Development in Rural China (SOSC 163)
Course Objective:
To interpret the development experience of rural China in the last 100
hundred years from an economics perspective
Why the last 100 years?

Need to understand what went on (and wrong?) between 1949 and
1978 in order to understand what, how and why of China’s recent rural
economic reforms (circa. 1979)

Difficult to make sense of the period ruled by the Chinese Communist
Party (the CCP) without knowing what happened before it

Choice of late 19th-century predicated upon China’s increasing contact
with the West or integration into the world economy (after Opium
War)

What were the immediate effects of “commercialization” on economic
development?

Why did specialization and trade and the development of markets
failed to transform China into a super industrial power just like Adam
Smith predicted?

Why, after the Communists came into power were markets and private
property rights eradicated?

Finally, why after three decades of Communist rule based upon a
planned economic system and communal property rights did the same
ruling party change the approach to economic development?

To what extent does the current Chinese (village) economy
approximate itself half a century ago? What is yet to be changed?
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The Analytical Framework

To interpret recent development experience from an economic
perspective that emphasizes the role and importance of institutions in
the development process

Two dimensions of institutions: 1) rules and mechanisms by which
scarce resources are allocated (allocative efficiency) and; 2) criteria by
which individual rights to income are determined

Examples of (1) are markets vs. plan

Examples of (2) are private vs. communal property rights; former
recognizes and protects monetary returns to one’s labor and
investments, as opposed to more or less equal sharing of returns to
group effort
“Mapping” the two

Before 1949 China’s economy operated according to markets and based
upon private property rights

Between 1949 and 1978 ……plans and communal rights

After 1979 moving away from plans…….increasingly
private….reverting back to markets and private property
Greater emphasis placed upon 1949-1978, why?

Period when China deviated from conventional wisdom of
development strategy of concomitantly urbanizing and industrializing
the economy

Paid huge economic and social costs…..e.g., Great Leap forward in
1958
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Why the CCP pursued a different development strategy?

Scarcity of resource endowments: China was poorly endowed in land
resources relative to her population

China a predominantly rural society and economy when the PRC was
founded

Close to 90% of population lived in villages

Had a populace of relatively low levels of literacy

Close to 70% of national income accounted for by agriculture

Over half of exports were agricultural products

Had insufficient “hard currencies” with which to import latest
technology

It was technologically backward: industry confined to simple
processing and distribution of primary commodities
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The Development Question: How did China go about embarking on the path of
industrialization under the above constraints?
Role of Agriculture in Economic Development
 to feed and clothe the people
 to provide “surplus” to industry in the forms of cheaply priced food and
raw materials
 What institutions would help keep prices low?
 Problems dealing with millions of (profits-oriented) farm households
 Plans and collectives
Concerned with how to effectively mobilize resources from one sector to
another according to development priority …..
But economic performance requires also a second dimension of efficiency,
namely, organizational efficiency, which is a function of work incentives
(referring to both intensity and quality of effort)
Question then becomes what determines work incentives?
 material rewards (w = marginal product of labor)
 non-material incentives (ideology – the notion that one should serve not
merely one’s economic interests but also those of the fellow countrymen)
Chinese leaders had relied upon:
 the massive MOBILIZATION of the country’s vast labor force (China’s
“comparative advantage”)

the reliance on ideology for effort mobilization
 Nothing replaces material incentives: stagnant peasant income and farm
output growth for two decades
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Economic Reform saw gradual removal of prior restrictions on:
 use and income rights
 free allocation of labor time especially in non-agriculture
 rise of rural industries and migration (partial urbanization)
but they remained incomplete …..
This course attempts to explain WHY and HOW certain economic policies
and institutions were implemented and their CONSEQUENCES.
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So, why study development of rural China?

One of two most populous countries

Has to feed 1/4 (25%) of world’s population on 7% arable land

compared to the U.S., only 70% of China’s arable land can be sown to
crops but has to feed 3-4 times as many a population

Western and northwestern part not suitable for farming

Still a substantial % of population living in rural areas

resources compared poorly even with India (in the 1950s) and Soviet
union (in the late 1920s)

Development requires transformation of employment and factors of
production (i.e. industrialization) and urbanization
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Our Approach
Economic performance depends on the strengths of an incentive system – the
PROPERTY RIGHTS approach
PROPOSITION: work incentives are closely related to the extent to which
one’s effort is remunerated: the stronger such a relationship the stronger the
incentives and the better the economic performance
There are, however, a number of factors that may bear upon incentives
Resource scarcity and ideology contributed to disproportionate use and
emphasis on non-material incentives
That just didn’t work! That is what Reform is all about!
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*The Development of China's Rural Institutions in Chronological Order
1. 1949-1952 -- Recovery from war & civil disturbances: Land Reform to
redistribute scarce land and other farm resources from rich to poor
2. formation of mutual aid teams to rationalize resource allocation due to
scarcity: a) temporary; b) permanent (up to 1954)
3. the establishment of elementary agricultural coops and the restriction of
farmers' control-cum-use right and income right (1954-55)
4. transition to advanced agricultural coops and the complete abolition of
private property rights (1956-57)
5. collective farming under the three-tier structure of the people's commune
(renmin gongshe) 1958-1978
6. The restoration of farm household as primary unit of agricultural
production
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