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AGRICULTURAL PRODUCTIVITY AND

RURAL POVERTY IN CHINA


Lee Travers and Jun Ma

ABSTRACT: A variable elasticity model of the aggregate agricultural production function was used to
assess the potential impact of proposed poverty alleviation interventions. The findings suggest that some
scope remains, under current technologies and prices, for improving peasant income through further inten-
sification of machinery and fertilizer use, but not by further irrigation development. ./EL Classification:
013.

INTRODUCTION

Virtually all of China’s poor live in rural areas and rely heavily on agriculture for survival.
Until the mid- 1980s government poverty alleviation efforts were limited largely to income
subsidies to help the poor avoid debilitating hunger, but over the past decade a more aggres-
sive strategy has included investment in poor area agricultural and nonagricultural enter-
prises. Indeed, the eighth Five Year Plan (1991-1995) calls for greater emphasis on
agricultural investment in poor areas, especially terracing and irrigation. Despite these
efforts to increase the productive potential of poor areas and people, in recent years the
number of absolute poor has stagnated at about 100 million people. Additional evidence
discussed below also suggests that recent policies have had limited success in reducing the
number of poor.
This paper evaluates the potential for agricultural intensification to raise peasant
incomes in poor areas. Elasticities of output with respect to key inputs are estimated sepa-
rately for poor and wealthy counties in China. The findings reveal that under current crop-
ping regimes, technologies and prices, increased use of machinery and fertilizer offers
some potential for increasing peasant income in poor areas. However, irrigation investment
in poor areas would only raise net peasant incomes if government subsidies cover at least
one-third of the capital costs of projects.

THE RURAL POOR

The number of rural poor in China fell rapidly from 1978 to 1984.’ Since 1984, the number
of poor has stagnated at between 90 and 100 million people (see Table 1).
The decline in the number of poor between 1978 and 1984 can be attributed to broad par-
ticipation in the gains from a series of rural policy changes that began in 1978. The new

Direct all correspondence to: Lee Travers, 6419 31st St. NW Washington, DC 20015; Jun Ma, Department of
Economics, Georgetown University, Washington, D.C. 20057.

China Economic Review, Volume 4, Number 1, 1994, pages 141-159 Copyright 0 1994 by JAI Press, Inc.
All rights of reproduction in any form reserved. ISSN: 1043-951X.
142 CHINA ECONOMIC REVIEW VOLUME 5( 1) 1994

Table 1
Number and Percent of Rural Poor, 1978- 1990
(millions)
1978 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
number 260 194 140 123 89 96 97 91 86 103 97
percent 33.0 24.3 17.4 15.2 11.0 11.9 11.9 11.1 10.4 12.3 11.5

Source: See World Bank (1992).

policies were designed to increase the share of national income going to peasants by
increasing crop purchase prices, reducing mandatory delivery quotas, decreasing taxes, and
increasing marketing freedom and state investment. Concurrent decollectivization of agri-
cultural production through distribution of land use rights and other collective assets to
farm families led, by 1984, to a new institutional structure of production. Favorable policy,
good weather, rising efficiency, and diversification of income sources all contributed to
average real net peasant income increases of about 13 percent per year over the six year
period.2 Although available data on income distribution are highly aggregated, they yield a
Gini index slightly lower for 1984 than 1981.3 The income gains were shared widely
enough to cut the number of poor, hence the rate of poverty, by more than half.
The rapid rise in peasant real incomes ended in 1984. The government cut the marginal
(above quota) procurement price for grain in 1985 and the overall agricultural purchase
price index rose only slightly faster than overall inflation in subsequent years.4 Production
costs began to steadily increase as a percentage of total output value, reflecting an end to
the productivity gains of the previous seven years and putting further pressure on net
incomes.5 The growth of average real per capita peasant income dropped to 0.6 percent in
1985 and averaged only 1.6 percent per year between then and 1989.
Over the 19851989 period, the rural income distribution became less egalitarian, with
the Gini index rising from 0.264 to 0.308.6 The deterioration probably resulted from the
changed nature of income gains. With real crop prices stagnant and input prices rising,
income gains needed to come from increased efficiency in agricultural production and mar-
keting or from employment outside of agriculture. Although the poor now had greater
access to modem inputs, their generally adverse production conditions kept gains low. For
many rural families, nonfarm employment was a growing source of income over the
period, but such employment opportunities were concentrated in areas with more favorable
communications and markets, areas in which families already enjoyed higher incomes. The
growth slowdown and increased inequality led to the observed stagnation in the number of
rural poor after 1984.

Concentration of Poverty

Chinese poverty is concentrated in mountainous areas, primarily in the several ranges


and high plateaus that define the western boundary of traditional Han agriculture. Moun-
tainous areas further east also contain pockets of poverty, most often in the relatively inac-
cessible and resource poor areas along provincial borders. Even within mountain areas
distinct differences in well-being exist. Villages on valley bottoms typically have much less
poverty than those on the hills.
AGRICULTURAL PRODUCTNITY IN RURAL CHINA 143

Statements about location subsume not only physical conditions such as topography and
rainfall, but also aspects of the economic environment, including communications, mar-
kets, and industrial infrastructure. Individual and family characteristics such as education,
family composition and work experience overlay the environmental characteristics in
determining the probability of a family being impoverished. Analysis generally suggests
that individual and family characteristics are less important in China than in other countries
in explaining who is poor. The reasons for this are several:

1) Within villages, egalitarian access to economic assets that began in the 1950s and
continued through the distribution of collective means of production in the early
1980s limited asset-based income inequality.
2) Over the same period, access to social services such as education and medical care
tended to be village, not family, specific.
3) Continued state control of major agricultural inputs, particularly fertilizer, and of
major outputs reduced the opportunity to exploit differential abilities in those mar-
kets.
4) Finally, collectives continued to directly control or heavily influence access to
many forms of nonagricultural employment, with one collective goal being to
spread jobs widely among local families.

