Dual Track System in China s transition:

Transcription

1 Dual Track System in China s transition: Rongsheng Tang Washington University in St. Louis February 19, 2014 Abstract In this study, we build a dynamic model to analyze the role of Dual Track System(DTS) on Chinese agricultural growth between 1978 and 1992, we compare the economy under DTS with planning economy as well as market economy to see how large this DTS affected Chinese economy. We also try to analyze the distributional effect as well as general equilibrium price effect of procurement, this analysis helps us better understand the source of inequality between rural and urban in China. Another contribution of this paper is to build first macro model to study DTS, which might help us see more clearly about how DTS affect Chinese economy. Keyword: Dual Track System Chinese Economy Procurement Economic Transition 1

2 Introduction Rapid growth of Chinese economy is largely documented in the literature 1, it is mainly explained by reforms starting from rural area. At the end of 1978, land reform in rural area called Household Responsibility System(HRS) began to implement, by solving the incentive problem, it substantially improve the agricultural productivity. From 1977 to 1984, the total output per capita in rural area increased by 83.5%. Because of this increasing productivity, by the end of 1984, surplus labor force problem becomes more and more serious. Suffering from the Hu Kou system, labor force in rural can not move freely to urban. In order to make best use of this large number of surplus labor force, government encouraged the development of rural industry which is called Township and Village Enterprises(TVEs). Hence starting from 1984 a large number of farmers chose to be workers in the factory which located in the same village or some small towns not far away from their village. The number of employment increase from 32.3 million in 1983 to million in 1992, the ratio to total labor force in rural increase from 9.3% to 24.2%. Besides HRS and TVEs, Chinese government also tried to loosen the tie that bound planning economy and socialism. Before early 1977, planning is designed under economy with shortage supply. Starting from 1978, as agricultural productivity increase, Chinese government was trying to open the market partially, since then trading in the market increase substantially. Take the trade between urban and rural people as an example, the volume increase from 1.3 billion to 21.7 billion under fixed price, the ratio to total purchasing increase from 4.4% in 1978 to 24.4% in Though market trade increase a lot, government purchasing called procurement is still dominant in agricultural goods trade. In this line, DTS can be simply defined as coexist of plan and market economy. On one hand, farmers have obligation to sell certain amount of product to government at given price which is normally lower than market price, on the other hand, after fulfilling obligation they are free to sell in the market. The procurement amount is adjusted according to production as well as population growth and some other factors. For example, the ratio of procurement to total product of grain and cotton are around 20% and 70% respectively. The procurement price is also adjusted, specifically increasing, year by year. The ratio of market price to procurement price is 1.8 in 1978, 1 For example, data based on World Development Report in Wu(1996) shows that the average growth rate from 1980 to 1990 is 9.5%. 2

3 then 1.1 in 1989 and at end of 1992 almost 1. Previous literature focus more on identifying the contribution of reforms on economic growth or productivity. For example, McMillan, Whalley and Zhu(1989) shows a robust result based on estimation: during 1978 to 1984, higher price account for 22% agricultural productivity increase and the rest 78% is attributed to the institution incentive. Lin(1992) collected the data from 28 out of 29 provinces in the mainland of China from 1970 to 1987 and showed that institution reform(shift from production team system to HRS) is the most important in explaining output growth among the various components of reforms before To explain the growth after 1984, the author conjectured the sharp drop of state procurement price relative to input price which caused the decrease of usage of fertilizer as well as the exodus of labor might be the reason. There are few amount of papers focusing on the role of DTS. One exception is Sicular(1988) who built a theoretical model to analyze DTS in China s agricultural sector. In this paper, she documented the coexist of planning and market and described how it works in China. By examining the interaction of these two mechanisms, she claim that the market places pressure on planning price and quota so that it won t deviate too much from market and also planning affects the market price indirectly by affecting the income distribution but the direction is unambiguous. Although the model in this paper described the economy well, it didn t get any quantitative results, even on the qualitative part the result is not sufficiently justified. In addition, through this static model, it is hard to see any transitional characteristics. Lau, Qian and Roland(2000) analyzes the DTS generally on the efficiency and Pareto improvement, it shows that under some standard conditions this market reform is Pareto improving and it is also efficient under full market liberalization. Then they justify the satisfaction of those conditions in China and conclude that this reform achieve efficiency without creating loser in China. In the economy of this study, we have rural household, urban household, rural industry and urban industry. Rural household produce agricultural good, rural and urban industry produce manufacture good. Household consumes both agricultural good and manufacture good and only care current consumption for each period. Each household in rural has procurement requirement, only after fulfilling this they are free to sell to the market. Besides working on farmland, they can also choose to work in TVEs to earn the rural wage but they can not work in the urban as 3

