Markets, Specialization and China's Smallholder Agriculture

Working Paper

Published By

Food and Agricultural Organization

April 2004

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As seen in the previous sections, China's reformers, more than anything, have followed a
strategy based on providing incentives through property rights reforms, even though in China the shift to private ownership is today far from complete. The reforms started with the Household Responsibility System (HRS), a policy of radical decollectivization that allowed farmers to keep the residual output of their farms after paying their agricultural taxes and completing their mandatory delivery quotas. Farmers also began to exercise control over much of the production process (although in the initial years, the local state shared some control rights and in some places still do today). In this way the first reforms in the agricultural sector reshuffled property rights in an attempt to increase work incentives and exploit the specific knowledge of individuals about the production process (Perkins, 1994). In executing the property rights reforms, leaders also fundamentally restructured farms in China. Within a few years, for example, reformers completely broke up the larger collective farms into small household farms. In China today there are more than 200 million farms, the legacy of an HRS policy that gave the primary responsibilities for farming to the individual household. McMillan, Whalley and Zhu (1989), Fan (1991), Lin (1992) and Huang and Rozelle (1996) have all documented the strong, positive impact that property rights reforms had on output and productivity. 

In addition to property rights reform and transforming incentives, the other major
task of reformers is to create more efficient institutions of exchange. Markets-whether
classic competitive ones or some workable substitute-increase efficiency by facilitating
transactions among agents to allow specialization and trade and by providing information
through a pricing mechanism to producers and consumers about the relative scarcity of
resources. But markets, in order to function efficiently, require supporting institutions to
ensure competition, define and enforce property rights and contracts, ensure access to
credit and finance and provide information (John McMillan, 1997; World Bank 2002).
These institutions were either absent in the Communist countries or, if they existed, were
inappropriate for a market system. Somewhat surprisingly, despite their importance in
the reform process there is much less work on the success that China has had in building
markets and the effect that the markets has had on the economy.

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