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Thursday, January 21, 2021

ExplainSpeaking: How China reformed its agriculture and reduced poverty

China followed a radically different approach by creating incentives and institutions needed for a market economy

Written by Udit Misra , Edited by Explained Desk | New Delhi | Updated: December 21, 2020 2:59:40 pm
Farmers drive a cart loaded with sunflowers at the Dounan Flower Market in Kunming, Yunnan Province, China, on July 14, 2020. (Photographer: Qilai Shen/Bloomberg)

Dear Readers,

The farmer protests in the national capital refuse to weaken and with each passing day more and more people in the country seem to be growing curious about the wisdom behind the government’s new farm laws.

At The Indian Express, we have written several “Explained” pieces about what the new farm laws aim to do, what the current state of Indian farmers is, including those hailing from Punjab and Haryana — the two states which have opposed the farm laws the most. Incidentally, these are also the two states that benefitted the most under the previous policy regime.

Looking back there are two aspects to the current impasse.

Farm reforms – In India, China

One is the question of whether these reforms will benefit the farmers or not. This is a question of economics. Broadly speaking, the government’s argument is that opening up the agriculture sector to market forces will not only reduce the stress on government finances but also help farmers by making agriculture more remunerative. The protesting farmers, however, disagree. They argue that interaction with private players will ruin them financially.

The second aspect is more political and relates to how the laws concerned were legislated. The government believes it has gone through due diligence before turning its ideas into laws. The farmers, on the other hand, stridently criticise the lack of debate before the laws were enacted.

The first one indicates a deep-seated mistrust in the way a market economy functions. A market economy essentially refers to a system where the pricing and supply of goods and services are predominantly determined by the free and voluntary interaction of people and firms in the marketplace.

The second one reflects a deepening distrust in the way this government is functioning.

As it turns out, both strains of suspicions are intertwined and that is what makes the current deadlock a question of political economy and not just economics. Whatever may be the eventual solution to break this deadlock, it would have both political and economic aspects.

The key question to ask is: how did we arrive here? Why are farmers so suspicious of market forces and could things have been different?

In this regard, a 2008 paper published in Economic and Political Weekly— titled “The Dragon and The Elephant: Learning from agricultural and rural reforms in China and India” — by Shenggen Fan and Ashok Gulati (both associated with the International Food Policy Research Institute at that time) is quite instructive.

Farmers at the Singh border on Saturday

“Despite similar trends in the growth rates, the two countries have taken different reform paths; China started off with reforms in the agriculture sector and in rural areas, while India started by liberalising and reforming the manufacturing sector. These differences have led to different growth rates and, more importantly, different rates of poverty reduction,” they state at the start of the paper.

How?

“By making agriculture the starting point of market-oriented reforms, a sector which gave majority of the people their livelihood, China could ensure widespread distribution of gains and build consensus and political support for the continuation of reforms. Reform of incentives resulted in greater returns to the farmers and in more efficient resource allocation, which in turn strengthened the domestic production base and made it more competitive. Besides, prosperity in agriculture favoured the development of a dynamic rural non-farm (RNF) sector, regarded as one of the main causes for rapid poverty reduction in China as it provided additional sources of income outside farming,” they state. 📣 Follow Express Explained on Telegram

“The rapid development of the RNF sector also encouraged the government to expand the scope of policy changes and put pressure on the urban economy to reform as well, since non-farm enterprises in rural areas had become more competitive than the state-owned enterprises (SOEs). Reforms of the SOEs, in turn, triggered macroeconomic reforms, opening up the economy further,” they state.

Between 1978 and 2002, the rate of growth in agriculture nearly doubled over the 1966 to 1977 period and this was the main reason why poverty in China came down from 33 per cent of the population in 1978 to 3 per cent in 2001.

In stark contrast, they found that in India, the most rapid poverty reduction occurred from late 1960s and the late 1980s but this was not because of reforms, rather due to a strong policy support to agriculture.

“India still continues with state food procurement and distribution, mainly because it is seen as affirmative action for over two-thirds of the population, including the poorest, who are dependent on agriculture and the rural economy, for livelihood,” they clarify.

So what was the most important differentiating factor between the two strategies?

Farmers gather in large numbers during their protest against the new farm laws, at Singhu border in New Delhi, Sunday, Dec 13, 2020 Express Photo By Amit Mehra

“The Chinese policymakers first created the incentives and institutions required by the market economy and then, in the mid-1980s, they began to slowly open up markets, by withdrawing central planning and reducing the scope of procurement while expanding the role of private trade and markets,” they find.

Of course, it is no one’s case that India could have simply replicated the China model. It is crucial to note that China had more favourable initial conditions — even in 1970, China had a significant edge over India be it health, education, more egalitarian access to land, and growth of the power sector. And that explains “why, despite the private and economic restrictions imposed on the Chinese rural population, the country could achieve a sustained growth even before the reforms”.

Seen in this perspective, the whole issue of Minimum Support Prices is essentially about flawed incentives. Notwithstanding the economic logic that greater play of free markets will improve outcomes for farmers, it is unreasonable to expect farmers of Punjab and Haryana to give up on the safety of MSPs overnight. Ideally, the government should have built up the case for markets ground up and allowed farmers the time to adjust to market forces.

But if you move away from agriculture for a moment and examine the essential nature of policies in other sectors, you would find that there too policies suffer from the same issue.

For instance, the production linked incentives to boost India’s manufacturing is essentially about shielding the domestic firms from market competition. So are the policies justifying import bans and higher import tariffs. Similarly, India’s decision to stay out of RCEP is also driven by the same notion — shielding the domestic firms from market forces. The undermining of the Insolvency and Bankruptcy Code is again essentially a story of not letting market forces hurt the existing promoters.

Data shows that the bulk of farm produce was traded privately even before these laws came into force. The key concern for India should be the creation of incentives and institutions for a market economy to function because therein lies the only sustainable solution to allaying deep-set suspicions.

Beyond the farmer unrest, this week is likely to see some fiery discussion on the latest National Family Health Survey (NFHS-5) data. It showed that in several Indian states child malnutrition levels rose between 2015 and 2019 — basically, during the first five years of Prime Minister Narendra Modi’s regime.

Yet another debate brewing in the background pertains to the desirability of RBI’s inflation-targeting framework. More on these next week.

Until then, stay safe.

Udit

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