4 mentioned above. The only income source for urban household is wage earning from urban industry but they enjoy some quota to buy agricultural good with procurement price. Rural industry and urban industry produce the same manufacture good, there are three input: capital, labor and agricultural good as intermediate good. For simplicity, we assume there is no capital market and firms will save all the profit as their capital for next period. The difference between rural and urban industry is that like household urban industry can buy agricultural good with lower price under certain amount while rural industry always face the market price. Two distortions in the economy consist the main feature: labor immobility and price difference. Labor distortion favor rural industry but price distortion favors urban industry, our purpose in this study is to isolate these two, given labor distortion, we will examine the effect of price distortion or the procurement policy. The model Household in rural Household in rural, with mass M RH,t, consume both agricultural and manufacture goods and own land and is also the producer of agricultural good. As long as fulfilling procurement requirement, farmers are free to sell in the market. Another source of income is the labor earning from rural industry or TVE. Hence household will choose the time distribution between farming and working in TVE as well as goods consumptions, that is, max u(c a,t,c m,t ) (1) c a,t,c m,t,q a,t,l a,t s.t. P a,t c a,t + c m,t P a,t (y a,t Q a,t ) + P a,t Q a,t + w R t l R,t (2) Q a,t Q a (3) l a,t + l R,t = l (4) 4

5 where the agricultural production function is y a = A a Z α a l 1 α a a,, Z is the amount of land household owns, l a is the working time on agricultural good production, l R,t is the working time in TVE, l is the total amount time of household. Household in urban Household in urban area, with mass M UH,t, will also consume both agricultural and manufacture good. For agricultural goods, they will enjoy quota q H from state with a lower price P a,t. max u(c a,t,c m,t ) (5) c a,t,c m,t,q H,t,l u,t s.t P a,t (c a,t q H,t ) + P a,t q H,t + c m,t w u t l u,t (6) q H,t q H (7) l u,t l (8) TVE We denote the mass of TVE as M RE,t, the role of TVE is to absorb the surplus labor in rural area because of restriction of labor mobility. Given the capital, it hire the labor force and purchase intermediate goods to maximize the profit and leave all of them as the capital for next period, that is, π R,t (K R,t ) = max L R,t,X R,t A R,t (K α R R,t X 1 α R R,t ) β R L 1 β R R,t w R t L R,t P a,t X R,t (9) s.t. K R,t+1 = π R,t (K R,t ) + (1 δ)k R,t (10) 5

6 Urban enterprises With mass M UE,t, urban enterprises faces the similar problem as rural enterprises, the difference is that they enjoy some quota on intermediate good π U,t (K U,t ) = max L U,t,X U,t, q E,t A U,t (K α U U,t X 1 α U U,t ) β U L 1 β U U,t w U t L U,t P a,t (X u,t q E,t ) P a,t q E,t (11) s.t K U,t+1 = π U,t (K U,t ) + (1 δ)k U,t (12) q E,t q E (13) Market clear Labor market in rural M RH,t l R,t = M RE,t L R,t (14) Labor market in urban M UH,t l u,t = M UE,t L U,t (15) Agricultural good market: rural households production is the only source for both consumption and intermediate good M RH c a,r,t + M UH,t c a,u,t = M RH,t y a,t M RE,t X R,t M UE,t X U,t (16) We also assume the total procurement for rural household equal to the sum of quota for urban household and enterprises M RH Q a = M UH q H + M UE q E (17) 6