To the extent that inequality is explained by intervillage differences in assets and social
services, villages (production teams) would be the most analytically useful unit from which
to view the effect of the economic environment on individual achievement. However, the
lowest administrative level for which income and related information is readily available is
the county. Indeed, the central government has made counties the focus of their poverty
alleviation efforts. Counties also serve as the key level of local government from a budget-
ing and policy point of view. For these reasons, the county will be the basic level of orga-
nization at which poverty interventions are discussed in this paper.

Poor County Performance 1980-l 987

In 1986, the central government identified 300 counties as poor and eligible for a special
investment program. Counties qualifying for this program included all those with 1985 per
capita rural incomes below 150 yuan; minority counties with incomes below 200 yuan; and
a small number of counties in old revolutionary base areas, which could have incomes as
high as 300 yuan.’
In 1988 the government began publishing statistics on selected major agricultural inputs
and outputs for all counties. The 1988 county yearbook also included aggregate figures for
counties grouped by selected criteria, and these figures provide the basis for an initial
assessment of relative agricultural performance by poor counties over the 1980-1987
period. Table 2 lists some basic data for the 300 poor counties and, for comparison, for the
1,816 nonpoor rural counties.
Poor areas had more arable land per capita than other areas, but less favorable growing
conditions resulted in a lower multiple cropping index, and hence less sown area per capita
than nonpoor areas. Grain yields were consistently lower for poor counties than nonpoor,
as were the growth rates of those yields.
144 CHINA ECONOMIC REVIEW VOLUME 5(l) 1994

Table 2
Agricultural Indices, 1980-1987
(300 poor counties/all other rural counties)
1980 1985 1987
Sown area per capita 2.4612.56 2.3412.52 2.2812.48
Multiple cropping index 1.34/1.54 1.42/1.58 1.44/1.61
Grain yield (kg/ha) 2130/2940 258013270 256513900
Grain production per capita (kg) 2961398 3 151473 3 101492
Meat production per capita (kg) ll.Ul4.8 16.9121.5 18.7123.5
Fertilizer (kg/ha) 57199 84/138 93/150
Effective irrigation ( percent of arable land) 29.1/50.1 29.4150.7 30.315 1.2

Source: State Statistical Bureau (1988b).

Table 3
Share of Agriculture in Social Output Value, 1987
Per Capita Social Share of Agriculture in
Output Value (yuan) Social Output (percent)
300 Centrally-designated Poor Counties 504 70
363 Provincially-designated Poor Counties 654 67
541 Yangtze River Valley Counties 1,433 42
337 Suburban Counties 1,669 39
283 Coastal Counties 2.204 34

Source: State Statistical Bureau (1988b). pp. 598-661.

Figures on net agricultural output value (NVAO) in constant 1980 prices that were pub-
lished for 1985 and 1987 show the lagging performance in poor area agricultural produc-
tion over those years. In the 300 poor counties, per capita NVAO fell by approximately one
percent per year from 1985-1987, while in all other areas per capita NVAO increased 1.8
percent per year.8 As will be shown, poor areas are particularly dependent on income from
agriculture and the mediocre performance of this sector in poor areas after 1984 thus
deserves additional scrutiny.

Agriculture in Total Income

In China as a whole, agriculture has been ever less important as a source of rural income.
For example, agriculture’s contribution to rural social output value fell from 68.9 percent
in 1980 to 45.1 percent in 1989.9 However, the relative importance of agriculture remained
high for poor counties (Table 3), where in 1987 it contributed roughly 70 percent of rural
social output value.
Agriculture’s contribution to net personal income exceeds its share of gross rural output
value. This is so because material production costs are a smaller proportion of output value
for agriculture, particularly field crops, than for other productive sectors. In addition, most
agricultural income accrues directly to rural families. lo Those factors combined result in
AGRICULTURAL PRODUCTIVITY IN RURAL CHINA 145

agriculture contributing about 15 percentage points more to net farmer incomes in middle
and low income areas than the gross output shares in Table 3 suggest.” For the poorest
counties, this implies that about 85 percent of peasant income derives from agriculture, a
magnitude consistent with income data collected in a variety of poor households. The con-
tinued, very strong reliance on agriculture (particularly field crops) to generate poor area
incomes gives it a potentially dominant role in any attempt to alleviate poverty.

The Agriculture-based Poverty Alleviation Strategy

The 1985-1987 decrease in poor county income came in the face of an attempt to main-
tain the pace of poverty reduction through a special effort initiated in 1986 and coordi-
nated by the State Council Leading Group for the Economic Development of Poor Areas.
That organization, which directs the use of over four billion yuan a year in special low
interest loan funds, designed an eclectic intervention strategy emphasizing agricultural
and rural enterprise development. A complementary program run by the State Planning
Commission currently grants about 1.5 billion yuan a year for infrastructure investment in
poor areas.
The development strategy under these programs was changed for the eighth Five Year
Plan (1991-1995) to more strongly emphasize direct investment in agriculture. In addition
to the previous support for agricultural input purchases, the program began to encourage
farmers to borrow for terracing and the construction of small irrigation system. Those
improvements would, in theory, increase the productivity of other agricultural inputs.
However, from an economic standpoint, improved physical productivity is not sufficient to
justify investments in terracing and irrigation. Such investments must improve not only
physical productivity, but also must yield returns greater than those in alternative uses. At
a minimum, the investments must promise positive financial returns.
The remainder of this paper analyzes information on county agricultural performance
during the 1980s to evaluate whether the new emphasis on irrigation investment in poor
areas is economically justified. The analysis uses recently published county-level data on a
variety of agricultural inputs and outputs to estimate the physical productivity of agricul-
tural inputs. The results from the production function estimation, combined with informa-
tion on input and output levels and prices, are then used to analyze whether irrigation
investment will yield positive economic returns, and whether those returns exceed the
returns from increased application of fertilizer or mechanical power. To provide a contrast
with the situation in poor counties, the same analysis is done for wealthy counties.

