China's Land Reform: Speeding The Plough

By Tom Orlik and Scott Rozelle

For China's 700 million strong rural population, the light of property rights may finally be appearing at the end the Communist-era tunnel. Thirty years of economic reform have left the countryside significantly better off than before, but neither farmers nor migrants are yet able to participate fully in the benefits of China's ongoing modernization. That may start to change if positive signals from China's leaders translate into concrete policies for turning farmers' contractual land-use rights into legal title to land.

China's peasant farmers, each tilling a fraction of a hectare, have a tough life. An average annual disposable income of 4,140 yuan ($572) compares unfavorably to urban net incomes of 13,786 yuan ($1,907), and the gap is widening. Under the current land-contracting system, there is still a barrier to achieving either a rapid improvement in standards of living on the farm, or an enterprising move to the big city. Without formal legal title to their land, China's peasant farmers cannot raise the money for, and have little incentive to invest in, soil testing, a tractor, or other productivity-enhancing technology. Neither can the rural masses sell up and raise the funds necessary to set up shop on the urban East coast. For some, requisition of farmland by the government for industrial projects, for which the occupants are never adequately compensated, is a constant threat. Yan Junchang, a 67-year-old peasant farmer from a village in Anhui province, puts the problem succinctly: "If land rights are returned to us, we will have peace of mind, we can plan for the future. Without land rights, we will always feel troubled, always fear our land may be taken away."

China's reform-era agricultural policies have been a striking success. With the right incentives in place, farmers have consistently increased supply to meet rising demand from a still growing population. But for the agricultural sector, the consequence of the current land-contracting system is productivity lower than where it could be. Millions of small farmers, laboring under uncertain conditions, are unable to raise the level of their on-farm incomes and produce less-than-optimal harvests. For society as a whole, the consequence is rural poverty, food prices that are higher than they need to be, and an increased risk of food-safety disasters. While no one is blaming the farming population, poisoned dumplings, tainted pet food, and -- most recently -- contaminated baby milk, are the natural consequences of a food chain with millions of small players, minimal traceability and zero accountability.

Raising agricultural productivity and contributing to food safety are compelling arguments for land reform. Even more compelling, however, is the role that strengthened land rights could play in China's transition to a modern, urban society. This transition is a work in progress: in unprecedented numbers, China's rural laborers are streaming out of agriculture into the off-farm sector. Even the State Statistical Bureau's figures that 60% of the rural labor force (all of those aged between 18 and 65 with a rural hukou) have already made the transition, disguise the magnitude of the labor transformation. A recent study by Stanford University, MIT and the Chinese Academy of Sciences found that when looking at younger cohorts of workers (those between 16 and 35), there is virtually full employment, with most workers already working in the city. Those left in the countryside are fully engaged as small businessmen or are raising families.

The labor transformation from agriculture to industry and services may be nearly complete, but China's transition to a modern, urban society is still far from over. There are virtually unlimited employment opportunities for young, able-bodied rural workers in China's cities. But because they are unable to purchase a flat or afford a long-term lease on an apartment, and because high entry costs and risks prohibit investment in a small business, many rural workers subsist in the netherworld of urban villages, suburban slums and cramped dormitories. For these unfortunates, work in the city has yet to transform into a life in the city.

They are unable to launch into their new lives -- lives that will necessarily be tough for them no matter what the circumstances -- but which will give hope for their children, who will be able to benefit from an urban education and entitlements. This transition, cementing the integration between rural and urban populations, is the missing piece of China's development puzzle and bringing it about is the most compelling argument for land reform.

What role does rural land reform play? Securely under control of China's rural families, land becomes an asset to produce a stream of income (by leasing it out) or a significant sum of cash (by selling it), which can help households finance the difficult and expensive move to the city. Under the current system, poor land rights, which are a barrier to the straightforward and secure sale or leasing of rural land, is one of the major factors hindering the transition to a modern, urban society -- a transition that all successful developing countries go through.

The argument for land reform appears compelling. In early October, speaking to a gathering in Yan Junchang's village, President Hu Jintao seemed to recognize as much, promising long-term stability in land contracts, and legally enforceable land rights for farmers. Reports following the recent meeting of Communist Party leaders appeared to confirm that the government would press ahead with reforms, aiming to "construct a healthy market for the transfer of land-contract rights . . . based on the principles of legality, free will and adequate compensation for the peasants." The first land use rights exchange has been established in Chengdu, Sichuan province, to allow farmers to sell or rent out the rights to use their land. Thirty years after Deng Xiaoping's agricultural reforms opened the door to increased harvests and higher standards of living for China's peasants, China's fourth generation of leaders appears to have bitten the land-reform bullet. But there is more to be done to make a rural-reality of the government's high-level commitment to land reform -- a process that is under intense debate in Beijing today.

First, in the absence of a land registry, a thorough survey is required. Establishing a public record of the extent and ownership of land will be no easy task. With 200 million farming families, each tilling on average five plots of land, there are around one billion plots to be demarcated. With multiple local boundary changes over the past 30 years, informal agreements on land sharing and leasing, and rapacious local officials conducting the survey, the scope for disputes and rent-seeking behavior is immense.

