doing textile piecework, or going off to the cities to work in a factory. All these other things are high-risk/high-reward activities.

Finally, if you increase agricultural productivity too quickly, then you end up with huge unemployment. Basically, you want to increase agricultural productivity only to the degree to which you have enough industrial jobs to absorb surplus labor.

This is the type of economic problem that central planning is hideously bad at. What happens is that you miscalculate the rate at which agricultural productivity is growing in which case tens of millions of people starve to death, or you underestimate agricultural productivity, in which case end up with lots of surplus workers that you put in factories that aren’t producing anything.

The genius of the market economy is that you give the farmer a set of economic choices, and they have them decide which one makes them the most money. They can go to work in a factory, farm the plot of land, or start their own service based business. Also, if you have the household as the basic unit of production, you can distribute labor between all three to maximize income, and given the structural characteristics of the Chinese economy, that moves *away* from high-capital/high-productivity improvements in agriculture, since you have lots of people. If you have a productivity improvement that is low capital (chemical pesticides) then people will take it, but if you have high capital productivity improvements (tractors) then the return on investment isn’t worth it. Also, low-capital doesn’t mean low-technology. Cell phones, for example.

But one thing that about this is that you have to be careful about the term “peasant” since this gives the incorrect idea that you have uneducated, rustic, peasants unconnected with the world economy and living life exactly like it’s been lived for thousands of years.

The “Chinese peasant” is a pretty shrewd and sophisticated businessman is very tightly connected with the world economy, and has been for the last five hundred years, and they are going to make better economic decisions than some central planner a thousand miles away that doesn’t know one end of a pig from another.

Also, the fact that the Chinese economy works *against* high capital solutions explains why the industrial revolution happened in England and not in China. In China, it’s never been particularly profitable to invest large amounts of money in manufacturing, because there are lots of people. In England, you had the Americas which could absorb excess population.

It’s actually remarkable because what has happened in the last few years is a massive *de-industrialization* of manufacturing. High productivity machines are getting replaced by low-productivity people. It’s basically the industrial revolution in reverse which explains why China never had a local industrial revolution in the first place.

A lot of the “fantasies” that people have about third world peasant are basically to justify colonialism. These peasants are stupid and backward, and it’s the “white man’s burden” to lift them up.

You still see this in World Bank and IMF reports, and I’ve never detected in these reports the realization that “Hey, maybe Chinese farmers know more about Chinese agriculture than we do?” I’ve been to lots of conferences on Chinese economic development, and I’ve heard lots of people *talk* about Chinese farmers, but I’ve never seen one there.

Except that the peasant’s aren’t so stupid and backward. The English in 1830, had this image of using advanced machinery to dominate Chinese textile markets, but if you have a shirt today, chances are that it says made in China and not made in England.

In southern China you’ve had a huge network of social relations and markets that has existed for several hundred years. Once you tap those social networks and use them for light manufacturing and finance, then boom, the world changes.

One other interesting note is the connection between textiles and finance. It turns out that places with strong textile industries always turn out to be major centers of finance (NYC, North Carolina, London, Italy, Pearl River delta). I think the reason why is that both textiles and finance require crucially on very complex and sophisticated social networks, so if you have the networks that can be used to make clothes, you pretty soon have a banking network.

The farmers are all cash based, and the peasant economy has been “capitalist” for hundreds of years.”

Far enough if you’re talking about the surplus product and perhaps I should have been clearer but subsistence farmers will consume a large proportion of the output they produce i.e. they will grow food and eat it without it going through the market. That proportion of output, which I’m guessing is a pretty significant proportion of their production, is not “capitalist” inasmuch as it is is not exchanged on a market. Its rather like when you do the housework at home, rather than getting a cleaner in except it applies to around 500 million people.
Obviously as agricultural productivity increases the size of the surplus rises and so does the integration of farmers into the circuit of capital, as indeed does the social differentiation of the countryside with relatively richer capitalist farmers employing rural workers.
The point about the development of capitalism in China is that through separating farmers from the soil they create a consumer who is completely dependent for the market for all their needs and through transforming them into workers from farmers their level of productivity is radically increased.