THE MODEL

The hypothesis examined here is that expected marginal returns exceed marginal costs at
current input use levels. If marginal returns exceed marginal costs, and if one accepts that
farmers would under these circumstances willingly use more inputs, then the potential
exists for policy intervention to relieve constraints holding input use below preferred levels.
Constraints could include those on credit, input supply under quantity rationing, or organi-
zational capacity (as when irrigation works cross village boundaries). If necessary, policy
interventions could also be designed to reduce price or other risks that deter input use by
risk averse farmers.
146 CHINA ECONOMIC REVIEW VOLUME 5( 1) 1994

The hypothesis that expected returns exceed costs can be tested by comparing marginal
revenue to marginal cost under current production conditions.12 The test derives very sim-
ply from the partial derivative with respect to the input,
n
Y = PqQ(X,,X,, . . ..XJ - c P,X,
i= 1

where Y is net income, P, is the output price, Q the production function, Pi the price of input
i and Xi the quantity of input i. A positive partial derivative indicates that additional use of
that input will yield positive returns.
Calculation of these partial derivatives requires specification of the underlying produc-
tion function. The Cobb-Douglas production function is the traditional specification of
agricultural production relationships. The purest form of the Cobb-Douglas function
assumes constant elasticities over the range of input use. However, the wide range of input
use within the sample of counties suggested the need to test for, rather than assume, con-
stant elasticity. This was done using a variant of Antle’s variable elasticity modification of
the translog production function. The translog production function relaxes the Cobb-Dou-
glas restrictions by viewing all the coefficients in the model as functions of all inputs.
Antle’s modification assumes that all of the technological choices affect the constant term
and the elasticities of all inputs. i3 However, multicollinearity problems arise when simul-
taneously explaining both the constant term and the elasticities of inputs with technological
choices. Furthermore, consideration of the way in which technology affects inputs would
seem to support an approach that, for example, attributes the affect of labor saving technol-
ogy to labor only, rather than to land and the constant term as well.
Based on that reasoning, this study uses a variation of the Antle production function in
which land and labor saving variables come into play in the following way:

Q = b&b’X2b2, (1)

where

b, = al0 + a,ilogY, + aiZlogY, + .. . + al,JogYk

b, = a20 + a2ilogYk+, + a22 logYk+2 + . . . + a2,10gY,,,. (3)

Here, Q denotes aggregate field crop output, and Xi and X2 are the traditional factors land
and labor, respectively. And Yi, Y2,..., Y,,,are inputs that affect the productivity of the tradi-
tional inputs.
This formulation specifies technological inputs as either land saving or labor saving. For
some inputs, such as fertilizer, attribution as land or labor saving is straightforward. For
others, like mechanical power, the attribution is not so clear. Tractor power saves labor, but
by allowing deep plowing may also be land saving. A specification error will occur if the
input is attributed to only one of several actual effects. In the model used here, inputs with
uncertain attribution were included in the initial estimates of both equations (2) and (3), but
eliminated in later specifications if the coefficients were found insignificant.
Data availability constrained the possible specifications of the production function. Data
for certain variables suspected to be important, such as rainfall and temperature, are
AGRICULTURAL PRODUCTNITY IN RURAL CHINA 147

unavailable and the variables therefore omitted. It follows that some potentially important
interactions, such as those between rainfall and irrigation, are also omitted. However, the
data set includes the key variables of sown area, agricultural labor, mechanical power, elec-
tricity use, fertilizer use, and effective irrigated area.
Although included in initial specifications, coefficients on electricity use were uniformly
insignificant and that input was therefore eliminated from the estimated equations reported
here. Mechanical power was significant only as a labor-saving input. Fertilizer and irriga-
tion were highly correlated, leading to high variance of their estimated coefficients. Conse-
quently, two separate models were constructed, one using only irrigation (Model A) and
the other only fertilizer (Model B) in the land elasticity function.
Based on the initial findings, the revised variable labor and land elasticity Model A can
be written as:

Q = b,,Xlb1X2b2 (4)

where

b, = al0 + a,,logYt (5)

b2 = a20 + a2210gY2 (6)

where Q is output, X, is labor, X2 is land, Y, is mechanical power, and Y2 is irrigated area.


Model B has the same structure as Model A except that it substitutes Ys, fertilizer consump-
tion, for Y2, irrigation, in equation (6), i.e.,

b2 = a2o + a2JogY3. (6’)


To find the impact of mechanical power, irrigated area, and fertilizer on output, three
elasticities are derived from Models A and B. Taking the logarithm of equation (4) yields

1ogQ = logbo + (ato + a,,logY1) logX, + (u2o + a22 log Y,)log X2.

