Intersectoral Resource Flows in
China Revisited---in memory of the
late professor Shigeru Ishikawa
Katsuji Nakagane （中兼和津次）
Professor Emeritus at the University
of Tokyo
Email: knakagane@gmail.com
Shigeru Ishikawa (1920-2014)
Ishikawa’s contributions to the Chinese
economic studies
• Statistical analysis of China’s national income and
capital formation (Ishikawa1960)
• Macroeconomic analysis of China’s economic
growth and structural imbalances based on
Fel’dman=Domar model
• Studies on intersectoral resource flows in China
• Constructing an analytical framework for studies
on economies with market underdevelopment
Development of ISRF issue
• The roles of agriculture in economic
development and intersectoral resource flows
(ISRF)
• Lewis(1954)→Fei=Ranis(1964)
→Ishikawa(1967)
• Lee(1971), Mundle(1981), Ohkawa et al.(1978),
Teranishi(1982)
• Ishikawa(1990), Karshenas (1993)
Agro-industrial relationship
• Conventional wisdom: agriculture must provide
industry with financial resources at the initial stage
of economic development
• Historical experiences: e.g. Japan after the Meiji
restoration
• Preobrazhensky’s proposition on socialist
industrialization strategy---rural sector as a domestic
‘colony’ to provide the primitive accumulation for
the national economy
• Moreover, agriculture’s resource should be
transferred to the state through skewed price
mechanisms
Ishikawa’s hypothesis
• Ishikawa’s hypothesis: industry must aid
agriculture in contemporary developing
economies
• Ricardian trap: underdeveloped agriculture→poor
production of grains →rising grain price →
increasing industrial wage → decreasing industrial
profit → declining investment rate →declining
growth → underdeveloped agriculture
• Agriculture in today’s developing countries needs
more infrastructural investment by the state or
the industrial sector to escape from the trap
ISRF and Ishikawa’s formula
• ISRF between agricultural and industrial sectors
(agricultural surplus): Xa-Xi
where Xa is agricultural exports, Xi its imports
• Real ISRF: S=Xa/Pa-Xi/Pi=(Xa-Xi)/Pa +(1/Pa1/Pi)Xi=(Xa-Xi)/Pa +(1-Pa/Pi)Xi/Pa
where Pa is price index of agricultural exports, Pi
price index of its imports, thus Pa/Pi is terms of
trade for agricultural sector
・ Conventional wisdom: Xa-Xi>0, S>0
・ Ishikawa’s hypothesis: : Xa-Xi<0, S<0
Estimates of ISRF in China
• Several estimates of China’s ISRF have been
made
• Two types of estimates
• Type A: Ishikawa(1967), Ishikawa(1990);
Nakagane(1989) basically support Ishikawa’s
hypothesis
• Type B: Sheng(1993), Knight and Song(1999),
Huang et al.(2006), Yuan(2010) deny the
hypothesis
Different approaches between the two
types of estimates
• Type A: based on official (planned) prices
• Preobrazhensky’s proposition: Pa/Pi<1
• Type B: based on non-official, “appropriate”
prices, which seem to reflect more correctly
the real supply and demand relations than the
official prices
Type A estimates of China’s ISRF
Example:Ishikawa(1967)
Type A estimates of China’s ISRF
Example:Nakagane(1989)
Type B estimates of China’s ISRF
Example: Knight and Song’s simulation
• Their methodology: R*=pi*xi －pa*xa, where
p* represents certain “appropriate price”
• Preobrazhensky’s proposition: pi*<pi, pa*>pa
• Procurement prices of agricultural products
were highly underpriced, while prices of
industrial products for the agricultural sector
were intentionally overpriced
Terms of trade between rice and selected industrial
goods in Guangzhou and Hong Kong, mid-1970’s
Ratio of free market prices to state
procurement prices of grains, 1977-89
Simulation analysis: intersectoral resource
transfers, assuming market price to exceed procurement price
by 50,100, or 150% (Knight and Song 1999, p.239)
Appropriate prices p*
• What are the appropriate prices p*, then?
• Market prices?
• There are no sufficient data of market prices
during the Maoist era, when any markets were
squeezed and often shut down
• Prices reflecting “labor values” inherent in the
products ? (e.g. Li 1985)
• But such prices are based on ambiguous
assumptions about labor values
Transactions under p*
• If the intersectoral transactions had been
made under the appropriate price system, the
balance must have been as follows
• R*=pi*xi －pa*xa
• Hidden resource flows: R-R*, where R shows
actual resource flows under the official
(planned) price system, i.e. R=pixi － paxa
• R-R*>0, since pi >pi* , pa*>pa as implied by
Preobrazhensky’s proposition
Question 1
• Agricultural products consist of many items.