Second, on the basis of the completed survey, the government will have to issue binding contracts (or land titles) to the households. The new policy directives are clear on how to do this: new titled contracts are supposed to be allocated according to the current distribution of use right (which for most villages took place in the late 1990s in the form of 30 year contracts). However, if as it appears, this is the last and final redistribution of land among households, there will be intense pressure on village leaders to find an equitable solution and not leave any current households out (or give some households more than others). Many villages are considering the possibility of again redividing the land according to some egalitarian rule -- probably equal division amongst households.

Third, and the most important priority at this stage, is a change in the law. Under the current system, farmers collective land rights are inferior to state land rights and subservient to them. In effect, this allows any level of authorized government to acquire land by taking the collective land and converting it by executive fiat into state land. Throw greedy developers and rent-seeking local officials into the mix, and the result is a helter-skelter development process: ill-conceived urban sprawl built on the backs of dispossessed peasant farmers. The key to resolving this cluster of problems is to make title to land the primary proof of ownership. If this were the case, no freeway, or residential development, or industrial park could be built on land till all the land title certificates had been brought up and transferred to the new owner's (or government's) name. Where, in the past, the peasant farmer was tossed aside by the development juggernaut, this new system would give them a substantial stake in the process, and the capacity to negotiate for a share in the profits that flow from it.

Finally, rules of ownership must be agreed and announced. In particular, Mr. Hu's ambiguous assurance of "long-term" stability in land-use rights must morph into a concrete commitment. Fifty-year land use rights, 100-year rights, or indefinite rights (as is the case in Vietnam) are all possibilities. In addition, to work effectively the new system will have to introduce clarity regarding the procedures for sales of land, leasing of land, the use of land as collateral, and the bequeathing of land to children, the village, or anyone else.

All of these pieces need to be in place to make land reform work. In Vietnam, the survey and division of land alone took 15 years to complete. In China, rapid agreement on a change in the law and rules of ownership would line all parties up behind the need for more rapid completion of the package of reforms. Even so, it is clear that the road ahead is long. The devil of policies announced with a fanfare in Beijing is always in the detail of implementation at the provincial and, in this case, village level.

The final outcome is not yet completely certain; this is one of the reasons why the initial policy pronouncement was not clearer. There are powerful interests ranged against reform. Local government, industrial ministries, and the construction and property development sectors all have a stake in the status quo.

Development and career-minded local officials know that land reform may slow the process of acquisition of land for industrial projects. Construction companies and property developers, many of whom have strong links to the government in Beijing, know that reform will drive up the cost of acquiring land. At the same time, there is also the fear that a small number of ill educated and credulous peasants will be duped into selling their land for a song, forming a new landless and impoverished underclass.

Perhaps more realistic, there is a risk that a much larger group of peasants would sell their land at reasonable prices but would be thrown into landless poverty by the first serious recession. In the past, this combination of political economy constraints and genuine concern for farmers' future well-being won the argument against land reform. Reading the signs in the Chinese press, and the statements from government insiders, it is still not completely clear who has won this round of the reform battle. But for reformists in the government, the hope is that this time the stars are aligned in their favor: in terms of economic development and agricultural productivity, the time is right for land reform.

Land reform would give farmers a valuable asset they can collateralize or sell to finance a move to the city. A low-cost urban housing program introduced alongside land reform would allow Mr. Yan, or perhaps his children, and others like them, to sell their plot of land in the village in Anhui province and move to a housing development in Hefei -- the provincial capital. Permanent migration, with capital to fall back on, and perhaps even some entitlement to the benefits of urban citizenship, would strengthen migrants' position in the labor market. More important, it would mean that migrants' children will grow up with an urban education -- and the opportunities and aspirations that brings with it.

In the long run, one of the most fundamental consequences of the newly proposed "third land reform" will be the reshaping of China's agriculture into a modern sector with farmers that are able to produce high enough incomes to support their families comfortably. A successful land-reform policy will also support an agricultural sector able to produce sufficient supplies of safe food for the hundreds of millions of their compatriots that live in the city.

This will not happen quickly or seamlessly. Land reform will not bring the same step-change in harvests that followed the green revolution of the 1970s or the introduction of the household responsibility system in the early 1980s. Farmers will be reluctant to sell. Farm households are small, poor and risk adverse; owning land is a big part of their risk management strategy and no one will sell their land without a great deal of thought. Increasing the size of farms is, therefore, going to be a slow process.

Since the beginning of the reform era, innovation in land use and agricultural technology has enabled China to confound expectations and consistently increase food supply to meet growing demand. Land reform will speed the plough of consolidation and modernization in the agricultural sector, and at the same time do more than any other policy to improve the standard of living for China's 700 million rural population.

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Mr. Orlik is a free-lance writer based in Shanghai. Mr. Rozelle is a professor of economics at Stanford University.