Taking partial derivatives of log Q with respect to log yi, i=1,2,3, the elasticities of
mechanical power and irrigation from Model A are:

E
alogQ = alllogxl
= - (7)
me alogY

-- alogQ (8)
% - alogy = a22logx2

Similarly, the elasticity of fertilizer can be derived from Model B:

-- alogQ
&fe - alogy = a2310gx2 (9)
148 CHINA ECONOMIC REVIEW VOLUME 5(l) 1994

Note that the elasticities are functions of labor and land input levels, and the mean value
and standard deviations can be obtained by taking the expectation and variance of equa-
tions (7), (8), and (9).
One estimation problem not yet addressed is possible heteroscedasticity when using
cross-region data. Since the natural conditions (e.g., rainfall, quality of soil, temperature)
and sizes of counties vary greatly in China, the variance of the regression error terms is
likely to vary, which reduces the accuracy of OLS estimates. To deal with possible het-
eroscedasticity, the White test was conducted when estimating the coefficients of the mod-
els.i4 The test identified heteroscedasticity as a problem, so consistent estimates of the
covariance matrices were used to calculate the heteroscedastic t ratios for each coefficient
estimated.

THE DATA

The main data source of this study is China’s County Level Rural Economic Statistical
Abstract (1980-1987) (hereafter “County Abstract”).15 Due to limited data entry
resources, a sample of 12 of China’s 27 provinces was randomly selected (the three pro-
vincial-level municipalities of Shanghai, Beijing and Tianjin were excluded). Returns for
a single year, 1987, for all agricultural counties in these provinces were included in the
data set. The selected provinces display a desirable level of income and geographical
diversification. Among them, Heilongjiang, Neimenggu, Hebei, Henan and Shanxi are in
North and North East China; Sichuan, Hubei, Jiangxi, and Jiangsu are located along the
middle and lower reaches of the Yangtze river; Shaanxi and Gansu are in Northwest
China; and Hunan and Guangdong are in the south. The 12 provinces yielded 1,125
county observations. To test the representativeness of the 12 provinces, the mean and
standard error of per capita rural social output of the twelve provinces was compared to
those of the population of the 27 provinces from which the sample was drawn. The 12
selected provinces yielded a mean and standard error of 1027.4 yuan and 477.4 yuan,
respectively, while those of the 27 provinces were 1032.6 yuan and 487.1 yuan. The
selected provinces are therefore felt to accurately represent the income characteristics of
the whole.
When the 1,125 counties in the sample were arrayed by per capita total social output
value, the distribution had a relatively steep slope on both tails, with the bulk of the coun-
ties found in a middle range with a gradual slope. The samples of poor and rich counties
used for this analysis include the 200 counties on each tail of this distribution, excluding
the middle range with its slow income transition. The chosen counties exhibit the charac-
teristics shown in Table 4.
The data in the County Abstract have some characteristics that deserve discussion before
they are used in the regressions:
Income: This paper seeks to identify agricultural development potential specific to
poor areas, so it is first necessary to group counties by income level. In this case, the
desired income measure is peasant per capita income. The SSB measures such income
directly, but not in every county, and county-level results, even when collected, are not
often published. The County Abstract includes rural total social output value and agricul-
tural output value for all counties. l6 A simple test demonstrates that per capita total social
output value (PCTSOV) can serve, for grouping purposes, as a good proxy for per capita
AGRICULTURAL PRODUCTIVITY IN RURAL CHINA 149

Table 4
Selected Indices of Poor and Wealthy Counties, 1987
Poor Counties Wealthy Counties
-
Per Capita TSOV 415 yuan 2,708 yuan
Sown Area/Labor 0.43 ha 0.65 ha
Grain Yield/Sown ha 2,550 kg 4,755 kg
Fe~ili~r/Sown ha 76.5 kg 168 kg

Source: State Statistical Bureau (1988b).

peasant net income (PCNI) as measured by the SSB. PCNI data can be regressed against
PCTSOV using OLS:

PCNI = a + b*PCTSOI/:

where PCNZ and PCTSOV are both measured in yuan. At the provincial level, this gives the
following:

PCNZ = 343 + O.l4*PCTSU~ n = 30; R2 = 0.91,


(5.12) (17.51)

where the numbers in parentheses are t ratios, and n is the number of observations.” The
strong results allow per capita social output value to be used as a proxy for per capita net
peasant income in grouping counties.
Output: Field crop output is estimated using an aggregated output index which
includes the three types of field crops for which output is given: grains, cotton, and oil-
bearing crops. These three types of crop stood on 87 percent of sown area in 1987. The
aggregation was performed by weighting oil and cotton crop output by their average price
relative to the average price of grain and stating all output as equivalent metric tons of grain
(see appendix for details).
Labor: Agricultural labor force data were not presented in the county yearbook, only
rural population. The 1989 yearbook, however, did present labor force data by county and
the 1987 rural population was multiplied by the 1989 labor/population ratio to estimate the
1987 agricultural labor force. The latter variable is expressed in numbers of laborers.
Lancd: The source gives figures for total arable land and for sown area. Sown area was
used as the measure for land input in the estimating equations. It is measured in mu (1 mu
= l/15 ha).
Mechanical Power: This variable measures the stock of mechanical power in rural
areas applied to agriculture. The two major types of powered machines are tractors and ini-
gation pumps. The analysis here assumes that the available machinery is applied to field
crop production in equal proportion to the machinery stock in each county. This assump-
tion clearly does not hold across the entire range of incomes explored here, but may be an
acceptable approximation within the partitions of poor and wealthy counties. Mechanical
power is measured in 10 kilowatt units.
Irrigated Area: The measure used here is “effectively irrigated area.” This measure
excludes land with irrigation works that lack dependable water supplies. As with mechan-
ical power, this is a stock variable. However, an assumption of proportional use is riskier
150 CHINA ECONOMIC REVIEW VOLUME 5( 1) 1994

here, for actual irrigation use is based on given year rainfall patterns rather than the exist-
ence of irrigation infrastructure. For example, in the one province (Shaanxi) for which the
authors could make the comparison, effective irrigated area did not correlate highly with
area actually irrigated in a single year. Therefore, this variable might be best interpreted as
a measure of low risk water supply. Effective irrigated area is measured in mu.
Fertilizer Consumption: The fertilizer variable estimates total application of chemical
fertilizer in the given year using the proxy of total sales through official channels. Elasticity
estimates remain robust if actual applications are everywhere an equal proportional of total
sales. The measure is the sum of nutrients (nitrogen, potassium, or phosphate), stated in
metric tons.