• Proportions of “price-skewedness ” of the
agricultural products must be different by
item
• Thus, it must be wrong to obtain “appropriate
prices” by multiplying a single correction
parameter to the official planned prices
• Furthermore, their approach does not
consider “overpriced” industrial goods
If world prices p* were available for major
items of agricultural and industrial products
• If no domestic market price data were
available for the Maoist era, apply the world
price to the calculation of ISRF for the same
period.
• Collecting both domestic and world prices of
agricultural and industrial products for 19522000, Yuan (2010) concludes that China’s
agriculture has long been taxed indirectly
through the skewed planned price system
Question 2
• If market prices were applied in simulation
analysis, transaction volumes, too, must have
been changed under these prices
• Assume that every transaction were made by free
market with p*
• R^, or resource flow under the truly free market
system, = pi*x*i －pa*x*a
• Truly hidden intersectoral resource transfer, then,
might be R-R^=0?, because x*i could be more
than xi and x*a could be less than xa
Ambiguous ISRF calculation
• How much has agriculture provided China
with its industrialization fund?
• In what way did it provide the fund?
• Through scissors' prices, or underpricing
agricultural products as well as overpricing
industrial products?
• There seems to be no definite and exact way
of ISRF calculation
Undeniable facts and history
• However, it is undeniable that Chinese peasants
have contributed to the national capital formation,
by sacrificing themselves with low income in
collectivized agriculture, forced procurement, and
hukou (household registration) system
• Industrial workers, too, sacrificed their life under
the “rational low wage” system during the Maoist
era, but their sacrifice was much lighter than their
counterparts in the countryside. See no starvation
in the cities after the Great Leap Forward
Significance of ISRF issue for today’s
Chinese economy
• Market economy has been expanding in rural
China since 1978, as the procurement system was
abolished in 1992
• Agricultural tax was abolished in 2006
• Hukou system has become relaxed
• Last, but not the least, the share of agriculture in
national income has been declining in China
• However, as long as rural-urban divide exists, the
ISRF issue still remains, though to a lesser extent
• It must be a permanent issue until China’s
economy is fully marketized, and the divided two
sectors are unified in the true sense
Acknowledgements
• Thank you for giving me an opportunity to
present my view today
• Comments are welcome!
Reference
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Ishikawa, Shigeru (1965), National Income and Capital Formation in Mainland
China---An Examination of Official Statistics, Institute of Asian Economic Affairs
Ishikawa, Shigeru (1967), Economic Development in Asian Perspective,
Kinokuniya
Ishikawa, Shigeru(1967), “Net Resource Flow between Agriculture and
Industry : The Chinese Experience”, The Developing Economies, Vol.5 No.1, pp.
Karshenas, Massoud (1993), “Intersectoral Resource Flows and Development:
Lessons of Past Experience”, in A Singh and H. Tabatabai (eds.), Economic Crisis
in Third World Agriculture, Cambridge University Press
Knight, John and Lina Song(1999), The Rural-Urban Divide: Economic
Disparities and Interactions in China, Oxford University Press
Lee, Teng-hui (1971), Intersectoral Capital Flows in the Economic Development
of Taiwan, 1895-1960, Cornell University Press
Li, Bingkun (1985), “Guanyu Jiandaocha dingliangfenxide jigewenti (Several
problems concerning quantitative analysis of scissors prices)
Continued-•
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Mundle, Sudipto (1981), Surplus Flows and Growth Imbalances: The Inter-Sectoral
Flow of Real Resources in India 1951-1971, Allied Publishers Private Ltd
Nakagane, Katsuji. (1989), “Intersectoral Resource Flows in China Revisited: Who
Provided Industrialization Funds?”, The Developing Economies Vol.7, No. 2,
pp.146–173
Sheng,Yuming(1993), Intersectoral Resource Flows and China's Economic
Development. Basingstoke: Macmillan Press; New York: St. Martin's Press
Yuan, Tangjun (2010), China’s Economic Development and Resource Allocation
1860-2004 (袁堂軍『中国の経済発展と資源配分1860-2004』東京大学出版会)