7 Equilibrium The equilibrium is defined as the standard way in which all the households and enterprises solve maximization problem and market clear. In addition, we assume there is an exogenous technology improvement g a in agricultural production mainly due to HRS or the use of fertilizer, and there is constant population growth g N. What is more, we assume the procurement is proportional to output with ratio τ, and the ratio of quota price to market price is γ, the ratio of quota for urban household to total procurement is η, that is A a,t+1 = (1 + g a )A a,t (18) N t+1 = (1 + g N )N t (19) Q a = τy a (20) P a = γp a (21) M UH q H = ηm RH Q a (22) We assume the preference of consumers can be represented by the following utility function u(c a, c m ) = θlog(c a ā) + (1 θ)logc m (23) where ā is the subsistence level for household, θis the share for agricultural good in this utility function. Preliminary theoretical results We mainly focus on three parameters in this economy, τ the ratio of procurement to total output in each rural household, γ the ratio of procurement price to market price of agricultural good, η the ratio of quota for urban household to that for urban enterprise. 7

8 Partial equilibrium In the partial equilibrium where we take all the prices as given, the labor distribution between farming and rural enterprise will not change, the same as the intermediate input in rural industry, while it will change in urban enterprises since urban enterprises enjoy quota on agricultural goods. Specifically, X u will decrease in γ η and increase in τ, that is, the total demand for intermediate good will increase if the rural enterprises enjoy larger quota or lower quota price as expected. General equilibrium To understand general equilibrium effect, we need to solve the model comprehensively, which relies on numerical analysis, but we can first roughly see the direct effect of DTS on the economy by examining the effect on price. The market clear condition implies following equation 1 (1 θ)m RH y a M RE A R K α Rβ R R [ (1 α R)β R ] (1 α R)β R +1 ( 1 β R ) 1 β R (24) α R β R P a w R M UE 1 α U α U A U K α U β U U [ (1 α U)β U ] (1 α U )β U ( 1 β U ) 1 β U (25) P a w U θ w Rl R M RH + w U l U M UH P a + (M UH + M RH )(1 θ)ā (26) = ( 1 α U α U θ)m RH (1 η)(1 γ)τy a (27) Hence whether procurement policy has negative or positive effect on price depends on how much people care about agricultural good, i.e θ, in particular, if (1 + θ)α U > 1 then P a will increase in η and γ and decrease in τ, that is, price decrease when quota increase or quota price decrease, one interesting finding is when η decrease then urban household have less quota and hence it should have driven the price up, the opposite happen probably mainly because of urban enterprises have more quota hence shrink the demand for intermediate good. 8

9 Another conclusion we can make from this market clear condition is that there is no general equilibrium effect if all the quota go to urban household, i.e. η = 1. In this case, it is just a transfer from rural household to urban household, and the aggregate demand won t change given the same log linear utility function. Either γ = 1 or τ = 0 means there is no procurement requirement in fact. When γ = 1 the procurement price is the same as market price hence although rural household has procurement quantity requirement, it will not make any difference to them. Quantitative analysis(incomplete) In order to comprehensively solve the model, we can only get numerical solution. We will first calibrate the model using Chinese NBS data, and then compare the results with those when setting τ = 0 to see the effect of procurement quantity, and also we will see the changes of results when either τ, η, γ change. 9

10 References [1] Lawrence J Lau, Yingyi Qian, and Gerard Roland. Reform without losers: An interpretation of china s dualtrack approach to transition. Journal of Political Economy, 108(1): , [2] Justin Yifu Lin. Rural reforms and agricultural growth in china. The American Economic Review, pages 34 51, [3] John McMillan, John Whalley, and Lijing Zhu. The impact of china s economic reforms on agricultural productivity growth. The Journal of Political Economy, pages , [4] Dwight Heald Perkins. Market control and planning in communist China, volume 128. Harvard University Press, [5] Terry Sicular. Plan and market in china s agricultural commerce. The Journal of Political Economy, pages , [6] Yanrui Wu. Productive performance in Chinese enterprises: an empirical study. Palgrave Macmillan,