EMPIRICAL RESULTS

The Input Elasticities

Results of regressions for the 200 poor and 200 wealthy counties are reported in Tables
5 through 8, below. Based on the estimated coefficients in Tables 5 and 6, elasticities of the
various inputs are calculated using equations (7)-(9) and are reported in Tables 7 and 8.
Labor and Lund Elasticities. The elasticities of labor and land are calculated at the
mean values for all included inputs. By the nature of a variable elasticity model, the value

Table 5
Estimated Production Function Results
for 200 Poor Counties, 1987,
Variable Elasticity Model
Coeficients Model A Model B
Constant 0.295 1.131
(0.922) (4.417)
Labor (mean) 0.804 0.549
Constant 0.742 0.565
(9.393) (9.916)
Mechanical Power 0.016 -0.004
(2.286) (-0.666)
Land (mean) 0.125 0.207
Constant 0.105 -0.413
(0.946) (-3.622)
Irrigation 0.013
(1.444)
Fertilizer 0.079
(9.875)
R2 0.833 0.891
F Value 243.4 398.5

Noret Numbers in parentheses are t-ratios based on standard deviations


calculated from the consistent covariance matrix with heterosce-
dasticity.
AGRICULTURAL PRODUCTTVITY IN RURAL CHINA 151

Table 6
Estimated Production Function Results
for 200 Wealthy Counties, 1987:
Variable Elasticity Model
Coeflcienfs Model A Model t?
Constant 0.922 0.806
(5.122) (3.459)
Labor (mean) 0.223 0.278
Constant 0.312 0.477
(4.952) (5.482)
Mechanical Power -0.017 --0.038
(-2.125) (-2.923)
Land (mean) 0.834 0.799
Constant 0.727 0.246
(18.641) (1.984)
Irrigation 0.042
(5.250)
Fettilizer 0.063
(5.250)
R= 0.937 0.944
F Value 714.9 824.2

NOW Numbersin parentheses arc t ratios based on standard deviations


c&u&d from the consistent covariance matrix with beterosce-
dasticity.

Table 7
Poor Counties: Elasticities of Mechanical Power,
Irrigation, Fertilizer, Labor and Land
CoefEcienfs Model A Model B
Mechanical Power 0.075(s) -0.019(n)
krigation 0.052(m)
Fertilizer 0.306(s)
Labor (mean) 0.804(s) 0.549(s)
Land (mean) 0.125(n) 0.207(s)

N0D3: “n” in parentheses means tbe r ratio for the coefficient is not significant at
the 15 percent confidence level; “m” means significant between 5 percent
and 15 percent; “s” means significant at the 5 percent cotttidence level.

of the elasticity is itself dependent on the levels of the various inputs, as can be seen from
inspection of equations (5) and (6). From Table 6, the poor county estimates show rela-
tively high labor elasticities, 0.804 and 0.549 for Models A and B, respectively. The corre-
sponding elasticities of land are only 0.125 and 0.207. By contrast, in the wealthy counties
labor elasticities are a relatively low 0.223 and 0.228, while land elasticities reach 0.834
and 0.799 (Table 7).
The hypothesis of constant elasticities of labor and land is tested by applying the f test to
the coefficients of modern inputs in the elasticity functions. The hypothesis of constant
152 CHINA ECONOMIC REVIEW VOLUME 5(l) 1994

Table 8
Wealthy Counties: Elasticities of Mechanical Power,
Irrigation, Fertilizer, Labor and Land
CoefJicients Model A Model B
Mechanical Power -0.727(s) -0.162(s)
Irrigation 0.164(s)
Fertilizer 0.247(s)
Labor (mean) 0.223(s) 0.278(s)
Land (mean) 0.834(s) 0.799(s)

Notes: 3” meam the I ratio for the coeffkient is significant at the 5 percent conti-
dence level.

land elasticity is rejected for both the poor and wealthy counties, since t ratios for the coef-
ficient of irrigation and fertilizer are all significant and positive in the variable elasticity
models. The hypothesis of constant labor elasticity in the wealthy counties is also rejected
by the significant negative t ratio for mechanical power. The case where constant elasticity
cannot be rejected is for labor elasticity in the poor areas.
Elasticity of Mechanical Power. The estimated coefficient of mechanical power is sig-
nificant at the five percent level for Model A but not for Model B. The elasticity of
mechanical power in the poor counties is calculated to be 0.016 and -0.004, respectively,
for Models A and B. In wealthy counties the coefficients of mechanical power are signifi-
cant, but the corresponding elasticities are negative for both specifications. While not pre-
cluded by theory, a negative elasticity can in practice be rejected as an outcome. The
significant negative results for the wealthy areas doubtless reflect measurement problems.
For example, in some parts of China the principal use of small tractors is freight transport
rather than crop production. Motive power in village enterprises might also be captured in
this variable.
Elasticity oflrrigation. The coefficient of irrigation in the poor counties is marginally
significant, with an elasticity of 0.052. In the wealthy counties, irrigation has a higher and
statistically significant coefficient, with an elasticity of 0.164.
Elasticity of Fertilizer. Chemical fertilizer consumption in both poor and wealthy
counties has a statistically significant effect on output. In the poor counties, the estimated
elasticity is 0.306, and in the wealthy counties 0.247. The higher elasticity for poor coun-
ties is in line with the observed difference in application intensity between poor and
wealthy areas. Interestingly, it suggests that farmers in poor counties have locally appropri-
ate fertilizer responsive seed varieties, supporting the finding that modem varieties have
been widely applied in China.ia

Financial Returns to Modern Inputs

Profit maximizing farmers will respond to expected financial returns rather than
expected physical productivity. Therefore, knowledge of the financial returns to the inputs
analyzed above will help address the question posed earlier-will the government’s pro-
posed input intensification strategy help raise peasant income?
The marginal financial return to the ith input (mechanical power, irrigation or fertilizer)
can be written as
AGRICULTURAL PROLXJCTNITY IN RURAL CHINh 153

P,aQ
-_ ‘4 Q
MRi= piaxi l = q&q - 1,
(10)

where Pq is the output price, Pi is the input price, & is the level of the ith input, and q
denotes the output elasticity. Although the elasticity is positively related to marginal eco-
nomic return, the output-input price ratio and the average pr~uctivity of the input also
determine the economic return. The output/input price ratios that generate a zero marginal
return can be computed from the elasticities and the average productivity of the inputs
derived in the previous section. i9 These price ratios, hereafter called “break-even” price
ratios, can be written as:

‘4
-=-
‘i
(11)
‘i EiQ
The numerical values of these “break-even price ratios,” as well as the actual national aver-
age price ratios for 1991 appear in Table 9.
The breakeven price ratio can be compared to actual price ratios to test the hypothesis on
which the intensification policy is based-that returns exceed costs. Direct comparison of
the ratios presented in Table 9 suffers from the problem that most farmers face prices for
inputs and outputs that differ from the national average prices used in the table. National
average prices capture neither farm to market transport costs nor price differences among
market towns. In general the farm to market transport costs increase input costs and
decrease net income from crop sales. Transport costs are generally higher in poor areas, with
their poorly developed infrastructure. Transport costs also lead to price differences among
market towns, although for many years government pricing policies minimized regional
differences in agricultural input prices. With recent price reforms, those differences are
growing and will result in relativefy higher manufactured input prices in most poor areas.
Given that breakeven price ratios are estimates from the sample of county data, the sam-
ple distribution must be used to test the hypothesis that returns are greater than costs, For
ease of testing, the null hypothesis is defined as

Ha: breakeven price ratio 2 current price ratio.

Table 9
Output-Input Price Ratiosa
Break-even Price Ratios
.. Acfd Market Price
Poor Wealfhy Ratios”
4.390b - 5,400
0.017 0.008 0.013
0.113 0.171 0.180

Nofes: a q (output) is measured in kg, me (mechanical power) in watts, ir (irrigation) in mu, and
fe (fertilizer) in kg.
b From Mode.1 A.
‘These price ratios reflect national market conditions. See the appendix for details on
calculations of the actual price ratios.
154 CHINA ECONOMIC REVIEW VOLUME 5(l) 1994

For each input, if He is rejected and the current price ratio is greater than the breakeven
price ratio, we can conclude that the return exceeds the cost of additional inputs.
Formally this hypothesis can be written as
Y.
H . -XPRi (12)
0’ E~Q-

where CPRi is the current price ratio. Using equations (7), (8) and (9), the null hypotheses
for the three inputs are:

Ho: ‘11’ Q. CPR, . log (xl) (13)

and

(14)
Ho: ‘22 ’ Q CPR, . log (x2)

HO’ ‘23 ’ Q CPR, . log (x2)


(15)

where Xi denotes labor and land inputs, j=1,2; and all, a22 and ~23 are parameters defined
in the production function in the second section.
Tables 5 and 6 yield the point estimates as well as the standard deviations of all, a22 and
~23.~'Since the ordinary least square method assumes that error terms are normally distrib-
uted, the estimated coefficients (the estimates of a ii, az2 and ~23) also have normal distri-
butions. But the true variances of the estimated coefficients are unknown, so the normal
distribution cannot be directly used for testing purposes. Following the conventional t test
for linear models, construct the following statistic that has a t distribution when H,, holds
as an equality*’
n ‘i

‘ji - Q . CPRi . log (xj)


T= n
oji

where Liti, 622 and 623 are estimated values of ~11, ~22 and ~23; and aji is the variance of ~ji.
Let 01 be the significance level (say, five percent) of the one-tail test. This significance
level corresponds to a critical level of t at which Ho can be rejected. If the calculated, t
exceeds the critical level, then Ho is rejected at the significance level of cc. The mean values
of log(xj) and the yilQ ratios from the 200 sample points are used to calculate the t ratios.
The results of the three t tests are reported in Table 10.
The test for mechanical power does not reject the null hypothesis that the current price
ratio is lower than or equal to the breakeven price ratio at the five percent significance
level. But at the significance level of 34 percent the null hypothesis is rejected. This result
suggests that although additional purchases of farm machinery for field crop production
will be unattractive for poor areas facing price ratios close to the national average, areas
with more favorable price or physical endowments may still have room for such invest-
AGRICULTURAL PRODUCTNITY IN RURAL CHINA 155

Table 10
Test Results of the Null Hypothesis: Break-even Price Ratios
2 Current Price Ratios
Rejection at 5%
Significance Levela
t ratio Prob > t (one tail)
Mechanical Power 0.402 0.344 No
Irrigation -0.538 0.705 No
Fertilizer 3.692 0.0001 Yes

Note: a Degrees of freedom = 195.

ments. This outcome is consistent with the observed increase in mechanically cultivated
area in poor counties in recent years. The latter trend may also have been fostered by the
growth of custom tractor work, which lowers average cultivation costs by allowing tractors
to work larger areas than were previously possible.
For irrigation, the null hypothesis cannot be rejected at five percent significance level, or
at any significance level below 70 percent. Even this result is obtained under the generous
assumption that irrigation construction costs in poor areas are no higher than the average
for large projects in all areas of the country. In fact, the mountainous nature of most poor
areas leads to very much higher irrigation costs. The finding supports the argument that the
irrigated area stagnated for economic rather than organizational reasons. Only if a govern-
ment subsidy covered a substantial part of the irrigation costs would further irrigation
expansion be financially feasible for farmers.
Fertilizer differs from machinery and irrigation. The test result strongly rejects the null
hypothesis at the one percent significance level. It implies positive marginal returns of fer-
tilizer use at current prices in almost all poor areas. This finding holds despite the choice of
a fertilizer price well above the within-plan prices and is consistent with fertilizer market
experience in recent years that has shown farmer willingness to bid prices up above state-
mandated levels. The differential marginal return between wealthy and poor areas can be
explained through government policy which has sought to maximize marketable surplus,
not rural incomes. An important element of that policy has been the linkage of fertilizer
sales with delivery of crops to government, which has concentrated fertilizer supply in high
surplus, and wealthier, areas.
As the fertilizer supply constraint eases and government becomes more concerned with
raising poor area incomes, poverty alleviation programs do have a role to play in relaxing
institutional constraints to greater fertilizer use. Field visits to poor areas confirm that a
lack of credit prevents many poor households from buying as much fertilizer as they would
like. Those findings are supported by a formal survey that found credit to be a binding con-
straint even in wealthier areas with fertilizer priced at free market levels.22 The supply and
credit constraints explain the relationship between current prices and the breakeven price
shown above.
The conclusions assume a continuation of the current price regime. China has entered a
period of rapid price and subsidy reform and the ultimate levels of relative prices are hard
to predict. Furthermore, the reforms may well end the practice of assigning rights to subsi-
dized chemical fertilizers and diesel fuel in exchange for the delivery of crops. Credit, also,
156 CHINA ECONOMIC REVIEW VOLUME 5(l) 1994

has often been tied to delivery contracts. Such factors, in addition to the specification prob-
lems mentioned earlier, suggest caution must be used in interpreting the results.

CONCLUSION

A variable elasticity model of the aggregate agricultural production function was used to
assess the potential impact of proposed poverty alleviation interventions. It suggests that
some scope remains, under current technologies and prices, for improving peasant income
through further intensification of machinery and fertilizer use, but not of further irrigation
development. The latter point calls into question the new emphasis on terracing and water
conservancy in the national poverty alleviation program. Although total production can be
increased through such efforts, they will not lead to increased peasant income unless part
of the capital costs are covered by government transfers.
Additional fertilizer offers particularly good potential for increasing incomes because
returns are well above the breakeven point and therefore robust both to price changes and
farmer risk preferences. Other modem inputs that are not analyzed here, such as new seed
varieties, may also offer high returns.
Poor area farmers have been rapidly increasing use of those inputs shown above to have
the highest returns, and avoiding investment in those with low returns. These input choices
suggest that the most important policy recommendation for improving poor area agricul-
tural incomes may simply be to relieve institutional constraints, such as those on credit and
fertilizer supply, that have been shown to hold input use below profit maximizing levels.
More generally, giving poor area farmers as wide a choice of potential inputs and outputs
as possible may serve poor areas much better than a government decision to push specific
technologies as a panacea for poverty.

APPENDIX

The absence of county-specific prices precludes estimation of county-specific current price


ratios. Recognizing the uncertainty in prices, the authors chose the prices used in the anal-
ysis with a bias toward validating the government’s strategy of input intensification in poor
areas. That is, based on national average prices for 1991, an output price well above the
national average was chosen, while inputs were priced at the national average for machin-
ery and irrigation. For fertilizer, an attempt was made to reflect the fact that the marginal
price in both rich and poor areas was known to be well above the published average price.
The bias in price choices strengthens the conclusions in the text, which show little room for
profitable implementation of the stated government strategy apart from fertilizer.
Price of Agricultural Output: In the output variable used in the regression, nongrain
crop output was converted to grain equivalents using 1991 national average purchase
prices for both grain and non-grain crops. For grain itself, the optimal price would be tl e
marginal price realized for grain sales. These prices vary considerably by grain type aiid
locality, but in 1991 the average price for unprocessed grain over all market types was no
more than 0.6 yuan/kg (see Zhongguo Wujia Nianjian (1989, p. 411); and State Statistical
Bureau (1992, p. 260)). For the price ratio in the text, the higher price of 0.7 yuan/kg was
arbitrarily chosen.
Price of Agricultural Mechanical Power: The average purchase price per tractor watt
based on ex-factory tractor prices from the Nanjing Machinery Import and Export Company
AGRICULTURAL PRODUCTIVITYIN RURAL CHINA 157

was 0.447 yuan in 199 1- 1992.23 Assuming a 10 year useful life and 10 percent interest rate,
annual capital costs average 0.07 yuan/watt. Based on the 1990 cost of mechanical cultiva-
tion reported in China Agricultural Yearbook 1991, p. 457, adjusted for inflation, operation
and maintenance costs approximate 0.06 yuan/watt/year. The total cost per watt/year is
therefore 0.13 yuan.
Price per mu of Irrigation: Construction costs for newly irrigated area vary consider-
ably depending on local conditions, so it would be difficult to defend a single number as
representing all experience. Irrigation engineers working on a variety of large scale
projects in China estimate the approximate cost of newly irrigated area in 1991 at 600 yuan
per mu. Assuming a 40 year useful life and an eight percent interest rate, capital costs aver-
age 50.5 yuan/mu. Operating and maintenance costs also vary, although government elec-
tricity price subsidies for high lift irrigation works help keep differences due to that cost
down. Very few irrigation projects charge the full cost of operation and maintenance, so the
cost of water figures given in China Agricultural Yearbook 1991, pp. 457-459, are likely to
understate true costs but are nonetheless used here. The yearbook figures, adjusted for
cropping intensity and inflation, approximate 4.7 yuan per mu. Total irrigation costs, there-
fore, are about 55.2 yuan/mu/year.
Price of Chemical Fertilizer: The weighted average of state-controlled and market
chemical fertilizer prices in 1990 was 630 yuan/ton (SSB, 1991), while the average effec-
tive nutrient yield that same year was 0.245 (MOA, 1991, p. 425,426). This gives a fertil-
izer price of 2.6 yuan/kg in terms of effective nutrient content. For this analysis, a price 50
percent higher, or 3.9 yuan/kg, was arbitrarily chosen to reflect the fact that an equilibrium
market price in a fully decontrolled market would be lower than the current market price
but substantially higher than the state-controlled price.

ACKNOWLEDGEMENT

The authors would like to thank Dipak Mazumdar, Terry Sicular, the referees, and partici-
pants at the International Conference “Chinese Agriculture Development in the 1990s”
(Beijing, 1992) for helpful comments and discussions.

NOTES

1. This paper evaluates poverty purely in terms of the number of people falling below a line
defined as that income needed to purchase a low cost food basket yielding 2,150 kcaYday/capita
and nonfood items in a proportion based on actual Chinese consumption patterns. Alan Piazza
of the World Bank developed the poverty estimates used here and reported in World Bank
(1992, p. 32). The poverty line approximates the lower of two lines used by the World Bank in
a recent international comparative study of poverty (World Bank, 1990).
Both Dr. Piazza and we fully recognize that poverty has many dimensions other than income.
China’s ability before 1978 to radically improve many indicators of well-being without much
improvement in per capita food availability and personal income deserves as much attention as
the post- 1978 successes built upon those earlier efforts.
2. The policy changes and their impact are described in many sources. See, for example, Perry and
Wong (1985).
3. The State Statistical Bureau reports rural incomes in only seven intervals. By the mid-1980s the
upper interval was absorbing a rapidly increasing proportion of the population. See State
Statistical Bureau, China Statistical Yearbook, various years.
158 CHINA ECONOMIC REVIEW VOLUME 5( 1) 1994

4. State Statistical Bureau (1990, pp. 259,274).


5. Fan (1990, p. 86) shows the slowdown beginning in 1985.
6. Calculated from State Statistical Bureau (1990), p. 312.
7. The income figures against which these standards were tested were those of the Ministry of
Agriculture’s (MOA) income reporting service, not the State Statistical Bureau’s (SSB). The
SSB income surveys cover less than a third of all counties, while the MOA covers all counties
but with a cruder measure of income that typically yields lower estimates than those of the SSB.
A further 31 counties were added later, primarily drawn from livestock producing areas.
Provinces also had the right to designate poor counties for provincially-funded assistance and
another 370 counties were thus named.
8. See World Bank (1992, pp. 121, 124).
9. See State Statistical Bureau (1990, pp. 333,335). The Chinese definition of agricultural income
includes farm handicraft, forestry, and fishery income. If only field crop and livestock
operations are considered, their percentage contribution fell from 62.0 percent to 37.8 percent
from 1980 to 1987.
10. See Ministry of Agriculture (1991, pp. 455-478) for comparative returns to labor in various
types of agriculture.
11. Derived by comparing the share of agriculture in rural personal income as shown by SSB rural
income surveys and the share of agriculture in rural social output value in the same year, for the
1980s. See State Statistical Bureau, China Statistical Yearbook, various years, for both sets of
data.
12. Such a test must make assumptions about farmer response to risk. Risk aversion will be
compatible with an equilibrium in which realized marginal returns consistently exceed realized
costs. The analysis in this paper assumes that farmers are risk neutral.
13. See Antle (1984) and Capalbo and Antle (1988).
14. White (1980) provides a method, used here, for testing heteroscedasticity when nothing is
known about the structure of the true covariance matrix.
15. State Statistical Bureau (1988b).
16. Social output value measures all physical production plus value added in transportation and
commerce, while agricultural output value measures the value of all agricultural production,
whether sold, self-consumed, or added to stocks.
17. Data from the 1987 State Statistical Bureau (1988a) are used in the regression. The necessary
information at the county level only exists for a single province, Hubei. See Hubei Statistical
Bureau (1990). A test using the county level data is as follows:
PCNI = 382 + O.l2*PCTSOV; n=70; R2 = 0.63.
(4.32) (10.53)
Again, the finding is quite robust.
18. See Stone (1988).
19. This exercise assumes that the underlying production function did not change significantly over
the period of the investigation (1987-1992). This assumption appears justified by the stability
of the cropping mix and land under crops over that period.
20. A standard deviation can be obtained by multiplying the estimated coefficient by the t ratio.
21. This statistic has a t distribution because the numerator has a normal distribution and the
denominator has a X2 distribution.
22. See Feder et al (1989).
23. Private correspondence.

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